Comments & Cases on Sales and Lease

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Part I

SALES(Title VI, Arts. 1458-1637)

INTRODUCTION

Governing law.

The provisions of the Code of Commerce relating to sales havebeen repealed by the Civil Code. (Art.* 2270[2].) Today, sales aregoverned by the provisions of the Civil Code on the subject. (BookIV, Title VI, Arts. 1458-1637.) The distinction between the so-calledcivil sales and commercial sales is eliminated.

The provisions of the Civil Code on Obligations (Title I, Arts.1156-1304.) and Contracts (Title II, Arts. 1305-1422.) are applica-ble to the contract of sale, but Articles 1458 to 1637 are special ruleswhich are peculiar to sales alone.

Sources of our law on sales.

(1) The Philippine law on sales, as it exists today, is an admix-ture of civil law and common law principles. According to theCode Commission:

“A majority of the provisions of the Uniform Sales Lawwhich is in force in 31 States and Territories of the AmericanUnion have been adopted in the Civil Code with modificationsto suit the principles of Philippine Law.” (Report of the CodeCommission, p. 60.)

*Unless otherwise indicated, refers to article in the Civil Code.

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In incorporating some provisions of the Uniform Sales Act ofthe United States, the Commission states:

“This incorporation of a goodly number of American ruleson sale of goods has been prompted by these reasons:

(1) The present [old] Code does not solve questions aris-ing from certain present-day business practices. Among themare: the sale of “future goods” (Art. 1482.); sale of goods bydescription or by sample (Art. 1501.); when goods are deliv-ered “on sale or return” (Art. 1522.); sale of goods by negotia-tion or transfer of a document of title (Arts. 1527 to 1540.); andthe rights of the unpaid seller of goods. (Arts. 1545 to 1555.)1

(2) The present Code fails to regulate many incidents andaspects of delivery and acceptance of goods, of warranty oftitle and against hidden defects, and of payment of the price.

(3) It is probable that a considerable portion of the foreigntrade of the Philippines will continue for many years with theUnited States. In order to lessen misunderstanding betweenthe merchants on both sides of the Pacific, their transactionsshould, as far as possible, be governed by the same rules. Thisdesirable condition will not only facilitate trade but will alsoperpetuate sentiments of esteem and goodwill between thetwo peoples. It is but a truism to say that fair and mutuallybeneficial trade incalculably enhances international friend-ship.” (Ibid., pp. 60-61.)

(2) In addition:

“The Title on ‘Sales’ has been enriched by the addition of newprovisions based on the opinions of commentators (Arts. 1479,1480, 1481, 1485, 1490, 1491, 1497, 1498, 1512, 1516, 1558, 1561,1569, 1570, 1571.2) and on judicial decisions (Arts. 1486, 1487.3) andof new rules adopted with modifications to suit the philosophyand framework of Philippine Law, from the Uniform Sales Act of

1The articles mentioned are now Arts. 1462, 1481, 1502, 1507-1520, 1525-1935, re-spectively, in the new Code.

2Now, Arts. 1459, 1460, 1461, 1465, 1470, 1471, 1477, 1478, 1492, 1496, 1538, 1541,1549, 1550, 1551, respectively.

3Now, Arts. 1466, 1467, respectively.

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the United States, Arts. 1482 to 1484, 1494, 1496, 1501, 1503, 1514,1522 to 1526, 1527 to 1540, 1541 to 1543, 1545 to 1555, 1565, 1566,1567, 1582 to 1585, 1602 to 1608, 1614 to 1617, 1618 to 1619, 16574

x x x.”

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

— oOo —

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

INTRODUCTION

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Chapter 1

NATURE AND FORM OF THECONTRACT

ART. 1458. By the contract of sale one of the con-tracting parties obligates himself to transfer the own-ership of and to deliver a determinate thing, and theother to pay therefor a price certain in money or itsequivalent.

A contract of sale may be absolute or conditional.(1445a)

Concept of contract of sale.

The contract of sale is an agreement whereby one of the parties(called the seller or vendor) obligates himself to deliver somethingto the other (called the buyer or purchaser or vendee) who, onhis part, binds himself to pay therefor a sum of money or itsequivalent (known as the price).

Under the Spanish Civil Code, the contract was referred to asa contract of “purchase and sale.” As every “sale” necessarilypresupposes a “purchase,” this name was regarded as redundant.Hence, the name of Title VI has been simplified by calling it “sales”and the name of the contract has been changed for the same rea-son to “contract of sale.” (Report of the Code Commission, p. 141.)

“It is required in the proposed Code that the seller trans-fers the ownership of the thing sold. (Arts. 1458, 1459, 1495,1547.) In the present Code (Art. 1445.), his obligation is merelyto deliver the thing, so that even if the seller is not the owner,he may validly sell, subject to the warranty (Art. 1474.) tomaintain the buyer in the legal and peaceful possession of the

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thing sold. The Commission considers the theory of thepresent law unsatisfactory from the moral point of view.”(Ibid.)

Characteristics of a contract of sale.

The contract of sale is:

(1) Consensual, because it is perfected by mere consent with-out any further act;

(2) Bilateral,1 because both the contracting parties are boundto fulfill correlative obligations towards each other — the seller,to deliver and transfer ownership of the thing sold and the buyer,to pay the price;

(3) Onerous, because the thing sold is conveyed in considera-tion of the price and vice versa (see Gaite vs. Fonacier, 2 SCRA 820[1961].);

(4) Commutative, because the thing sold is considered theequivalent of the price paid and vice versa. (see Ibid.) However,the contract may be aleatory2 as in the case of the sale of a hope(e.g., sweepstakes ticket);

(5) Nominate, because it is given a special name or designa-tion in the Civil Code, namely, “sale”; and

(6) Principal, because it does not depend for its existence andvalidity upon another contract.

ILLUSTRATIVE CASES:

1. Trial Court decided that there was no payment by buyer oflumber covered by invoices of seller but Court of Appeals held that

1Obligations are bilateral when both parties are mutually bound to each other. Theyare reciprocal when the performance one is designed to be the equivalent and the condi-tion for the performance of the other. In a contract of sale, in the absence of any stipula-tion, the obligations of the seller and buyer are reciprocal, the obligation or promise ofeach party is the cause or consideration for the obligation or promise by the other. Thereciprocal obligations would normally be, in the case of the buyer, the payment of theagreed price and in the case of the seller, the fulfillment of certain express warranties.

2Art. 2010. By an aleatory contract, one of the parties or both reciprocally bind them-selves to give or to do something in consideration of what the other shall give or doupon the happening of an event which is uncertain, or which is to occur at an indetermi-nate time.

Art. 1458 NATURE AND FORM OF THE CONTRACT

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delivery of lumber was not duly proved because counter-receipts is-sued by buyer merely certified to receipt of certain statement on claimsfor the lumber allegedly delivered.

Facts: S filed a complaint for collection of a sum of moneyagainst B for lumber purchased on credit and received by B. Bdenied all the material allegations of the complaint. The trialcourt rendered judgment in favor of S. On appeal, the Court ofAppeals reversed the judgment on the ground that the deliv-ery of the lumber to B was not duly proved.

S asserts that the case having been tried and decided bythe trial court on the issue of whether or not there was pay-ment by B of the lumber covered by invoices of S and counter-receipts issued by B, it is alone on this issue that the Court ofAppeals should have decided the case and not on the issue ofwhether or not there was delivery of the lumber in question.The Court of Appeals found that the counter-receipts merelycertified the fact of having received from S certain statementson claims for lumber allegedly delivered.

Issue: Did the Court of Appeals decide the case on a newissue not raised in the pleadings before the lower court?

Held: No. The issue of delivery is no issue at all. For deliv-ery and payment in a contract of sale, or for that matter in quasi-contracts, are so interrelated and interwined with each otherthat without delivery of the goods there is no correspondingobligation to pay. The two complement each other. (see Art.1458, par. 1.) It is clear that the two elements cannot be dissoci-ated, for the contract of purchase and sale is, essentially, a bi-lateral contract, as it gives rise to reciprocal obligations. (PioBarretto Sons, Inc. vs. Compania Maritima, 62 SCRA 167 [1975].)

——— ———— ———-

2. To secure payment of the balance of the purchase price ofiron ore, buyer executed a surety bond in favor of seller, the buyer,however, claiming that such payment was subject to a suspensivecondition — the sale of the iron ore by buyer.

Facts: B, owner of a mining claim, appointed S as attorney-in-fact to enter into a contract with any individual or juridicalperson for the exploration and development of said claim on aroyalty basis. S himself embarked upon the exploitation of theclaim.

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Subsequently, B revoked the authority granted by him to Swho assented thereto subject to certain conditions. As a result,a document was executed wherein S transferred to B all of S’srights and interests over the “24 tons of iron ore, more or less”that S had already extracted from the mineral claims in consid-eration of the sum of P75,000.00, P10,000.00 of which was paidupon the signing of the agreement, and “the balance ofP65,000.00 will be paid from and out of the first letter of creditcovering the first shipment of iron ores and of the first amountderived from the local sale of iron ore” from said claims.

To secure the payment of the balance, B executed in favorof S a surety bond. No sale of approximately 24,000 tons of ironore had been made nor had the balance of P65,000.00 been paidto S.

Issue: Is the shipment or local sale of the iron ore a condi-tion precedent (or suspensive condition) to the payment of thebalance, or only a suspensive period or term?

Held: (1) Obligation of B one with a term. — The words of thecontract express no contingency in the buyer’s obligation topay. There is no uncertainty that the payment will have to bemade sooner or later; what is undetermined is merely the exactdate at which it will be made. By the very terms of the contract,therefore, the existence of the obligation to pay is recognized;only its maturity or demandability is deferred.

Furthermore, to subordinate B’s obligation to the sale orshipment of the ore as a condition precedent would be tanta-mount to leaving the payment at his discretion (Art. 1182.), forthe sale or shipment could not be made unless he took steps tosell the ore.

(2) A contract of sale is normally commutative and onerous. —In a contract of sale, not only does each one of the parties as-sume a correlative obligation, but each party anticipates per-formance by the other from the very start.

Nothing is found in the record to evidence that S desiredor assumed to run the risk of losing his right over the ore with-out getting paid for it, or that B understood that S assumed anysuch risk. This is proved by the fact that S insisted on a bond toguarantee the payment of the P65,000.00 and the fact that B didput such bond, indicated that he admitted the definite exist-ence of his obligation to pay the balance of P65,000.00. The only


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

Essential requisites of a contract of sale.

The rules of law governing contracts in general are applica-ble to sales. Like every contract, “sale” has the following requi-sites or elements:

(1) Consent or meeting of the minds. — This refers to the con-sent on the part of the seller to transfer and deliver and on thepart of the buyer to pay. (see Art. 1475.) The parties must havelegal capacity to give consent and to obligate themselves. (Arts.1489, 1490, 1491.) The essence of consent is the conformity of theparties on the terms of the contract, the acceptance by one of theoffer made by the other. The contract to sell is a bilateral contract.Where there is merely an offer by one party without the accept-ance of the other, there is no consent. (Salonga vs. Farrales, 105SCRA 359 [1981].) The acceptance of payment by a party is anindication of his consent to a contract of sale, thereby precludinghim from rejecting its binding effect. (Clarin vs. Rulova, 127 SCRA512 [1984].)

There may, however, be a sale against the will of the owner incase of expropriation (see Art. 1488.) and the three different kindsof sale under the law, namely: an ordinary execution sale (seeRules of Court, Rule 39, Sec. 15.), judicial foreclosure sale (Ibid.,Rule 68.), and extra-judicial foreclosure sale. (Act No. 3135,as amended.) A different set of law applies to each class of salementioned. (see Fiestan vs. Court of Appeals, 185 SCRA 751[1990].)

The sale of conjugal property requires the consent of both thehusband and the wife. The absence of the consent of one rendersthe sale null and void (see Art. 124, Family Code.) while the vitia-tion thereof (see Art. 1390.) makes it merely voidable. (Guiang vs.Court of Appeals, 95 SCAD 264, 290 SCRA 372 [1998].)

(2) Object or subject matter. — This refers to the determinate thingwhich is the object of the contract. (Art. 1460.) The thing must be

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determinate or at least capable of being made determinate becauseif the seller and the buyer differ in regard to the thing sold, thereis no meeting of the minds; therefore, there is no sale. The subjectmatter may be personal or real property. The terms used in thelaw are “thing” (e.g., Art. 1458), “article” (Art. 1467), “goods” (e.g.,Art. 1462), “personal property” (e.g., Art. 1484), “property” (e.g.,Art. 1490), “movable property” (e.g., Art. 1498), “real estate” (e.g.,Art. 1539), “immovable” (e.g., Ibid.), “immovable property” (e.g.,Art. 1544), and “real property.” (Art. 1607.)

A buyer can only claim right of ownership over the object ofthe deed of sale and nothing else. Where the parcel of land de-scribed in the transfer certificate of title is not in its entirety theparcel sold, the court may decree that the certificate of title becancelled and a correct one be issued in favor of the buyer, with-out having to require the seller to execute in favor of the buyer aninstrument to effect the sale and transfer of the property to thetrue owner. (Veterans Federation of the Philippines vs. Court ofAppeals, 138 SCAD 50, 345 SCRA 348 [2000].)

The sale of credits and other incorporeal rights is covered byArticles 1624 to 1635; and

(3) Cause or consideration. — This refers to the “price certainin money or its equivalent” (Art. 1458.) such as a check or a prom-issory note, which is the consideration for the thing sold. It doesnot include goods or merchandise although they have their ownvalue in money. (see Arts. 1468, 1638.) However, the words “itsequivalent” have been interpreted to mean that payment need notbe in money, so that there can be a sale where the thing given astoken of payment has “been assessed and evaluated and [its] priceequivalent in terms of money [has] been determined.” (see Re-public vs. Phil. Resources Dev. Corp., 102 Phil. 968 [1958].)

The price must be real, not fictitious; otherwise, the sale is voidalthough the transaction may be shown to have been in reality adonation or some other contract. (Art. 1471.) A seller cannot renderinvalid a perfected contract of sale by merely contradicting thebuyer’s allegation regarding the price and subsequently raisingthe lack of agreement as to the price. (David vs. Tiongson, 111SCAD 242, 313 SCRA 63 [1999].)


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The absence of any of the above essential elements negatesthe existence of a perfected contract of sale.3 Sale, being a consen-sual contract (see Art. 1475.), he who alleges it must show its ex-istence by competent proof. (Dizon vs. Court of Appeals, 302SCRA 288 [1999].)

Natural and accidental elements.

The above are the essential elements of a contract of sale orthose without which no sale can validly exist. They are to be dis-tinguished from:

(1) Natural elements or those which are deemed to exist in cer-tain contracts, in the absence of any contrary stipulations, likewarranty against eviction (Art. 1548.) or hidden defects (Art.1561.); and

(2) Accidental elements or those which may be present or ab-sent depending on the stipulations of the parties, like conditions,interest, penalty, time or place of payment, etc.

ILLUSTRATIVE CASES:

1. Supposed sale was evidenced by a receipt acknowledging re-ceipt of P1,000.00.

Facts: B bought on a partial payment of P1,000.00, evidencedby a receipt, a portion of a subdivision from S, administrator ofthe testate estate of his deceased spouse. Subsequently, S wasauthorized by the court to sell the subdivision. In the mean-time, PT Co. became the new administrator. It sold the lot toanother which sale was judicially approved.

B files a complaint which seeks, among other things, forthe quieting of title over the lot in question.

Issue: Was there a valid and enforceable sale to B?

Held: No. An examination of the receipt reveals that thesame can neither be regarded as a contract of sale nor a prom-

3When a contract of sale is void, the possessor is entitled to keep the fruits duringthe period for which he held the property in good faith. Good faith of the possessorceases when an action to recover possession of the property is filed against him and heis served summons therefor. (Development Bank of the Phils. vs. Court of Appeals, 316SCRA 650 [1999]; see Arts. 526, 528.)

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ise to sell. There was merely an acknowledgment of the sumP1,000.00. There was no agreement as to the total purchase priceof the land nor to the monthly installments to be paid by B. Therequisites for a valid contract of sale are lacking. (Leabres vs.Court of Appeals, 146 SCRA 158 [1986].)

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2. Buyer did not sign draft of Contract to Sell because it cov-ered seven (7) lots instead of six (6), but sent to seller five (5) checksas down payment which the seller did not encash.

Facts: B Company and S, subdivision developer, agreed toenter into a new Contract to Sell whereby S will sell seven (7)lots at P423,250.00 with a down payment of P42,325.00 and thebalance payable in 48 monthly installments of P7,395.94. Thedraft of the Contract to Sell prepared by S was sent to B Com-pany but B’s president did not sign it although he sent five (5)checks covering the down payment totalling P27,542.72. S re-ceived the checks but did not encash it because B’s presidentdid not sign the draft contract, the reason given by the latterwas that the draft covered seven (7) lots instead of six (6).

Since no written contract was signed, S sued B to recoverpossession of the lots still occupied by the latter.

Issues: (1) May the unsigned draft be deemed to embodythe agreement between the parties?

(2) May the receipt of the five (5) checks by S serve to pro-duce the effect of tender of down payment by B?

Held: (1) Based on the facts, the parties had not arrived at adefinite agreement. The only agreement they arrived at wasthe price indicated in the draft contract. The number of lots tobe sold was a material component of the Contract to Sell. With-out an agreement on the matter, the parties may not in any waybe considered as having arrived at a contract under the law.

(2) Moreover, since the five (5) checks were not encashed,B should have deposited the corresponding amount of the saidchecks as well as the installments agreed upon. A contract tosell, as in this case, involves the performance of an obligation,not merely the exercise of a privilege or a right. Consequently,performance or payment may be effected not by tender of pay-ment alone but by both tender and consignation. It is consigna-tion which is essential to extinguish B’s obligation to pay thebalance of the purchase price. (see Arts. 1256-1258.) B did not


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

Effect of absence of price/non-payment of price.

(1) There can be no sale without a price. (see Art. 1474.) Tech-nically, the cause in sale is, as to the seller, the buyer’s promise topay the price, and as to the buyer, the seller’s promise to deliverthe thing sold. A contract of sale is void and produces no effectwhatsoever where the same is without cause or consideration (Art.1409[3].) in that the purchase price, which appears thereon as paid,has, in fact, never been paid by the buyer to the seller. Such sale isnonexistent and cannot be considered consummated. (Mapalo vs.Mapalo, 17 SCRA 116 [1966]; Ladanga vs. Court of Appeals, 31SCRA 361 [1984]; Castillo vs. Galvan, 85 SCRA 526 [1978].)

Where the figures referred to by the buyer as prices are mereestimates given them by the seller of the condominium units inquestion, the transaction lacks an essential requisite for the per-fection of the contract of sale. (Raet vs. Court of Appeals, 98 SCAD584, 295 SCRA 677 [1998].)

(2) Non-payment of the purchase price is a resolutory condi-tion for which the remedy is either rescission or specific perform-ance under Article 1191 of the Civil Code. It constitutes a verygood reason to rescind a sale, for it violates the very essence ofthe contract of sale. (Central Bank of the Philippines vs. Bachara,328 SCRA 807 [2000].)

But the failure to pay the price in full within a fixed perioddoes not, by itself, dissolve a contract of sale in the absence of anyagreement that payment on time is essential (Ocampo vs. Courtof Appeals, 52 SCAD 610, 233 SCRA 551 [1994]; see Art. 1592.), ormake it null and void for lack of consideration, but results at mostin default on the part of the vendee for which the vendor mayexercise his legal remedies. (Balatbat vs. Court of Appeals, 73SCAD 660, 261 SCRA 128 [1996].) It is incumbent upon the partychallenging the recital of a notarized deed of sale that the vendor

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has received the purchase price to prove his claim with clear andconvincing evidence. A notarized document is evidence of highcharacter. (Diaz vs. Court of Appeals, 145 SCRA 346 [1986].)

An action to declare a contract void or inexistent does notprescribe. (Art. 1410.)

Transfer of title to property for a price,essence of sale.

(1) Obligations to deliver and to pay. — The transfer of title toproperty or agreement to transfer title for a price actually paid orpromised, not a mere physical transfer of the property, is the es-sence of sale. (see Ker & Co., Ltd. vs. Lingad, 38 SCRA 524 [1971];see Gardner vs. Court of Appeals, 131 SCRA 585 [1984]; Santosvs. Court of Appeals, 337 SCRA 67 [2000].) But neither is the de-livery of the thing bought nor the payment of the price necessaryfor the perfection of the contract of sale. Being consensual, it isperfected by mere consent. (See Art. 1475.) However, where theseller can no longer deliver the object of the sale to the buyer be-cause the latter has already acquired title and delivery thereoffrom the rightful owner, such contract may be deemed to be in-operative and may thus fall, by analogy, under Article 1409(5) ofthe Civil Code: “those which contemplate an impossible service,’’since delivery of ownership is no longer possible. (Nool vs. Courtof Appeals, 84 SCAD 941, 276 SCRA 149 [1997]; Heirs of SanMiguel vs. Court of Appeals, 364 SCRA 523 [2001].)

It is only upon the existence of the contract of sale that theseller is obligated to transfer ownership to the buyer and the buyer,to pay the purchase price to the seller. (Chua vs. Court of Ap-peals, 401 SCRA 54 [2003].) In defining the contract of sale, Arti-cle 1458 merely specifies the obligations of the parties to transferownership and to pay under the contract. The parties will havethese obligations even without Article 1458.

ILLUSTRATIVE CASE:

Spouses exchanged their properties for no par shares of a corpo-ration as a result of which they gained control of the corporation.

Facts: Spouses H & W, stockholders of DT Corporation, con-veyed to said DT a parcel of land leased to E, in exchange for


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2,500 shares of stock equivalent to 55% majority in the corpora-tion. E questioned the transaction on the ground that it was notgiven the first option to buy the leased property pursuant tothe proviso in the lease agreement.

Issue: Is the “deed of exchange” a contract of sale which, ineffect, prejudiced E’s right of first refusal over the leased prop-erty?

Held: No. In effect, DT Corporation is a business conduit ofH and W. What they really did was to invest their propertiesand change the nature of their ownership from unincorporatedto incorporated form by organizing DT to take control of theirproperties and at the same time save on inheritance taxes. Thedeed of exchange cannot be considered a contract of sale. Therewas no transfer of actual ownership interests by H and W to athird party. They merely changed their ownership from oneform to another. The ownership remained in the same hands.Hence, E has no basis for its claim of a right of first refusal un-der the lease contract. (Delpher Trades Corporation vs. Intermedi-ate Appellate Court, 157 SCRA 349 [1988].)

(2) Where transfer of ownership not intended by the parties. —A contract for the sale or purchase of goods/commodity to bedelivered at a future time, if entered into without the intentionof having any goods/commodity pass from one party to an-other, but with an understanding that at the appointed time,the purchaser is merely to receive or pay the difference betweenthe contract and the market prices, is illegal. Such contract fallsunder the definition of what is called “futures” in which theparties merely gamble on the rise or fall in prices and is de-clared null and void by law.4 (Onapal Philippines Commodities,Inc. vs. Court of Appeals, 218 SCRA 281 [1993].)

Kinds of contract of sale.

(1) As to presence or absence of conditions. — A sale may beeither:

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

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(a) Absolute. — where the sale is not subject to any condi-tion whatsoever and where title passes to the buyer upondelivery of the thing sold. Thus, it has been held that a deedof sale is absolute in nature although denominated as a “Deedof Conditional Sale” in the absence of any stipulation that thetitle to the property sold is reserved in the vendor until fullpayment of the purchase price nor a stipulation giving thevendor the right to unilaterally rescind the contract the mo-ment the vendee fails to pay within a fixed period. (Dignos vs.Court of Appeals, 158 SCRA 375 [1988]; Pingol vs. Court ofAppeals, 44 SCAD 498, 226 SCRA 118 [1995]; People’s Indus-trial and Commercial Corporation vs. Court of Appeals, 88SCAD 559, 281 SCRA 206 [1997].) In such case, ownership ofthe property sold passes to the vendee upon the actual or con-structive delivery thereof. (see Art. 1497.)

Payment of the purchase price is not essential to the trans-fer of ownership as long as the property sold has been deliv-ered. Such delivery (see Art. 1497.) operates to divest the ven-dor of title to the property which may not be regained or re-covered until and unless the contract is resolved or rescindedin accordance with law (Philippine National Bank vs. Courtof Appeals, 82 SCAD 472, 272 SCRA 291 [1997].); or

(b) Conditional. — where the sale contemplates a contin-gency (Arts. 1461, 1462, par. 2; Art. 1465.), and in general,where the contract is subject to certain conditions (see Art.1503, par. 1.), usually, in the case of the vendee, the full pay-ment of the agreed purchase price (Art. 1478; see People’sHomesite & Housing Corp. vs. Court of Appeals, 133 SCRA777 [1984].) and in the case of the vendor, the fulfillment ofcertain warranties, e.g., the timely eviction of squatters on theproperty sold. (Romero vs. Court of Appeals, 65 SCAD 621,250 SCRA 223 [1995].)

In sales with assumption of mortgage, the assumption ofmortgage is a condition to the seller-mortgagor’s consent tothe sale so that without approval by the mortgagee no sale isperfected and the seller remains the owner and mortgagor ofthe subject property with the right to redeem in the case offoreclosure. (Ramos vs. Court of Appeals, 87 SCAD 24, 279SCRA 118 [1997].)


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However, a sale denominated as a “Deed of ConditionalSale’’ is still absolute where the contract is devoid of any pro-viso that title is reserved or the right to unilaterally rescind isstipulated, e.g., until or unless the price is paid. (Heirs of JuanSan Andres vs. Rodriguez, 332 SCRA 769 [2000].)

The delivery of the thing sold does not transfer title untilthe condition is fulfilled. Where the condition is imposed, in-stead, upon the perfection of the contract the failure of suchcondition would prevent such perfection (Galang vs. Court ofAppeals, 43 SCAD 737, 225 SCRA 37 [1993]; Roque vs. Lapuz,96 SCRA 741 [1980]; Babasa vs. Court of Appeals, 94 SCAD 679,290 SCRA 532 [1998].) or the juridical relation itself from com-ing into existence.

If the condition is imposed on an obligation of a party (e.g.,ejection by the vendor of squatters within a certain periodbefore delivery of property) not upon the perfection of thecontract itself, which is not complied with, the other party mayeither refuse to proceed or waive said condition. (see Art. 1545;Romero vs. Court of Appeals, 65 SCAD 621, 250 SCRA 223[1995].) The stipulation that the “payment of the full consid-eration [of a parcel of land] shall be due and payable in five(5) years from the execution of a formal deed of sale’’ is not acondition which affects the efficacy of the contract of sale. Itmerely provides the manner by which the full considerationis to be computed and the time within which the same is to bepaid. (Heirs of Juan San Andres vs. Rodriguez, supra.) Simi-larly, the mere fact that the obligation of the buyer to paythe balance of the purchase price was made subject to thecondition that the seller first deliver the reconstituted title ofthe house and lot sold does not make the contract a contractto sell for such condition is not inconsistent with a contract ofsale. (Laforteza vs. Machuca, 127 SCAD 798, 333 SCRA 643[2000].)

(2) Other kinds. — There are, of course, other kinds of saledepending on one’s point of view, e.g., as to the nature of the sub-ject matter (real or personal, tangible or intangible), as to mannerof payment of the price (cash or installment), as to its validity(valid, rescissible, unenforceable, void), etc.

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Contract of sale and contract to sellwith reserved title distinguished.

At this stage, it would be desirable to point out that there aredistinctions between the two contracts.

(1) Transfer of title. — In a contract of sale, title passes to thebuyer upon delivery of the thing sold, while in a contract to sell(or of “exclusive right and privilege to purchase”), where it isstipulated that ownership in the thing shall not pass to the pur-chaser until he has fully paid the price (Art. 1478.), ownership isreserved in the seller and is not to pass until the full payment ofthe purchase price. In the absence of such stipulation, especiallywhere the buyer took possession of the property upon executionof the contract, indicates that what the parties contemplated is acontract of absolute sale.

(2) Payment of price. — In the first case, non-payment of theprice is a negative resolutory condition (see Art. 1179.), and theremedy of the seller is to exact fulfillment or to rescind the con-tract (see Arts. 1191, 1592.), while in the second case, full paymentis a positive suspensive condition, the failure of which is not abreach, casual or serious, of the contract but simply an event thatprevents the obligation of the vendor to convey title from acquir-ing binding force. (Manvel vs. Rodriguez, 109 Phil. 1 [1960]; Roquevs. Lapuz, 96 SCRA 741 [1980]; Jacinto vs. Kaparaz, 209 SCRA 246[1992]; Adelfa Properties, Inc. vs. Court of Appeals, 58 SCAD 462,240 SCRA 565 [1995].) Where the seller promises to execute a deedof absolute sale upon full payment of the purchase price, the agree-ment is a contract to sell. (Rayos vs. Court of Appeals, 434 SCRA365 [2004].)

(3) Ownership of vendor. — Being contraries, their effect in lawcannot be identical. In the first case, the vendor has lost and can-not recover the ownership of the thing sold and delivered, actu-ally or constructively (see Art. 1497.), until and unless the con-tract of sale itself is resolved and set aside. In the second case,however, the title remains in the vendor if the vendee does notcomply with the condition precedent of making payment at thetime specified in the contract. (see Heirs of P. Escanlar vs. Courtof Appeals, 88 SCAD 532, 281 SCRA 176 [1997]; People’s Indus-trial and Commercial Corporation vs. Court of Appeals, 281 SCRA


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206 [1997]; Luzon Brokerage Co. vs. Maritime Bldg. Co., Inc., 43SCRA 93 [1972] and 86 SCRA 305 [1978]; Katigbak vs. Court ofAppeals, 4 SCRA 243 [1962]; Lim vs. Court of Appeals, 182 SCRA564 [1990]; Tuazon vs. Garilao, 152 SCAD 699, 362 SCRA 654[2001].) There is no actual sale until and unless full payment ofthe price is made (see Bowe vs. Court of Appeals, 220 SCRA 158[1993].) and a contract of sale is entered into to consummate thesale. If the vendor should eject the vendee for failure to meet thecondition precedent he is enforcing the contract and not rescind-ing it. Article 11915 is not applicable. A contract to sell is commonlyentered into so as to protect the seller against a buyer who intendsto buy a property in installments by withholding ownership overthe property until the buyer effects full payment therefore. (Cityof Cebu vs. Heirs of C. Rubi, 106 SCAD 61, 306 SCRA 408 [1999].)

A stipulation in a contract providing for automatic rescissionupon non-payment of the purchase price within the stipulatedperiod is valid. (see Art. 1191.) It is in the nature of an agreementgranting a party the right to rescind a contract unilaterally in caseof breach without need of going to court. (Pangilinan vs. Courtof Appeals, 87 SCAD 408, 279 SCRA 590 [1997].)

ILLUSTRATIVE CASES:

1. Vendor “sells, transfers, and conveys” a land to the vendeewho may sell or assign the land prior to full payment of allinstallments.

Facts: The dispositive part of a deed entitled “Deed of Saleof Real Property” states: “for and in consideration of the sumof P140,000, payable under the terms and conditions stated inthe foregoing premises, the VENDOR sells, transfers and con-

5Art. 1191. The power to rescind obligations is implied in reciprocal ones, in caseone of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of theobligation, with the payment of damages in either case. He may also seek rescission,even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizingthe fixing of a period.

This is understood to be without prejudice to the rights of third persons who haveacquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.(1124)

Art. 1458

19

veys unto the VENDEE x x x” the property in question as ofDecember 22, 1971, the date of said document.”

In paragraph 5 thereof, it is provided that “should theVENDEE prior to the full payment of all the amounts afore-mentioned, decide to sell or to assign part or all of the afore-mentioned parcel of land, the VENDOR shall be informed inwriting and shall have the option to repurchase the property xx x. Should the VENDOR herein decide to repurchase and theproperty is sold or transferred to a third person, the balance ofthe consideration herein still due to the VENDOR shall consti-tute automatically a prior lien on the consideration to be paidby the third person to herein VENDEE.”

Issue: Is the above instrument a contract to sell?

Held: No. (1) Title to land transferred to vendee. — “It is a deedof sale in which title to the subject land was transferred to thevendee as of the date of the transaction, notwithstanding thatthe purchase price had not yet been fully paid at that time.Under the first-cited stipulation, what is deferred is not thetransfer of ownership but the full payment of the purchase price,which is to be made in installments, on the dates indicated.Under the second stipulation, it is recognized that the vendeemay sell the property even ‘prior to full payment of all theamounts aforementioned,’ which simply means that althoughthe purchase price had not yet been completely paid, the vendeehad already become the owner of the land. As such, he couldsell the same subject to the right of repurchase reserved to thevendor.”

(2) Right of vendor where land sold by vendee. — “In fact, thecontract also provides for the possibility of the vendee sellingthe property to a third person, in which case the vendor, if shewishes to repurchase the land, shall have a lien on any balanceof the consideration to be paid by the third person to thevendee.” (Filoil Marketing Corp. vs. Intermediate Appellate Court,169 SCRA 293 [1989].)

———— ———— ————

2. The sale of scrap iron is subject to the condition that thebuyer will open a letter of credit in favor of the seller for P250,000.00on or before May 15, 1983.

Facts: In May 1, 1983, B (buyer) and S (seller) entered into acontract entitled “Purchase and Sale of Scrap Iron” whereby S


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bound itself to sell the scrap iron upon the fulfillment by B ofhis obligation to make or indorse an irrevocable and uncondi-tional letter of credit not later than May 15, 1983.

On May 17, 1983, B, through his men, started to dig andgather scrap iron at S’s premises. S cancelled the contract be-cause of B’s alleged non-compliance with the essential precon-ditions among which is the opening of the letter of credit. Itappeared that the opening of the letter of credit was made onMay 26, 1983 by a corporation which was not a party to thecontract, with a bank not agreed upon, and was not irrevocableand unconditional, for it was without recourse and stipulatedcertain conditions.

In his complaint, B, private respondent, prayed for judg-ment ordering S, petitioner corporation, to comply with thecontract and to pay damages.

Issue: Is the transaction between S and B a mere contract tosell or promise to sell, and not a contract of sale?

Held: (1) The contract is not one of sale. — “The petitionercorporation’s obligation to sell is unequivocally subject to apositive suspensive condition, i.e., the private respondent’sopening, making or indorsing of an irrevocable and uncondi-tional letter of credit. The former agreed to deliver the scrapiron only upon payment of the purchase price by means of anirrevocable and unconditional letter of credit. Otherwise stated,the contract is not one of sale where the buyer acquired owner-ship over the property subject to the resolutory condition thatthe purchase price would be paid after delivery. Thus, therewas to be no actual sale until the opening, making or indorsingof the irrevocable and unconditional letter of credit. Since whatobtains in the case at bar is a mere promise to sell, the failure ofthe private respondent to comply with the positive suspensivecondition cannot even be considered a breach — casual or seri-ous — but simply an event that prevented the obligation ofpetitioner corporation to convey title from acquiring bindingforce.”

(2) The obligation of the petitioner corporation to sell did notarise. — “Consequently, the obligation of the petitioner corpo-ration to sell did not arise; it, therefore, cannot be compelled byspecific performance to comply with its prestation. In short,Article 1191 of the Civil Code does not apply; on the contrary,pursuant to Article 1597 of the Civil Code, the petitioner cor-

Art. 1458

21

poration may totally rescind, as it did in this case, the contract.’’Since the refusal of petitioner to deliver the scrap iron wasfounded on the “non-fulfillment by the private respondent of asuspensive condition,’’ it cannot be held liable for damages.(Visayan Sawmill Company, Inc. vs. Court of Appeals, 219 SCRA381 [1993].)

Romero, J., dissenting:

(1) The contract reached the stage of perfection. — “Evidently,the distinction between a contract to sell and a contract of saleis crucial in this case. Article 1458 has this definition: x x x. Ar-ticle 1475 gives the significance of this mutual undertaking ofthe parties, thus: x x x. Thus, when the parties entered into thecontract entitled “Purchase and Sale of Scrap Iron” on May 1,1983, the contract reached the stage of perfection, there being ameeting of the minds upon the object which is the subject mat-ter of the contract and the price which is the consideration.Applying Article 1475 from that moment, the parties may recip-rocally demand performance of the obligations incumbent uponthem, i.e., delivery by the vendor and payment by the vendee.

(2) The seller has placed the goods in the control and possessionof the vendee. — From the time the seller gave access to the buyerto enter his premises, manifesting no objection thereto but evensending 18 or 20 people to start the operation, he has placedthe goods in the control and possession of the vendee and de-livery is effected. For, according to Article 1497, “The thing soldshall be understood as delivered when it is placed in the con-trol and possession of the vendee.”

(3) That payment of the price in any form was not yet effected isimmaterial to the transfer of ownership. — “That payment of theprice in any form was not yet effected is immaterial to the trans-fer of the right of ownership. In a contract of sale, the nonpay-ment of the price is a resolutory condition which extinguishesthe transaction that, for a time, existed and discharges the obli-gations created thereunder. x x x.

“Consequently, in a contract of sale, after delivery of theobject of the contract has been made, the seller loses ownershipand cannot recover the same, unless the contract is rescinded.But in the contract to sell, the seller retains ownership and thebuyer’s failure to pay cannot even be considered a breach,whether casual or substantial, but an event that prevented theseller’s duty to transfer title to the object of the contract.”


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(4) The transaction is an absolute contract of sale and not a con-tract to sell. — “The phrase in the contract ‘on the followingterms and conditions’ is standard form which is not to be con-strued as imposing a condition, whether suspensive or reso-lutory, in the sense of the happening of a future and uncertainevent upon which an obligation is made to depend. There mustbe a manifest understanding that the agreement is in what maybe referred to as “suspended animation” pending compliancewith provisions regarding payment. The reservation of title tothe object of the contract in the seller is one such manifestation.Hence, it has been decided in the case of Dignos vs. Court ofAppeals (158 SCRA 375 [1988].) that, absent a proviso in the con-tract that the title to the property is reserved in the vendor un-til full payment of the purchase price or a stipulation givingthe vendor the right to unilaterally rescind the contract themoment the vendee fails to pay within the fixed period, thetransaction is an absolute contract of sale and not a contract tosell.”

Contract to sell and conditional saledistinguished.

A contract to sell may be defined as a bilateral contractwhereby the prospective seller, while expressly reserving theownership of the subject property despite delivery thereof to theprospective buyer, binds himself to sell the said property exclu-sively to the prospective buyer upon fulfillment of the conditionagreed upon, that is, full payment of the purchase price.

(1) Transfer of title to the buyer. — A contract to sell as definedabove may not even be considered as a conditional contract of salewhere the seller may likewise reserve title to the property subjectof the sale until the fulfillment of the suspensive condition, be-cause in a conditional contract of sale, the first element of con-sent is present, although it is conditioned upon the happening ofa contingent event which may or may not occur. If the suspensivecondition is not fulfilled, the perfection of the contract of sale iscompletely abated. (cf. Homesite and Housing Corp. vs. Court ofAppeals, 133 SCRA 777 [1984].) However, if the suspensive con-dition is fulfilled, the contract of sale is thereby perfected, suchthat if there had already been previous delivery of the propertysubject of the sale to the buyer, ownership thereto automatically

Art. 1458

23

transfers to the buyer by operation of law without any further acthaving to be performed by the seller.

In a contract to sell, upon the fulfillment of the suspensivecondition which is the full payment of the purchase price, own-ership will not automatically transfer to the buyer although theproperty may have been previously delivered to him. The pro-spective seller still has to convey title to the prospective buyer byentering into a contract of absolute sale to consummate the trans-action.

(2) Sale of subject property to a third person. — It is essential todistinguish between a contract to sell and a conditional contractof sale specially in cases where the subject property is sold by theowner not to the party the seller contracted with, but to a thirdperson. In a contract to sell, there being no previous sale of theproperty, a third person buying such property despite thefulfillment of the suspensive condition such as the full paymentof the purchase price, for instance, cannot be deemed a buyer inbad faith and the prospective buyer cannot seek the relief of re-conveyance of the property. There is no double sale in such case.Title to the property will transfer to the buyer after registrationbecause there is no defect in the owner-seller’s title per se, but thelatter, of course, may be sued for damages by the intending buyer.6

In a conditional contract of sale, however, upon the fulfillmentof the suspensive condition, the sale becomes absolute and this willdefinitely affect the seller’s title thereto. In fact, if there had beenprevious delivery of the subject property, the seller’s ownershipor title to the property is automatically transferred to the buyer,such that the seller will no longer have any title to transfer to anythird person. Applying Article 1544 of the Civil Code, such sec-ond buyer of the property who may have had actual or construc-tive knowledge of such defect in the seller’s title, or at least wascharged with the obligation to discover such defect, cannot be aregistrant in good faith. Such second buyer cannot defeat the firstbuyer’s title. In case a title is issued to the second buyer, the first


6A prior contract to sell made by a decedent during his lifetime prevails over asubsequent sale made by an administrator without probate court approval. The estate isbound to convey the property upon full payment of the consideration. (Liu vs. Loy, Jr.,438 SCRA 244 [2004].)

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buyer may seek reconveyance of the property subject of the sale.(Coronel vs. Court of Appeals, 75 SCAD 141, 263 SCRA 15 [1996].)

Other cases of contract to sell.

(1) Where the subject matter is not determinate (Arts. 1458,1460.) or the price is not certain (Art. 1458.), the agreement ismerely a contract to sell. (Yu Tek vs. Gonzales, 29 Phil. 384 [1915];Ong & Jang Chuan vs. Wise & Co., 33 Phil. 339 [1916].) For pur-poses of the perfection of a contract of sale (see Art. 1475.), thereis already a price certain where the determination of the price isleft to the judgment of a specified person or persons (see Art. 1469,par. 1.), and notwithstanding that such determination has yet tobe made.

(2) A sale of future goods (see Art. 1462.) even though thecontract is in the form of a present sale operates as a contract tosell the goods.

(3) Where the stipulation of the parties is that the deed of saleand corresponding certificate of sale would be issued only afterfull payment of the purchase price, the contract entered into is acontract to sell and not a contract of sale. (David vs. Tiongson,111 SCAD 242, 313 SCRA 63 [1999].)

It has been held that the act of the vendor of delivering thepossession of the property (land) to the vendee contemporane-ous with the contract (deed of sale in a private instrument) wasan indication that an absolute contract of sale was intended bythe parties and not a contract to sell. (Dignos vs. Court of Appeals,158 SCRA 375 [1988].)

ILLUSTRATIVE CASE:

Seller of interest in a business claims the profits derived by busi-ness before the price thereof was fixed by appraisers designated by theparties in the contract.

Facts: S sold to B his interest in a company, the price to beascertained by three (3) appraisers. After six (6) months, theappraisers rendered their report at which time S signed a docu-ment whereby he acknowledged receipt of the price arrived atand relinquished any claim that he had in the business. The

Art. 1458

25

report of the appraisers did not contain any segregation of theassets of the business from the accumulated profits.

S is now claiming the profits from B from the time of theexecution of the sale to the time he acknowledged receipt ofthe price on the ground that before the price was fixed by theappraisers, the contract was not a sale but merely a contract tosell.

Issue: Is this contention of S tenable?

Held: No. The contract of sale is perfected when the partiesagree upon the thing sold and upon the price (see Art. 1475.), itbeing sufficient for the price to be certain that its determina-tion be left to the judgment of a specified person. (Barretto vs.Sta. Maria, 26 Phil. 200 [1913].)

ART. 1459. The thing must be licit and the vendormust have a right to transfer the ownership thereof atthe time it is delivered. (n)

Requisites concerning object.

(1) Things. — Aside from being (a) determinate (Arts. 1458,1460.), the law requires that the subject matter must be (b) licit orlawful, that is, it should not be contrary to law, morals, good cus-toms, public order, or public policy (Arts. 1347, 1409[1, 4].), andshould (c) not be impossible. (Art. 1348.) In other words, like anyother object of a contract, the thing must be within the commerce ofmen.

If the subject matter of the sale is illicit, the contract is voidand cannot, therefore, be ratified. (Art. 1409.) In such a case, therights and obligations of the parties are determined by applyingthe following articles of the Civil Code:

“Art. 1411. When the nullity proceeds from the illegality ofthe cause or object of the contract, and the act constitutes a crimi-nal offense, both parties being in pari delicto, they shall have noaction against each other, and both shall be prosecuted. Moreo-ver, the provisions of the Penal Code relative to the disposal ofeffects or instruments of a crime shall be applicable to the thingsor the price of contract.

This rule shall be applicable when only one of the parties is


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guilty; but the innocent one may claim what he has given, andshall not be bound to comply with his promise.”

“Art. 1412. If the act in which the unlawful or forbiddencause consists does not constitute a criminal offense, the fol-lowing rules shall be observed:

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

(2) When only one of the contracting parties is at fault, hecannot recover what he has given by reason of the contract, orask for the fulfillment of what has been promised him. Theother, who is not at fault, may demand the return of what hehas given without any obligation to comply with his promise.”

(2) Rights. — All rights which are not intransmissible or per-sonal may also be the object of sale (Art. 1347.), like the right ofusufruct (Art. 572.), the right of conventional redemption (Art.1601.), credit (Art. 1624.), etc.

Examples of intransmissible rights are the right to vote, rightto public office, marital and parental rights, etc.

No contract may be entered upon future inheritance exceptin cases expressly authorized by law. (Art. 1347, par. 2.) Whileservices may be the object of a contract (Art. 1347, par. 3.), theycannot be the object of a contract of sale. (Art. 1458; see Art. 1467.)

Kinds of illicit things.

The thing may be illicit per se (of its nature) or per accidens (be-cause of some provisions of law declaring it illegal).

Article 1459 refers to both. Decayed food unfit for consump-tion is illicit per se, while lottery tickets (Art. 195, Revised PenalCode.) are illicit per accidens. Land sold to an alien is also per acci-dens because the sale is prohibited by the Constitution.7 The rule

7A sale of land in violation of the constitutional prohibition against the transfer oflands to aliens (Art. XII, Sec. 7, Constitution.) is void (see Art. 1409[1, 7].) and the selleror his heirs may recover the property. But where a land is sold to an alien, who later soldit to a Filipino, the sale to the latter cannot be impugned. (Herrera vs. Tuy Kim Guan, 1SCRA 406 [1961]; Godinez vs. Fong Pak Luen, 120 SCRA 223 [1983].)

Art. 1459

27

is well-settled that the mortgagor (or pledgor) continues to be theowner of the property mortgaged, and, therefore, has the powerto alienate the same; however, he is obliged, under pain of penalliability, to secure the consent of the mortgagee. (Service Special-ist, Inc. vs. Intermediate Appellate Court, 174 SCRA 80 [1989].)

Right to transfer ownership.

(1) Seller must be owner or authorized by owner of thing sold. —It is essential in order for a sale to be valid that the vendor mustbe able to transfer ownership (Art. 1458.) and, therefore, he mustbe the owner or at least must be authorized by the owner of thething sold. This rule is in accord with a well-known principle oflaw that one can not transmit or dispose of that which he doesnot have — nemo dat quod non-habet. Accordingly, one can sell onlywhat one owns or is authorized to sell, and the buyer can acquireno more than what the seller can transfer legally. (Azcona vs.Reyes & Larracas, 59 Phil. 446 [1934]; Manalo vs. Court of Appeals,366 SCRA 752 [2001]; Tangalin vs. Court of Appeals, 159 SCAD343, 371 SCRA 49 [2001]; for exceptions, see Art. 1505.)

Thus, a sale of paraphernal (separate) property of the deceasedwife by the husband who was neither an owner nor administra-tor of the property at the time of sale is void ab initio. Such beingthe case, the sale cannot be the subject of ratification by the ad-ministrator or the probate court. (Manotok Realty, Inc. vs. Courtof Appeals, 149 SCRA 372 [1987].) Only so much of the share ofthe vendor-co-owner can be validly acquired by the vendee evenif he acted in good faith in buying the shares of the other co-own-ers. (Segura vs. Segura, 165 SCRA 368 [1988].) Where the sale fromone person to another was fictitious as there was no considera-tion, and, therefore, void and inexistent, the latter has no title toconvey to third persons. (Traders Royal Bank vs. Court of Appeals,80 SCAD 12, 269 SCRA 15 [1997].)

(2) Right must exist at time of delivery. — Article 1459, however,does not require that the vendor must have the right to transferownership of the property sold at the time of the perfection of thecontract. (Martin vs. Reyes, 91 Phil. 666 [1952].) Perfection per sedoes not transfer ownership which occurs upon the actual or con-structive delivery of the thing sold. Sale, being a consensual con-


28 SALES

tract, it is perfected by mere consent (see Art. 1475.), and owner-ship by the seller of the thing sold is not an element for its perfec-tion. It is sufficient if the seller has the “right to transfer the own-ership thereof at the time it is delivered.” Thus, the seller isdeemed only to impliedly warrant that “he has a right to sell thething at the time when the ownership is to pass.” (Art. 1547[1].)

The reason for the rule is obvious. Since future goods (Arts.1461, par. 1; 1462 par. 1.) or goods whose acquisition by the sellerdepends upon a contingency (Art. 1462, par. 2.) may be the sub-ject matter of sale, it would be inconsistent for the article to re-quire that the thing sold must be owned by the seller at the timeof the sale inasmuch as it is not possible for a person to own athing or right not in existence. An agreement providing for thesale of property yet to be adjudicated by a court is thus valid andbinding. (Republic vs. Lichauco, 46 SCRA 305 [1972].)

(3) Where property sold registered in name of seller who employedfraud in securing his title. — Although generally a forged or fraudu-lent deed is a nullity and conveys no title, there are instances whensuch a document may become the root of a valid title. One suchinstance is where the certificate of title was already transferredfrom the name of the true owner to the forger, and while it re-mained that way, the land was subsequently sold to an innocentpurchaser for value. Where there is nothing in the certificate toindicate any cloud or vice in the ownership of the property, or anyencumbrance thereon, or in the absence of any fact or circumstanceto excite suspicion, the purchaser is not required to explore fur-ther than what the Torrens title upon its face indicates in questfor any hidden defect or inchoate right that may subsequentlydefeat his right thereto.

If the rule were otherwise, the efficacy and conclusiveness ofthe certificate of title which the Torrens System seeks to insurewould entirely be futile and nugatory. The established rule is thatthe rights of an innocent purchaser for value must be respectedand protected, notwithstanding the fraud employed by the sellerin securing his title. The proper recourse of the true owner of theproperty who was prejudiced and fraudulently dispossessed ofthe same is to bring an action for damages against those whocaused or employed the fraud, and if the latter are insolvent, an

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29

action against the Treasurer of the Philippines may be filed forrecovery of damages against the Assurance Fund. (Fule vs. Legare,7 SCRA 351 [1951]; Pino vs. Court of Appeals, 198 SCRA 434 [1991];Phil. National Bank vs. Court of Appeals, 187 SCRA 735[1990]; Eduarte vs. Court of Appeals, 68 SCAD 179, 256 SCRA 391[1996].)

(4) Where properly sold in violation of a right of first refusal ofanother person. — The prevailing doctrine is that a contract of saleentered into in violation of a right of first refusal of another per-son, while valid is rescissible. (Guzman, Bocaling and Co. vs.Bonnevie, 206 SCRA 668 [1992]; Conculada vs. Court of Appeals,156 SCAD 624, 367 SCRA 164 [2001].) A right of first refusal isneither “amorphous nor merely preparatory’’ and can be executedaccording to its terms. In contracts of sale, the basis of the right offirst refusal must be the current offer of the seller to sell or theoffer to purchase of the prospective buyer. Only after the granteefails to exercise his right under the same terms and within theperiod contemplated can the owner validly offer to sell the prop-erty to a third person, again, under the same terms as offered tothe grantee. (Polytechnic University of the Philippines vs. Courtof Appeals, 368 SCRA 691 [2001]; Equatorial Realty Development,Inc. vs. Mayfair, Inc., 76 SCAD 407, 264 SCRA 483 [1996];Parañaque King’s Enterprises, Inc. vs. Court of Appeals, 79 SCAD936, 268 SCRA 727 [1997].) Where, however, there is no showingof bad faith on the part of the vendee, the contract of sale may notbe rescinded (see Arts. 1380-1381[3].), and the remedy of the per-son with the right of first refusal is an action for damages againstthe vendor. (Rosencor Development Corporation vs. Inquing, 145SCAD 484, 354 SCRA 119 [2001].)

(5) Where real property, subject of unrecorded sale, subsequentlymortgaged by seller which mortgage was registered. — The mortga-gee’s registered mortgage right over the property is inferior to thatof the buyer’s unregistered right. The unrecorded sale betweenthe buyer and the seller is preferred for the reason that if the sellerthe original owner, had parted with his ownership of the thingsold then, he no longer had ownership and free disposal of thatthing so as to be able to mortgage it again. Registration of themortgage is of no moment since it is understood to be withoutprejudice to the better right of third parties. (State Investment


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House, Inc. vs. Court of Appeals, 69 SCAD 135, 254 SCRA 368[1996]; Dela Merced vs. GSIS, 154 SCAD 816, 365 SCRA 1 [2001].)

ART. 1460. A thing is determinate when it is par-ticularly designated or physically segregated from allothers of the same class.

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

Subject matter must be determinate.

(1) When thing determinate. — A thing is determinate or spe-cific (not generic) when it is particularly designated or physicallysegregated from all others of the same class. (see Art. 1636[1].) Thisrequisite that the object of a contract of sale must be determinateis in accordance with the general rule that the object of every con-tract must be determinate as to its kind. (Art. 1349.) A determi-nate thing is identified by its individuality, e.g., my car (if I haveonly one); the watch I am wearing; the house located at the cor-ner of Rizal and Del Pilar Streets, etc.;

(2) Sufficient if subject matter capable of being made determinate.— It is not necessary that the thing sold must be in sight at thetime the contract is entered into. It is sufficient that the thing isdeterminable or capable of being made determinate without thenecessity of a new or further agreement between the parties (Art.460, par. 2; see Melliza vs. City of Iloilo, 23 SCRA 477 [1968].) toascertain its identity, quantity, or quality. The fact that such anagreement is still necessary constitutes an obstacle to the exist-ence of the contract (Art. 1349.) and renders it void. (Art. 1409[3].)

Thus, a person may validly sell all the cavans of rice in a par-ticular bodega or a parcel of land located at a particular street butif the bodega is not specified and the seller has more than onebodega or owns more than one parcel of land at the particularstreet, and it cannot be known what may have been sold, the con-tract shall be null and void. (Arts. 1378, par. 2; 1409[6].) Similarly,an obligation by a person to sell one of his cars is limited to the

Art. 1460

31

cars owned by him. The subject matter is determinable; it becomesdeterminate the moment it is delivered.

In a case, the respondent purchased a portion of a lot contain-ing 345 square meters, which portion is located in the middle ofanother lot with a total area 854 square meters, and referred to inthe receipt as the “previously paid lot.’’ held: “Since the lot subse-quently sold to respondent is said to adjoin the ‘previously paidlot’ on three sides thereof, the subject lot is capable of being de-termined without the need of any new contract. The fact that theexact area of these adjoining residential lots is subject to the re-sult of a survey does not detract from the fact that they are deter-minate or determinable.’’ (Heirs of Juino San Andres vs.Rodriguez, 337 SCRA 769 [2000].)

ILLUSTRATIVE CASES:

1. Tobacco factory sold was specifically pointed out. — A to-bacco factory with its contents having been specifically pointedout by the parties and distinguished from all other tobacco fac-tories was held sold under a contract which did not provide forthe delivery of the price of the thing until a future time.(McCullough vs. Aenille Co., 13 Phil. 284 [1909].)

——— ———— ———-

2. Payment of price was withheld pending proof by vendor ofhis ownership. — A sale of a specific house was held perfectedbetween the vendor and the vendee, although the delivery ofthe price was withheld until the necessary documents of own-ership were prepared by the vendee. (Borromeo vs. Franco, 5 Phil.49 [1905].)

———— ———— ————

3. Purchase price agreed upon had not yet been paid. — A quan-tity of hemp delivered by the vendor into the warehouse of thevendee and thus set apart and distinguished from all otherhemp was held sold, although the purchase price which hadbeen agreed upon had not yet been paid. (see Tan Leoncio vs. GoInqui, 8 Phil. 531 [1907].)

———— ———— ————

4. Subject matter is sugar of specified quantity and given qual-ity. — A contract whereby a party obligates himself to sell for a


32 SALES

price certain (P3,000.00) a specified quantity of sugar (600 piculs)of a given quality (of the first grade and second grade) withoutdesignating a particular lot of sugar, is not perfected until thequantity agreed upon has been selected and is capable of beingphysically designated and distinguished from all other sugar.(Yu Tek & Co. vs. Gonzales, 29 Phil. 348 [1915]; De Leon vs. Aquino,87 Phil. 193 [1950].)

In this case, the contract is merely an executory contract tosell, its subject matter being a generic or indeterminate thing. Athing is generic when it is indicated only by its kind and cannotbe pointed out with particularity.

———— ———— ————

5. Subject matter is flour of a certain brand and specified quan-tity. — Similarly, the undertaking of a party to sell 1,000 sacksof “Mano” flour at P11.05 per barrel, 500 to be delivered in Sep-tember and 500, in October, is a promise to deliver a genericthing and not a determinate thing within the meaning of Arti-cle 1460. Hence, there is no perfected sale. (Ong & Jang Chuanvs. Wise & Co., 33 Phil. 339 [1916].)

———— ———— ————

6. Subject matter are palay grains produced in the farmland.— Where S initially offered to sell palay grains in his farmlandto NFA and the latter accepted to buy 2,640 cavans, there wasalready a meeting of the minds between the parties. The objectof the contract, being the palay grains produced in S’s farm-land and the NFA was to pay the same depending upon itsquality. The fact that the exact number of cavans of palay to bedelivered has not been determined does not affect the perfec-tion of the contract.

In this case, there was no need for NFA and S to enter intoa new contract to determine the exact number of cavans of palayto be sold. S can deliver so much of his produce as long as itdoes not exceed 2,640 cavans. (National Grains Authority vs. In-termediate Appellate Court, 171 SCRA 131 [1989].)

———— ———— ————

7. Lots sold were described by their lot numbers and area andas the ones needed according to a named development plan. — Thedeed of sale describes the four parcels of land sold by their lotnumbers and area; and then it goes on to further describe notonly those lots already mentioned but the lots object of the sale,

Art. 1460

33

by stating that said lots are the ones needed for the construc-tion of the City Hall site, avenues and parks according to theArellano Plan, the development plan of the city, which was thenin existence.

It was held that the specific mention of some of the lotsplus the statement that the lots object of the sale are the onesneeded, etc., according to the aforementioned plan, sufficientlyprovide a basis, as of the time of the execution of the contract,for rendering determinate said lots without the need of a newand further agreement of the parties. (Melliza vs. City of Iloilo,23 SCRA 477 [1968].)

———— ———— ————

8. Receipt issued stated that the lot being purchased was theone earlier earmarked for the buyer’s sister. — B presented the fol-lowing receipt signed by S, seller, as evidence of payment: “Re-ceived from B the sum of P500.00 as additional partial paymentfor the lot which is the portion formerly earmarked for Twherein she already paid the sum of P1,500; hence, by agree-ment of B and T, who are sisters, the sum of P1,500.00 is ap-plied as additional payment for and in behalf of B, therebymaking the total payments made by B to said lot in the sum ofP2,000.00.’’ The subject lot is adequately described in the re-ceipt, or at least can be easily determinable. Any mistake in thedesignation of the lot does not vitiate the consent of the partiesor affect the validity and binding effect of the contract of sale.(David vs. Tiongson, 111 SCAD 242, 313 SCRA 63 [1999].)

———— ———— ————

9. Sugar quota of certain number of piculs sold without speci-fication of the land to which it relates. — Section 4 of R.A. No. 1825(An Act to Provide for the Allocation, Reallocation and Admin-istration of the Absolute Quota of Sugar) reads: “The produc-tion allowance or quota corresponding to each piece of landunder the provisions of this Act shall be deemed to be an im-provement attaching to the land entitled thereto.

The intangible property that is the sugar quota should beconsidered as real property by destination, an improvementattaching to the land entitled thereto.” Sugar quota allocationsdo not have existence independently of any particular tract ofland. There can be no sale simply of sugar quota of a certainnumber of piculs without specification of the land to which it


34 SALES

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

ART. 1461. Things having a potential existence maybe the object of the contract of sale.

The efficacy of the sale of a mere hope or expect-ancy is deemed subject to the condition that the thingwill come into existence.

The sale of a vain hope or expectancy is void. (n)

Sale of things having potential existence.

Even a future thing (Arts. 1461, par. 1; 1347, par. 1.) not exist-ing at the time the contract is entered into may be the object ofsale provided it has a potential or possible existence, that is, it isreasonably certain to come into existence as the natural incrementor usual incident of something in existence already belonging tothe seller, and the title will vest in the buyer the moment the thingcomes into existence.

Thus, a valid sale may be made of “the wine a vine is ex-pected to produce; or the grain a field may grow in a given time;or the milk a cow may yield during the coming year; or the woolthat shall thereafter grow upon a sheep; or what may be taken atthe next cast of a fisherman’s net; or the goodwill of a trade, orthe like. The thing sold, however, must be specific and identified.They must be also owned by the vendor at the time.” (Sibal vs.Valdez, 50 Phil. 522 [1927]; Pichel vs. Alonzo, 111 SCRA 341 [1982];see 46 Am. Jur. 223.)

Sale of a mere hope or expectancy.

The efficacy of the sale of a mere hope or expectancy is deemedsubject to the condition that the thing contemplated or expectedwill come into existence. (par. 2.)

The sale really refers to an “expected thing” which is not yetin existence, and not to the hope or expectancy which alreadyexists, in view of the condition that the thing will come into exist-ence. But the sale of a mere hope or expectancy is valid even if the

Art. 1461

35

thing hoped or expected does not come into existence, unless thehope or expectancy is vain in which case, the sale is void. (par. 3.)

A plan whereby prizes can be obtained without any additionalconsideration (when a product is purchased at the usual price plusthe chance of winning a prize) is not a lottery. (Phil. Refining Co.vs. Palomar, 148 SCRA 313 [1987].)

EXAMPLES:

(1) S binds himself to sell for a specified price to B a parcelof land if he wins a case for the recovery of said land pendingin the Supreme Court.

Here, the obligation of S to sell will arise, if the “expectedthing,’’ the land, will come into existence, i.e., if he wins thecase.

Before a decision is rendered, there is only “the mere hopeor expectancy’’ that the thing will come into existence.

(2) B buys a sweepstakes ticket in the hope of winning aprize. Here, the object of the contract is the hope itself. The saleis valid even if B does not win a prize because it is not subjectto the condition that the hope will be fulfilled.

Sale of thing expected and sale of hopeitself distinguished.

Emptio rei speratae (sale of thing expected) is the sale of a thingnot yet in existence subject to the condition that the thing will existand on failure of the condition, the contract becomes ineffectiveand hence, the buyer has no obligation to pay the price. On theother hand, emptio spei is the sale of the hope itself that the thingwill come into existence, where it is agreed that the buyer will paythe price even if the thing does not eventually exist.

(1) In emptio rei speratae, the future thing is certain as to itselfbut uncertain as to its quantity and quality. Such sale is subject tothe condition that the thing will come into existence (see Art. 1545,par. 2.), whatever its quantity or quality. In emptio spei (like thesale of a sweepstake ticket), it is not certain that the thing itself(winning a prize) will exist, much less its quantity and quality.

(2) In the first, the contract deals with a future thing, while in


36 SALES

the second, the contract relates to a thing which exists or is present— the hope or expectancy.

(3) In the first, the sale is subject to the condition that the thingshould exist, so that if it does not, there will be no contract byreason of the absence of an essential element. On the other hand,the second produces effect even though the thing does not comeinto existence because the object of the contract is the hope itself,unless it is a vain hope or expectancy (like the sale of a falsifiedsweepstake ticket which can never win).

Presumption in case of doubt.

In case of doubt, the presumption is in favor of emptio reisperatae which is more in keeping with the commutative charac-ter of the contract. (see 10 Manresa 29-30.)

ILLUSTRATIVE CASE:

Buyer executed a surety bond in favor of seller to secure paymentof the balance of purchase price of iron ore, which balance shall bepaid out of amount derived from sale by buyer of the iron ore.

Facts: S embarked upon the exploration and developmentof mining claims belonging to B. Later, they executed a docu-ment wherein S transferred to B all of S’s rights and interestover the 24,000 tons of iron ore, “more or less” that S had al-ready extracted from the mineral claims in consideration of adown payment of P10,000.00, and the balance of P65,000.00which will be paid out of the “first shipment of iron ore and ofthe first amount derived from the local sale of iron ore made”from said claims, which amount was secured by a surety bondexecuted by B in favor of S.

No sale of the approximately 24,000 tons of iron ore hadbeen made nor had the P65,000.00 been paid.

Issue: Is the obligation of B to pay the remaining P65,000.00subordinated to the sale or shipment of the ore as a conditionprecedent?

Held: No. A contract of sale is normally commutative andonerous (see Art. 1458.): not only does each one of the partiesassume a correlative obligation (the seller to deliver and trans-fer ownership of the thing sold and the buyer to pay the price),

Art. 1461

37

but such party anticipates performance by the other from thevery start.

(1) Contingent character of obligation to pay must clearly ap-pear. — Where in a sale, the obligation of one party can be law-fully subordinated to an uncertain event, so that the other un-derstands that he assumes that risk of receiving nothing forwhat he gives as in the case of a sale of hopes or expectations(emptio spei), it is not in the usual course of business to do so,hence, the contingent character of the obligation must clearlyappear.

(2) Surety bond negates such contingent character. — In thecase at bar, nothing is found in the record to evidence that Sdesired or assumed to run the risk of losing his rights over theore without getting paid for it, or that B understood that S as-sumed any such risk. This is proven by the fact that S insistedon a bond by a surety company to guarantee payment of theP65,000.00; and the fact that B did put up such bond indicatesthat he admitted the definite existence of his obligation to paythe balance of P65,000.00. (Gaite vs. Fonacier, 2 SCRA 830 [1961].)

ART. 1462. The goods which form the subject of acontract of sale may be either existing goods, ownedor possessed by the seller, or goods to be manufac-tured, raised, or acquired by the seller after the per-fection of the contract of sale, in this Title called “fu-ture goods.”

There may be a contract of sale of goods, whoseacquisition by the seller depends upon a contingencywhich may or may not happen. (n)

Goods which may be the object of sale.

Goods which form the subject of a contract of sale may be ei-ther:

(1) Existing goods or goods owned or possessed by the seller;or

(2) Future goods or goods to be manufactured (like the sale ofmilk bottles to be manufactured with the name of the buyerpressed in the glass), raised (like the sale of the future harvest of


38 SALES

palay from a ricefield), or acquired (like the sale of a definite par-cel of land the seller expects to buy).8 (Art. 1460.)

Future goods as object of sale.

A sale of future goods, even though the contract is in the formof a present sale, is valid only as an executory contract to be ful-filled by the acquisition and delivery of the goods specified.

In other words, “property or goods which at the time of thesale are not owned by the seller but which thereafter are to beacquired by him, cannot be the subject of an executed sale but maybe the subject of a contract for the future sale and delivery thereof,”even though the acquisition of the goods depends upon a contin-gency which may or may not happen. In such case, the vendorassumes the risk of acquiring the title and making the convey-ance, or responding in damages for the vendee’s loss of his bar-gain. (Martin vs. Reyes, 91 Phil. 666 [1952]; 77 C.J.S. 604.)

Paragraph 1 of Article 1462 does not apply if the goods are tobe manufactured especially for the buyer and not readily saleableto others in the manufacturer’s regular course of business. Thecontract, in such case, must be considered as one for a piece ofwork. (Art. 1467.)

Article 1462 contemplates a contract of sale of specific goodswhere one of the contracting parties binds himself to transfer theownership of and deliver a determinate thing and the other to paytherefor a price certain in money or its equivalent. The said articlerequires that there be delivery of goods, actual or constructive, tobe applicable. It does not apply to a transaction where there wasno such delivery; neither was there any intention to deliver a de-terminate thing. Thus, a “futures” contract where the partiesmerely speculate on the rise and fall on the price of the goodssubject matter of the transaction is a form of gambling was de-clared null and void by Article 2018 of the Civil Code. (see note 2.)

Art. 1462

8Art. 751. Donations cannot comprehend future property. By future property is un-derstood anything which the donor cannot dispose of at the time of the donation. (635)

Art. 1347. x x x No contract may be entered into upon future inheritance except incases expressly authorized by law. x x x.

39

ART. 1463. The sole owner of a thing may sell anundivided interest therein. (n)

Sale of undivided interest in a thing.

The sole owner of a thing may sell the entire thing; or only aspecific portion thereof; or an undivided interest therein and suchinterest may be designated as an aliquot part of the whole.

The legal effect of the sale of an undivided interest in a thingis to make the buyer a co-owner in the thing sold. As co-owner,the buyer acquires full ownership of his part and he may, there-fore, sell it. Such sale is, of course, limited to the portion whichmay be allotted to him in the division of the thing upon the ter-mination of the co-ownership. (Article 493.)9 This rule operatessimilarly with respect to ownership of fungible goods. (Art. 1464.)

Article 1463 covers only the sale by a sole owner of a thing ofan undivided share or interest thereof.

EXAMPLE:

S is the owner of a parcel of land with an area of 1,000 squaremeters. As the sole owner, S can sell to B the entire portion; oronly 500 square meters of the land by metes and bounds inwhich case he becomes the sole owner of the remaining 500meters and B the portion sold; or he may sell an undivided halfof the land without specially designating or identifying theportion sold, in which case they become co-owners.

As a co-owner, S or B can convey or transfer only the titlepertaining to the undivided half of the land, for vital to thevalidity of a contract of sale is that the vendor be the owner ofthe thing sold. (Art. 1459.)

ART. 1464. In the case of fungible goods, there maybe a sale of an undivided share of a specific mass,though the seller purports to sell and the buyer to buy

9Art. 493. Each co-owner shall have the full ownership of his part and of the fruitsand benefits pertaining thereto, and he may therefore alienate, assign or mortgage it,and even substitute another person in its enjoyment, except when personal rights areinvolved. But the effect of the alienation or the mortgage, with respect to the co-owners,shall be limited to the portion which may be allotted to him in the division upon thetermination of the co-ownership. (399)

Arts. 1463-1464 NATURE AND FORM OF THE CONTRACT

40 SALES

a definite number, weight or measure of the goods inthe mass, and though the number, weight or measureof the goods in the mass is undetermined. By such asale the buyer becomes owner in common of such ashare of the mass as the number, weight or measurebought bears to the number, weight or measure of themass. If the mass contains less than the number,weight or measure bought, the buyer becomes theowner of the whole mass and the seller is bound tomake good the deficiency from goods of the same kindand quality, unless a contrary intent appears. (n)

Sale of an undivided share of a specific mass.

The Civil Code classifies movable goods into consumable ornon-consumable (Art. 418.), thereby discarding the old classifi-cation (Art. 334, old Civil Code.) into fungible and non-fungible.This change of classification seems to be in name only as the defi-nition of fungible goods as those which cannot be used withoutbeing consumed under the old Civil Code is precisely that of con-sumable goods. Article 1464, however, still speaks of fungiblegoods.

(1) Meaning of fungible goods. — It means goods of which anyunit is, from its nature or by mercantile usage, treated as theequivalent of any other unit (Uniform Sales Act, Sec. 76.), such asgrain, oil, wine, gasoline, etc.

(2) Effect of sale. — The owner of a mass of goods may sell onlyan undivided share thereof, provided the mass is specific or ca-pable of being made determinate. (Art. 1460.)

(a) By such sale, the buyer becomes a co-owner with theseller of the whole mass in the proportion in which the defi-nite share bought bears to the mass.

(b) It must follow that the aliquot share of each owner canbe determined only by the measurement of the entire mass. Iflater on it be discovered that the mass of fungible goods con-tains less than what was sold, the buyer becomes the ownerof the whole mass and furthermore, the seller shall supply

Art. 1464

41

whatever is lacking from goods of the same kind and quality,subject to any stipulation to the contrary.

(3) Risk of loss. — If the buyer becomes a co-owner, with theseller, or other owners of the remainder of the mass, it follows thatthe whole mass is at the risk of all the parties interested in it, inproportion to their various holdings.

(4) Subject matter. — Take note that in the sale of an undividedshare, either of a thing (Art. 1463.) or of that of mass of goods (Art.1464.), the subject matter is an incorporeal right. (Art. 1501.) Here,ownership passes to the buyer by the intention of the parties.

EXAMPLE:

S owns 1,000 cavans of palay stored in his warehouse. If Ssells to B 250 cavans of such palay which cavans are not segre-gated from the whole mass, B becomes a co-owner of the saidmass to the extent of 1/4. If the warehouse happens to containonly 200 cavans, S must deliver the whole 200 cavans and sup-ply the deficiency of 50 cavans of palay of the same kind andquality.

In the same example, the number of cavans in the ware-house may be unknown or undetermined and S may sell only1/4 share of the contents. The legal effect of such a sale is tomake B a co-owner in that proportion. It is obvious that in suchcase, the obligation of the seller “to make good the deficiency”will not arise.

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


42 SALES

ART. 1465. Things subject to a resolutory condi-tion may be the object of the contract of sale. (n)

Sale of thing subject to a resolutory condition.

A resolutory condition is an uncertain event upon the happen-ing of which the obligation (or right) subject to it is extinguished.Hence, the right acquired in virtue of the obligation is also extin-guished. (see Arts. 1179, 1181.)

EXAMPLES:

(1) S (vendor a retro) sold a parcel of land to B (vendee aretro) subject to the condition that S can repurchase the prop-erty within two years from the date of sale. If S exercises theright to repurchase, then the sale made by B to C before thelapse of the two (2)-year period falls.

The rule, however, that a vendor cannot transfer to hisvendee a better right than he had himself, suffers an exceptionin case of property with Torrens title. (see Hernandez vs.Katigbak Vda. de Salas, 69 Phil. 748 [1940].)

(2) For failure to pay his debt, the land of S (mortgagor)was sold to B, the highest bidder and purchaser in an extra-judicial foreclosure of a real estate mortgage.

Under the law (Act No. 3135, as amended.), the mortgagormay redeem the property at any time within one year from andafter the date of the registration of the sale. If S redeems theproperty, then the sale made to B is extinguished.

One of the obligations of the vendor is to transfer the owner-ship of the thing object of the contract. (Art. 1458.) If the reso-lutory condition attaching to the object of the contract, whichobject may include things as well as rights (Arts. 1427, 1347, par.1.), should happen, then the vendor cannot transfer the owner-ship of what he sold since there is no object.

ART. 1466. In construing a contract containing pro-visions characteristic of both the contract of sale andof the contract of agency to sell, the essential clausesof the whole instrument shall be considered. (n)

Arts. 1465-1466

43

Sale distinguished from agency to sell.

By the contract of agency, a person binds himself to render someservice or to do something in representation or on behalf of an-other, with the consent or authority of the latter. (Art. 1868.)

In order to classify a contract, due regard must be given to itsessential clauses. A contract is what the law defines it to be, andnot what it is called by the contracting parties. (Quiroga vs. Par-son Hardware Co., 38 Phil. 501 [1918]; Baluran vs. Navarro, 79SCRA 309 [1977].) Sale may be distinguished from an agency tosell, as follows:

(1) In a sale, the buyer receives the goods as owner; in anagency to sell, the agent receives the goods as the goods of theprincipal who retains his ownership over them and has the rightto fix the price and the terms of the sale and receive the proceedsless the agent’s commission upon the sales made;

(2) In a sale, the buyer has to pay the price; in an agency tosell, the agent has simply to account for the proceeds of the salehe may make on the principal’s behalf;

(3) In a sale, the buyer, as a general rule, cannot return theobject sold; in an agency to sell, the agent can return the object incase he is unable to sell the same to a third person;

(4) In a sale, the seller warrants the thing sold (see Arts. 1547,1548, 1561.); in an agency to sell, the agent makes no warrantyfor which he assumes personal liability as long as he acts withinhis authority and in the name of the seller; and

(5) In a sale, the buyer can deal with the thing sold as hepleases being the owner; in an agency to sell, the agent in dealingwith the thing received, must act and is bound according to theinstructions of his principal.10

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


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ILLUSTRATIVE CASES:

1. One given exclusive right to sell beds furnished by manu-facturer, agreed to pay discounted invoice price at a certain period.

Facts: S granted B the exclusive right to sell the former’sbeds in Visayas. S was to furnish B with the beds which thelatter might order. The price agreed upon was the invoice priceof the beds in Manila with a discount of from 20% to 25%. Pay-ment was to be made at the end of sixty days.

Issue: S claimed that the contract was an agency to sell whileB maintained that it was a sale.

Held: The stipulations are precisely the essential features ofa contract of purchase and sale. There was the obligation onthe part of S to supply the beds and on the part of B, to paytheir price.

These features exclude the legal conception of an agencyor order to sell whereby the mandatory or agent receives thething to sell it and does not pay its price but delivers to theprincipal the price he obtains from the sale of the thing to athird person, and if he does not succeed in selling, he returns it.By virtue of the contract between S and B, the latter, on receiv-ing the beds was necessarily obliged to pay their price withinthe terms fixed without any other consideration and regard-less as to whether he had sold the beds. (Quiroga vs. ParsonHardware Co., 38 Phil. 501 [1918].)

———— ———— ————

2. Partial payments were made without mention of goods un-sold and without stipulation for their return.

Facts: B received from S 350 pairs of shoes, the price of whichis stated as P2,450.00 or P7.00 per pair. B made partial paymentson account thereof.

Issue: On the issue of the nature of the transaction, S claimedthat it was an absolute sale and not a consignment.

Held: The transaction was an absolute sale. In makingsaid partial payments, B made no mention whatsoever of thenumber of shoes sold by him and the number of shoes re-maining unsold which he should have done had the sale beenon the consignment basis. He merely mentioned the balanceof the purchase price after deducting the several paymentsmade by him.

Art. 1466

45

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

Contract creating both a sale and an agencyrelationship.

The transfer of title or agreement to transfer it for a price paidor promised is the essence of sale. If such transfer puts the trans-feree in the position of an owner and makes him liable for theagreed price, the transaction is a sale. On the other hand, the es-sence of an agency to sell is the delivery to an agent, not as hisproperty, but as the property of his principal, who remains theowner and has the right to control sales, fix the price and terms,demand and receive the proceeds less the agent’s commissionupon sales made. (Ker & Co., Inc. vs. Lingad, 38 SCRA 524 [1971];Schmid and Oberly, Inc. vs. RJL Martinez Fishing Corp., 166 SCRA493 [1988].)

In some circumstances, however, a contract can create both asale and an agency relationship. For example: An automobiledealer receives title to the cars he orders from the manufacturerand that transaction is a sale; but he is an agent to the extent thathe is authorized to pass on to the ultimate purchaser the limitedwarranty of the manufacturer. In any event, the courts must lookat the entire transaction to determine if it is a principal-agent re-lationship or a buyer-seller relationship. (1 Williston on Sales, 4thed., pp. 16-17.)

ART. 1467. A contract for the delivery at a certainprice of an article which the vendor in the ordinarycourse of his business manufactures or procures for


46 SALES

the general market, whether the same is on hand atthe time or not, is a contract of sale, but if the goodsare to be manufactured specially for the customer andupon his special order, and not for the general mar-ket, it is a contract for a piece of work. (n)

Sale distinguished from contractfor a piece of work.

By the contract for a piece of work the contractor binds himselfto execute a piece of work for the employer, in consideration of acertain price or compensation. The contractor may either employhis labor or skill, or also furnish the material. (Art. 1713.)

The distinction between a contract of sale and one for work,labor or materials or for a piece of work is tested by the inquirywhether the thing transferred is one not in existence and whichnever would have existed but for the order of the party desiringto acquire it, or a thing which would have existed and been thesubject of sale to some other person, even if the order had not beengiven.

(1) In the first case, the contract is one for work, labor andmaterials and in the second, one of sale. (Inchausti & Co. vs.Cromwell, 20 Phil. 345 [1911]; see Celestino Co. & Co. vs. Coll., 99Phil. 841 [1956]; Comm. vs. Engineering Equipment and SupplyCo., 64 SCRA 590 [1975]; Comm. vs. Arnoldus Carpentry Shop,Inc., 159 SCRA 199 [1988]; Engineering & Machinery Corp. vs.Court of Appeals, 67 SCAD 113, 252 SCRA 156 [1996].)

(2) In the first case, the risk of loss before delivery is borne bythe worker or contractor, not by the employer (the person whoordered). (Arts. 1717, 1718.) A contract is for a piece of work ifservices dominate that contract even though there is a sale ofgoods involved. Where the primary objective of a contract is a saleof a manufactured item, it is a sale of goods even though the itemis manufactured by labor furnished by the seller and upon previ-ous order of the customer. (see 1 Williston, 4th ed., p. 23.)

(3) The importance of marking the line that divides contractsfor a piece of work from contracts of sale arises from the fact thatthe former is not within the Statute of Frauds. (see Art. 1483.)

Art. 1467

47

EXAMPLE:

If B is buying a pair of shoes of a particular style and sizefrom S which the latter ordinarily manufactures or procuresfor the general market but the same is not available, an orderfor one would be a contract of sale, since the article would haveexisted and been the subject of sale to some other person evenif the order had not been given.

On the other hand, if B places an order for a pair of shoes ofa particular shape because his feet are deformed, the fact thatsuch kind of shoes is not suitable for sale to others in the ordi-nary course of the seller’s business and is to be manufacturedespecially for B and upon his special order, makes the contractone for a piece of work.

ART. 1468. If the consideration of the contract con-sists partly in money, and partly in another thing, thetransaction shall be characterized by the manifest in-tention of the parties. If such intention does not clearlyappear, it shall be considered a barter if the value ofthe thing given as a part of the consideration exceedsthe amount of the money or its equivalent; otherwise,it is a sale. (1446a)

Sale distinguished from barter.

By the contract of barter or exchange, one of the parties bindshimself to give one thing in consideration of the other’s promiseto give another thing. (Art. 1638.) On the other hand, in a con-tract of sale, the vendor gives a thing in consideration for a pricein money. (Art. 1458.)

(1) The above distinction is not always adequate to distin-guish one from the other. Hence, the rule in Article 1468 for thosecases in which the thing given in exchange consists partly inmoney and partly in another thing.

(a) In such cases, the manifest intention of the parties isparamount in determining whether it is one of barter or of saleand such intention may be ascertained by taking into accountthe contemporaneous and subsequent acts of the parties. (Art.1371.)


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(b) If this intention cannot be ascertained, then the last sen-tence of the article applies. But if the intention is that the con-tract shall be one of sale, then such intention must be followedeven though the value of the thing given as a part considera-tion is more than the amount of the money given.

(2) The only point of difference between the two contracts isin the element which is present in sale but not in barter, namely:“price certain in money or its equivalent.” (see Art. 1641.)

EXAMPLES:

(1) S, a sugar miller, and B, a manufacturer and dealer ofwhisky, entered into an agreement whereby S was to deliversugar worth P20,000.00 to B who was to give 100 bottles ofwhisky worth also P20,000.00. This is a contract of barter.

(2) Suppose at the date of delivery, B had only 25 bottlesof whisky. With the consent of S, S paid the difference of P15,000in cash. In this case, the contract is still barter. The considera-tion for the sugar is not cash but the whisky, and the amount ofP15,000.00 paid by B is in consideration for the 75 bottles ofliquor.

(3) Suppose, in the same example, B had no whisky at thestipulated date of delivery and he paid S P20,000.00 instead ofgiving whisky. Did the contract become one of sale? No, be-cause the payment is in consideration of the value of the whisky,and not of the sugar. The manifest intention of the parties wasto enter into a contract of barter. But if B had whisky at the dateof delivery and he paid P20,000.00 with the consent of S, thecontract would become one of sale.

(4) Assume now that the contract between S and B was forS to deliver sugar to B who agreed to give 100 bottles of whiskyor to pay P20,000.00 cash. If B, instead of whisky, paid P20,000.00cash, it is clear that the resulting contract is that of sale, and notbarter.

(5) If the obligation of B is to deliver 50 bottles of whiskyand pay P10,000.00 cash, or 75 bottles of whisky and P5,000.00cash, or 25 bottles of whisky and P15,000.00 cash, the transac-tion shall be considered a barter or sale depending on the mani-fest intention of the parties. Under Article 1468, if such inten-tion does not clearly appear, the contract shall be considered a

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49

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

Sale distinguished from lease.

In the lease of things, one of the parties binds himself to give toanother the enjoyment or use of a thing for a price certain and fora period which may be definite or indefinite. (Art. 1643.) In otherwords, in a lease, the landlord or lessor transfers merely the tem-porary possession and enjoyment of the thing leased. In a sale,the seller transfers ownership of the thing sold.

Sale distinguished from dation in payment.

Dation in payment (or dacion en pago) is the alienation of prop-erty to the creditor in satisfaction of a debt in money. (see Art.1619.) It is governed by the law on sales. (Art. 1245.) As such theessential elements of a contract of sales, namely, consent: objectcertain, and cause or considerations, must be present.

The distinctions are the following:

(1) In sale, there is no preexisting credit, while in dation inpayment, there is;

(2) In sale, obligations are created, while in dation in payment,obligations are extinguished;

(3) In sale, the cause is the price paid, from the viewpoint ofthe seller, or the thing sold, from the viewpoint of the buyer, whilein dation in payment, the extinguishment of the debt, from theviewpoint of the debtor, or the object acquired in lieu of the credit,from the viewpoint of the creditor;11

(4) In sale, there is more freedom in fixing the price than indation in payment; and

(5) In sale, the buyer has still to pay the price, while in dationin payment, the payment is received by the debtor before the con-tract is perfected. (see 10 Manresa 16-17.)

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


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EXAMPLE:

S owes B P10,000.00. To pay his debt, S, with the consent ofB, delivers a specific television set. If the value of the televisionset, however, is only P8,000.00, S is still liable for P2,000.00 un-less the parties have considered the conveyance as full pay-ment.

ART. 1469. In order that the price may be consid-ered certain, it shall be sufficient that it be so withreference to another thing certain, or that the deter-mination thereof be left to the judgment of a specifiedperson or persons.

Should such person or persons be unable orunwilling to fix it, the contract shall be inefficacious,unless the parties subsequently agree upon the price.

If the third person or persons acted in bad faith orby mistake, the courts may fix the price.

Where such third person or persons are preventedfrom fixing the price or terms by fault of the seller orthe buyer, the party not in fault may have such rem-edies against the party in fault as are allowed the selleror the buyer, as the case may be. (1447a)

When price considered certain.

The price in a contract of sale ought to be settled for there canbe no sale without a price. (see Borromeo vs. Borromeo, 98 Phil.432 [1955].) It must be certain or capable of being ascertained inmoney or its equivalent; and money is to be understood as cur-rency, and its equivalent means promissory notes, checks andother mercantile instruments generally accepted as representingmoney.

The fact that the exact amount to be paid for the thing sold isnot precisely fixed, is no bar to an action to recover such compen-sation, provided the contract, by its terms furnishes a basis ormeasure for ascertaining the amount agreed upon. (Majarabas vs.Leonardo, 11 Phil. 272 [1908]; Villanueva vs. Court of Appeals, 78SCAD 484, 267 SCRA 89 [1997].)

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Under the above article, the price is certain if:

(1) The parties have fixed or agreed upon a definite amount;or

(2) It be certain with reference to another thing certain (seeArt. 1472; Majarabas vs. Leonardo, 11 Phil. 272 [1908].); or

(3) The determination of the price is left to the judgment of aspecified person or persons and even before such determina-tion. (see Barretto vs. Sta. Maria, 26 Phil. 200 [1913], under Art.1458.)

It must be understood that the last two cases are applicableonly when no specific amount has been stipulated by the parties.

ILLUSTRATIVE CASES:

1. Price was fixed at 10% below the price in the inventory, atthe invoice price, and in accordance with the price list less 20% dis-count.

Facts: S sold to B a tobacco and cigarette factory togetherwith the trademark “La Maria Cristina,” the stocks of tobacco,machinery, labels, wrappers, etc. for a sum subject to modifica-tion, in accordance with the result shown by the inventory tobe drawn up. In this inventory the value of each individualprice of furniture was fixed at 10% below the price in the part-nership inventory. The value of the tobacco, both in leaf and inprocess of manufacture, was fixed at the invoice price.

The value of tobacco made up into cigars was fixed in ac-cordance with the price list of the company less 20% discount.

Issue: Under the terms of the agreement, may the price ofthe property sold be considered certain within the meaning ofthe law?

Held: The price may be considered certain. The articleswhich were the subject of the sale were definitely and finallyagreed upon. The price for each article was fixed. It is true thatthe price of the tobacco, for example, was not stated in pesosand centavos. But by its terms B agreed to pay therefor theamount named in the invoices then in existence. The price couldbe made certain by a mere reference to these invoices.(McCullough vs. Aenille & Co., 13 Phil. 258 [1909].)

———— ———— ————


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2. Price was fixed at a certain amount subject to modificationsbased on known factors.

Facts: S contracted to sell large quantity of coal to B. Thebasic price fixed in the contract was P9.45 per long ton but itwas stipulated that the price was subject to modifications “inproportion to variations in calories and ash content and nototherwise.”

Issue: Is the price certain within the meaning of the law?

Held: By stipulation, the price could be made certain by theapplication of known factors (Art. 1469.), and for the purposesof this case, it may be assumed that the price was fixed at P9.45per long ton. (Mitsui Bussan Kaisha vs. Manila B.R.R. and L. Co.,39 Phil. 624 [1919].)

———— ———— ————

3. Price (compensation) promised was the cost of maintenance.

Facts: X rendered services as wet nurse and governess toY’s infant daughter. Y promised to compensate X for the serv-ices, providing for the maintenance of X, her husband and herchildren during all the time that the services were required.

Y contends that there was no valid contract of lease of serv-ices because the price thereof was not fixed.

Issue: Does the contract furnish a basis or measure by whichthe amount of compensation may be ascertained?

Held: Yes. In this case, the cost of maintenance determinesthe compensation according to the agreement of the parties.(Majarabas vs. Leonardo, supra.)

———— ———— ————

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

Facts: Under the contract of lease with option to buy en-tered into in 1975, the lessee was given the option to purchasethe parcel of land lease within a period of 10 years from thedate of signing of the contract “at a price not greater than P210.00per square meter.”

Issue: Is the price certain or definite?

Held: Yes, given the circumstances of the case. “Contractsare to be construed according to the sense and meaning of theterms which the parties themselves have used. In the present

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53

dispute, there is evidence to show that the intention of the par-ties is to peg the price of P210 per square meter. This was con-firmed by the petitioner [lessor] himself in his testimony as fol-lows. x x x

Moreover by his subsequent acts of having the land titledunder the Torrens System, and in pursuing the back [lessee]manager to effect the sale immediately means that he under-stood perfectly well the terms of the contract. He even had thesame property mortgaged to the respondent back sometime in1979, without the slightest hint of wanting to abandon his offerto sell the property at the agreed price of P210 per square me-ter.’’ (Serra vs. Court of Appeals, 47 SCAD 55, 229 SCRA 60 [1994].)

Effect where price fixed by third persondesignated.

As a general rule, the price fixed by a third person designatedby the parties is binding upon them. There are, however, excep-tions such as:

(1) When the third person acts in bad faith or by mistake aswhen the third person fixed the price having in mind not the thingwhich is the object of the sale, but another analogous or similarthing in which case the court may fix the price. But mere error injudgment cannot serve as a basis for impugning the price fixed;and

(2) When the third person disregards specific instructions orthe procedure marked out by the parties or the data given him,thereby fixing an arbitrary price. (see 10 Manresa 53-54.)

EXAMPLE:

S sold to B a diamond ring. The determination of the pricewas left to C whom the parties thought was a jeweler.

If C acted by mistake, as when he is incompetent to knowthe price of the diamond ring, or in bad faith, as when he con-nived with S, the court may fix the price.

ILLUSTRATIVE CASE:

Price was fixed on the basis of a certain proportion of total netvalue of business to be ascertained by appraisers.


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Facts: S executed a document whereby he agreed to trans-fer to B “the whole of the right, title, and interest” in a business.This whole was 4/173 of the entire net value of the business.The parties agreed that the price should be 4/173 of the totalnet value. The ascertainment of such net value was left unre-servedly to the judgment of the appraisers.

Issue: Is the price certain?

Held: Yes, for the minds of the parties have met on the thingand the price. Nothing was left unfinished and all questionsrelating thereto were settled. This is an example of a perfectedsale. (Barretto vs. Santa Maria, 26 Phil. 200 [1913].)

Effect where price not fixed by thirdperson designated.

(1) If the third person designated by the parties to fix the pricerefuses or cannot fix it (without fault of the seller and the buyer),the contract shall become ineffective, as if no price had been agreedupon unless, of course, the parties subsequently agree upon theprice. (par. 2.)

(2) If such third person is prevented from fixing the price bythe fault of the seller or the buyer, the party not in fault may ob-tain redress against the party in fault (par. 2.) which consists of achoice between rescission or fulfillment, with damages in eithercase. (Art. 1191, par. 2; see Art. 1594.) If the innocent party choosesfulfillment, the court shall fix the price.

ART. 1470. Gross inadequacy of price does notaffect a contract of sale, except as it may indicate adefect in the consent, or that the parties really intendeda donation or some other act or contract. (n)

Effect of gross inadequacy of pricein voluntary sales.

(1) General rule. — While a contract of sale is commutative,mere inadequacy of the price or alleged hardness of the bargaingenerally does not affect its validity when both parties are in aposition to form an independent judgment concerning the trans-action. (Askav vs. Cosalan, 46 Phil. 79 [1924]; Ereñeta vs. Bezore,

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54 SCRA 13 [1973]; Auyong Hian vs. Court of Appeals, 59 SCRA110 [1974]; see Ong vs. Ong, 139 SCRA 133 [1985].) This rule holdstrue in voluntary contracts of sale otherwise free from invalidat-ing defects. A valuable consideration, however small or nominal,if given or stipulated in good faith is, in the absence of fraud,sufficient. (Rodriguez vs. Court of Appeals, 207 SCRA 553 [1992].)

In determining whether the price is adequate or not, the priceobtaining at the date of the execution of the contract, not thoseobtaining a number of years later, should be considered.(Siopongco vs. Castro, [C.A.] No. 12448-R, Jan. 18, 1957.)

(2) Where low price indicates a defect in the consent. — The inad-equacy of price, however, may indicate a defect in the consent suchas when fraud, mistake, or undue influence is present (Art. 1355.)in which case the contract may be annulled not because of theinadequacy of the price but because the consent is vitiated. Con-tracts of sale entered into by guardians or representatives of ab-sentees are rescissible whenever the wards or absentees whomthey represent suffer lesion by more than 1/4 of the value of thethings which are the object thereof. (Art. 1381[1, 2].)

The unsupported claim that the sale of property was madefor an inadequate price is a mere speculation which has no placein our judicial system. Since every claim must be substantiatedby sufficient evidence, such a conjectural pretension cannot beentertained. Allegation of inadequacy of price must be proven.(Ng Cho Cio vs. Ng Diong, 1 SCRA 275 [1961].)

(3) Where price so low as to be “shocking to conscience”. — Whileit is true that mere inadequacy of price is not a sufficient groundfor the cancellation of a voluntary contract of sale, it has been heldthat where the price is so low that “a man in his senses and notunder a delusion” would not accept it, the sale may be set asideand declared an equitable mortgage to secure a loan. (Aguilar vs.Rubiato, 40 Phil. 570 [1919]; De Leon vs. Salvador, 36 SCRA 507[1970]; Art. 1602[1].) But where the price paid is much higher thanthe assessed value of the property and the sale is effected by afather to his daughter in which filial love must be taken into ac-count, the price is not to be construed “as so inadequate to shockthe court’s conscience.” (Alsua-Bett vs. Court of Appeals, 92 SCRA332 [1979]; Jocson vs. Court of Appeals, 170 SCRA 333 [1989].)


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ILLUSTRATIVE CASES:

1. Selling price is 1/26 of value of property.

Facts: S sold to B with pacto de retro (right to repurchase) aland valued at P26,000 for only P1,000.00.

Issue: May the contract be construed as an equitable mort-gage? (see Arts. 1602, 1603.)

Held: As the price is so grossly inadequate, the contract willbe interpreted to be one of loan with equitable mortgage withthe price paid as principal of said loan and the land given merelyas security. (Aguilar vs. Rubiato, 40 Phil. 570 [1919].)

———— ———— ————

2. Purchaser of property earned greater profit by its subsequentresale than that earned by seller by the sale to such purchaser.

Facts: S bought a land for P870.00. One year later, he soldthe same land to B for P1,125.00. Subsequently, B sold 1/20 ofthe land for P681.00. S brought action to have the sale annulled,claiming that the price of the land was “so inadequate as toshock the conscience of men’’ as shown by B’s sale of 1/20 ofthe land for more than half of what was paid to S.

Issue: Is the price of P870.00 grossly inadequate?

Held: Having sold the land to B for the sum of P1,125.00one year after he had purchased it for P870.00 at a profit ofabout 28%, S had no ground for complaint. A sale may not beannulled simply because the purchaser subsequently resold theproperty or a part of it at a greater profit than that earned byhis vendor. (Alarcon vs. Kasilag, [C.A.] 40 O.G. [Supp. 11] 203.)

———— ———— ————

3. Conveyance of property is for P1.00 and other valuable con-siderations.

Fact: S, for and in consideration of P1.00 and other valu-able considerations, executed in favor of B then a minor, aQuitclaim Deed whereby she transferred to B all her rights andinterests in the 1/2 undivided portion of a parcel of land. Later,S claimed that the deed is null and void as it is equivalent to aDeed of Donation, acceptance of which by the donee is neces-sary to give it validity.

lssue: Is the Quitclaim Deed a conveyance of property witha valid cause or consideration?

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Held: Yes. The cause or consideration is not the P1.00 alonebut also other valuable considerations. Although the cause isnot stated in the contract it is presumed that it is existing un-less the debtor proves the contrary. (Art. 1354.) This presump-tion cannot be overcome by a simple assertion of lack of con-sideration especially when the contract itself states that con-sideration was given, and the same has been reduced into apublic instrument with all due formalities and solemnities.

Moreover, even granting that the Quitclaim Deed is a do-nation, Article 741 of the Civil Code provides that the require-ment of the acceptance of the donation in favor of a minor byparents or legal representatives applies only to onerous andconditional donations where the donee may have to assumecertain charges or burdens. (Ong vs. Ong, 139 SCRA 133 [1985].)

Effect of gross inadequacy of pricein involuntary sales.

(1) General rule. — A judicial or execution sale is one made bya court with respect to the property of a debtor for the satisfac-tion of his indebtedness.12

Like in a voluntary sale, mere inadequacy of price is not asufficient ground for the cancellation of an execution sale if thereis no showing that in the event of a resale, a better price can beobtained. It has been held that the public sale of a lot valued atP40,500.00 for P12,000.00 cash “does not appear to be inadequate.”(see Cu Bie vs. Court of Appeals, 15 SCRA 306 [1965]; Pascua vs.Heirs of Segundo Simeon, 161 SCRA 1 [1988].)

(2) Where price so low as to be “shocking to the conscience.” — Ifthe “price is so inadequate as to shock the conscience of the Court”,“such that the mind revolts at it and such that a reasonable mindwould neither directly or indirectly be likely to consent to it,’’ ajudicial sale, say, of real property, will be set aside. (National Bankvs. Gonzales, 45 Phil. 693 [1923]; Warnes, Barnes & Co. vs. Santos,

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


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15 Phil. 446 [1910]; Paras vs. Court of Appeals, 91 Phil. 389 [1952];Cometa vs. Court of Appeals, 143 SCAD 90, 351 SCRA 294 [2001].)Thus, where a land with an assessed value of more than P60,000.00was sold for only P867.00, the sale was set aside. (Director of Landsvs. Abarca, 61 Phil. 70 [1934]; Jalandoni vs. Ledesma, 64 Phil. 1058[1937].)

Similarly, an execution sale whereby 33 hectares of land wereceded to the judgment creditor to satisfy a liability for 146 cavansof palay was held void for inadequacy of price. (Singson vs.Babida, 79 SCRA 111 [1977].) So, also the price of the sale of prop-erties at around 10% of their value was held to be grossly inad-equate. (Provincial Sheriff of Rizal vs. Court of Appeals, 68 SCRA329 [1975].)

(3) Where seller is given the right to repurchase. — The validityof the sale is not necessarily affected where the law gives to theowner the right to redeem, as when a sale is made at public auc-tion, upon the theory that the lesser the price, the easier it is forthe owner to effect the redemption. (De Leon vs. Salvador, 36SCRA 567 [1970]; Ravanera vs. Imperial, 93 SCRA 589 [1979];Ramos vs. Pablo, 146 SCRA 24 [1986]; Francia vs. IntermediateAppellate Court, 162 SCRA 753 [1988]; Abaca Corporation of thePhils. vs. Garcia, 81 SCAD 635, 272 SCRA 475 [1997].) He mayreacquire the property or also sell his right to redeem and thusrecover the loss he claims he suffered by reason of the price ob-tained at the execution sale. (Tolentino vs. Agcaoli, [unrep.] 91 Phil.917 [1952]; Barrozo vs. Macaraeg, 83 Phil. 378 [1949]; Velasquezvs. Coronel, 5 SCRA 985 [1962]; Dev. Bank of the Phils. vs. Moll,43 SCRA 82 [1972].)

ART. 1471. If the price is simulated, the sale is void,but the act may be shown to have been in reality adonation, or some other act or contract. (n)

Effect where price is simulated.

(1) If the price is simulated or false such as when the vendorreally intended to transfer the thing gratuitously, then the sale isvoid but the contract shall be valid as a donation. (Arts. 1471, 1345,1353.)

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EXAMPLE:

S sold to B a parcel of land worth P50,000.00 for onlyP30,000.00. This contract of sale is valid although the price isgrossly inadequate. However, if it is shown that B induced S tosell the land through fraud, mistake, or undue influence, thecontract may be annulled on that ground.

If the price is simulated, B may prove another considera-tion like the liberality of S and if such liberality is proved, thenthe contract is valid as a donation; or B may prove that the actis in reality some other contract, like barter and, therefore, thetransfer of ownership is unaffected.

(2) If the contract is not shown to be a donation or any otheract or contract transferring ownership because the parties do notintend to be bound at all (Art. 1345, ibid.), the ownership of thething is not transferred. The contract is void and inexistent. (Art.1409[2].) The action or defense for the declaration of the inexist-ence of a contract does not prescribe. (Art. 1410; see Catindig vs.Heirs of Catalina Roque, 74 SCRA 83 [1976].)

(3) Simulation occurs when an apparent contract is a decla-ration of a fictitious will deliberately made by agreement of theparties, in order to produce, for the purpose of deception, theappearance of a juridical act which does not exist or is differentfrom that which was really executed. Its requisites are (a) an out-ward declaration of will different from the will of the parties; (b)the false appearance must have been intended by mutual agree-ment; and (c) the purpose is to deceive third persons. (Tongoy vs.Court of Appeals, 123 SCRA 99 [1983]; Bayongayong vs. Court ofAppeals, 430 SCRA 210 [2004].)

The fact that the seller continues to pay realty taxes on the landsold even after the execution of the contract to sell does not nec-essarily prove ownership, much less simulation of said contract.The non-payment of the price does not prove simulation; at most,it gives the seller the right to sue for collection. Generally, in acontract of sale, payment of the price is a resolutory condition andthe remedy of the seller is to exact fulfillment or, in case of a sub-stantial breach, to rescind the contract. (Villaflor vs. Court ofAppeals, 87 SCAD 778, 280 SCRA 297 [1997].) The non-paymentof the price by the supposed buyer, a minor, when taken into ac-


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count together with the many intrinsic defects of the deed of sale,may, however, show that the price is simulated, making the salevoid. (Lebagela vs. Santiago, 371 SCRA 360 [2001].)

ART. 1472. The price of securities, grain, liquids,and other things shall also be considered certain,when the price fixed is that which the thing sold wouldhave on a definite day, or in a particular exchange ormarket, or when an amount is fixed above or belowthe price on such day, or in such exchange or market,provided said amount be certain. (1448)

Price on a given day at particular market.

The above provision follows the principle in Article 1469 thata price is considered certain if it could be determined with refer-ence to another thing certain.

Note the last phrase of the above article: “provided saidamount be certain.” When an amount is fixed above or below theprice on a given day or in a particular exchange or market, thesaid amount must be certain; otherwise, the sale is inefficacious(Art. 1474.) because the price cannot be determined.

This article is especially applicable to fungible things like se-curities, grain, liquids, etc. the price of which are subject to fluc-tuations of the market.

ART. 1473. The fixing of the price can never be leftto the discretion of one of the contracting parties.However, if the price fixed by one of the parties is ac-cepted by the other, the sale is perfected. (1449a)

Fixing of price by one of the contractingparties, not allowed.

The reason for the rule is obvious.

(1) If consent is essential to a contract of sale, the determina-tion of the price cannot be left to the discretion of one of the con-tracting parties; otherwise, it cannot be said that the other con-sented to a price he did not and could not previously know. (see

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61

ART. 1474. Where the price cannot be determinedin accordance with the preceding articles, or in anyother manner, the contract is inefficacious. However,if the thing or any part thereof has been delivered toand appropriated by the buyer, he must pay a reason-able price therefor. What is a reasonable price is aquestion of fact dependent on the circumstances ofeach particular case. (n)

Effect of failure to determine price.

(1) Where contract executory. — If the price cannot be deter-mined in accordance with Articles 1469 and 1472, or in any othermanner, and the bargain is still executory, the contract is withouteffect. Price certain is an essential element of the contract of sale.(Art. 1458.) Consequently, there is no obligation on the part of thevendor to deliver the thing and on the part of the vendee to pay.

(2) Where delivery has been made. — If the thing or any partthereof has already been delivered and appropriated by the buyer,the latter must pay a reasonable price therefor. This obligation ofthe buyer is sometimes contractual (if the agreement omits anyreference to price), and sometimes, quasi-contractual (if the agree-ment provides that the parties are thereafter to agree on the price).(see Art. 2142.)

(a) If a buyer, for example, orders a cavan of rice from astore, nothing being said as to the price, the parties intend andunderstand that a reasonable price shall be paid. The obliga-tion here is contractual. The law merely enforces the intentionof the parties.


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

(2) Moreover, to be just, the price must be determined impar-tially by both parties (Art. 1458.) or left to the judgment of a speci-fied person or persons. (Art. 1469.)

However, where the price fixed by one party is accepted bythe other, the contract is deemed perfected because in this case,there exists a true meeting of minds upon the price. (Art. 1475.)

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(b) Article 1474 applies only where the means contem-plated by the parties for fixing the price have, for any reason,proved ineffectual. In this case, the obligation of the buyer topay a reasonable price is an obligation imposed by law as dis-tinguished from a contractual obligation. It is based on thefundamental principle that no one should enrich himself at theexpense of another. (Ibid.) In case, however, the parties do notintend to be bound until after the price is settled, the buyermust return any goods already received or if unable to do so,must pay their reasonable value at the time of delivery, andthe seller must return any portion of the amount received.

Concept of reasonable price.

The reasonable price or value of goods is generally the mar-ket price at the time and place fixed by the contract or by law forthe delivery of the goods. Under special circumstances of unnatu-ral conditions in the market, the market price does not furnishthe only test. In the leading case upon this point, the court said:

“A reasonable price may or may not agree with the cur-rent price of the commodity at the port of shipment when suchshipment is made. The current price of the day may be highlyunreasonable from accidental circumstances, as on account ofthe commodity having been purposely kept back by the ven-dor himself, or with reference to the price at the other ports inthe immediate vicinity, or from various other causes. Thisdoctrine has been applied in cases where the market has beenmonopolized.” (1 Williston,13 op. cit., p. 447.)

Determination of fair market value.

Offers to sell are not competent evidence of the fair marketvalue of a property, because they are no better than offers to buy,which have been held to be inadmissible as proof of said values.(City of Manila vs. Estrada, 25 Phil. 208 [1913]; Manila RailroadCo. vs. Aguilar, 35 Phil. 118 [1913].)

“In discussing the term ‘market value’, the author of a well-known treatise on the subject of damages observes that to make a

13If not indicated, the 3rd edition thereof.

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market there must be both buying and selling; and the ‘marketvalue’ is that ‘reasonable’ sum which property would bring on afair sale by a man willing but not obliged to sell to a man willingbut not obliged to buy.” (Sedgewick on Damages, Sec. 245, citedin Compagnie Franco-Indo Chinoise vs. Deutsch-Australiache, 39Phil. 474 [1919]; Perez vs. Araneta, 6 SCRA 457 [1962].)

ART. 1475. The contract of sale is perfected at themoment there is a meeting of minds upon the thingwhich is the object of the contract and upon the price.

From that moment, the parties may reciprocallydemand performance, subject to the provisions of thelaw governing the form of contracts. (1450a)

Perfection of contract of sale.

This article follows the general rule that contracts are perfectedby mere consent. (Art. 1315.) The contract of sale being consen-sual, it is perfected at the moment of consent without the neces-sity of any other circumstances. From the moment there is a meet-ing of minds upon the thing which is the object of the contractand upon the price (see Art. 1624.), the reciprocal obligations ofthe parties arise even when neither has been delivered. (see Pa-cific Oxygen & Acetylene Co. vs. Central Bank, 37 SCRA 685[1971]; Villongco Realty Co. vs. Bormacheco, Inc., 65 SCRA 352[1975]; Vargas Plow Factory, Inc. vs. Central Bank, 27 SCRA 84[1969]; Xentrex Automotive, Inc. vs. Court of Appeals, 94 SCAD923, 290 SCRA 66 [1998].) The essence of consent is the conform-ity of the parties on the term of the contract, the acceptance byone of the offer made by the other. (Salonga vs. Farrales, 105 SCRA359 [1981]; Firme vs. Buklod Enterprises and Dev. Corp., 414 SCRA190 [2003].)

(1) Conduct of the parties. — Appropriate conduct by the par-ties may be sufficient to establish an agreement. While there maybe instances where interchanged correspondence does not disclosethe exact point at which the deal was closed, the actions of theparties may indicate that a binding obligation has been under-taken. (Maharlika Publishing Corp. vs. Tagle, 142 SCRA 553[1986].) There is, however, no perfected sale where it is conditional


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(e.g., approval by higher authorities) and the condition is not ful-filled. (see People’s Homesite & Housing Corp. vs. Court of Ap-peals, 133 SCRA 777 [1984].)

(2) Transfer of ownership. — The ownership is not transferreduntil the delivery of the thing. (Arts. 1496, 1164.14) The parties,however, may stipulate that the ownership in the thing, notwith-standing its delivery, shall not pass to the purchaser until after hehas fully paid the purchase price thereof. (Arts. 1478, 1306.)

(3) Form of contract. — Generally, a contract of sale is bindingregardless of its form. (Art. 1356.) However, in case the contractof sale should fall within the provisions of the Statute of Frauds(Art. 1403[2].) or of any other applicable statute which requires acertain form for its enforceability or validity (Art. 1356.), then thatform must be complied with. (Art. 1483.) A contract of sale maybe in a private instrument; the contract is valid and binding be-tween the parties upon its perfection and a party may compel theother to execute a public instrument embodying the contract. (seeArts. 1357, 1358.)

A sale of real estate, whether made as a result of a private trans-action or of a foreclosure or execution sale, becomes legally effec-tive against third persons only from the date of its registration.(Campillo vs. Phil. National Bank, 28 SCRA 720 [1969].)

In a case, a letter-offer to buy a particular property for a speci-fied price was received by the offeree who annotated on the copythe phrase “Received original, 9-4-89’’ beside which appears hissignature. Held: The receipt can neither be regarded as a contractof sale nor a promise to sell. Such an annotation by the offereeamounts to neither a written nor an implied acceptance of theoffer. It is merely a memorandum of the receipt by him of the of-fer. The requisites of a valid contract of sale are lacking in saidreceipt. (Jovan Land, Inc. vs. Court of Appeals, 79 SCAD 428, 268SCRA 160 [1997].)

(4) Consent reluctantly given. — There is no difference in lawwhere a person gives his consent reluctantly and even against his

Art. 1475

14Art. 1164. The creditor has a right to the fruits of the thing from the time theobligation to deliver it arises. However, he shall acquire no real right over it until thesame has been delivered to him.

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good sense and judgment as when he acts voluntarily and freely.(Acasio vs. Corp. de los PP. Dominicos de Filipinas, 100 Phil. 253[1956].)

(5) Notarized deed of sale states receipt of price. — The unsup-ported verbal claim of the seller that the sale of a motor vehiclewas not consummated for failure of the purchaser to pay the pur-chase was held insufficient to overthrow a notarized deed of salewherein it is recited that the seller “sold, transferred and con-veyed” the motor vehicle to the purchaser “for and in considera-tion of the amount of P10,000 and other valuable considerations,receipt of which is hereby acknowledged.”

To overcome a public document solemnly executed before anotary public, the evidence to the contrary must be clear, strong,and convincing. Parol evidence will not suffice to negate the clearand positive recitals of a public document not otherwise taintedwith fraud or falsification. (Regalario vs. Northwest Finance Cor-poration, 117 SCRA 45 [1982].)

(6) Applicant’s qualification to buy still subject for investigation.— In a case, the agreement denominated as “contract of sale” wasconsidered by the court as a mere application to buy the land inquestion, and not a perfected contract of sale. Although it embod-ied all the essential elements of a contract of sale by installment,it appearing that “after the approval of such application it wasstill necessary to have the [applicant’s] qualifications investigatedas well as whether or not he has complied with the provisions ofthe law regarding the disposition of lands by the Board of Liqui-dators,” the application was subject to revocation in case the ap-plicant was found not to possess the qualifications necessary.(Alvarez vs. Board of Liquidators, 4 SCRA 95 [1962]; Galvez vs.Tagle Vda. de Kangleon, 6 SCRA 162 [1962].)

(7) Chattel mortgage of car by mortgagor-buyer prior to transfer oftitle to his name. — The fact that the chattel mortgage of a car bythe buyers in favor of the seller was executed on a date earlierthan the transfer of the registration certificate thereof in the nameof the buyers does not render the said mortgage made by thebuyers invalid, because the mortgagors were already the ownerof the car when the mortgage was executed, inasmuch as at thetime of the sale wherein the parties agreed over the car and the


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price, the contract became perfected, and when part of the pur-chase price was paid and the car was delivered, upon the execu-tion of the promissory note and the mortgage by the mortgagors,the sale became consummated. The registration of the transfer ofautomobiles and of the certificates of license for their use in theBureau of Land Transportation merely constitutes an administra-tive proceeding which does not bear any essential relation to thecontract of sale entered into between the parties. (Montano vs. LimAng, 7 SCRA 250 [1963].)

Registration of motor vehicles is required not because it is theoperative act that transfers ownership in vehicles (as in land reg-istration cases), but because it is the means to identify the ownerthereof in case of accident so that responsibility for the same canbe fixed. (De Peralta vs. Mangusang, 11 SCRA 598 [1964].)

(8) Non-fulfillment by one party of his obligation. — In case oneof the contracting parties should not comply with what is incum-bent upon him, the injured party may sue for fulfillment or re-scission with the payment of damages in either case. (Art. 1191,pars. 1 and 2.) This right is predicated on the violation of the reci-procity between the parties brought about by a breach of obliga-tion by one of them.

ILLUSTRATIVE CASES:

1. Purchase order form directed to seller asking delivery of apiano carries the address of purchaser in Dipolog City while deliveryreceipt form directed to purchaser carries address of seller in Cagayande Oro City.

Facts: B, an appliance center of Dipolog City, issued a pur-chase order to S, an appliance center of Cagayan de Oro City,directing the latter to furnish the former a Weinstein AccousticonPiano. The order was honored by S, which issued a deliveryreceipt for the item. B’s representative received the piano, andsigned the delivery receipt at Cagayan de Oro, and assumedthe responsibility and expenses of bringing it to Dipolog City.

Upon the refusal of B to pay, S filed a complaint for collec-tion with the City Court of Cagayan de Oro. B filed a motion todismiss alleging that there being no written agreement betweenthe parties specifying where the action arising out of the con-

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tract should be filed, the venue of the case properly falls inDipolog City under Section 1(b), Rule 4 of the Rules of Court.

Issue: Where is the place of the execution of the contract orthe place where there was meeting of the minds of the parties?

Held: The meeting of minds took place in Cagayan de OroCity when S received the purchase order, agreed to its terms,and acted upon it. As a matter of fact, it was not the meeting ofminds alone but also the consummation of the contract whichhappened in Cagayan de Oro City.

Under the circumstances of the case, the documents evi-dencing the contract show the place of execution to be Cagayande Oro City. The purchase order is the contract sued upon. Byitself, it was only an offer to buy directed to S with address atCagayan de Oro City. It was brought to said city to be actedupon at that place. The delivery receipt indicates the accept-ance of the offer and the delivery of the piano also at Cagayande Oro City. The entry on the delivery receipt showing that thepurchased item was delivered to B of Dipolog City merely in-dicates the name and address of the buyer but not the place ofthe execution of the contract. (Raza Appliance Center vs. Villaraza,117 SCRA 576 [1982].)

———— ———— ————

2. A co-owner sold 10 hectares portion of a land owned in com-mon which portion was to be surveyed, with acknowledgment of thereceipt of an initial payment.

Facts: S executed two documents: in the first, S agreed tosell and B agreed to buy, for P2,500.00, 10 hectares of land, whichis part and parcel of a bigger lot owned in common by S andhis sister although the boundaries of the 10 hectares would bedelineated at a later date and in the second, S acknowledgedreceipt as initial payment of P800.

Additional payments of P300 were made. B filed a com-plaint for specific performance after S returned the amountspaid.

Issue: Was there a perfected contract of sale between theparties?

Held: Yes. While it is true that the two documents are inthemselves not contracts of sale, there are, however, clear evi-dence that a contract of sale was perfected. S’s acceptance of


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the initial payment of P800.00 clearly showed his consent tothe contract thereby precluding him from rejecting its bindingeffect. With the contract being partially executed, the same isno longer covered by the requirements of the Statute of Fraudsin order to be enforceable. As co-owner, S cannot dispose of aspecific portion of the land, but his share shall be bound by theeffect of the sale under Article 493 of the Civil Code. (Clarin vs.Rulona, 127 SCRA 512 [1984].)

When definite agreement on mannerof payment essential.

As a consensual contract, a contract of sale becomes a bind-ing and valid contract upon the meeting of the minds of the par-ties as to the price, despite the manner of payment, or even thebreach of that manner of payment. It is not the act of payment ofprice that determines the validity of a contract of sale. (Buena-ventura vs. Court of Appeals, 416 SCRA 263 [2003].)

Where the parties, however, still have to meet and agree onhow and when the downpayment and installment payments areto be made, it cannot be said that a contract of sale has been per-fected.

Thus, in a case where the buyer is “to give a down-paymentof P10,000 to be followed by P20,000 and the balance of P70,000would be paid in installments, the equal monthly amortizationof which has to be determined as soon as the P30,000 had beencompleted,” it was held that the fact that the buyer delivered thesum of P1,000 as part of the downpayment cannot be consideredas sufficient proof of the perfection of any purchase and sale agree-ment between the parties under Article 1482. In this case, a defi-nite agreement on the manner of payment of the purchase priceis an essential element in the formation of a binding and enforce-able contract of sale. (Velasco vs. Court of Appeals, 51 SCRA 439[1973]; Limketkai Sons Milling, Inc. vs. Court of Appeals, 69 SCAD976, 255 SCRA 626 [1996]; see Navarro vs. Sugar Producers Corp.Mktg. Assoc., 1 SCRA 1180 [1961]; Co vs. Court of Appeals, 286SCRA 76 [1998].)

It appears, however, that the parties in the Velasco case agreedon the purchase price of P100,000. It is believed that upon themeeting of the minds of the parties on the thing which is the ob-

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ject of the contract and the price (P100,000), the contract of salemust be deemed to have been perfected. (Art. 1475.) The termsand conditions of payment are merely accidental, not essential,elements of the contract of sale except where the parties them-selves clearly stipulate that in addition to the subject matter andthe price, they are essential or material to the contract. (see A.Magsaysay, Inc. vs. Cebu Portland Cement Co., 100 Phil. 351[1956].) A disagreement on the manner of payment is tantamountto a failure to agree on the price. (Swedish Match, AB vs. Court ofAppeals, 441 SCRA 1 [2004].)

Article 119715 of our Civil Code authorizes courts to fix theperiod or periods of payment where there is lack of agreementregarding the same.

In Uraca vs. Court of Appeals (86 SCAD 734, 278 SCRA 702[1997].), S sent a letter to B, offering to sell a lot and commercialbuilding for P1,050,000. B sent a reply-letter within the 3-day pe-riod contained in the offer accepting the aforesaid offer. Later, Bwas told by S that the price was P1,400,000 in cash or manager’scheck and not P1,050,000 as erroneously dated in the letter-offer.B agreed to the price of P1,400,000 but counter-proposed thatpayment be paid in installments, with a downpayment ofP1,000,000 and the balance of P400,000 to be paid in 30 days. Itwas held that a contract of sale was perfected at the original priceof P1,050,000 but there was no agreement in the sale at the in-creased price of P1,400,000. The qualified acceptance by B consti-tutes a counter-offer and, in effect, a rejection of S’s offer. (Art.1319.) Since there was no definite agreement on the manner of thepayment of the purchase price of P1,400,000, the first sale forP1,050,000 remained valid and existing.

Although the law does not expressly state that the minds ofthe parties must also meet on the terms or manner of payment of

15Art. 1197. If the obligation does not fix a period, but from its nature and the cir-cumstances it can be inferred that a period was intended, the courts may fix the dura-tion thereof.

The courts shall also fix the duration of the period when it depends upon the willof the debtor.

In every case, the courts shall determine such period as may under the circum-stances have been probably contemplated by the parties. Once fixed by the courts, theperiod cannot be changed by them. (1128a)


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the price, the same is needed. Agreement on the manner of pay-ment goes into the price such that a disagreement on the mannerof payment is tantamount to failure to agree on the price. (ToyotaShaw, Inc. vs. Court of Appeals, 61 SCAD 310, 244 SCRA 320[1995]; San Miguel Properties Philippines, Inc. vs. Huang, 130SCAD 713, 336 SCRA 737 [2000].) An agreement on the price buta disagreement on the manner of its payment will not result inconsent. This lack of consent is separate and distinct from lack ofconsideration where the contract states that the price has been paidwhen in fact it has never been paid. (Montecillo vs. Reyes, 170SCAD 440, 385 SCRA 244 [2002], infra.)

ILLUSTRATIVE CASE:

The buyer, having failed to open a letter of credit as required bythe seller, claimed that there was no perfected contract of sale betweenthe parties.

Facts: B (buyer) established contact with S (seller) throughthe Philippine Consulate General in Hamburg, West Germany,because he wanted to purchase MAN bus spare parts from Ger-many.

On October 16, 1981, B submitted to S a list of the parts hewanted to purchase, with specific parts number and descrip-tion. On December 17, 1971, S submitted its formal offer con-taining the item number, quantity, part number, description,unit price and total to B. On December 24, 1981, B informed Sof his desire to avail of the prices of the parts at that time andenclosed its Purchase Order containing the item number, partnumber and description. On December 29, 1981, B personallysubmitted the quantities he wanted to the General Manager ofS in the Philippines. H, trading partner of S, sent a pro formainvoice to be used by B in applying for a letter of credit; saidinvoice required that said letter be opened in favor of J.

On February 16, 1982, S reminded B to open the letter ofcredit to avoid delay in the shipment and payment of interest.On October 18, 1982, S again reminded B of his order and ad-vised that the case may be endorsed to its lawyers. B replied thathe did not make any valid Purchase Order and that there wasno definite contract between him and S. Subsequently, S filed acomplaint for recovery of actual or compensatory damages,unearned profits, interest, attorney’s fees and costs against B.

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Issue: The issue posed for resolution is whether or not acontract of sale has been perfected between the parties.

Held: (1) A meeting of the minds has occurred. — “The offer bypetitioner [S] was manifested on December 17, 1981 when peti-tioner submitted its proposal containing the item number, quan-tity, part number, description, the unit price and total to pri-vate respondent [B]. On December 24, 1981, private respond-ent informed petitioner of his desire to avail of the prices of theparts at that time and simultaneously enclosed its PurchaseOrder No. 0101 dated December 14, 1981. At this stage, a meet-ing of the minds between vendor and vendee has occurred, theobject of the contract being the spare parts and the considera-tion, the price stated in petitioner’s offer dated December 17,1981 and accepted by the respondent on December 24, 1981.

Although said purchase order did not contain the quantityhe wanted to order, private respondent made good his prom-ise to communicate the same on December 29, 1981. At this junc-ture, it should be pointed out that private respondent was al-ready in the process of executing the agreement previouslyreached between the parties.’’

(2) B has accepted S’s offer. — “There appears this statementmade by private respondent: “Note above P.O. will include a3% discount. The above will serve as our initial P.O.” This no-tation on the purchase order was another indication of accept-ance on the part of the vendee, for by requesting a 3% discount,he implicitly accepted the price as first offered by the vendor.The immediate acceptance by the vendee of the offer was im-pelled by the fact that on January 1, 1982, prices would go up,as in fact, the petitioner informed him that there would be a 7%increase effective January 1982. On the other hand, concurrenceby the vendor with the said discount requested by the vendeewas manifested when petitioner immediately ordered the itemsneeded by private respondent from Schuback Hamburg whichin turn ordered from NDK, a supplier of MAN spare parts inWest Germany.”

(3) Contract was perfected on December 24, 1981. — “Whilewe agree with the trial court’s conclusion that indeed a perfec-tion of the contract was reached between the parties, we differas to the exact date when it occurred, for perfection took place,not on December 29, 1981, but rather on December 24, 1981.Although the quantity to be ordered was made determinate on


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only December 24, 1991, quantity is immaterial in the perfec-tion of sales contract. What is of importance is the meeting ofthe minds as to the object and cause, which from the facts dis-closed, show that as of December 24, 1981, these essential ele-ments had already concurred.”

(4) Opening of letter was not intended as a suspensive condi-tion. — “On the part of the buyer, the situation reveals that pri-vate respondent failed to open an irrevocable letter of creditwithout recourse in favor of Johannes Schuback of Hamburg,Germany. This omission, however, does not prevent the per-fection of the contract between the parties, for the opening of aletter of credit is not to be deemed a suspensive condition. Thefacts herein do not show that petitioner reserved title to thegoods until private respondent had opened a letter of credit.Petitioner, in the course of its dealings with private respond-ent, did not incorporate any provision declaring their contractof sale without effect until after the fulfillment of the act of open-ing a letter of credit. The opening of a letter of credit in favor ofvendor in only a mode of payment. It is not among the essen-tial requirements of a contract of sale enumerated in Articles ofday of which will prevent the perfection of the contract fromtaking place.” (Johannes Schuback & Sons Phil. Trading Corp. vs.Court of Appeals, 46 SCAD 240, 227 SCRA 717 [1993].)

Effect of failure to pay price.

Failure to pay the consideration of contract is different fromlack of consideration; the former results in a right to demandfulfillment or cancellation of the obligation under an existing validcontract, while the latter prevents the existence of a valid contract.(Montecillo vs. Reyes, 170 SCAD 440, 385 SCRA 244 [2002].)

(1) The failure to pay the stipulated price after the executionof the contract does not convert the contract into one without causeor consideration as to vitiate the validity of the contract, it notbeing essential for the existence of cause that payment or fullpayment be made at the time of the contract. (Puato vs. Mendoza,64 Phil. 417 [1937].) Non-payment of the purchase price is notamong the instances where the law declares a contract of sale tobe null and void. (Peñalosa vs. Santos, 153 SCAD 531, 363 SCRA545 [2001].) Such failure does not ipso facto resolve the contract inthe absence of any agreement to that effect. (De la Cruz vs.

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Legaspi, 98 Phil. 43 [1955]; Ocampo vs. Court of Appeals, 52 SCAD610, 233 SCRA 551 [1994].)

The situation is rather one in which there is failure to pay theconsideration, with its resultant consequences. The vendor’s rem-edy in such case is generally to demand specific performance orrescission with damages in either case under Article 1191. (De laCruz vs. Legaspi, supra; Chua Hai vs. Kapunan, Jr., 103 Phil. 110[1958]; Lebrilla vs. Intermediate Appellate Court, 180 SCRA 188[1989].)

(2) But a contract of sale is null and void where the purchaseprice, which appears thereon as paid, has, in fact, never been paidby the buyer to the seller. In such case, the sale is without cause orconsideration. (Art. 1409[3].) Such sale is non-existent or cannotbe considered consummated. It produces no effect whatsoever.(Mapalo vs. Mapalo, 17 SCRA 114 [1966]; Yu Bun Guan vs. Ong,157 SCAD 38, 367 SCRA 559 [2001]; Montecillo vs. Reyes, supra.)

If the real price is not stated in the contract, then the contractis valid but subject to reformation. If there is no meeting of theminds of the parties as to the price, because the price stipulatedin the contract is simulated, then the contract is void. Article 1471states that if the price is simulated, the sale is void. (Buenaventuravs. Court of Appeals, 416 SCRA 263 [2003].)

ILLUSTRATIVE CASES:

1. Seller is authorized by the contract, in case of buyer’s de-fault, to recover interest sold in property which was subsequentlydamaged, and buyer defaulted.

Facts: S and B were the co-owners in equal shares of a mo-tor boat. By written contract, S sold her undivided interest inthe boat to B payable in three (3) equal installments. In case ofdefault “the buyer authorizes the seller to recover her one-halfparticipation of ownership of the boat without obligation toreimburse the payments made by the buyer.” B defaulted afterP750.00 was paid. Later, the boat was damaged by a typhoon.

S filed action to recover the balance of the purchase price.B answered that he had notified S to take over her half interestin the boat, which she refused to do.

Issue: Under the contract, is B relieved of the obligation topay the purchase price?


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Held: No. The sole fact that the contract of sale between theparties only provides that in case of default “the buyer author-izes xxx,” and is silent on the seller’s right to exact payment ofthe outstanding balance, there being no other stipulations in-compatible therewith, does not import that the seller has therebylost the alternative right to demand full payment. (see Cui vs.Sun Chuan, 41 Phil. 523.) This becomes more apparent from thecircumstance that the contract as written confers upon the sellerthe right (“buyer authorizes the seller”) to rescind the sale andrecover her half interest, but does not obligate her to do so.

Since S chose to collect full payment as she is entitled todo, the loss of the boat without fault of the buyer (B) is irrel-evant to the case. The generic obligation to pay monthly is notexcused by fortuitous loss of any specific property of the debtor.(Ramirez vs. Court of Appeals, 98 Phil. 225 [1956].)

———— ———— ————

2. Subject matter of sale is “24,000 tons of iron ore, more orless” already extracted, for a lump sum, and buyer, refusing to pay,claims short-delivery and asks for damages.

Facts: S embarked upon the exploration and developmentof mining claims belonging to B. Later, they executed a docu-ment wherein S transferred to B all of S’s rights and interestover the “24,000 tons of iron ore, more or less” that S had al-ready extracted from the mineral claims in consideration of adownpayment of P10,000.00 and the balance of P65,000.00which will be paid out of the “first shipment of iron ore and ofthe first amount derived from the local sale of iron ore made”from said claims, which amount was secured by a surety bondexecuted by B in favor of S.

No sale of the approximately 24,000 tons of iron ore hadbeen made nor had the P65,000.00 been paid. S brought suit forthe recovery of the balance of the purchase price. B claims ashort delivery, and asks for damages. There is no charge that Sdid not deliver to B all the ore found in the stockpiles in themining claims in question.

Issue: If there had been short delivery, as claimed by B, ishe entitled to the payment of damages?

Held: No. (1) Contract is sale of specific mass of tangible goods.— “The sale between the parties is a sale of specific mass offungible goods because no provision was made in their con-

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tract for the measuring or weighing of the ore sold in order tocomplete or perfect the sale nor was the price of P75,000.00agreed upon based upon any such measurement. (Art. 1480,par. 2.) The subject matter of sale is a determinate object, themass, for a single price or lump sum (the quantity ‘24,000 tonsof iron ore, more or less,’ being a mere estimate by the partiesof the total tonnage weight of the mass), and not the actualnumber of units or tons contained therein so that all that wasrequired of S was to deliver in good faith to B all the ore foundin the mass, notwithstanding that the quantity delivered is lessthan the amount estimated by them.’’

(2) Reasonable percentage of error considered. — “Even grant-ing the estimate of 21,889.7 tons made by B is correct, consider-ing that the actual weighing of each unit of the mass was prac-tically impossible, a reasonable percentage of error should beallowed anyone making an estimate of the exact quantity intons found in the mass. In this case, both parties predicatedtheir respective claims only upon an estimated number of cu-bic meters of ore multiplied by the average tonnage factor percubic meter. Furthermore, the contract expressly stated theamount to be 24,000 tons more or less.’’ (Gaite vs. Fonacier, 2SCRA 830 [1961].)

Right of owner to fix his own price.

(1) The owner of a thing has the right to quote his own price,reasonable or unreasonable. It is up to the prospective buyer toaccept or reject it. He may even impose a condition hard to fulfilland name a price quite out of proportion to the real value of thething offered for sale. (Cornejo vs. Calupitan, 87 Phil. 555 [1950].)

(2) He is also well within his right to quote a small or nomi-nal consideration (see Arts. 1470-1471.) and such consideration isjust as effectual and valuable a consideration as a larger sum stipu-lated or paid. (see Pelacio vs. Adiosola, [C.A.] No. 7572-R, Sept.10, 1952.)

ART. 1476. In the case of a sale by auction:

(1) Where goods are put up for sale by auction inlots, each lot is the subject of a separate contract ofsale.


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(2) A sale by auction is perfected when the auc-tioneer announces its perfection by the fall of the ham-mer, or in other customary manner. Until such an-nouncement is made, any bidder may retract his bid;and the auctioneer may withdraw the goods from thesale unless the auction has been announced to bewithout reserve.

(3) A right to bid may be reserved expressly by oron behalf of the seller, unless otherwise provided bylaw or by stipulation.

(4) Where notice has not been given that a sale byauction is subject to a right to bid on behalf of theseller, it shall not be lawful for the seller to bid him-self or to employ or induce any person to bid at suchsale on his behalf or for the auctioneer, to employ orinduce any person to bid at such sale on behalf of theseller or knowingly to take any bid from the seller orany person employed by him. Any sale contraveningthis rule may be treated as fraudulent by the buyer. (n)

Rules governing auction sales.

(1) Sales of separate lots by auction are separate sales. — Whereseparate lots are the subject of separate biddings and are sepa-rately knocked down, there is a separate contract in regard to eachlot. As soon as the hammer falls on the first lot, the purchaser ofthat lot has a complete and separate bargain. He need not makeanother. When a second lot is put up and knocked down to thehighest bidder, there is a separate complete contract as to the saidlot whether the bidder who secured the first lot or whether an-other person happens to be the highest bidder. Such is the rule inNo. (1) though no doubt the parties may subsequently consoli-date all the purchases into one transaction — as by giving a sin-gle note — for the aggregate price. (see 2 Williston on Sales [1948Rev. Ed.], pp. 199-200.)

(2) Sale perfected by the fall of the hammer. — In putting up thegoods for sale, the seller is merely making an invitation to thosepresent to make offers which they do by making bids (Art. 1326.),one of which is ultimately accepted. Each bid is an offer and the

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contract is perfected only by the fall of the hammer or in othercustomary manner. It follows that the bidder may retract his bidand the auctioneer may withdraw the goods from sale any timebefore the hammer falls. However, if the sale has been announcedto be without reserve, the auctioneer cannot withdraw the goodsfrom sale once a bid has been made and the highest bidder has aright to enforce his bid. (see 2 Williston, op. cit., pp. 200-201, 204-205.)

(3) Right of seller to bid in the auction. — The seller or his agentmay bid in an auction sale provided: (a) such right was reserved;(b) notice was given that the sale is subject to a right to bid onbehalf of the seller; and (c) the right to bid by the seller is not pro-hibited by law or by stipulation.16

(a) Where no notice given of right to bid. — Where there is nonotice that the sale is subject to seller’s right to bid, it shall beunlawful for the seller to bid either directly or indirectly or forthe auctioneer to employ or induce any person to bid on be-half of the seller. (No. 4.) The purpose of the notice is to pre-vent puffing or secret bidding by or on behalf of the seller bypeople who are not themselves bound. The employment of apuffer or by bidder to enhance or inflate the price of the goodssold is a fraud upon the purchaser and a sufficient ground forrelieving him from his bid and avoiding the sale. (see Fishervs. Hersey, 17 Hun. [N.Y.] 370.) This is true although the em-ployment of the puffer by the auctioneer was without theowner’s knowledge, since the auctioneer is the owner’s agent.

(b) Where notice of right to bid given. — Though bidding bythe seller or his agent is fraudulent, a right to bid may be ex-pressly reserved by or on behalf of the seller. (No. 3.) It is,therefore, the secrecy of puffing which renders it a fraud uponbidding. (2 Williston, op. cit., p. 208.) Where there is notice ofthe intention to bid by the seller, the bidding in such a casewould not operate as a fraud.

16Art. 2113. At the public auction, the pledgor or owner may bid. He shall, moreo-ver, have a better right if he should offer the same terms as the highest bidder.

The pledgee may also bid, but his offer shall not be valid if he is the only bidder.Art. 2114. All bids at the public auction shall offer to pay the purchase price at once.

If any other bid is accepted, the pledgee is deemed to have received the purchase price,as far as the pledgor or owner is concerned.


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(4) Contract not to bid. — A sale may be fraudulent not onlybecause of conduct of the seller, but because of conduct of thebuyer. It is not permissible for intending buyers at auction or othercompetitive sales to make an agreement for a consideration thatonly one of them shall bid, in order that the property may beknocked down at a low price. The bargain is fraudulent as regardsthe seller though the agreement is without consideration, if it isactually carried out, for the fraud against the seller is the same asif there were considerations. (Ibid., pp. 209-219.)

(5) Advertisements for bidders. — They are simply invitationsto make proposals, and the advertiser is not bound to accept thehighest or lowest bidder, unless the contrary appears. (Art. 1326.)

Right of owner to prescribe termsof public auction.

The owner of property which is offered for sale, either at publicor private auction, has the right to prescribe the manner, condi-tions, and terms of such sale. He may provide that all of the pur-chase price or any portion thereof should be paid at the time ofthe sale, or that time will be given for that payment, or that anyor all bids may be rejected.

The conditions of a public sale announced by an auctioneeror by the owner of the property at the time and place of the saleare binding upon all bidders, whether they knew of such condi-tions or not. (Leoquinco vs. Postal Savings Bank, 47 Phil. 772[1925].)

ART. 1477. The ownership of the thing sold shallbe transferred to the vendee upon the actual or con-structive delivery thereof. (n)

ART. 1478. The parties may stipulate that owner-ship in the thing shall not pass to the purchaser untilhe has fully paid the price. (n)

Ownership of thing transferredby delivery.

The delivery of the thing sold is essential in a contract of sale.Without it, the purchaser may not enjoy the thing sold to him. It

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is only after the delivery of the thing sold that the purchaser ac-quires a real right or ownership over it. (Arts. 1164, 1496-1497.)

In the absence of stipulation to the contrary, the ownership ofthe thing sold passes on to the vendee upon delivery thereof. (seeFroilan vs. Pan Oriental Shipping Co., 12 SCRA 276 [1964]; Boy vs.Court of Appeals, 427 SCRA 196 [2004].) This is true even if thepurchase has been made on credit. Payment of the purchase priceis not essential to the transfer of ownership, as long as the prop-erty sold has been delivered. (Sampaguita Pictures, Inc. vs.Jalwindor Manufacturers, Inc., 93 SCRA 420 [1979].) Non-paymentonly creates a right to demand payment or to rescind the contract,or to criminal prosecution in the case of bouncing checks. (EDCAPublishing and Distributing Corp. vs. Santos, 184 SCRA 614[1990].)

The delivery may be actual (Art. 1497.) or constructive. (Arts.1498-1501.) The contract is consummated by the delivery of thething sold and of the purchase money.

In all forms of delivery, it is necessary that the act of delivery,whether actual or constructive, should be coupled with the inten-tion of delivering the thing sold. The act without the intention isinsufficient; there is no tradition. (Union Motor Corporation vs.Court of Appeals, 151 SCAD 714, 361 SCRA 506 [2001].) It has beenheld that the issuance of a sales invoice does not prove transferof ownership of the thing sold to the buyer, an invoice being noth-ing more than a detailed statement of the nature, quantity, andcost of the thing sold, and considered not a bill of sale. (Ibid., cit-ing P.T. Cerna Corporation vs. Court of Appeals, 221 SCRA 19[1993]; Norkis Distributor’s, Inc. vs. Court of Appeals, 93 SCRA694 [1991].)

Exceptions to the rule.

(1) Contrary stipulation. — The ownership of things is trans-ferred by delivery, and not by mere payment. However, the par-ties may stipulate that despite the delivery, the ownership of thething shall remain with the seller until the purchaser has fully paidthe price. (see Art. 1503.) In other words, non-payment of the price,after the thing has been delivered, prevents the transfer of own-ership only if such is the stipulation of the parties. This stipula-

Arts. 1477-1478 NATURE AND FORM OF THE CONTRACT

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tion is usually known as pactum reservati dominii or contractualreservation of title, and is common in sales on the installment plan.(Jovellanos vs. Court of Appeals, 210 SCRA 126 [1992].) A con-tract which contains this kind of stipulation is considered a con-tract to sell. The agreement may be implied. (Adelfa Properties,Inc. vs. Court of Appeals, 58 SCAD 462, 240 SCRA 565 [1995].)

(a) Where in a contract of sale the seller agreed that theownership of the goods shall remain with the seller until thepurchase price shall have been fully paid, merely to secure theperformance by the buyer of his obligation, such stipulationcannot make the seller liable in case of loss of the goods. (seeLawyers Cooperative Publishing Co. vs. Tabora, 13 SCRA 762[1965]; see Art. 1503, par. 2.)

(b) If there is doubt by the wording of the contract whetherthe parties intended a suspensive condition (Art. 1478.) or asuspensive period (Art. 1193, par. 1.) for the payment of thestipulated price, the doubt shall be resolved in favor of thegreatest reciprocity of interests. (see Art. 1378.) There can beno question that greater reciprocity will be obtained if thebuyer’s obligation is deemed to be actually existing, with onlyits maturity (due date) postponed or deferred. Sale is essen-tially onerous. (Gaite vs. Fonacier, 2 SCRA 830 [1961].)

(c) A stipulation that ownership in the thing sold shall notpass to the purchaser until after he has fully paid the pricethereof could only be binding upon the contracting parties,their assigns, and heirs (see Art. 1311, par. 1.) but not upon thirdpersons without notice. Such a stipulation is only a kind ofsecurity for the benefit of the vendor who has not been fullypaid.

(2) Contract to sell. — In contracts to sell, where ownership isretained by the seller and is not to pass until the full payment ofthe price, such payment is a positive suspensive condition, the fail-ure of which is not a breach, casual or serious, but simply an eventthat prevents the obligation of the vendor to convey title fromacquiring binding force. To say that there is only a casual breachis to proceed from the assumption that the contract is one of ab-solute sale, where non-payment is a resolutory condition, whichis not the case. (Luzon Brokerage Co., Inc. vs. Maritime Bldg., Co.

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Inc., 43 SCRA 93 [1972] and 86 SCRA 305 [1978]; Manuel vs.Rodriguez, 109 Phil. 1 [1960]; Roque vs. Lapuz, 96 SCRA 741[1980]; see Art. 1184.)

(3) Contract of insurance. — A perfected contract of sale evenwithout delivery vests in the vendee an equitable title, an existinginterest over the goods sufficient to be the subject of insurance.(see Sec. 14[a], Insurance Code.) Thus, a perfected contract of salebetween the vendee-consignee and the shipper of goods operatesto vest in the former an equitable title even before delivery orbefore he performed the conditions of the sale, the contract ofshipment, whether under F.O.B., or C.I.F., or C & F, being imma-terial in the determination of whether the vendee has an insur-able interest or not in the goods. (Filipino Merchants InsuranceCo., Inc. vs. Court of Appeals, 179 SCRA 638 [1989].)

ART. 1479. A promise to buy and sell a determi-nate thing for a price certain is reciprocally demand-able.

An accepted unilateral promise to buy or to sell adeterminate thing for a price certain is binding uponthe promissor if the promise is supported by a con-sideration distinct from the price. (1451a)

Kinds of promise treated in Article 1479.

The above article refers to three kinds of promises, namely:

(1) An accepted unilateral promise to sell in which the prom-isee (acceptor) elects to buy;

(2) An accepted unilateral promise to buy in which the prom-isee (acceptor) elects to sell; and

(3) A bilateral promise to buy and sell reciprocally acceptedin which either of the parties chooses to exact fulfillment. (see 10Manresa 71.)

Effect of unaccepted unilateral promise.

A unilateral promise or offer to sell or to buy a thing which isnot accepted creates no juridical effect or legal bond. Suchunaccepted imperfect promise or offer is called policitacion. A pe-


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riod may be given to the offeree within which to accept the offer.(infra.)

EXAMPLE:

S offers or promises to sell to B his car at a stated price andB just let the promise go by without accepting it. Neither S norB is bound by any contract. Obviously, this is not the one con-templated in Article 1479.

Meaning of option.

An option is a privilege existing in one person for which hehas paid a consideration which gives him the right to buy/sell,for example, certain merchandise or certain specified property,from/to another person, if he chooses, at any time within theagreed period at a fixed price, or under, or in compliance withcertain terms and conditions.

Nature of option contract.

(1) An option is a contract. It is a preparatory contract, sepa-rate and distinct from the main contract itself (subject matter ofthe option) which the parties may enter into upon the consum-mation of the option.

(2) It gives the party granted the option the right to decide,whether or not to enter into a principal contract, while it bindsthe party who has given the option, not to enter into the princi-pal contract with any other person during the agreed time andwithin that period, to enter into such contract with the one towhom the option was granted if the latter should decide to usethe option.17 (see Carceller vs. Court of Appeals, 103 SCAD 258,302 SCRA 718 [1999]; Litonjua vs. L & R Corporation, 328 SCRA796 [2000].)

(3) An option must be supported by a consideration distinctfrom the price. (Co. vs. Court of Appeals, 312 SCRA 528 [1999];Laforteza vs. Machuca, 127 SCAD 798, 333 SCRA 643 [2000];

17In a right of first refusal, while the object might be made determinate, the exerciseof the right would be dependent not only on the grantor’s eventual intention to enterinto a binding juridical relation with another but also on terms, including the price, thatare yet to be firmed up. (Vasquez vs. Ayala Corporaton, 443 SCRA 218 [2004].)

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Abalos vs. Macatangay, Jr., 439 SCRA 649 [2004].) The promiseehas the burden of proving such consideration. (see Vasquez vs.Court of Appeals, 199 SCRA 102 [1991].)

(4) A consideration of an option contract is just as importantas the consideration for any other kind of contract. (see Enriquezde la Cavada vs. Diaz, 37 Phil. 982 [1918].) An option withoutconsideration is void; the effect is the same as if there was nooption.

Effect of accepted unilateral promise.

The second paragraph of Article 1479 refers to what is calledas “option” in the commercial world.

A unilateral promise to sell or to buy a determinate thing fora price certain does not bind the promissor even if accepted andmay be withdrawn at any time. It is only if the promise is sup-ported by a consideration distinct and separate from the price thatits acceptance will give rise to a perfected contract.

The optionee (holder of the option), after accepting the optionand before he exercises it, has the right, but not the obligation, tobuy or sell, as the case may be. Once the option is exercised, i.e.,offer is accepted before a breach of the option, a bilateral promiseto sell and to buy ensues and both parties are then reciprocallybound to comply with their respective undertakings. It would bea breach of the option for the optioner-offeror to withdraw the offerduring the agreed period. If in fact, he withdraws the offer beforeits acceptance (exercise of the option) by the optionee-offeree, thelatter may not sue for specific performance on the proposed con-tract since it has failed to reach its own stage of perfection. Theofferor, however, renders himself liable for damages for breach ofthe option.18 (Asuncion vs. Court of Appeals, 56 SCAD 163, 238SCRA 602 [1994].)


18An option imposes no binding obligation on the optionee, aside from the consid-eration for the offer. Until accepted, it is not, properly speaking, treated as a contract.(Tayag vs. Lacson, 426 SCRA 282 [2004]; Adelfa Properties, Inc. vs. Court of Appeals,240 SCRA 565 [1995].) When the consideration given, for what otherwise would havebeen an option, partakes the nature in reality of a part payment of the purchase price(termed as earnest money [Art. 1482.] and considered as an initial payment thereof), anactual contract of sale is deemed entered into and enforceable as such. (Asuncion vs.Court of Appeals, supra.)

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Consideration in an option contract may be anything of value,unlike in sale where it must be the price certain in money or itsequivalent. Lacking any proof of such consideration, the optionis unenforceable. (San Miguel Properties Philippines, Inc. vs.Huang, 130 SCAD 713, 336 SCRA 737 [2000].) A contract of op-tion to buy is separate from the contract to sell, and both contractsneed separate and distinct considerations for validity. (Dijamcovs. Court of Appeals, 440 SCRA 190 [2004].)

EXAMPLE:

In the preceding example, even if B accepts the promise ofS (this is a case of an accepted unilateral promise to sell), S isnot bound to sell his car to B because there is no promise, inturn, on the part of B to buy.

However, if the promise is covered by a consideration dis-tinct from the price of the car, as when B paid or promised topay a sum of money to S for giving him the right to buy the carif he chooses within an agreed period at a fixed price, its accept-ance produces consent or meeting of the minds. A legally bind-ing and independent contract of option is deemed perfected.

ILLUSTRATIVE CASE:

Stipulation in mortgage deed gives mortgagees option to pur-chase mortgaged property within a certain period at an agreed price.

Facts: A provision in a mortgage deed states: “That it haslikewise been agreed that if the financial condition of the mort-gagees will permit, they may purchase said land absolutely onany date within the two-year term of this mortgage at the agreedprice of P3,900.” The mortgagors contend that as such, theycannot be deprived of the right to redeem the mortgaged prop-erty because such right is inherent in and inseparable from thiskind of contract.

Issue: Having reasonably advised the mortgagors that theyhad decided to buy the land in question pursuant to theaforequoted provision, are the mortgagees entitled to specificperformance consisting of the execution by the mortgagors ofthe corresponding deed of sale?

Held: Yes. The added special provision renders the mortga-gors’ right to redeem defeasible at the election of the mortga-gees. There is nothing illegal or immoral in this. It is simply an

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

Full payment of price not necessaryfor exercise of option to buy.

The obligations under an option to buy are reciprocal obliga-tions — the performance of one obligation is conditioned uponthe simultaneous fulfillment of the other obligation. (Art. 1169.)

In an option to buy, the party who has an option may validlyand effectively exercise his right by merely notifying the ownerof the former’s decision to buy and expressing his readiness topay the stipulated price.

The notice need not be coupled with actual payment of thepurchase price so long as this is delivered to the owner of theproperty upon the execution and delivery by him of the deed ofsale. The payment of the price is contingent upon the delivery ofthe deed of sale. Unless and until the owner shall have done this,the buyer who has the option is not and cannot be held in defaultin the discharge of his obligation to pay. (Nietes vs. Court of Ap-peals, 46 SCRA 654 [1972].) Consequently, since the obligation topay is not yet due, consignation19 in court of the purchase price isnot required. (Heirs of Luis Bacus vs. Court of Appeals, 341 SCRA2295 [2003].)

An option to buy is not, of course, a contract of purchase andsale. (Kilosbayan, Inc. vs. Morato, 63 SCAD 97, 246 SCRA 540[1995].)

19Consignation is the act of depositing the thing or sum due with the proper courtwhenever the creditor cannot accept or refuses to accept payment. It generally requiresa prior tender of payment. Where no debt is due and owing, consignation is not proper.(see Arts. 1256, 1257, 1258; Legaspi vs. Court of Appeals, 142 SCRA 82 [1986].)


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Article 1479 and Article 1324 compared.

Article 1324 of the Civil Code provides as follows:

“When the offerer has allowed the offeree a certain periodto accept, the offer may be withdrawn at any time before ac-ceptance by communicating such withdrawal, except whenthe option is founded upon a consideration, as something paidor promised.”

Under the above-quoted article, the general rule regardingoffer and acceptance (see Art. 1319.) is that, when the offerer hasallowed the offeree a certain period within which to accept theoffer, the offer may be withdrawn as a matter of right at any timebefore acceptance. But if the option is founded upon a separateconsideration, the offerer cannot withdraw his offer, even if thesame has not yet been accepted, before the expiration of the stipu-lated period. Regardless of whether it is supported by a consid-eration or not, the offer, of course, cannot be withdrawn after ac-ceptance of the offer.

This general rule as embodied in Article 1324 was interpretedas modified by the provision of Article 1479 which applies spe-cifically to a promise “to buy or to sell.” As already stated, thisrule requires that for a promise to sell to be valid, it must be sup-ported by a consideration distinct from the price. American au-thorities which hold that an offer, once accepted, cannot be with-drawn, regardless of whether or not it is supported by a consid-eration (62 Am. Jur. 528.), uphold the general rule applicable tooffer and acceptance as contained in our Civil Code. (Art. 1319;see Southern Sugar & Mollasses Co. vs. Atlantic Gulf & PacificCo., 97 Phil. 249 [1955]; Mendoza vs. Comple, 15 SCRA 162 [1965].)

In a later case (Sanchez vs. Rigos, 45 SCRA 368 [1972], infra.),the Supreme Court abandoned the view adhered to in Southwest-ern Sugar (supra.) which holds that an option to sell can still bewithdrawn, even if accepted, if the same is not supported by anyconsideration, and reaffirmed the doctrine in Atkins, Kroll & Co.,Inc. vs. Cua Hian Tek (102 Phil. 948 [1958], infra.), holding that itcould no longer be withdrawn after acceptance. In other words,if acceptance is made before withdrawal, it constitutes a bindingcontract of sale although the option is given without considera-

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tion. Before acceptance, the offer may be withdrawn as a matterof right.20 Be that as it may, the offerer cannot revoke, before theperiod has expired, in an arbitrary or capricious manner the offerwithout being liable for damages which the offeree may sufferunder Article 19 of the Civil Code.

ILLUSTRATIVE CASES:

1. Promissor withdrew an option to sell, which is not supportedby any consideration, after its acceptance by promisee.

Facts: S and B executed an instrument, entitled “Option toPurchase,” whereby S agreed, promised, and committed “x x xto sell” to B for a certain sum a parcel of land within two (2)years with the understanding that said option shall be deemed“terminated and elapsed” if B shall fail to exercise the right tobuy the property “within the stipulated period.’’

Inasmuch as several tenders of payment made by B wererejected by S, the former commenced an action for specific per-formance.

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

20Article 1324 may be interpreted to refer to a bilateral promise (e.g., to buy andsell). Hence, the offer (to sell or buy) may not be withdrawn after acceptance of the offer.The offer may be withdrawn before acceptance since there is no meeting of minds yet,unless an option supported by a consideration has been granted. A unilateral promise tosell or buy does not bind the offerer even after acceptance except where the promise issupported by a consideration distinct from the price.

In Rural Bank of Parañaque vs. Remolado (135 SCRA 409 [1985].), the commitment bya bank to resell a property within a specified period, although accepted by the party inwhose favor it was made, was considered an option not supported by a considerationdistinct from the price and, therefore, not binding upon the promissor. Lacking suchconsideration, the option was held void pursuant to Southwestern Sugar and Molasses Co.case.

To the same effect is the recent case of Natno vs. Intermediate Appellate Court. (179SCRA 323 [1991].) Citing Rural Bank of Parañaque, Inc. case, the Supreme Court held thatthe promise made by the President of a bank to allow the petitioners to buy (or to re-sellto them) the foreclosed property (not redeemed since the offer took place after the expi-ration of the redemption period) at any time they have money is not binding on thebank because it was a promise unsupported by a consideration distinct from the re-purchase price.

In Diamante vs. Court of Appeals (206 SCRA 52 [1992].), the Option to Repurchaseexecuted by the vendee after the sale in favor of the vendor was held merely a promiseto sell governed by Article 1479, sale in the absence of a separate consideration was notbinding upon the promissor (vendee) even if the promise was accepted.


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Held: No. (1) Acceptance resulted in perfected contract of sale.— “Since there may be no valid contract without cause or con-sideration, the promissor (S) is not bound by his promise andmay accordingly withdraw it. Pending notice of its withdrawal,his accepted promise partakes, however, of the nature of anoffer to sell which, if accepted, results in a perfected contract ofsale. This view has the advantage of avoiding a conflict betweenArticle 1324 (on the general principles on contracts) and Arti-cle 1479 (on sales) of the Civil Code, in line with the cardinalrule of statutory construction that, in construing different pro-visions of one and the same law or code, such interpretationshould be favored as will reconcile or harmonize said provi-sions and avoid a conflict between the same.’’

(2) Exceptions not favored. — “Moreover, the decision in theSouthwestern case (supra.), in effect, considers Article 1479 as anexception to Article 1324, and exceptions are not favored un-less the intention to the contrary is clear, and it is not so insofaras said two (2) articles are concerned. What is more, the refer-ence, in both the second paragraph of Article 1479 and Article1324, to an option or promise supported by or founded upon aconsideration, strongly suggests that the two (2) provisions in-tended to enforce or implement the same principle.

The doctrine laid down in the Atkins case (supra.) is reaf-firmed, and, insofar as inconsistent therewith, the view adheredto in Southwestern case should be deemed abandoned or modi-fied.21 (Sanchez vs. Rigos, supra.)

———— ———— ————

21In the case of Cronico vs. J.M. Tuazon & Co., Inc. (78 SCRA 331 [1977].), the SupremeCourt said: “In order that a unilateral promise may be binding upon a promissor, Article1479 . . . requires the concurrence of the condition that the promise be supported by aconsideration distinct from the price.” To the same effect is Montilla vs. Court of Appeals(161 SCRA 167 [1988].) and Salame vs. Court of Appeals, 57 SCAD 631, 239 SCRA 356(1994).

In an earlier case, the Supreme Court, in rejecting the holding of the Court of Ap-peals, “that Isabel Ariolas’ promise (to sell) does not bind Rowena Teodoro (petitioner)because it is not supported by a consideration distinct from the price pursuant to Article1479, held: “That consideration is expressed in Exhibit ‘A’ under which the petitionersshouldered all rental expenses payable by Ariola for her occupation of the property(leased and subsequently sold to her by the former owner). This should be distinguishedfrom a sublease arrangement in which the sublessee’s responsibility as and for rentsdue the lessor is subsidiary. But here, the petitioners bound themselves primarily toanswer for the rents. That is enough consideration to support Ariola’s promise.” (Teodorovs. Court of Appeals, 155 SCRA 547 [1987].)

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2. The Deed of Option which was in the same document doesnot provide for the period within which the parties may demand theperformance of their respective undertakings.

Facts: R, owner of a 600-meter lot, sold a portion of 300square meters of the lot to spouses V, for P21,000.00 or P70.00per square meter. Subsequently, R, with the consent of her hus-band, executed a Deed of Option in favor of V in which theremaining 300 square meters portion of the property would besold to V under the conditions stated therein. The Court ofAppeals ruled that the Deed of Option was void for lack ofconsideration.

Issue: The pivotal issue to be resolved is the validity of theDeed of Option whereby the private respondents (R and herhusband) agreed to sell their lot to petitioners (spouses V)“whenever the need of such sale arises” on the part of eitherparties.

Held: (1) Option supported by a consideration. — “As expressedin Gonzales vs. Trinidad (67 Phil. 682 [1939].), consideration is‘the why of the contract, the essential reason which moves thecontracting parties to enter into the contract’. The cause or theimpelling reason on the part of private respondent in execut-ing the deed of option as appearing in the deed itself is thepetitioners’ having agreed to buy the 300 square meters of pri-vate respondents’ land at P70.00 per square meter portion‘which was greatly higher than the actual reasonable prevail-ing price’. This cause or consideration is clear from the deedwhich stated: ‘That the only reason why the spouses-vendeesJulio Villamor and Marina V. Villamor agreed to buy the saidone-half portion at the above-stated price of about P70.00 persquare meter, is because I, and my husband Roberto Reyes, haveagreed to sell and convey to them the remaining one-half por-tion still owned by me x x x.’

The respondent appellate court failed to give due consid-eration to petitioners’ evidence which shows that in 1969 theVillamor spouses bought an adjacent lot from the brother ofMacaria Labing-isa for only P18.00 per square meter which theprivate respondents did not rebut. Thus, expressed in terms ofmoney, the consideration for the deed of option is the differ-ence between the purchase price of the 300-square meter por-tion of the lot in 1971 (P70.00 per sq.m.) and the prevailing rea-sonable price of the same lot in 1971. Whatever it is (P25.00 orP18.00), though not specifically stated in the deed of option,


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was ascertainable. Petitioners’ allegedly paying P52.00 persquare meter for the option may, as opined by the appellatecourt, be improbable but improbabilities do not invalidate acontract freely entered into by the parties.”

(2) Private respondents as well were granted an option to sell.— “The ‘deed of option’ entered into by the parties in this casehad unique features. Ordinarily, an optional contract is a privi-lege existing in one person, for which he had paid a considera-tion and which gives him the right to buy, for example, certainmerchandise or certain specified property, from another person,if he chooses, at any time within the agreed period at a fixedprice. (Enriquez de la Cavada vs. Diaz, 37 Phil. 982 [1918].) Ifwe look closely at the ‘deed of option’ signed by the parties, wewill notice that the first part covered the statement on the saleof the 300-square-meter portion of the lot to Spouses Villamorat the price of P70.00 per square meter ‘which was higher thanthe actual reasonable prevailing value of the lands in that placeat that time (of sale).’

The second part stated that the only reason why theVillamor spouses agreed to buy the said lot at a much higherprice is because the vendor (Reyeses) also agreed to sell to theVillamors the other half-portion of 300 square meters of the land.Had the deed stopped there, there would be no dispute that thedeed is really an ordinary deed of option granting the Villamorsthe other half-portion of 300 square meters of the lot in consid-eration of their having agreed to buy the other half of the landfor a much higher price. But, the ‘deed of option’ went on andstated that the sale arises, either on our (Reyeses) part or on thepart of the Spouses Julio Villamor and Marina V. Villamor. Itappears that while the option to buy was granted to theVillamors, the Reyeses were likewise granted an option to sell.In other words, it was not only the Villamors who were grantedan option to buy for which they paid a consideration. TheReyeses as well were granted an option to sell should the needfor such sale on their part arises.”

(3) Offer to sell had been accepted. — “In the instant case, theoption offered by private respondents had been accepted bythe petitioner, the promisee, in the same document. The accept-ance of an order to sell for a price certain created a bilateralcontract to sell and buy and upon acceptance, the offeree ipsofacto assumes obligations of a vendee. (see Atkins, Kroll & Co.vs. Cua Hian Tek, 102 Phil. 948 [1958].) Deman dability may beexercised at any time after the execution of the deed. In Sanchez

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vs. Rigos (45 SCRA 368 [1972].), We held: ‘In other words, sincethere may be no valid contract without a cause of considera-tion, the promissor is not bound by this promise and may ac-cordingly withdraw it. Pending notice of its withdrawal, his ac-cepted promise partakes, however, of the nature of an offer to sell which,if accepted, results in a perfected contract of sale.”

(4) Acceptance created a perfected contract of sale. — A con-tract of sale is, under Article 1475 of the Civil Code, perfectedat the moment there is a meeting of minds upon the thing whichis the object of the contract and upon the price. From that mo-ment, the parties may reciprocally demand performance, sub-ject to the provisions of the law governing the form of contracts.Since there was, between the parties, a meeting of minds uponthe object and the price, there was already a perfected contractof sale. What was, however, left to be done was for either partyto demand from the other their respective undertakings underthe contract. It may be demanded at any time either by the pri-vate respondents, who may compel the petitioners to pay forthe property or the petitioners, who may compel the privaterespondents to deliver the property.”

(5) Action to enforce contract had prescribed. — “However,the Deed of Option did not provide for the period within whichthe parties may demand the performance of their respectiveundertakings in the instrument. The parties could not have con-templated that the delivery of the property and the paymentthereof could be made indefinitely and render uncertain thestatus of the land. The failure of either parties to demand per-formance of the obligation of the other for an unreasonablelength of time renders the contract ineffective.

Under Article 1144(1) of the Civil Code, actions upon a writ-ten contract must be brought within ten (10) years. The Deed ofOption was executed on November 11, 1971. The acceptance,as already mentioned, was also accepted in the same instru-ment. The complaint in this case was filed by the petitioners onJuly 13, 1987, seventeen (17) years from the time of the execu-tion of the contract. Hence, the right of action had prescribed.’’(Villamor vs. Court of Appeals, 202 SCRA 607 [1991].)

———— ———— ————3. The contract of lease gives the lessee 30-day exclusive option

to purchase the leased premises

Facts: A contract of lease in paragraph 8 provides: “x x xthat if the lessor [R] should desire to sell the leased premises,


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the LESSEE [E] shall be given 30 days exclusive option to thesame. In the event, however, that the leased premises is sold tosomeone other than the LESSEE, the LESSOR is bound andobligated, as it hereby binds and obligates itself, to stipulate inthe Deed of Sale thereof that the purchaser shall recognize thislease and be bound by all the terms and conditions thereof.’’

The lessor later sold his property including the leasedpremises located thereon to petitioner (P).

Rereading the law on the matter of sales and option con-tracts, respondent Court of Appeals differentiated betweenArticle 1324 and Article 1479 of the Civil Code, analyzed theirapplication to the facts of this case, and concluded that sinceparagraph 8 of the two lease contracts does not state a fixedprice for the purchase of the leased premises, which is an es-sential element for a contract of sale to be perfected, what para-graph 8 is, must be a right of first refusal and not an optioncontract. Besides the ruling that paragraph 8 vests in E the rightof first refusal as to which the requirement of distinct consid-eration indispensable in an option contract has no application,respondent appellate court also addressed the claim of R thatassuming arguendo that the option is valid and effective, it isimpossible of performance because it covered only the leasedpremises and not the entire property of R whose offer to sellpertained to the entire property in question.

Issue: Does the contractual stipulation provide for an op-tion clause or an option contract?

Held: (1) Contractual stipulation is an option clause. — “Weagree with the respondent Court of Appeals that the aforecitedcontractual stipulation provides for a right of first refusal infavor of Mayfair [E]. It is not an option clause or an option con-tract. It is a contract of a right of first refusal.

As early as 1916, in the case of Beaumont vs. Prieto (41 Phil.670.), unequivocal was our characterization of an option con-tract as one necessarily involving the choice granted to anotherfor a distinct and separate consideration as to whether or notto purchase a determinate thing at a predetermined fixed price.

x x x

The rule so early established in this jurisdiction is that thedeed of option or the option clause in a contract, in order to bevalid and enforceable, must, among other things, indicate the

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definite price at which the person granting the option is will-ing to sell.

Notably, in one case we held that the lessee loses his rightto buy the leased property for a named price per square meterupon failure to make the purchase within the time specified(Tuazon, Jr. vs. De Asis, 107 Phil. 131 [1960].); in one other casewe freed the landowner from her promise to sell her land if theprospective buyer could raise P4,500.00 in three weeks becausesuch option was not supported by a distinct consideration(Mendoza vs. Comple, 15 SCRA 162 [1965].); in the same veinin yet one other case, we also invalidated an instrument enti-tled, “Option to Purchase’’ a parcel of land for the sum ofP1,510.00 because of lack of consideration (Sanchez vs. Rigor,45 SCRA 368 [1972].); and as an exception to the doctrine enu-merated in the two preceding cases, in another case, we ruledthat the option to buy the leased premises for P12,000.00 asstipulated in the lease contract, is not without considerationfor in reciprocal contracts, like lease, the obligation or promiseof each party is the consideration for that of the other. (Vda. deQuirino vs. Palanca, 29 SCRA 1 [1969].) In all these cases, theselling price of the object thereof is always predetermined andspecified in the option clause in the contract or in the separatedeed of option. x x x.

In the light of the foregoing disquisition and in view of thewording of the questioned provision in the instant case, we sohold that no option to purchase in contemplation of the secondparagraph of Article 1479 of the Civil Code, has been grantedto E under the lease contract.

Respondent Court of Appeals correctly ruled that the saidparagraph 8 grants the right of first refusal to E and is not anoption contract. It also correctly reasoned that as such, the re-quirement of a separate consideration for the option has no ap-plicability in the instant case.’’

(2) Right of first refusal is an integral part of the contract oflease. — “An option is a contract granting a privilege to buy orsell within an agreed time and at a determined price. It is aseparate and distinct contract from that which the parties mayenter into upon the consummation of the option. It must besupported by consideration. In the instant case, the right of firstrefusal is an integral part of the contract of lease. The consid-eration is built into the reciprocal obligations of the parties.


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To rule that a contractual stipulation such as that found inparagraph 8 of the contract is governed by Article 1324 on with-drawal of the offer or Article 1479 on promise to buy and sellwould render ineffectual or “inutile’’ the provisions on right offirst refusal so commonly inserted in leases of real estate nowa-days. The Court of Appeals is correct in stating that paragraph8 was incorporated into the contract of lease for the benefit of Ewhich wanted to be assured that it shall be given the first crackor the first option to buy the property at the price which R iswilling to accept. It is not also correct to say that there is noconsideration in an agreement of right of first refusal. The stipu-lation is part and parcel of the entire contract of lease. The con-sideration for the lease includes the consideration for the rightof first refusal. Thus, E is in effect stating that it consents tolease the premises and to pay the price agreed upon providedthe lessor also consents that, should it sell the leased property,then, E shall be given the right to match the offered purchaseprice and to buy the property at that price.’’

(3) Consequential rights, obligations and liabilities of R, E, andP. — “It is undisputed that R did recognize this right of E, for itinformed the latter of its intention to sell the said property in1974. There was an exchange of letters evidencing the offer andcounter-offers made by both parties. R, however, did not pur-sue the exercise to its logical end. While it initially recognizedE’s right of first refusal, R violated such right when withoutaffording its negotiation with E the full process to ripen to atleast an interface of a definite offer and a possible correspond-ing acceptance within the “30-day exclusive option’’ timegranted E, R abandoned negotiations, kept a low profile forsome time, and then sold, without prior notice to E, the entireClaro M. Recto property to Equatorial (P).

Since P is a buyer in bad faith, this finding renders the saleto it of the property in question rescissible. We agree with re-spondent Appellate Court that the records bear out the fact thatP was aware of the lease contract because its lawyers had, priorto the sale, studied the said contract. As such, P cannot tenablyclaim to be a purchaser in good faith, and, therefore, rescissionlies.

x x x x x x

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

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meal determination of this case and leave festering sores todeteriorate into endless litigation. The facts of the case and con-siderations of justice and equity require that we order rescis-sion here and now.

x x x x x x

This Court has always been against multiplicity of suitswhere all remedies according to the facts and the law can beincluded. Since R sold the property for P11,300,000.00 to P, theprice at which E could have purchased the property is, there-fore, fixed. It can neither be more nor less. There is no disputeover it. The damages which E suffered are in terms of actualinjury and lost opportunities. The fairest solution would be toallow E to exercise its right of first refusal at the price which itwas entitled to accept or reject which is P11,300,000.00.

x x x x x x

Under the Ang Yu Asuncion vs. Court of Appeals (57 SCAD163, 238 SCRA 602 [1994].) decision, the Court stated that therewas nothing to execute because a contract over the right of firstrefusal belongs to a class of preparatory juridical relations gov-erned not by the law on contracts but by the codal provisionson human relations. This may apply here if the contract is lim-ited to the buying and selling of the real property. However,the obligation of R to first offer the property to E is embodiedin a contract. It is Paragraph 8 on the right of first refusal whichcreated the obligation. It should be enforced according to thelaw on contracts instead of the panoramic and indefinite ruleon human relations. The latter remedy encourages multiplicityof suits. There is something to execute and that is for R to com-ply with its obligation to the property under the right of thefirst refusal according to the terms at which they should havebeen offered then to E, at the price when that offer should havebeen made. Also, E has to accept the offer. This juridical rela-tion is not amorphous nor it is merely preparatory.

On the question of interest payments on the principalamount of P11,300,000.00, it must be borne in mind that both Rand P acted in bad faith. R knowingly and deliberately broke acontract entered into with E. x x x On the part of P, it cannot bea buyer in good faith because it bought the property with no-tice and full knowledge that E had a right to or interest in theproperty superior to its own. R and P took unconscientiousadvantage of E.


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Neither may R and P avail of considerations based on eq-uity which might warrant the grant of interests. The vendorreceived as payment from the vendee what, at the time, was afull and fair price for the property. It has used the P11,300,000.00all these years earning income or interest from the amount. P,on the other hand, has received rents and otherwise profitedfrom the use of the property turned over to it by R. In fact,during all the years that this controversy was being litigated, Epaid rentals regularly to the buyer who had an inferior right topurchase the property. E is under no obligation to pay any in-terest arising from the judgment to either R and P.’’ (EquatorialRealty Development, Inc. vs. Mayfair Theater, Inc., 76 SCAD 407,264 SCRA 483 [1996].)

———— ———— ————

4. Lessee with right of first refusal, offered to buy leased prop-erty at P5.000 per square meter, which property was sold by the les-sor-owner to another for P5,300 per sq. meter.

Facts: Under the contract of lease executed by defendantReyes (lessor) with plaintiff Riviera (lessee), the “Lessee shallhave the right of first refusal should the lessor decide to sell theproperty during the term of the lease.’’

Since the beginning of the negotiation between the plain-tiff and defendant Reyes for the purchase of the property, inquestion, the plaintiff was firm and steadfast in its position,expressed in writing by its President Vicente Angeles, that itwas not willing to buy the said property higher than P5,000.00,per square meter, which was far lower than the asking price ofdefendant Reyes for P6,000.00, per square meter, undoubtedly,because, in its perception, it would be difficult for other partiesto buy the property, at a higher price than what it was offering,since it is in occupation of the property, as lessee, the term ofwhich was to expire after about four (4) years more.

In the petition at bar, Riviera posits the view that its rightof first refusal was totally disregarded or violated by Reyes bythe latter’s sale of the subject property to Cypress and Cornhillat P5,300 per square meter. It contends that the right of firstrefusal principally amounts to a right to match in the sense thatit needs another offer for the right to be exercised.

Issue: Has Riviera lost its right of first refusal?

Held: Yes. (1) Concept and interpretation of the right of firstrefusal. — “The concept and interpretation of the right of first

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refusal and the consequences of a breach thereof evolved inPhilippine juristic sphere only within the last decade. It allstarted in 1992 with Guzman, Bocaling & Co. vs. Bonnevie (206SCRA 668 [1992].), where the Court held that a lease with aproviso granting the lessee the right of first priority ‘all thingsand conditions being equal’ meant that there should be iden-tity of the terms and conditions to be offered to the lessee andall other prospective buyers, with the lessee to enjoy the rightof first priority. A deed of sale executed in favor of a third partywho cannot be deemed a purchaser in good faith, and which isin violation of a right of first refusal granted to the lessee is notvoidable under the Statute of Frauds but rescissible under Ar-ticles 1380 to 1381(3) of the New Civil Code.

Subsequently in 1994, in the case of Ang Yu Asuncion vs.Court of Appeals (238 SCRA 602 [1994].), the Court en banc de-parted from the doctrine laid down in Guzman, Bocaling & Co.vs. Bonnevie and refused to rescind a contract of sale which vio-lated the right of first refusal. The Court held that the so-called“right of first refusal” cannot be deemed a perfected contractof sale under Article 1458 of the new Civil Code and, as such, abreach thereof decreed under a final judgment does not entitlethe aggrieved party to a writ of execution of the judgment butto an action for damages in a proper forum for the purpose.

In the 1996 case of Equatorial Realty Development, Inc. vs.Mayfair Theater, Inc. (264 SCRA 483 [1996].), the Court en bancreverted back to the doctrine in Guzman Bocaling & Co. vs.Bonnevie stating that rescission is a relief allowed for the pro-tection of one of the contracting parties and even third personsfrom all injury and damage the contract may cause or to pro-tect some incompatible and preferred right by the contract.

Thereafter in 1997, in Parañaque Kings Enterprises, Inc. vs.Court of Appeals (268 SCRA 727 [1997].), the Court affirmed thenature of and the concomitant rights and obligations of partiesunder a right of first refusal. The Court, summarizing the rul-ings in Guzman, Bocaling & Co. vs. Bonnevie and Equatorial Re-alty Development, Inc. vs. Mayfair Theater, Inc., held that in orderto have full compliance with the contractual right granting pe-titioner the first option to purchase, the sale of the propertiesfor the price for which they were finally sold to a third personshould have likewise been first offered to the former. Further,there should be identity of terms and conditions to be offeredto the buyer holding a right of first refusal if such right is not to


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be rendered illusory. Lastly, the basis of the right of first refusalmust be the current offer to sell of the seller or offer to purchaseof any prospective buyer.’’

(2) Prevailing doctrine. — “Thus, the prevailing doctrine isthat a right of first refusal means identity of terms and condi-tions to be offered to the lessee and all other prospective buy-ers and a contract of sale entered into in violation of a right offirst refusal of another person, while valid, is rescissible. How-ever, we must remember that general propositions do not de-cide specific cases. Rather, laws are interpreted in the contextof the peculiar factual situation of each proceeding. Each casehas its own flesh and blood and cannot be ruled upon on thebasis of isolated clinical classroom principles. Analysis and con-struction should not be limited to the words used in the con-tract, as they may not accurately reflect the parties’ true intent.The court must read a contract as the average person wouldread it and should not give it a strained or forced construc-tion.’’

(3) Riviera intractable in its position. — “As clearly shownby the records and transcripts of the case, the actions of theparties to the contract of lease, Reyes and Riviera, shaped theirunderstanding and interpretation of the lease provision ‘rightof first refusal’ to mean simply that should the lessor Reyesdecide to sell the leased property during the term of the lease,such sale should first be offered to the lessee Riviera. And thatis what exactly ensued between Reyes and Riviera, a series ofnegotiations on the price per square meter of the subject prop-erty with neither party, especially Riviera, unwilling to budgefrom his offer, as evidenced by the exchange of letters betweenthe two contenders.

It can clearly be discerned from Riviera’s letters dated De-cember 2, 1988 and February 4, 1989 that Riviera was so intrac-table in its position and took obvious advantage of the knowl-edge of the time element in its negotiations with Reyes as theredemption period of the subject foreclosed property drew near.Riviera strongly exhibited a ‘take-it or leave-it’ attitude in its ne-gotiations with Reyes. It quoted its ‘fixed and final’ price as FiveThousand Pesos (P5,000.00) and not any peso more. It voiced outthat it had other properties to consider so Reyes should decideand make known its decision ‘within fifteen days.’ x x x.”

(4) Reyes under no obligation to Riviera to disclose his offer toanother. — “Nary a howl of protest or shout of defiance spewed

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forth from Riviera’s lips, as it were, but a seemingly whimperof acceptance when the counsel of Reyes strongly expressed ina letter dated December 5, 1989 that Riviera had lost its right offirst refusal. Riviera cannot now be heard that had it been in-formed of the offer of Five Thousand Three Hundred Pesos(P5,300.00) of Cypress and Cornhill it would have matched saidprice. Its stubborn approach in its negotiations with Reyesshowed crystal-clear that there was never any need to disclosesuch information and doing so would be just a futile effort onthe part of Reyes. Reyes was under no obligation to disclosethe same. Pursuant to Article 1339 of the New Civil Code, si-lence or concealment, by itself, does not constitute fraud, un-less there is a special duty to disclose certain facts, or unlessaccording to good faith and the usages of commerce the com-munication should be made. We apply the general rule in thecase at bar since Riviera failed to convincingly show that eitherof the exceptions are (sic) relevant to the case at bar.’’ (RivieraFilipina, Inc. vs. Court of Appeals, 380 SCRA 245 [2002].)

———— ———— ————

5. Petitioner claims that there was a perfected contract to sellwhile respondents argue that what was perfected between them was amere option.

Facts: The Receipt that contains the contract between peti-tioner L and respondent spouses H and W, provides substan-tially as follows:

“Received from L the sum of P20,000 as earnest money withoption to purchase a parcel of land owned by H located at x x xwith an area of x x x. Should the transaction not materializewithout the fault of the buyer [L], I [H] obligate myself to re-turn the P20,000; if through the fault of the buyer the saidamount shall be forfeited. I guarantee to notify L or her repre-sentative and get her conformity should I sell or encumber theproperty to a third person. The option to buy is good within 10days x x x.

Issue: Is the agreement between the parties a contract ofoption or a contract to sell?

Held: (1) Contract of option. — “The above Receipt reallyshows that respondent spouses and petitioner only entered intoa contract of option; a contract by which respondent spousesagreed with petitioner that the latter shall have the right to buythe former’s property at a fixed price of P34.00 per square me-


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ter within ten (10) days from 31 July 1978. Respondent spousesdid not sell their property; they did not also agree to sell it; butthey sold something, i.e., the privilege to buy at the election oroption of petitioner. The agreement imposed no binding obli-gation on petitioner, aside from the consideration for the of-fer.’’

(2) Option money. — “The consideration of P20,000.00 paidby petitioner to respondent spouses was referred to as ‘earnestmoney.’ However, a careful examination of the words used in-dicates that the money is not earnest money but option money.‘Earnest money’ and ‘option money’ are not the same but dis-tinguished thus: (a) earnest money is part of the purchase price,while option money is the money given as a distinct considera-tion for an option contract; (b) earnest money is given onlywhere there is already a sale, while option money applies to asale not yet perfected; and (c) when earnest money is given,the buyer is bound to pay the balance, while when the would-be buyer gives option money, he is not required to buy (De Leon,Comments and Cases on Sales, 1986 Rev. Ed., p. 67.), but mayeven forfeit it depending on the terms of the option.

(3) Contents of Receipt. — “There is nothing in the Receiptwhich indicates that the P20,000.00 was part of the purchaseprice. Moreover, it was not shown that there was a perfectedsale between the parties where earnest money was given. Fi-nally, when petitioner gave the ‘earnest money,’ the Receipt didnot reveal that she was bound to pay the balance of the pur-chase price. In fact, she could even forfeit the money given ifthe terms of the option were not met. Thus, the P20,000.00 couldonly be money given as consideration for the option contract.That the contract between the parties is one of option is but-tressed by the provision therein that should the transaction ofthe property not materialize without fault of petitioner as buyer,respondent Lorenzo de Vera obligates himself to return the fullamount of P20,000.00 “earnest money” with option to buy orforfeit the same on the fault of petitioner. It is further bolsteredby the provision therein that guarantees petitioner that she orher representative would be notified in case the subject prop-erty was sold or encumbered to a third person. Finally, the Re-ceipt provided for a period within which the option to buy wasto be exercised, i.e., ‘within ten (10) days’ from 31 July 1978.

(4) Absence of acceptance by L. — “Doubtless, the agreementbetween respondent spouses and petitioner was an ‘option con-

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tract’ or what is sometimes called an ‘unaccepted offer.’ Dur-ing the option period the agreement was not converted into abilateral promise to sell and to buy where both respondentspouses and petitioner were then reciprocally bound to com-ply with their respective undertakings as petitioner did nottimely, affirmatively and clearly accept the offer of respondentspouses. x x x But there is nothing in the acts, conduct or wordsof petitioner that clearly manifest a present intention or deter-mination to accept the offer to buy the property of respondentspouses within the 10-day option period. The only occasionwithin the option period when petitioner could have demon-strated her acceptance was on 5 August 1978 when, accordingto her, she agreed to meet respondent spouses and the Ramosesat the Office of the Register of Deeds of Makati. Petitioner’sagreement to meet with respondent spouses presupposes aninvitation from the latter, which only emphasizes their persist-ence in offering the property to the former. But whether thatshowed acceptance by petitioner of the offer is hazy and dubi-ous. On or before 10 August 1978, the last day of the optionperiod, no affirmative or clear manifestation was made by pe-titioner to accept the offer. Certainly, there was no concurrenceof private respondent spouses’ offer and petitioner’s accept-ance thereof within the option period. Consequently, there wasno perfected contract to sell between the parties.

x x x x x x

The option period having expired and acceptance was noteffectively made by petitioner, the purchase of subject prop-erty by respondent SUNVAR was perfectly valid and enteredinto in good faith.” (Limson vs. Court of Appeals, 147 SCAD 887,357 SCRA 209 [2001].)

———— ———— ————

6. Under a contract to sell a parcel of land, full payment wasnot made by the vendee because of the non-fulfillment of a suspensivecondition, which property was later sold absolutely by the vendor toanother.

Facts: S and B entered into a contract to sell a parcel of landevidenced by a memorandum of agreement which stipules, in-ter alia, that S, vendor, reserves to herself ownership and pos-session of the property until full payment of the purchase priceby B and that the balance thereof was payable within six (6)months from the date S would notify B that the certificate of


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title of the property could be transferred to B. Subsequently, Sexecuted a deed of absolute sale of the property in favor of T.

It appeared that S exerted efforts to register the propertyand B had no intention to buy the property and was only inter-ested in dealing with other buyers to make a profit. S evenpleaded with him several times to purchase the property, lessthe expenses of registration, as there were other interested buy-ers.

Issue: Is the memorandum of agreement contract of sale, anoption to purchase, or a contract to sell?

Held: (1) Contract to Sell. — “An examination of said Memo-randum of Agreement shows that it is neither a contract of salenor an option to purchase, but it is a contract to sell. An optionis a contract granting a privilege to buy or sell at a determinedprice within an agreed time, the specific length or duration ofwhich is not present in the Memorandum of Agreement. In acontract to sell, the title over the subject property is transferredto the vendee only upon the full payment of the stipulated con-sideration. Unlike in a contract of sale, the title in a contract tosell does not pass to the vendee upon the execution of the agree-ment or the Delivery of the thing sold. x x x

The agreement was in the nature of a contract to sell as thevendor, Encarnacion Diaz Vda. de Reston, clearly reserved toherself ownership and possession of the property until full pay-ment of the purchase price by the vendees, such payment be-ing a positive suspensive condition, the failure of which is notconsidered a breach, casual or serious, but simply an eventwhich prevented the obligation from acquiring obligatoryforce.’’

(2) No perfected sale. — “Petitioners, however, argue thattheir obligation to pay the balance of the purchase price hadnot arisen as the Memorandum of Agreement stipulated thatthe balance of P18,042.00 was payable within six (6) monthsfrom the date the vendor would notify them that the certificateof title of the property could already be transferred in theirnames. Said argument, however, does not change the nature ofthe contract they entered into, being a contract to sell, so thatthere was no actual sale until full payment was made by thevendees, and that on the part of the vendees, no full paymentwould be made until a certificate of title was ready for transferin their names.’’ (Buot vs. Court of Appeals, 148 SCAD 615, 357SCRA 846 [2001].)

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Effect of bilateral promise to buyand sell.

When the promise is bilateral, that is, one party accepts theother’s promise to buy and the latter, the former’s promise to sella determinate thing for a price certain, it has practically the sameeffect as a perfected contract of sale since it is reciprocally demand-able.

EXAMPLE:

S promised to sell his car to B and B promised to buy thesaid car for P100,000.00. The parties are bound by their con-tract so that in case one of them should not comply with whatis incumbent upon him, the other has the right to choose be-tween the fulfillment and the recission of the obligation, withthe payment of damages in either case. (Art. 1191, par. 2.)

ILLUSTRATIVE CASE:

Promissor withdrew an option to sell which is not supported byany consideration, after its acceptance by promisee.

Facts: S wrote B making a “firm offer for the sale” at a defi-nite price of a determinate quantity of sardines. B accepted theoffer unconditionally.

Issue: Is there a perfected contract of sale?

Held: Yes, as the promise is bilateral, i.e., a promise to buyand sell. Before accepting the promise of S and before exercis-ing his option, B is not bound to buy. Upon accepting S’s offer,a bilateral promise to sell and to buy ensues; B assumes ipsofacto the obligations of a purchaser, and not merely the rightsubsequently to buy or not to buy. The concurrence of both acts— the offer and the acceptance — generates a binding contractof sale. (see Atkins, Kroll & Co., Inc. vs. Cua Hian Tek, 102 Phil.948 [1958].)

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


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This rule shall apply to the sale of fungible things,made independently and for a single price, or withoutconsideration of their weight, number, or measure.

Should fungible things be sold for a price fixedaccording to weight, number, or measure, the risk shallnot be imputed to the vendee until they have beenweighed, counted, or measured, and delivered, un-less the latter has incurred in delay. (1452a)

Risk of loss or deterioration.

Four rules may be given regarding risk of loss:

(1) If the thing is lost before perfection, the seller and not theone who intends to purchase it bears the loss (see Roman vs.Grimalt, 6 Phil. 96 [1906].) in accordance with the principle thatthe thing perishes with the owner (res perit domino);

(2) If the thing is lost at the time of perfection, the contract isvoid or inexistent. (Art. 1409[3].) The legal effect is the same aswhen the object is lost before the perfection of the contract of sale(see Art. 1493.);

(3) If the thing is lost after perfection but before its delivery, thatis, even before the ownership is transferred to the buyer, the riskof loss is shifted to the buyer as an exception to the rule of res peritdomino (Arts. 1480, pars. 1 and 2, 1538, 1189, and 1269.); and

(4) If the thing is lost after delivery, the buyer bears the risk ofloss following the general rule of res perit domino.

Scope of Article 1480.

Article 1480 contemplates two rules:

(1) The first rule — where the thing is lost after perfection butbefore its delivery (see Rule No. 3, supra.) — applies to non-fun-gible things (par. 1.) and fungible things sold independently andfor a single price or for a price fixed without consideration of theirweight, number, or measure. (par. 2.)

Under this rule, which follows the Roman Rule, the risk of thething sold passes to the buyer, even though the thing has not yetbeen delivered to him. Therefore, if a house (sold) be destroyed

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wholly or partly by fire the loss falls upon the buyer who mustpay the price, even though he has not received the thing. For theseller is not liable for anything which happens without his fraudor negligence. But if after the sale any alluvion has accrued to theland, the benefit goes to the buyer for the benefit ought to belongto him who has the risk. (Sherman, Inchiridion Romani Juris, Sec.296.) In other words, the buyer assumes the risk of loss caused byfortuitous event (Art. 1174.) without the fault of the seller (Art.1262.), that is, in spite of the exercise of due diligence on his part(Art. 1163.) and before he has incurred in delay (Arts. 165, 1170,1262.) after the perfection of the contract to the time of delivery.(Art. 1480, par. 1.) With respect to the fruits, the buyer has a rightto the same from the time the obligation to deliver the thing arises.(Art. 1164.) If the risk ought to belong to the buyer before deliv-ery, the benefit ought to belong to him who has the risk. (see Arts.1538, 1189[5].)

Article 1480, paragraph 1 is applicable only where the thingis determinate. (Art. 1460.) It also applies to fungible things soldfor a price not fixed in relation to weight, number, or measurebecause in such case the fungible things have been “particularlydesignated or physically segregated.” (Ibid., par. 2.)

Is Article 1480 above in conflict with Article 1504 (infra.)?

(2) The second rule relates to fungible things sold for a pricefixed in relation to weight, number, or measure. Under the thirdparagraph, “the risk shall not be imputed to the vendee until theyhave been weighed, counted, or measured, and delivered.” (see U.S.vs. De Vera, 43 Phil. 1001 [1922].) Paragraph 3 is an exception tothe rule that the vendee bears the loss after the perfection of thecontract and before delivery. However, the vendee assumes therisk if he has incurred in delay in receiving the goods sold. (NorthNegros Sugar Co., Inc. vs. Compania General Tabacos de Filipinas,100 Phil. 1103 [1957].)

ILLUSTRATIVE CASES:

1. The sugar which the seller intended to deliver was destroyedby flood.

Facts: B advanced P3,000 to S in payment of 600 piculs ofsugar. The written contract did not specify that the sugar was


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to come from the crop on S’s land which was destroyed by aflood.

Issue: S claimed that the fortuitous cause excused non-per-formance by him of the contract.

Held: S promised to deliver a generic thing. Any sugar ofthe quality stipulated, regardless of origin or however acquired,(lawfully) would be obligatory on the part of B to receive andwould discharge the obligation. It seems, therefore, plain thatthe sugar to be sold not having been segregated, the sale wasnot perfected and the loss of the crop even through force ma-jeure, did not extinguish S’s obligation to deliver the sugar.

Flood, like other catastrophes, was a contingency, a collat-eral incident, which S should have provided for by proper stipu-lations. Genus nunquam perit (genus never perishes). (Yu Tek &Co. vs. Gonzales, 29 Phil. 384 [1915]; De Leon vs. Soriano, 87 Phil.193 [1950]; Bunge Corp. vs. Camenforte & Co., 91 Phil. 861[1954].)

———— ———— ————

2. Buyer denies liability for price of tobacco delivered to its agentby seller for inspection, grading and weighing, because it was burnedbefore it could be inspected, graded, and weighed.

Facts: S (vendor) delivered the tobacco in question to theredrying plant of A, trading agent of B (vendee). The tobaccowas burned while awaiting inspection, grading, and weighing.

It appeared that S directed, supervised, and controlled A inreceiving shipments of tobacco and in the performance of itsactivities, and that shipments, once received from trading enti-ties like S, were under B’s control, and not subject to withdrawalwithout its authority.

Issue: Should B be considered as having accepted the to-bacco shipments as of the fire and, therefore, should bear theloss?

Held: Yes. The contract of sale has been perfected at the timeof the loss (see Art. 1475.) and the shipment was placed in thecontrol and possession of B. The technical defect that the to-bacco in question “were still to be inspected, graded andweighed” cannot suffice to overturn the decision. Aside fromraising an issue of fact (for B’s own fieldmen had the responsi-bility of such tobacco being graded, weighed, baled and loadedon trucks duly sealed for transportation to its redrying plant

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and that responsibility was fulfilled according to the trial court),the delay was traceable to the fault of B and A and that A wasnegligent in causing the fire, whereas S had done everythingthat was required of him by B’s regulations in order to have thetobacco inspected and paid for.

Furthermore, for sometime after the conflagration, therewas no question raised by B as to its liability. It would, there-fore, be the height of injustice to deny S’s claim for payment.(Phil.-Virginia Tobacco Adm. vs. De Los Angeles, 87 SCRA 9 [1978].)

Dissenting opinion by R.C. Aquino, J.: The judgment is erro-neous. The sale was not consummated because there was notradition or delivery to B of the tobacco which was lost when itwas still owned by S. A was merely an agent of B. Even as agent,A had not yet accepted delivery of the tobacco before it waslost during the fire. There was no acceptance of delivery be-cause the tobacco, at the time it was lost, had not yet been prop-erly inspected, graded and weighed. Under the contract be-tween B and A, the latter’s responsibility as agent of the formerbegins from the moment the tobacco had been delivered, re-ceived and accepted from the trading entities (like S) and thesame had been properly graded and weighed.

These requirements had not yet been satisfied at the timethe tobacco was lost in A’s redrying plant. Inasmuch as B didnot become the owner of the lost tobacco and as S was still theowner thereof, the loss should be borne by S, not by B. Res peritdomino. Hence, B was not obligated to pay for the tobacco. S’scause of action was really against A. S did not appeal from thelower court’s judgment absolving A. Under the contract be-tween B and A, the latter was supposed to advance to the trad-ing entities the payment for the tobacco delivered to A, and Bwould then reimburse A for its advances. No such advanceswere made by A, a circumstance which may signify that thesale was not consummated.

Author’s Note: The buyer assumes the risk of loss caused byfortuitous event after the perfection of the contract even beforethe delivery of the thing sold. (see Rule 3 under “Risk of loss ordeterioration.”) In the mind of the author, the opinion of Jus-tice Aquino is that no contract of sale was perfected between Sand B; neither was there delivery of the tobacco to B before itwas lost. The opinion expresses its conformity to the followingexcerpts, among others, from the brief of the Solicitor Generalfor PVTA (B):


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“Viewed thus, the conclusion is inescapable that thetobacco shipments brought to the redrying plant to be in-spected, graded, and weighed are considered not deliveredand sold in legal contemplation, until after grading andweighing where the ‘meeting of minds’ takes place becausethe price or consideration is determined by the grade andweight thereof. And without agreement as to price, the saleis not perfected. It is worth emphasizing that before the to-bacco shipments were graded and weighed, they remainedproperties of the respondent trading entities (S and others)subject to their control and possession, and at their risk;consequently, respondents shall bear the loss which oc-curred prior to the grading and weighing of the tobaccos.”

———— ———— ————

3. Bales of tobacco were lost while in the control and possessionof buyers’ agent before they were graded and weighed.

Facts: PVTA, a government corporation, entered into a con-tract of procuring, redrying and servicing with FVTR for the1963 tobacco trading operation. Petitioners ATC shipped toFVTR bales of tobacco. Not all the bales of tobacco were gradedand weighed because some officers and employees in thepremises of FVTR asked for money to have the remaining balesgraded and weighed. The remaining ungraded and unweighedbales were lost while they were in the possession of FVTR.

Having learned of such loss, ATC demanded for their valueand the application of the same to ATC’s merchandising loanwith PVTA but both the latter and the FVTR refused to heedsaid demands.

Issue: Was the contract of sale between ATC and PVTA per-fected by ATC’s delivery of all bales of tobacco to FVTR, acontractee of PVTA, so as to hold PVTA liable for the loss ofsaid bales while in the possession of FVTR?

Held: (1) Delivery to buyer’s agent (FVTR) proven. — “Underthe Santiago Virginia Tobacco Planters Assoc. vs. PVTA (31 SCRA528 [1970].) case, shipping documents and checklists which areaccomplished prior to delivery do not prove actual delivery. Toprove such delivery, documents such as the weigher’s tally sheetand the warehouse receipts which are accomplished when theactual delivery is made, are necessary. The factual circumstancesextant in this case are different from those in the Santiago case.

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In said case, there was a need to prove actual delivery becausethe petitioner therein demanded for the payment of tobaccoshipments which were allegedly delivered to the FVTR. In otherwords, the actual physical delivery of the shipments was notproven. On the other hand, in this case, the lower court estab-lished from the testimonies of witnesses the fact that petitionerentrusted to the FVTR a total of 263 bales of tobacco, 89 bales ofwhich were even actually weighed and graded in the redryingplant. However, for reason beyond the control of the petitioner,the FVTR refused to weigh and grade the remaining 174 bales.On top of this, the FVTR also refused to grant petitioner’s re-quest to withdraw the unweighed and ungraded shipments.As it turned out later, said shipments were lost while in thecustody of FVTR, thereby placing the petitioner in a ‘no win’situation.’’

(2) Seller (ATC) lost possession and control over shipment. —“The Civil Code provides that ownership of the thing sold shallbe transferred to the vendee upon the actual or constructivedelivery thereof. (Art. 1477.) There is delivery when the thingsold is placed in the control and possession of the vendee. (Art.1497.) Indeed, in tobacco trading, actual delivery plays a piv-otal role. The peculiar procedure undergone in trading, whichprocedure was set out at length in both the Santiago and thePVTA vs. De los Angeles (87 SCRA 197 [1978].) cases, reveals thatdelivery seals the contract of sale because the trader loses notonly possession but also control over the shipment. Outlinedby the PVTA pursuant to its power ‘to take over and assume,and, therefore, exclusively direct, supervise and control, all func-tions and operations with respect to the processing, warehous-ing, and trading of Virginia tobacco, the provisions of any ex-isting law to the contrary notwithstanding, the procedure isobserved by everyone involved in the trade.’”

(3) Tobacco traders placed at a disadvantage. — “Verily, thetobacco trading procedure conceived and formulated by thePVTA is akin to a contract of adhesion wherein only one partyhas a hand in the determination of the terms. But observanceof the procedure more often than not renders a trader at a dis-advantage. The moment the shipment is placed in the hands ofthe PVTA or its representative and it is lost, the trader is leftempty-handed. While the flaw may not really be in the proce-dure itself, the same way may be found in the persons chargedwith the implementation of the procedure. Some personnel


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mishandle the shipment to the detriment of the trader. Somedemand grease money to facilitate the trading process. Sadly,this is what happened in this case.”

(4) Delivery considered effective delivery to seller (PVTA). —“Hence, while under an ideal situation, there would have beenmerit in respondent PVTA’s contention that the contract of salecould not have been perfected pursuant to Article 1475 becauseto determine the price of the tobacco traded, the shipmentshould first be inspected, graded and weighed, a strict inter-pretation of the provision may result in adverse effects to smallplanters who would not be paid for the lost products of theirtoil. Such situation was what the ruling in PVTA vs. De los An-geles sought to avoid.

Equity and fair dealing, the anchor of said case, must oncemore prevail. Since PVTA had virtual control over the losttobacco bales, delivery thereof to the FVTR should alsobe considered effective delivery to the PVTA.” (Alliance To-bacco, Inc. vs. Phil. Virginia Tobacco Administration, 179 SCRA 336[1989].)

ART. 1481. In the contract of sale of goods by de-scription or by sample, the contract may be rescindedif the bulk of the goods delivered do not correspondwith the description or the sample, and if the contractbe by sample as well as by description, it is not suffi-cient that the bulk of goods correspond with the sam-ple if they do not also correspond with the descrip-tion.

The buyer shall have a reasonable opportunity ofcomparing the bulk with the description or the sam-ple. (n)

Sale of goods by descriptionand/or sample.

The above article covers a sale of goods by description, bysample, and by sample as well as by description. It provides acause for rescission distinct from those stated in Article 1597.

(1) Sale by description. — Sale by description occurs where aseller sells things as being of a particular kind, the buyer not know-

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ing whether the seller’s representations are true or false, but re-lying on them as true; or, as otherwise stated, where the purchaserhas not seen the article sold and relies on the description givenhim by the vendor, or has seen the goods but the want of identityis not apparent on inspection. (77 C.J.S. 1170.)

The reason for the rule is that a dealer who sells an articledescribing it as the kind of an article of commerce the identity ofwhich is not known to the purchaser, must understand that suchpurchaser relies upon the description as a representation by theseller that it is the thing described. (55 C.J. 739.) If the bulk of thegoods delivered do not correspond with the description, the con-tract may be rescinded. (Art. 1481.) But if the thing delivered is asdescribed, the fact that the buyer cannot use the thing sold for thepurpose for which it was intended without the seller’s fault doesnot exempt the buyer from paying the purchase price agreedupon. (see Pacific Commercial Co. vs. Ermita Market & ColdStores, 55 Phil. 617 [1931].)

(2) Sale by sample. — To constitute a sale by sample, it mustappear that the parties contracted solely with reference to thesample, with the understanding that the bulk was like it. But amere exhibition of a sample by the seller in the absence of anyshowing that it was an inducement of the sale or formed the solebasis thereof, does not amount to a sale by sample as where thequality of the articles to be furnished is expressly described in thecontract without reference to the sample or the parties agree thatthe goods ordered shall differ from the sample in some particu-lar matter. Whether a sale is by sample is determined by the in-tent of the parties as shown by the terms of the contract and thecircumstances surrounding the transaction. (77 C.J.S. 925.) In a saleby sample, the vendor warrants that the thing sold and to be de-livered by him shall conform with the sample in kind, character,and quality. (77 C.J.S. 1169; see Art. 1565.)

A sale by sample is really a species of sale by description. Thesample is employed instead of words to communicate to the buyerthe characteristics of the goods being sold. It is itself a tacit asser-tion of the qualities of the bulk it represents.

(3) Sale by description and sample. — When a sale is made bothby sample and by description, the goods must satisfy all the


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warranties (see Art. 1565.) appropriate to either kind of sale, andit is not sufficient that the bulk of the goods correspond with thesample if they do not also correspond with the description, andvice versa. (77 C.J.S. 1172.)

Meaning of bulk of goods.

In this article, the term “bulk of goods” is not used to desig-nate the greater portion of the goods. Rather, it is used to denotethe goods as distinguished from the sample with which they mustcorrespond. The word “goods” in the phrase is an oppositionalgenitive defining “bulk.” In other words “bulk of goods” meanthe same as “goods” which, as a whole body, must correspondsubstantially with the sample and description. (see 77 C.J.S. 1172.)

The buyer is given a reasonable opportunity of comparing thebulk with the description or the example. (Art. 1481, par. 2.)

ART. 1482. Whenever earnest money is given in acontract of sale, it shall be considered as part of theprice and as proof of the perfection of the contract.(1454a)

Meaning of earnest money.

Earnest money is something of value given by the buyer to theseller to show that the buyer is really in earnest, and to bind thebargain. It is actually a partial payment of the purchase price andis considered as proof of the perfection of the contract. (seeVillongco Realty vs. Bormaecheco, 65 SCRA 352 [1975]; Topaciovs. Court of Appeals, 211 SCRA 291 [1992]; see Laforteza vs.Machuca, 127 SCAD 798, 333 SCRA 643 [2000].) Since earnestmoney constitutes an advance payment, it must be deducted fromthe total price.22

22Hence, it cannot be forfeited in case the buyer should fail to pay the balance of theprice, especially in the absence of a clear and express agreement thereon. In a case, byreason of its failure to make payment, petitioner, through its agent, informed privaterespondents that it would no longer push through with the sale. In other words, peti-tioner resorted to extra-judicial rescission of the contract with private respondents whodid not interpose any objection to the rescission. (Golden, Ltd., Inc. vs. Court of Ap-peals, 299 SCRA 141 [1998].)

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Note: By agreement of the parties, the amount given may bemerely a deposit of what would eventually become earnest moneyor downpayment should a contract of sale be made by them, notas a part of the purchase price and as proof of the perfection ofthe contract of sale but only as a guarantee that the buyer wouldnot back out of the sale. Thus, it is not really the giving of earnestmoney but the proof of the concurrence of all the essential ele-ments of a contract which establishes the existence of the perfectedcontract. There is no sale where the parties still have to agree onthe acceptable terms of payment. (San Miguel Properties Philip-pines, Inc. vs. Huang, 130 SCAD 713, 336 SCRA 737 [2000].) Theearnest money forms part of the consideration only if the sale isconsummated upon full payment of the purchase price. (Chua vs.Court of Appeals, 401 SCRA 54 [2003].)

Under Article 145423 of the old Civil Code, it has been heldthat the delivery of part of the purchase price should not be un-derstood as constituting earnest money to bind the agreement inthe absence of something in the contract showing that such wasthe intention of the parties. (Salas Rodriguez vs. Leuterio, 47 Phil.818 [1925].)

Earnest money and option moneydistinguished.

They may be distinguished as follows:

(1) Earnest money is part of the purchase price, while optionmoney (see Art. 1479, par. 2.) is the money given as distinct con-sideration for an option contract;

(2) Earnest money is given only where there is already a sale,while option money applies to a sale not yet perfected; and

(3) When earnest money is given, the buyer is bound to paythe balance, while the would-be buyer who gives option moneyis not required to buy. (Adelfa Properties, Inc. vs. Court of Ap-peals, 58 SCAD 962, 240 SCRA 565 [1995] and Limson vs. Court

23In this article, it is declared that “When earnest money or a pledge had been givento bind a contract of purchase and sale, the contract may be rescinded if the vendeeshould be willing to forfeit the earnest money or pledge or the vendor to return doublethe amount.”


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of Appeals, 357 SCRA 209 [2001], quoting De Leon, Comments andCases on Sales, 1986 rev. ed., p. 67.)

But option money may become earnest money if the partiesso agree.

ART. 1483. Subject to the provisions of the Stat-ute of Frauds and of any other applicable statute, acontract of sale may be made in writing, or by word ofmouth, or partly in writing and partly by word of mouth,or may be inferred from the conduct of the parties. (n)

Form of contract of sale.

(1) General rule. — The form of a contract refers to the mannerin which it is executed or manifested. As a general rule, a con-tract may be entered into in any form provided all the essentialrequisites for its validity are present. (Art. 1356.) It may be inwriting; it may be oral; it may be partly in writing and partly oral.It may even be inferred from the conduct of the parties. Sale is aconsensual contract and is perfected by mere consent. (Art. 1475.)

(2) Where form is required in order that a contract may be enforce-able. — In case the contract of sale should be covered by the Stat-ute of Frauds, the law requires that the agreement (or some noteor memorandum thereof) be in writing subscribed by the partycharged, or by his agent; otherwise, the contract cannot be en-forced by action. (see Art. 1403[2].)

Under the Statute of Frauds (Art. 1403[2, a, d, e].) of the CivilCode, the following contracts must be in writing; otherwise, theyshall be unenforceable by action:

(a) Sale of personal property at a price not less thanP500.00;

(b) Sale of real property or an interest therein regardlessof the price involved; and

(c) Sale of property not to be performed within a yearfrom the date thereof regardless of the nature of the propertyand the price involved.

The purpose of the Statute of Frauds is to prevent fraud andperjury in the enforcement of obligations depending for their

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evidence upon the unassisted memory of witnesses by requiringcertain enumerated contracts and transactions to be evidenced inwriting. (Claudel vs. Court of Appeals, 199 SCRA 113 [1991], cit-ing 4 Tolentino, Civil Code of the Phils., p. 580 [1973].) Contractsinfringing the Statute of Frauds are ratified when the defense failsto object to the introduction of parol evidence, or asks questionson cross-examination, which elicits evidence proving the exist-ence of a perfected contract of sale. (Limketkai Sons Milling, Inc.vs. Court of Appeals, 66 SCAD 136, 250 SCRA 523 [1995].)

The Statute of Frauds refers to specific kinds of transactionsand cannot apply to any other transaction that is not enumeratedtherein. The application of the Statute presupposes the existenceof a perfected contract. A right of first refusal is not among thoselisted as unenforceable under the statute. At best, it is a contrac-tual grant not of the sale of the property involved, but of the rightof first refusal over the property sought to be sold. Hence, a rightof first refusal need not be written to be enforceable and may beproven by oral evidence. (Rosencor Development Corporation vs.Inquing, 145 SCAD 484, 354 SCRA 119 [2001].)

(3) Where form is required in order that a contract may be valid. —Where the “applicable statute” requires that the contract of salebe in a certain form for its validity, the required form must beobserved in order that the contract may be both valid and enforce-able. (see Art. 1356.)

(4) Where form is required only for the convenience of the parties.— In certain cases, a certain form (e.g., public instrument) is re-quired for the convenience of the parties in order that the sale maybe registered in the Registry of Deeds to make effective as againstthird persons the right acquired under such sale. As between thecontracting parties, the form is not indispensable since they areallowed by law to compel each other to observe that form. (Arts.1357, 1358[1].) Hence, the fact that the deed of sale of a parcel ofland still had to be signed and notarized does not mean that nocontract had already been perfected. A sale of land is valid regard-less of the form it may have been entered into as long as the req-uisites for a valid contract of sale are present.

On the other hand, the fact that a deed of sale is a notarizeddocument does not necessarily justify the conclusion that the said


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sale is a true conveyance to which the parties thereto are irrevo-cably bound. Though its notarization vests in its favor the pre-sumption of regularity and due execution (Manzano vs. Perez, 152SCAD 473, 362 SCRA 430 [2001].), it is not the function of thenotary public to validate and make binding an instrument neverintended by the parties to have any binding legal effect upon them.The intention of the parties still and always is the primary con-sideration in determining the true nature of the contract. (Suntayvs. Court of Appeals, 66 SCAD 711, 251 SCRA 430 [1995];Nazareno vs. Court of Appeals, 343 SCRA 637 [2000].) Where thevendor did not personally appear before the notary public, suchfact raises doubt regarding the vendor’s consent to the sale not-withstanding that the deed states the contrary. (Tan vs. Mandap,429 SCRA 711 [2004].)

An invalidly notarized deed of sale must be considered merelyas a private document. Even if validly notarized, the deed wouldstill be classified as a private document if it is merely subscribedand sworn to by way of jurat but was not properly acknowledged.(Tigno vs. Aquino, 444 SCRA 61 [2004].)

Sale of real property or an interesttherein.

(1) A sale of a piece of land or interest therein when madethrough an agent is void unless the agent’s authority is in writing.(Art. 1874; see Copon vs. Umali, 87 Phil. 91 [1950].)

(2) For the sale of real property to be effective against thirdpersons, the sale must be registered in the Registry of Deeds (or Prop-erty) of the province or city where the property is located. Thesale must be in a public document (e.g., acknowledged before anotary public or any public officer authorized by law to adminis-ter oath) for otherwise, the registration will be refused.

(3) The real purpose of registration of a contract of sale beingto give notice to third persons and to protect the buyer againstclaims of third persons arising from subsequent alienations by thevendor, it is certainly not necessary to give efficacy to the deed ofsale, as between the parties to the contract (Phil. Suburban Dev.Corp. vs. The Auditor General, 63 SCRA 397 [1975].) and theirprivies because actual notice is equivalent to registration. It is set-

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tled that registration is not a mode of acquiring ownership.(Bollozo vs. Yu Tieng Su, 155 SCRA 50 [1987].)

(4) The sale of land in a private instrument is valid and bind-ing upon the parties, for the time-honored rule is that even a ver-bal contract of sale of real estate produces legal effects between theparties (Bucton vs. Gabar, 55 SCRA 499 [1974]; Gallar vs. Husain,20 SCRA 186 [1967].), since sale is a consensual contract and isperfected by mere consent. (Carbonell vs. Court of Appeals, 69SCRA 99 [1976].)

(5) The fact that the notarization of a deed of sale of real prop-erty is false is of no consequence, for it need not be notarized; it isenough that it be in writing. (Heirs of Amparo del Rosario vs.Santos, 108 SCRA 43 [1981].)

EXAMPLES:

(1) S orally sold to B a parcel of land. The sale is valid (Art.1356; Lopez vs. Alvarez, 9 Phil. 28 [1907]; Guerrero vs. Raquel,10 Phil. 52 [1908].) but it is unenforceable because the law re-quires that it be in writing to be enforceable. (Art. 1403[e].)

(2) If the contract of sale above is in private writing, thenit is valid and binding but only as between the parties and theirprivies (Soriano vs. Latoño, 87 Phil. 757 [1950]; Gallar vs.Husain, supra.) and not as against third persons without noticeuntil the sale is registered in the Registry of Property. B has theright to compel S to put the contract in a public instrument sothat it can be registered to affect third persons. (Art. 1357; seeCarbonell vs. Court of Appeals, supra; Mahilum vs. Court ofAppeals, 17 SCRA 482 [1966].)

Modes of satisfaction of the Statuteof Frauds.

The statute specifies three ways in which contracts of sales ofgoods within its terms may be made binding, namely:

(1) the giving of a memorandum;

(2) acceptance and receipt of part of the goods (or things inaction) sold and actual receipt of the same (see Art. 1585.); and

(3) payment or acceptance at the time some part of the pur-chase price.


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The requirement of a memorandum is obviously suitable ei-ther for a contract to sell or a sale. The other two modes of satis-faction seem more naturally to apply to sales than to executorycontracts. (Williston, op. cit., Sec. 73.)

The Statute of Frauds applies not only to goods but to thingsin action as well. (see Art. 1403[2, d].) Thus, an assignment of credit(Art. 1624.) at a price not less than P500.00 is within the operationof the Statute.

Statute of Frauds applicable onlyto executory contracts.

The Statute of Frauds is applicable only to executory contracts(where no performance, i.e., delivery and payment, has as yet beenmade by both parties) and not to contracts which are totally (con-summated) or partially performed. (see Vda. de Espiritu vs. CFIof Cavite, 47 SCRA 354 [1972].) It does not forbid oral evidence toprove a consummated sale. (Diama vs. Macalebo, 74 Phil. 70[1942].)

(1) Reason for the rule. — The reason is that partial perform-ance like the writing, furnishes reliable evidence of the intentionof the parties or the existence of the contract. A contrary rulewould result in injustice or unfairness to the party who has per-formed his obligation, and would promote fraud or bad faith onthe part of the party who has not performed his obligation, for itwould enable him to keep the benefits already derived by himfrom the transaction and at the same time, evade the responsi-bilities or liabilities assumed or contracted by him. (Carbonnel vs.Poncio, 103 Phil. 655 [1958]; Art. 1405.)

Thus, where a parol contract of sale is adduced not for thepurpose of enforcing it, but as a basis of the possession of theperson claiming to be the owner, the Statute of Frauds is not ap-plicable, in the same way that it does not apply to contracts whichare either totally or partially performed upon the theory that thereis a wide field for the commission of frauds in executory contractswhich can only be prevented by requiring them to be in writing,a fact which is reduced to a minimum in executed contracts be-cause the intention of the parties become apparent by their ex-ecution. (Pascual vs. Realty Invest., Inc., 91 Phil. 257 [1952].)

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(2) Circumstances indicating partial performance. — Where thereis partial performance of a parol contract of sale of realty, the prin-ciple excluding evidence of such contract does not apply.

Other circumstances indicating partial performance of an oralcontract of sale of realty are relinquishment of rights, continuedpossession by a purchaser who is already in possession, buildingof improvements, tender of payment, rendition of services, pay-ment of taxes, surveying of the land at the vendee’s expense(Ortega vs. Leonardo, 103 Phil. 870 [1958]; see 49 Am. Jur. 44, 755-756, 772.), and acceptance of initial payment. (Clarin vs. Rulona,127 SCRA 512 [1984].)

The application of the Statute of Frauds presupposes the ex-istence of a perfected contract and requires only that a note ormemorandum subscribed by the party charged or by his agentbe executed in order to compel judicial enforcement. Where thereis no perfected contract, there is no basis for the application ofthe Statute. (Villanueva vs. Court of Appeals, 78 SCAD 484, 267SCRA 89 [1997].) Thus, the annotation on the letter-offer of thephrase “Received original, 9-4-89,’’ beside which appears the sig-nature of the addressee, can neither be regarded as a contract ofsale nor a promise to sell. It is merely a memorandum of the re-ceipt of the offer. Hence, the alleged transaction is unenforceableas the requirements under the Statute of Frauds have not beencomplied with. (Jovan Land, Inc. vs. Court of Appeals, 79 SCAD428, 268 SCRA 160 [1997].)

Legal recognition of electronic data messagesand electronic documents.

The following are the pertinent provisions of the implement-ing rules and regulations of R.A. No. 8792, otherwise known asthe “Electronic Commerce Act.’’

(1) Validity and enforceability. — Information shall not be de-nied validity or enforceability solely on the ground that it is inthe form of an electronic data message or electronic document,purporting to give rise to such legal effect. Electronic data mes-sages or electronic documents shall have the legal effect, validityor enforceability as any other document or legal writing. In par-ticular, subject to the provisions of R.A. No. 8792 and the Rules:


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(a) A requirement under law that information is in writ-ing is satisfied if the information is in the form of an electronicdata message or electronic document.

(b) A requirement under law for a person to provide in-formation in writing to another person is satisfied by the pro-vision of the information in an electronic data message or elec-tronic document.

(c) A requirement under law for a person to provide in-formation to another person in a specified non-electronic formis satisfied by the provision of the information in an electronicdata message or electronic document if the information isprovided in the same or substantially the same form.

(d) Nothing limits the operation of any requirement un-der law for information to be posted or displayed in specifiedmanner, time or location; or for any information or documentto be communicated by a specified method unless and until afunctional equivalent shall have been developed, installed,and implemented. (Sec. 7, Rules.)

(2) Incorporation by reference. — Information shall not be de-nied validity or enforceability solely on the ground that it is notcontained in an electronic data message or electronic documentbut is merely incorporated by reference therein. (Sec. 8, Ibid.)

(3) Writing. — Where the law requires a document to be inwriting, or obliges the parties to conform to a writing, or providesconsequences in the event information is not presented or retainedin its original form, an electronic document or electronic datamessage will be sufficient if the latter:

(a) maintains its integrity and reliability; and

(b) can be authenticated so as to be usable for subsequentreference, in that:

1) It has remained complete and unaltered, apartfrom the addition of any endorsement and any author-ized change, or any change which arises in the normalcourse of communication, storage and display; and

2) It is reliable in the light of the purpose for which itwas generated and in the light of all relevant circum-stances. (Sec. 10, Ibid.)

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(4) Original. — Where the law requires that a document bepresented or retained in its original form, that requirement is metby an electronic document or electronic data message if:

(a) There exists a reliable assurance as to the integrity ofthe electronic document or electronic data message from thetime when it was first generated in its final form and suchintegrity is shown by evidence aliunde (that is, evidence otherthan the electronic data message itself) or otherwise; and

(b) The electronic document or electronic data message iscapable of being displayed to the person to whom it is to bepresented.

(c) For the purposes of No. (1) above:

1) The criteria for assessing integrity shall be whetherthe information has remained complete and unaltered,apart from the addition of any endorsement and anychange which arises in the normal course of communica-tion, storage and display; and

2) The standard of reliability required shall be as-sessed in the light of the purpose for which the informa-tion was generated and in the light of all relevant circum-stances.

An electronic data message or electronic document meetingand complying with the requirements of Section 6 or 7 of R.A. No.8792 shall be the best evidence of the agreement and transactioncontained therein. (Sec. 11, Ibid.)

(5) Solemn contracts. — No provision of the R.A. No. 8792 shallapply to vary any and all requirements of existing laws and rel-evant judicial pronouncements respecting formalities required inthe execution of documents for their validity. Hence, when thelaw requires that a contract be in some form in order that it maybe valid or enforceable, or that a contract is proved in a certainway, that requirement is absolute and indispensable. (Sec. 12, Ibid.)

Legal recognition of electronic signatures.

The following are the pertinent provisions of the implement-ing rules and regulations:


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An electronic signature relating to an electronic document orelectronic data message shall be equivalent to the signature of aperson on a written document if the signature:

(1) is an electronic signature as defined in Section 6(g) of theRules; and

(2) is proved by showing that a prescribed procedure, notalterable by the parties interested in the electronic document orelectronic data message, existed under which:

(a) A method is used to identify the party sought to bebound and to indicate said party’s access to the electronicdocument or electronic data message necessary for his consentor approval through the electronic signature;

(b) Said method is reliable and appropriate for the pur-pose for which the electronic document or electronic datamessage was generated or communicated, in the light of allcircumstances, including any relevant agreement;

(c) It is necessary for the party sought to be bound, inorder to proceed further with the transaction, to have executedor provided the electronic signature; and

(d) The other party is authorized and enabled to verify theelectronic signature and to make the decision to proceed withthe transaction authenticated by the same.

The parties may agree to adopt supplementary or alterna-tive procedures provided that the requirements of paragraph(b) are complied with. (Sec. 13, Rules.)

Communication of electronic data messagesand electronic documents.

The following are the pertinent provisions of the implement-ing rules and regulations:

(1) Formation and validity of electronic contracts. — Except asotherwise agreed by the parties, an offer, the acceptance of an offerand such other elements required under existing laws for the for-mation and perfection of contracts may be expressed in, demon-strated and proved by means of electronic data message or elec-tronic documents and no contract shall be denied validity or en-

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forceability on the sole ground that it is in the form of an elec-tronic data message or electronic document, or that any or all ofthe elements required under existing laws for the formation of thecontracts is expressed, demonstrated and proved by means ofelectronic documents. (Sec. 21, Rules.)

(2) Consummation of electronic transactions with banks. — Elec-tronic transactions made through networking among banks, orlinkages thereof with other entities or networks, and vice versa,shall be deemed consummated under rules and regulations issuedby the Bangko Sentral ng Pilipinas, upon the actual dispensing ofcash or the debit of one account and the corresponding credit toanother, whether such transaction is initiated by the depositor orby an authorized collecting party. The obligation of one bank,entity, or person similarly situated to another arising therefromshall be considered absolute and shall not be subjected to the proc-ess of preference of credits. The foregoing shall apply only to trans-actions utilizing the Automated Teller Machine switching network.

Without prejudice to the foregoing, all electronic transactionsinvolving banks, quasi-banks, trust entities, and other institutionswhich under special laws are subject to the supervision of theBangko Sentral ng Pilipinas shall be covered by the rules and regu-lations issued by the same pursuant to its authority under Sec-tion 59 of R.A. No. 8791 (The General Banking Act), R.A. No. 7653(the Charter of the Bangko Sentral ng Pilipinas) and Section 20,Article XII of the Constitution. (Sec. 22, Ibid.)

(3) Recognition by parties of electronic data message. — As be-tween the originator and the addressee of an electronic data mes-sage or electronic document, a declaration of will or other state-ment shall not be denied legal effect, validity or enforceabilitysolely on the ground that it is in the form of an electronic datamessage or electronic document. (Sec. 23, Ibid.)

ART. 1484. In a contract of sale of personal prop-erty the price of which is payable in installments, thevendor may exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should thevendee fail to pay;


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(2) Cancel the sale, should the vendee’s failure topay cover two or more installments;

(3) Foreclose the chattel mortgage on the thingsold; if one has been constituted, should the vendee’sfailure to pay cover two or more installments. In thiscase, he shall have no further action against the pur-chaser to recover any unpaid balance of the price.Any agreement to the contrary shall be void. (1454-A-a)

Remedies of vendor in sale of personalproperty payable in installments.

The vendor of personal property payable in installments mayexercise any of the following remedies:

(1) elect fulfillment upon the vendee’s failure to pay; or

(2) cancel the sale, if the vendee shall have failed to pay twoor more installments; or

(3) foreclose the chattel mortgage, if one has been constituted,if the vendee shall have failed to pay two or more installments.

Remedies alternative.

These remedies are alternative and are not to be exercisedcumulatively or successively and the election of one is a waiverof the right to resort to the others. (Pacific Commercial Co. vs. Dela Rama, 62 Phil. 380 [1935]; Erlanger & Galinger, Inc. vs. Flor,[C.A.] 57 O.G. 482; Cruz vs. Filipinas Invest. & Finance Corp., 23SCRA 791 [1968]; Filipinas Invest. & Finance Corp. vs. Ridad, 30SCRA 564 [1969]; Industrial Finance Corp. vs. Tobias, 78 SCRA 28[1977]; Nonato vs. Intermediate Appellate Court, 140 SCRA 255[1985].)

Thus, where from the prayer of the vendor in its brief, it asksthe appellate court to order the vendee to pay the remaining un-paid sum under the promissory note, it thereby waives the otherremedies. (Servicewide Specialists, Inc. vs. Intermediate Appel-late Court, 174 SCRA 80 [1989].) To file an action containing thethree remedies: to collect the purchase price; to seize the prop-erty purchased by suing for replevin; and to foreclose the mort-

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gage executed thereon, is not only irregular but is a flagrant cir-cumvention of the prohibition of the law. (Luneta Motor Co. vs.Dimagiba, 3 SCRA 884 [1961].)

Applicability of Article 1484.

The law is aimed at those sales of personal property wherethe price is payable in several installments.

(1) Sale of personal property not payable in installments. — Arti-cle 1484 does not apply to a sale of personal property on straightterm or partly in cash and partly in term. Where the balance, af-ter payment of the initial sum, should be paid in its totality at thetime specified, the transaction is not by installment as contem-plated in Article 1484. (Levi Hermanos, Inc. vs. Gervacio, 69 Phil.52 [1939].)

(2) Sale or mortgage of real estate. — Neither does the articleapply to sale of immovable property nor to real estate mortgage.Under Article 1484, the creditor is given the right or option to seizethe chattel and dispose of the same in accordance with the Chat-tel Mortgage Law, while the mortgage on real property may onlybe foreclosed in conformity with the provisions of the Rules ofCourt, or those of Act No. 3135, if a special power to sell is grantedto the creditor under the contract. (Pacific Commercial Co. vs.Jocson, [C.A.] 39 O.G. 1859.)

(3) Action of replevin. — It does not also apply to an action ofreplevin. (Universal Motors Corp. vs. Dy Hian Tat, 28 SCRA 161[1969].) An action by the mortgagee for recovery of possession ofpersonal property with replevin as a provisional remedy is notan action for collection much less for foreclosure (extra-judicial)of chattel mortgage. It is a preliminary step to foreclosure whichshould be conducted in accordance with Section 14 of Act No.1508. (Universal Motors Corp. vs. Velasco, 98 SCRA 545 [1980];PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals, 109SCAD 7, 310 SCRA 281 [1999].)

Right of vendor to recover unpaid balanceof purchase price.

(1) Remedy of specific performance. — The vendor who has cho-sen to exact the fulfillment of the obligation is not limited to the


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proceeds of the sale of the mortgaged goods. He may still recoverfrom the purchaser the unpaid balance of the price, if any (seeTajanlangit vs. Southern Motors, Inc., 101 Phil. 606 [1957]; Vda.de Quimba vs. Manila Motor Co., Inc., 3 SCRA 444 [1961].), onthe real and personal properties of the purchaser not exempt bylaw from attachment or execution. (Southern Motors, Inc. vs.Magbanua, 101 Phil. 155 [1957].) The mere fact that the seller se-cures possession of the personal property through an attachmentafter filing an action for collection of the unpaid balance, with aprayer for an issuance of a writ of preliminary attachment doesnot necessarily mean that he intends to resort to a foreclosure ofthe mortgage. Unlike in a judicial foreclosure sale, there is no needfor the court to confirm the sale on execution. (Palma vs. Court ofAppeals, 52 SCAD 38, 232 SCRA 714 [1994].)

(2) Remedy of cancellation. — If the vendor chooses rescissionor cancellation of the contract upon the vendee’s failure to paytwo or more installments, the latter can demand the return ofpayments already made unless there is a stipulation about forfei-ture. (see Art. 1486.) In a case, for failure of the buyer to pay twoor more installments, the vendor-mortgagee (or his assignee) re-possessed the car. The receipt issued by the vendor’s assignee tothe vendee when it took possession of the vehicle states that thevehicle could be redeemed within 15 days, meaning that shouldthe vendee fail to redeem within the said period by paying thebalance of the purchase price, the assignee would retain perma-nent possession of the vehicle as it did in fact. It was held that bythis act, the vendor exercised its option to cancel the contract ofsale, barring it from exacting payment of the balance of the pur-chase price. “It cannot have its cake and eat it too.” (Nonato vs.Intermediate Appellate Court, 140 SCRA 255 [1985].)

(3) Remedy of foreclosure. — If the vendor has chosen the thirdremedy of foreclosure of the chattel mortgage if one has been givenon the property, he is not obliged to return to the vendee theamount of the installments already paid should there be an agree-ment to that effect. (Ibid.) But he shall have no further actionagainst the vendee for the recovery of any unpaid balance of theprice remaining after the foreclosure and actual sale of the mort-gaged chattel, and any agreement to the contrary is void. (Zayas,

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Jr. vs. Luneta Motor Company, 117 SCRA 726 [1982]; PAMECAWood Treatment Plant, Inc. vs. Court of Appeals, 310 SCRA 281[1999].)

(a) Recovery by mortgagee of other than unpaid balance of pur-chase price. — Article 1484(3) is inapplicable where the amountsadjudged in favor of the vendor-mortgagee were not part ofthe unpaid balance of the purchase price or in the concept ofa deficiency judgment but were expenses of the suit. (Univer-sal Motors Corp. vs. Velasco, 98 SCRA 545 [1980], infra.) Wherethe mortgagor plainly refuses to deliver the chattel subject ofthe mortgage upon his failure to pay two or more installmentsor if he conceals the chattel to place it beyond the reach of themortgagee it logically follows as a matter of common sense,that the necessary expenses incurred in the prosecution by themortgagee in the prosecution of the action for replevin so thathe can regain possession of the chattel, should be borne by themortgagor. Recoverable expenses would include expensesproperly incurred in effecting seizure of the chattel and attor-ney’s fees in prosecuting the action for replevin. (Agustin vs.Court of Appeals, 81 SCAD 827, 271 SCRA 457 [1997].)

(b) Recourse of mortgagee against guarantor of vendee. — Nei-ther can the vendor after the foreclosure of the chattel mort-gage proceed against any third party who may have guaran-teed the vendee’s performance of his obligation, for “if theguarantor should be compelled to pay the balance of the pur-chase price, the guarantor will, in turn, be entitled to recoverwhat he has paid from the debtor-vendee (Art. 2066.); so thatultimately, it will be the vendee who will be made to bear thepayment of the balance of the price, despite the earlier fore-closure of the chattel mortgage given by him. Thus, the pro-tection given by Article 1484 (to the unpaid vendor) would beindirectly subverted, and public policy overturned.” (Cruz vs.Filipinas Invest. & Finance Corp., 23 SCRA 791 [1968]; Pascualvs. Universal Corporation, 61 SCRA 121 [1974].)

(c) Recourse of assignee against mortgagee. — When the ven-dor assigns his credit to another person, the latter is likewisebound by the same law. Accordingly, when the assignee fore-closes on the mortgage, there can be no further recovery of the


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deficiency and the seller-mortgagee is deemed to have re-nounced any right thereto. (Borbon II vs. Servicewide Special-ists, Inc., 72 SCAD 111, 258 SCRA 634 [1996].) Article 1484(3),however, does not bar one to whom the seller-mortgagee hasassigned on a with-recourse basis his credit against the buyerfrom recovering from the seller the assigned credit in full al-though the seller may have no right of recovery against thebuyer for the deficiency. (Filipinas Invest. & Finance Corp. vs.Vitug, Jr., 28 SCRA 658 [1969].)

ILLUSTRATIVE CASE:

Seller-mortgagee assigned on a recourse basis a promissory notecovering purchase price of motor vehicle executed by buyer-mortga-gor who defaulted, and assignee seeks to recover from assignor un-paid balance remaining after foreclosure.

Facts: B delivered to S a promissory note covering the pur-chase price of a motor vehicle bought by B from S, secured by achattel mortgage over such automobile. S negotiated the noteto C, assigning all S’s rights to the same, the assignment in-cluding the right of recourse against S.

B defaulted. The car was sold at public auction but the pro-ceeds still left a deficiency.

Issue: After the foreclosure and sale by C, could it hold Sliable for the payment of the outstanding balance, plus attor-ney’s fees and costs?

Held: Yes. Article 1483 is not applicable. The transaction be-tween S and C was purely an ordinary discounting transaction.The remedy sought by C is not against the buyer (B) of the carbut against the seller (S), independent of whether or not S mayhave a right of recovery against B, which in this case, he doesnot have. What Article 1484(3) seeks to protect are only thebuyers on installment. Surely, Congress could not have intendedto impair and much less to do away with the right of the sellerto make commercial use of his credit against the buyer, providedsaid buyer is not burdened beyond what the law allows.

The contention by S that since what were assigned to Cwere only whatever rights it had against B (the buyer), it shouldfollow that inasmuch as S has no right to recover from B be-yond the proceeds of the foreclosure sale, C, as assignee, should

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have also no right to recover any deficiency is untenable. Thevery fact that C was given the right of recourse against S ne-gates the idea that the parties contemplated to limit the recov-ery of C to only the proceeds of the mortgage sale. (Ibid.)

Note: In the case of Cruz vs. Filipinas Invest. & Finance Corp.(supra.), the Supreme Court broadened the scope of the RectoLaw (now Art. 1484.) beyond its letter and held that within itsspirit, a seller of goods on installments does not have any rightof action against a third party who, in addition to the buyer’smortgage of the goods sold, furnishes additional security forthe payment of said installment or the purchase price of saidgoods. That case is entirely different from the one at bar. In thatcase, the corporation was trying to recover from the guarantorof the buyer, whereas in the present case, it is precisely stipu-lated, in effect, that C had a right of recourse against the sellershould the buyer failed to pay the assigned credit in full. (Ibid.)

Meaning of certain terms as usedin Article 1484.

(1) “Exercise.” — In a case, the issue was “whether the plain-tiff (mortgagee) is precluded to press for collection of an accountsecured by a chattel mortgage, after it shall have informed thedefendant (mortgagor) of its intention to foreclose on the samemortgage and the voluntary acceptance of such step (foreclosure)by the defendants.”

The Supreme Court held that such desistance of the plaintiff,on its own initiative, from proceeding with the auction sale with-out gaining any advantage or benefit, and without causing anydisadvantage or harm to the defendant-mortgagor, rendered use-less its previous choice to foreclose, and for this reason, it couldnot be considered as having “exercised” (the Code uses the word“exercise”) the remedy of foreclosure because of its incompleteimplementation. Therefore, the plaintiff was not barred from su-ing on the unpaid account. In desisting from a foreclosure of chat-tel mortgage, and suing instead for the unpaid balance, the credi-tor does not assume really inconsistent positions, nor is heestopped considering that detriment to the opposing party is aprerequisite to the operation of estoppel. (Radiowealth, Inc. vs.Lavin, 7 SCRA 804 [1963].)


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(2) “Action.” — Considering the purpose for which the pro-hibition contained in Article 1484 was intended, the word “action”used therein may be construed as referring to any judicial or ex-tra-judicial proceeding by virtue of which the vendor may law-fully be enabled to exact recovery of the supposed unsatisfiedbalance of the purchase price from the purchaser or his privy.(Cruz vs. Filipinas Investment and Finance Corp., 23 SCRA 791[1968].)

(3) “Any unpaid balance.” — The phrase should be interpretedas having reference to the deficiency judgment to which the mort-gagee may be entitled where, after the mortgaged chattel is soldat public auction, the proceeds obtained therefrom are insufficientto cover the full amount of the secured obligation. It includes allother claims that may likewise be called for such as interest onthe principal, attorney’s fees, expenses of collection, and the costs.Were it the intention of the legislature to limit its meaning to theunpaid balance of the principal, it would have so stated.(Macondray & Co., Inc. vs. Eustaquio, 64 Phil. 446 [1937].) Thus,where the mortgagor unjustifiably refused to surrender the chat-tel subject of the mortgage upon failure of two or moreinstallments, or if he concealed the chattel to place it beyond thereach of the mortgagee, that thereby constrained the latter to seekcourt relief, the expenses incurred for the prosecution of the case,such as attorney’s fees, could rightly be awarded. (Borbon II vs.Servicewide Specialists, Inc., 72 SCAD 111, 258 SCRA 634 [1996].)

(4) “Foreclosure.” — Article 1484(3), in referring to foreclosureof a chattel mortgage given to secure payments in installments ofthe purchase price of the thing sold, means foreclosure by theusual methods including sale of the thing at public auction.

(a) Where there is no sale because the sheriff released theproperty without proceeding to sell the same and the sale wasnot rescinded by the vendor, the latter was not precluded fromsuing the vendee for the balance of the purchase price. (Pa-cific Commercial Co. vs. De La Rama, 72 Phil. 380 [1941].)

(b) Similarly, where the action instituted is for specific per-formance and the mortgaged property is subsequently at-tached and sold by virtue of an execution, the sale thereof doesnot amount to a foreclosure of the mortgage; hence, the seller-

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creditor is entitled to deficiency judgment (Southern Motors,Inc. vs. Moscoso, 2 SCRA 168 [1961].) and for an alias writ ofexecution for the portion of the judgment that has not beensatisfied. (Industrial Finance Corp. vs. Ramirez, 77 SCRA 152[1977].)

(c) Under the law, the delivery by the mortgagor of thepossession of the mortgaged chattel to the mortgagee prepara-tory for its foreclosure sale can only operate to extinguish themortgagor’s liability if the mortgagee had actually caused theforeclosure of the property when it recovered possessionthereof. It is the fact of foreclosure and actual sale of the mort-gaged chattel that bars the recovery by the vendor of the bal-ance of the vendee’s outstanding obligation not satisfied bythe sale. Accordingly, if the vendor desisted, on his own ini-tiative, from consummating the auction sale when it discov-ered that foreclosure would be impractical, such desistancewould operate as a timely disavowal of the remedy of fore-closure, and the vendor can still sue for specific performance.The mortgagee who accepted delivery of the mortgaged prop-erty is not estopped from demanding payment of the unpaidobligation in the absence of clear consent on his part to acceptthe delivery in full satisfaction of the mortgaged debt in theconcept of dacion en pago.24 (Filinvest Credit Corp. vs. Phil.Acetylene Co., Inc., 111 SCRA 421 [1982]; see De la Cruz vs.Asian Consumer & Industrial Finance Corp., 214 SCRA 103[1992].)

(d) In ordinary alternative obligations, a mere choice cat-egorically and unequivocally made and then communicatedby the person entitled to exercise the option concludes theparties. The creditor may not thereafter exercise any otheroption, unless the chosen alternative proves to be ineffectualor unavailing due to no fault on his part. This rule, in essence,is the difference between alternative obligations, on the onehand, and alternative remedies, upon the other hand, where,in the latter case, the choice generally becomes conclusive only

24Art. 1245. Dation in payment, whereby property is alienated to the creditor insatisfaction of debt in money, shall be governed by the law on sales.


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upon the exercise of the remedy. For instance, in one of theremedies expressed in Article 1484 of the Civil Code, it is onlywhen there has been a foreclosure of the chattel mortgage thatthe vendee-mortgagor would be permitted to escape from adeficiency liability. Thus, if the case is one for specific perform-ance, even when this action is selected after the vendee hasrefused to surrender the mortgaged property to permit anextrajudicial foreclosure, that property may still be levied onexecution and an alias writ may be issued if the proceedsthereof are insufficient to satisfy the judgment credit. So, also,a mere demand to surrender the object which is not heeded bythe mortgagor will not amount to a foreclosure, but the repos-session thereof by the vendor-mortgagee would have the ef-fect of foreclosure. (Borbon II vs. Servicewide Specialists, Inc.,supra.)

(e) Actual sale in accordance with the Chattel MortgageLaw (Act No. 1508, Sec. 14.) resulting in a deficiency of themortgaged chattel is the foreclosure contemplated by law.(Manila Motor Co. vs. Fernandez, 99 Phil. 782 [1956]; North-ern Motors, Inc. vs. Sapinoso, 33 SCRA 356 [1970]; IndustrialFinance Corp. vs. Tobias, 78 SCRA 28 [1977]; see Vda. deQuiambao vs. Manila Motor Co., 3 SCRA 444 [1961].) But thetaking by the mortgagee of the mortgaged chattel withoutproceeding to the sale of the same at public auction is not law-ful. The express purpose of taking the mortgaged property isto sell the same and/or foreclose the mortgage constitutedthereon either judicially or extra-judicially and thereby liqui-date the indebtedness in accordance with law. (Esguerra vs.Court of Appeals, 173 SCRA 1 [1989].)

ILLUSTRATIVE CASES:

1. Defaulting buyer-mortgagor was given by assignee the op-tion to pay unpaid balance of truck brought on installments or tosurrender the same, and the assignee, having learned after buyer ex-ercised the second option that the truck had met an accident, filed suitfor recovery of unpaid balance of price.

Facts: B bought a truck on installments from S. Paymentwas secured by a chattel mortgage. The promissory note andthe mortgage was assigned by S to C. B defaulted on the

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installment payments. As a consequence, C demanded paymentof the entire unpaid balance of the price or surrender of thetruck. B replied that he was voluntarily surrendering the truckto C. He said the truck was being repaired at the shop of S as ithad met with an accident, that there was too much delay in therepair, and that he was not satisfied with the repair of the fin-ished portions.

C decided not to get the truck. It filed a suit for the recov-ery of the balance of the obligation.

Issue: Is C estopped to insist on its claim on the balance ofthe promissory note when it demanded the return or surren-der of the truck?

Held: No. C did not know about the accident. Even B can-not expect C to accept the term of surrender because aside fromthe fact that the truck being surrendered met an accident, Cwas not satisfied with the repair of the finished portions of thetruck in question. C, therefore, was justified in refusing to ac-cept such surrender and in bringing suit to recover the balanceof the purchase price.

Since the case involves the sale of personal property oninstallments, Article 1484 of the Civil Code should apply. Theremedies provided for in Article 1484 are considered alterna-tive, not cumulative such that the exercise of one would bar theexercise of the others. Here, C has not cancelled the sale, norhas it exercised the remedy of foreclosure. Foreclosure, judicialor extrajudicial, presupposes something more than a mere de-mand to surrender possession of the object of the mortgage.Since C has not availed itself of the remedy of cancelling thesale of the truck in question or of foreclosing the chattelmortgage on said truck, C is still free to avail of the remedy ofexacting fulfillment of the obligation of B, the vendee of thetruck in question. (Industrial Finance Corp. vs. Tobias, 78 SCRA28 [1977].)

———— ———— ————

2. In a suit for recovery of unpaid balance of purchase price ofmortgaged truck sold on installments, seller caused the attachmentand subsequent sale of the vehicle.

Facts: B bought from S a truck on installment basis. Uponmaking a downpayment, B executed a promissory note for theunpaid balance of the purchase price to secure the payment ofwhich a chattel mortgage was constituted on the truck in favor


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of S. B failed to pay S installments on the balance. S filed a com-plaint for recovery of the unpaid balance. Pursuant to a writ ofattachment, the truck and other properties of A were attached.

B contends that S had availed of the third remedy providedin Article 1484, viz., the foreclosure of the chattel mortgage onthe truck. On the other hand, S claims that in filing the com-plaint, it availed of the first remedy, i.e., to exact fulfillment ofthe obligation (specific performance).

Issue: Do the attachment and subsequent sale of the mort-gaged truck amount to a foreclosure of the mortgage, hence, S(seller-creditor) is not entitled to deficiency judgment?

Held: No. There is nothing unlawful or irregular in B’s actof attaching the mortgaged truck. Since S has chosen to exactthe fulfillment of B’s obligation, it may enforce execution of thejudgment that may be favorably rendered thereon, on all per-sonal and real properties of B not exempt from execution suffi-cient to satisfy such judgment. (Southern Motors, Inc. vs. Moscoso,2 SCRA 168 [1961].)

Note: There is a substantial difference between the effect offoreclosing a chattel mortgage and attaching the mortgagedchattel. The variance lies in the ability of the debtor to retainpossession of the property attached by giving a counterbondand thereby discharging the attachment. This remedy the debtordoes not have in the event of foreclosure. (Reyes, J.B.L., J., con-curring.)

———— ———— ————

3. Seller brought suit to recover mortgaged truck sold oninstallment basis preparatory to foreclosure, and lower court held thatexpenses of suit adjudged in his favor may be enforced only againstproceeds of the vehicle.

Facts: B brought from S a truck on installment basis. To se-cure the balance of the purchase price B executed a promissorynote and a chattel mortgage. B defaulted in his payments. Sasked him to surrender the vehicle in accordance with the chat-tel mortgage contract, but B failed to surrender the truck. S filedan action to recover the truck preparatory to foreclosure of themortgage. By virtue of a writ of replevin, S was able to repos-sess the truck. The parties submitted a stipulation of facts whichmentioned, among other things, the expenses incurred by S insecuring possession of the vehicle.

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On the basis of the stipulation, the lower court rendered adecision which said, among other things, that the sums ad-judged in S’s favor may be enforced only against the proceedsof the vehicle mortgaged.

Issue: Is the third paragraph of Article 1484 applicable tothe case at bar?

Held: No. First, the action instituted in the court a quo wasnot for foreclosure of the chattel mortgage but for replevin; andsecond, the amounts adjudged in favor of the plaintiff werenot part of the unpaid balance of the purchase price or inthe concept of deficiency judgment but were for the expensesof the suit. (Universal Motors Corp. vs. Velasco, 98 SCRA 545[1980].)

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4. Chattel mortgage covers not only the personal property soldon installment payments but other personal property of the vendee-mortgagor.

Facts: B purchased from S two Ford sedans payable ininstallments. B executed a promissory note and a deed of chat-tel mortgage covering not only the two new cars but also anold car and his certificate of public convenience for the opera-tion of a taxicab fleet. With the conformity of B, S assigned itsrights to the note and the mortgage to F. Due to the failure of Bto pay the installments, F foreclosed the chattel mortgage ex-tra-judicially. At the public auction, F was the purchaser. An-other auction sale was held because B’s obligation was not fullysatisfied by the sale of the vehicles. At the second sale, the fran-chise to operate the taxicab service was sold to F. B filed anaction for annulment of the contract of mortgage. The trial courtheld the chattel mortgage was null and void insofar as the taxi-cab franchise and the old car were concerned.

Issue: Is the chattel mortgage valid insofar as the franchiseand the subsequent sale thereof are concerned?

Held: The resolution of said issue is unquestionably gov-erned by the provisions of Article 1484 of the Civil Code. Un-der the article, the vendor of personal property the purchaseprice of which is payable in installments, has the right, shouldthe vendee default in the payment of two or more of the agreedinstallments, to exact fulfillment by the purchaser of the obli-gation, or to cancel the sale, or to foreclose the mortgage on the


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purchased personal property, if one was constituted. Which-ever right the vendor elects, he cannot avail of the other, theseremedies being alternative, not cumulative. Furthermore, if thevendor avails himself of the right to foreclose his mortgage,the law prohibits him from further bringing an action againstthe vendee for the purpose of recovering whatever balance ofthe debt secured not satisfied by the foreclosure sale.

Consequently, the lower court rightly declared the nullityof the chattel mortgage in question insofar as the taxicab fran-chise and the used car of B are concerned. F has to content him-self with the proceeds of the sale at the public auction of thetwo cars which were sold on installment and mortgaged to S,his assignor. To allow the sale of other properties would beequivalent to obtaining a writ of execution against B concern-ing said properties which are separate and distinct from thosewhich were sold on installment. This would be contrary to pub-lic policy and the very spirit and purpose of the law limitingthe vendor’s right to foreclose the chattel mortgage only on thething sold. (Ridad vs. Filipinas Investment and Finance Corp., 120SCRA 246 [1983]; see Levi Hermanos, Inc. vs. Pacific Commer-cial, 71 Phil. 587 [1941].)

Recovery of deficiency after foreclosureprohibited.

(1) Purpose of prohibition. — The principal object of Article 1484(3) is to remedy the abuses committed in connection with foreclos-ure of chattel mortgages. This amendment prevents mortgageesfrom seizing the mortgaged property, buying it at foreclosure salefor a low price and then bringing suit against the mortgagor for adeficiency judgment. The almost invariable result of this procedurewas that the mortgagor found himself minus the property and stillowing practically the full amount of his original indebtedness. Inother words, in all proceedings for the foreclosure of chattel mort-gages, the mortgagee is limited to the property included in themortgage. (Bachrach Motor Co. vs. Milan, 61 Phil. 409 [1935];Manila Trading & Supply Co. vs. Reyes, 62 Phil. 461 [1935].) He hasno more cause of action against the purchaser or his guarantor.(Luneta Motor Co. vs. Salvador, 108 Phil. 1057 [1960].) “Although,of course, the purchaser must suffer the consequences of his im-prudence and lack of foresight, the chastisement must not be to the

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extent of ruining him completely and, on the other hand, enrich-ing the vendor in a manner which shocks the conscience.” (ManilaTrading and Supply Co. vs. Reyes, supra.)

(2) Prohibition not affected by assignment by vendor of his rights.— The assignment by the vendor of his rights to the sale of per-sonal property on installment basis covered by Article 1484 of theCivil Code does not change the nature of the transaction betweenthe parties — the vendor and the vendee. It remains the same.Hence, the assignee can have no better rights than the assignor.Accordingly, where the obligation of the vendee had already beendischarged by sale at public auction of the property subject of thechattel mortgage, no deficiency amount can be recovered by theassignee. To rule otherwise would pave the way for subvertingthe policy underlying Article 1484 on the foreclosure of chattelmortgages over personal property sold on installment basis.(Zayas, Jr. vs. Luneta Motor Company, 117 SCRA 726 [1982].)

Sale or financing of real estateon installment payments.

(1) Rights of buyer. — In transactions or contracts involving thesale or financing of real estate on installment payments (see Ap-pendix “B.”), including residential condominium apartments, thefollowing are the rights given to the buyer who has paid at leasttwo (2) years of installments in case he defaults in the payment ofsucceeding payments:

(a) To pay without additional interest, the unpaidinstallments due within the total grace period earned by himfixed at the rate of one (1)-month grace period for every one(1) year of installment payments made. This right however,shall be exercised by him only once in every five (5) years ofthe life of the contract and its extension, if any; and

(b) If the contract is cancelled, the seller shall refund to thebuyer the cash surrender value of the payments on the prop-erty equivalent to 50% of the total payments made and, afterfive (5) years of installments, an additional 5% every year butnot to exceed 90% of the total payments made. (Sec. 3, R.A. No.6552 [Realty Installment Buyer Protection Act]; see Layug vs.Intermediate Appellate Court, 67 SCRA 627 [1988].)


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(c) The buyer has the right to sell his right or assign thesame before actual cancellation of the contract (see Sec. 5, R.A.No. 6552.) and to pay in advance any unpaid installmentanytime without interest and to have such full payment of thepurchase price annotated in the certificate of title covering theproperty. (see Sec. 6, ibid.)

(2) Conditions for cancellation of sale by seller. — The actual can-cellation shall take place after 30 days from receipt by the buyerof the notice of cancellation or the demand for rescission by anotarial act and upon full payment of the cash surrender value tothe buyer. Down payments, deposits or options on the contractshall be included in the computation of the total number ofinstallment payments made. (Sec. 3, Ibid.; see McLaughlin vs.Court of Appeals, 144 SCRA 693 [1986].)

In case the defaulting buyer has paid less than two (2) yearsof installments, the seller shall give him a grace period of not lessthan 60 days from the date the installment became due. If he failsto pay the installments due at the expiration of the grace period,the seller may cancel the contract after 30 days from receipt bythe buyer of the notice of cancellation or the demand for rescis-sion of the contract by a notarial act. (Sec. 4, R.A. No. 6552.)

(3) Installment sales not covered. — The Act excludes from itsoperation sales on installments of industrial lots, commercialbuildings, and sales to tenants under the Code of Agrarian Re-forms.25 (Ibid.) In other words, in the case of such kind of prop-erty, the Act recognizes the vendor’s right unqualifiedly to can-cel the sale upon the buyer’s default. (Luzon Brokerage Co., Inc.vs. Maritime Bldg. Co., Inc., 86 SCRA 305 [1978]; see Art. 1592.)

(4) Purpose of the law. — The purpose is to protect buyers ofreal estate on installment payments against onerous and oppres-sive conditions. (Sec. 2, R.A. No. 6552.)

In a case, the petitioner claims that he is entitled to a convey-ance of at least eight (8) of the 12 lots subject of the conditionalsale, on the theory that since the total price of the 12 lots wasP120,000, each lot then had a value of P10,000 and, therefore, with

25R.A. No. 3844, as amended; now, R.A. No. 6657, the Comprehensive AgrarianReform Law of 1988.

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his P80,000.00, he had paid in full the price for the 8 lots. In sup-port of his claim, he invokes earlier rulings in Legarda Hermanosvs. Saldaña (55 SCRA 324 [1978].) and Calasanz vs. Angeles. (135SCRA 323 [1985].)

In the first case, the contract of sale provided for payment ofthe price of two (2) subdivision lots at P1,500.00 each, exclusiveof interest, in 120 monthly installments and at time of default, thebuyer had already paid P3,582.00, inclusive of interest; and in thesecond, the agreement had a price of P3,720.00 with interest at 7%per annum, and at time of default, the buyer had paid installmentstotaling P4,533.38, inclusive of interest. Upon considerations ofjustice and equity and in the light of the general provisions of thecivil law, the Supreme Court resolved in the first case to directthe conveyance of one of the lots to the buyer since he had alreadypaid more than the value thereof, and in the second, to disallowcancellation by the seller and direct transfer of title to the buyerupon payment of the first installments yet unpaid.

In both cases, the Supreme Court equitably allocated the ben-efits and losses between the parties to preclude undue enrichmentby one at the expense of the other. It was held that the cited prec-edents are not applicable. The petitioner cannot be permitted toclaim that all his payments should be credited to him in theirentirety, without regard whatever, to the damages his defaultmight have caused to the seller. In any event, it is no longer pos-sible to apply the rulings in the said cases to the case at bar, i.e., toresort to principles of equity and the general provisions of the CivilCode in the resolution of the present controversy, because at thetime of the execution of the contract in question and the breachthereof, R.A. No. 6552 was already in force and applicable thereto.It precludes resort to equity and analogous provisions of the CivilCode, it being axiomatic that where there is an adequate remedyat law available to the parties, equity should not come into play.(Layug vs. Intermediate Appellate Court, 167 SCRA 627 [1988].)

ART. 1485. The preceding article shall be appliedto contracts purporting to be leases of personal prop-erty with option to buy, when the lessor has deprivedthe lessee of the possession or enjoyment of the thing.(1454-A-a)


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Lease of personal propertywith option to buy.

(1) Nature of transaction. — Leases of personal property withoption to buy on the part of the lessee who takes possession orenjoyment of the property leased are really sales of personaltypayable in installments. Accordingly, the rules provided in Arti-cle 1484 are equally applicable to the so-called leases of personalproperty. Sellers desirous of making conditional sales of theirgoods but do not wish openly to make a bargain in that form, forone reason or another, have frequently resorted to the device ofmaking contracts in the form of leases either with option to thebuyer to purchase for small consideration at the end of the termprovided the so-called rent has been duly paid, or with the stipu-lation that if the rent throughout the term is paid, the title shallthereupon vest on in the lessee. (Filinvest Credit Corp. vs. Courtof Appeals, 178 SCRA 188 [1989].)

(2) Purpose of provision. — The evident purpose of Article 1485is to prevent vendors from resorting to this form of contract whichusually is in reality contract of sale of personal property payablein installments in contravention of the provisions of Article 1484.Through the set-up, the vendor by retaining ownership over theproperty in the guise of being the lessor, retains likewise the rightto repossess the same, without going through the process of fore-closure, in the event the vendee-lessee defaults in the payment ofthe installments. There arises, therefore, no need to constitute achattel mortgage over the movable sold. More important, thevendor, after repossessing the property and, in effect, cancellingthe contract of sale, gets to keep all the installments-cumrentalalready paid. (Filinvest Credit Corp. vs. Court of Appeals, 178SCRA 188 [1989].)

EXAMPLE:

B entered into a contract called “contract of lease” with Swhereby B leased the car of S. It is stipulated that B, the al-leged lessee, shall pay P10,000.00, upon signing the contract,and on or before the 5th day of every month, P2,000.00 byway of rental.

The contract fixed the value of the vehicle to beP100,000.00. It also provided that B has the option to pur-

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chase the car for the said amount and the payment made byway of rentals shall be deducted from the amount agreed inthe option and upon the full value fixed being paid, the leasewould terminate and title to the leased property would betransferred to B; and S would have the right to terminate thecontract and repossess the vehicle should B fail to make pay-ments on the dates specified, and in such event, the paymentstheretofore made should remain the property of S and notbe recoverable by B.

There can hardly be any question that the contract in thiscase is one of sale on installments and not lease, with the so-called monthly rentals being in truth monthly amortizationson the price of the car, and is, therefore, subject to the provisionthat “when the lessor had deprived the lessee of the enjoymentor possession” of the personal property, he shall have no fur-ther action against the lessee “to recover any unpaid balance”owing by the latter, “any agreement to the contrary being void.”In choosing the alternative remedy of depriving the lessee ofthe enjoyment of the leased property, the lessor, in such case,waives the right to bring an action for unpaid rentals on thesaid vehicle. (see U.S. Commercial vs. Halili, 93 Phil. 271 [1953];Manila Gas Corporation vs. Calupitan, 66 Phil. 646 [1938]; seeElisco Tool Manufacturing Corp. vs. Court of Appeals, 307 SCRA731 [1999].)

(3) Repossession by lessor need not be through court action. —Even where the lessee voluntarily delivers the property to thelessor, the case is not taken out of the purview of Article 1485 ifhe does so in obedience to the lessor’s demands. The articledoes not require that the deprivation of the enjoyment of theproperty be brought about through court action. Specially wherethe contract specifically authorizes the lessor to repossess theproperty whenever the lessee defaults in the payment of rent,court action for such purpose is not essential. (U.S. Commer-cial Co. vs. Halili, supra.)

ART. 1486. In the cases referred to in the two pre-ceding articles, a stipulation that the installments orrents paid shall not be returned to the vendee or les-see shall be valid insofar as the same may not be un-conscionable under the circumstances. (n)


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Stipulation authorizing the forfeitureof installments or rents paid.

In sales of personal property by installments or leases of per-sonal property with option to buy, the parties may stipulate thatthe installments or rents paid are not to be returned. Such a stipu-lation is valid “insofar as the same may not be unconscionableunder the circumstances’’; otherwise, the court has the power toorder the return of a portion of the total amount paid ininstallments or rents. (Zaragosa vs. Dimayuga, [C.A.] 62 O.G. 7028;see Art. 1229.)

Thus, in a case, where the monthly installment payable bydefendants (buyers) was P774.00 and the P5,655.92 installmentpayments corresponded only to seven (7) monthly installments,the treatment of the installment as rentals as stipulated in thecontract of sale for failure of the defendants to comply with theterms thereof, was held not unconscionable, since they admittedhaving used the air-conditioners sold for 22 months, meaning theydid not pay 15 monthly installments on the said air-conditionersand were thus using the same free for said period to the preju-dice of the plaintiff (seller). (Delta Motor Sales Corp. vs. Nui KimDuan, 213 SCRA 259 [1992].) In another case, the forfeiture of theinstallments paid as rentals, was applied only to the purchaseprice of P3,556 which was considered as fair and reasonable rentalfor the period in which the property was under the control of theawardee of the homelot but not to the overpayment of the amountof P8,244.00 for “a contrary ruling would unjustly enrich the ven-dor to the prejudice of the vendee.’’ (Gomez vs. Court of Appeals,134 SCAD 206, 340 SCRA 720 [2000].)

ART. 1487. The expenses for the execution andregistration of the sale shall be borne by the vendor,unless there is a stipulation to the contrary. (1455a)

Expenses for execution and registration.

Under this article, the vendor has the duty to pay not only theexpenses for the execution of the sale but also for the registrationof the same in the absence of any agreement between the partiesto the contrary.

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Expenses incurred subsequent to the transfer of title are to beborne by the buyer, unless caused by the fault of the seller.

ILLUSTRATIVE CASES:

(1) Vendee assumed liability for taxes and other expenses.

Facts: In the Deed of Absolute Sale, B, buyer, assumed li-ability for taxes and other expenses “relative to the executionand/or implementation” of the Deed “including, among oth-ers, documentation, documentary and service stamps, expensesfor registration and transfer of titles.’’

Issue: Is B liable for overdue real estate taxes?

Held: No. The interpretation that B assumed a liability inoverdue real estate taxes for the years prior to the contract ofsale when he was neither the owner nor the beneficial owner ofthe property is incongruent to the tax policy that the user of theproperty bears the tax, because there was no immediate trans-fer of possession of the property previous to the full paymentof the purchase price. If he intended to assume liability, the con-tract should have specifically stated “real estate taxes” due forthe previous years. The payments made under protest cannotbe construed to be an admission of liability. Hence, the tax as-sessed and collected should be refunded. (Estate of C.T. Lim vs.City of Manila, 182 SCRA 482 [1990].)

———— ———— ————

2. The Decision commands the petitioner (seller) to “execute aDeed of Absolute Sate in favor of private respondents (buyers) anddeliver the corresponding certificate of title to them.”

Facts: See above.

Issue: Can it be inferred from these directives that petitionershould also pay for the expenses in notarizing the deed andobtaining a new certificate of title?

Held: No. “The obligation to pay for such expenses is un-connected with and distinct from the obligations to execute anddeliver the deed of absolute and the certificate of title. Sincethere is no qualification that the duties to execute and to de-liver shall also compel petitioner to assume the expenses fortransferring the pertinent title in favor of private respondents,the ordinary and literal meaning of the words ‘execute’ and


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‘deliver’ should prevail, that is, for petitioner to perform allnecessary formalities of the deed of sale and give or cede theres of the certificate of title (that certificate which naturally mustbe in their possession since petitioner cannot give what it doesnot have) to the actual or constructive control of private re-spondents. Needless to stress, petitioner can actually dischargethese obligations without settling for its own account the ex-penses which private respondents are demanding. In this re-gard, petitioner can appear before the notary public fornotarization of the deed of absolute sale and assist in the can-cellation of the certificate of title in its name by giving this cer-tificate together with the deed of absolute sale to private re-spondents for presentation at the Registry of Deeds, which ithas several times expressed willingness to do so.’’ (Jose Clavano,Inc. vs. Housing and Land Use Regulatory Board, 378 SCRA 172[2002].)

ART. 1488. The expropriation of property for pub-lic use is governed by special laws. (1456)

Expropriation of property for public use.

The procedure for the exercise of the power of eminent do-main is provided for in Rule 67 of the Rules of Court. Expropria-tion must be decreed by competent authority and for public useand always upon payment of just compensation. (Art. 435, par. 1,Civil Code; Art. III, Sec. 9, Constitution.)

— oOo —

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Chapter 2

CAPACITY TO BUY OR SELL

ART. 1489. All persons who are authorized in thisCode to obligate themselves, may enter into a con-tract of sale, saving the modifications contained inthe following articles.

Where necessaries are sold and delivered to aminor or other person without capacity to act, he mustpay a reasonable price therefor. Necessaries are thosereferred to in article 290. (1457)

Person who may enter into a contractof sale.

As a general rule, all persons, whether natural or juridical, whocan bind themselves have also legal capacity to buy and sell. Thereare exceptions to this rule in those cases when the law determinesthat a party suffers from either absolute or relative incapacity.

Kinds of incapacity.

Such incapacity is absolute in the case of persons who cannotbind themselves; and relative where it exists only with referenceto certain persons or a certain class of property. (Wolfson vs. Es-tate of Martinez, 20 Phil. 340 [1911].) Persons who are merely rela-tively incapacitated are mentioned in Articles 1490-1491.

There are no incapacities except those provided by law andsuch incapacities cannot be extended to other cases by implica-tion for the reason that such construction would be in conflict withthe very nature of Article 1489. (Ibid.)

145

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Liability for necessaries of minor or otherperson without capacity to act.

Necessaries are those things which are needed for sustenance,dwelling, clothing, medical attendance, education and transpor-tation according to the financial capacity of the family of the in-capacitated person. (see Art. 194, Family Code.) Whether the na-ture of the contract is such that it can under any circumstances,be regarded as a contract for necessaries, is a question which de-pends upon the facts of the particular case.

Generally, the contracts entered into by a minor and otherincapacitated persons (e.g., insane or demented persons, deaf-mutes who do not know how to write), are voidable. (Arts. 1327,1390.) However, where necessaries are sold and delivered to him(without the intervention of the parent or guardian), he must paya reasonable price therefor. (Art. 1489, par. 2.) The contract is, there-fore, valid but the minor has the right to recover any excess abovea reasonable value paid by him.

Sale by minors.

The courts have laid down the rule that the sale of real estateeffected by minors who have already passed the ages of pubertyand adolescence and are now in the adult age, when they pre-tended to have already reached their majority, while in fact theyhave not, is valid, and they cannot be permitted afterwards toexcuse themselves from compliance with the obligations assumedby them or to seek their annulment. (see Mercado and Mercadovs. Espiritu, 37 Phil. 265 [1917].)

The doctrine is entirely in accord with the provisions of theRules of Court (see Rule 131, Sec. 1.) and the Civil Code (see Art.1431.) which determine cases of estoppel.

ART. 1490. The husband and the wife cannot sellproperty to each other, except:

(1) When a separation of property was agreedupon in the marriage settlements; or

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(2) When there has been a judicial separation ofproperty under article 191.* (1458a)

Relative incapacity of husbandand wife.

(1) The husband and the wife are prohibited by the abovearticle from selling property to each other. A sale between husbandand wife in violation of Article 1490 is inexistent and void fromthe beginning because such contract is expressly prohibited by law.(Art. 1409[7]; Uy Siu Pin vs. Chua Hue vs. Cantollas, 70 Phil. 55[1940]; Camia de Reyes vs. Reyes de Ilano, 63 Phil. 629 [1936];Medina vs. Collector of Internal Revenue, 1 SCRA 302 [1961].)

(2) They are also prohibited from making donations to eachother during the marriage except moderate gifts on the occasionof any family rejoicing. (Art. 87, Family Code.) However, if therehas been a separation of property agreed upon in the marriagesettlements, or when there has been a judicial separation of prop-erty decreed between them by the court, the sales between hus-band and wife are allowed. They have, therefore, in the two casesmentioned, capacity to buy from or to sell to each other.

Incidentally, a marriage settlement (also called “ante-nuptialcontract”) is an agreement entered into by persons who are aboutto be united in marriage, and in consideration thereof, for thepurpose of fixing the property relations that would be followedby them for the duration of the marriage. (see Arts. 74-80, Ibid.)

Reason for prohibition under Article 1490.

The reason for the law is not based so much on the union ofthe personality of the husband and wife nor on the weakness ofthe sex and on the possibility that the husband will induce his wifeto engage in ruinous operations, but primarily, for the protectionof third persons1 who, relying upon supposed property of either

*Now, Art. 135, Family Code.1The husband cannot alienate or encumber any real property of the conjugal part-

nership without the wife’s consent. (Art. 166.) An action to annul the questioned trans-action may be instituted by the wife during the marriage and within 10 years from thetransaction. (Art. 173.) The lack of consent makes the transaction merely voidable. The

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spouse, enters into a contract with either of them only to find outthat the property relied upon was transferred to the other spouse.(see 10 Manresa 95-96.)

Persons permitted to question sale.

(1) Although certain transfers between husband and wife areprohibited under Article 1490, such prohibition can be taken ad-vantage of only by persons who bear such relation to the partiesmaking the transfer or to the property itself that such transferinterferes with their rights or interests. Unless such a relationshipappears, the transfer cannot be attacked. Thus, the heirs of eitherspouse, as well as creditors at the time of the transfer, can attackthe validity of the sale but not creditors who became such onlyafter the transaction. (Cook vs. McMicking, 27 Phil. 10 [1914].)

(2) The government is always an interested party in all mat-ters involving taxable transactions. It is competent to questiontheir validity or legitimacy whenever necessary to block tax eva-sion. It can impugn sales between husband and wife. (Medina vs.Collector of Internal Revenue, supra.)

ART. 1491. The following persons cannot acquireby purchase, even at a public or judicial auction, ei-ther in person or through the mediation of another:

(1) The guardian, the property of the person orpersons who may be under his guardianship;

(2) Agents, the property whose administration orsale may have been entrusted to them, unless theconsent of the principal has been given;

(3) Executors and administrators, the property ofthe estate under administration;

(4) Public officers and employees, the property ofthe State or of any subdivision thereof, or of any gov-

legal prohibition against the disposition of conjugal property by one spouse without theconsent of the other has been established for the benefit, not of third persons, but only ofthe other spouse for whom the law desires to save the conjugal partnership from dam-ages that might be caused. (Villaranda vs. Villaranda, 423 SCRA 571 [2004]; Papa vs.Montenegro, 54 Phil. 331 [1930].)

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ernment owned or controlled corporation, or institu-tion, the administration of which has been entrustedto them; this provision shall apply to judges and gov-ernment experts who, in any manner whatsoever, takepart in the sale;

(5) Justices, judges, prosecuting attorneys, clerksof superior and inferior courts, and other officers andemployees connected with the administration of jus-tice, the property and rights in litigation or levied uponan execution before the court within whose jurisdic-tion or territory they exercise their respective func-tions; this prohibition includes the act of acquiringby assignment and shall apply to lawyers, with respectto the property and rights which may be the object ofany litigation in which they may take part by virtue oftheir profession;

(6) Any others specially disqualified by law.(1459a)

Incapacity by reason of relationto property.

The above article enumerates the persons who, by reason ofthe relation of trust with the persons under their charge or theirpeculiar control over the property, are prohibited from acquiringsaid property either directly or indirectly and whether in privateor public sale. They are the: (1) guardians; (2) agents; (3) execu-tors and administrators; (4) public officers and employees; (5)judicial officers, employees and lawyers; and (6) others especiallydisqualified by law. (Rubias vs. Batiller, 51 SCRA 120 [1973].)

The persons disqualified to buy referred to in Articles 1490and 1491 are also disqualified to become lessees of the thingsmentioned thereon. (Art. 1646.)

Reason for prohibitions underArticle 1491.

The disqualifications imposed by Article 1491 on the personenumerated is grounded on public policy considerations whichdisallow the transactions entered into by them, whether directly


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or indirectly, in view of the fiduciary relationship involved or thepeculiar control exercised by these individuals over the proper-ties or rights covered. (Mananquil vs. Villegas, 189 SCRA 335[1990].)

The prohibitions seek to prevent frauds on the part of suchpersons and minimize temptations to the exertion of undue andimproper influence. The fear that greed might get the better ofthe sentiments of loyalty and disinterestedness is the reason un-derlying Article 1491. The law does not trust human nature toresist the temptations likely to arise out of antagonism betweenthe interest of the seller and buyer. (23 Scaevola 403; GregorioAraneta, Inc. vs. Tuazon de Paterno, 91 Phil. 786 [1952].)

Prohibition with respect to guardians.

The relation between guardian and ward is so intimate, thedependence so complete and the influence so great that any trans-action between the two parties entered while the relationshipexists are, in the highest sense, suspicious and presumptivelyfraudulent. This influence is presumed to last while the guardi-an’s functions are to any extent still unperformed, while the prop-erty is still under his control and until the accounts have been fi-nally settled. (39 Am. Jur. 2d 160.)

Prohibition with respect to agents.

The agent’s incapacity to buy his principal’s property rests onthe fact that the agent and the principal form one juridical per-son. Like the guardian, the agent stands in a fiduciary relation withhis principal. A sale made by an agent to himself, directly or indi-rectly, without the permission of the principal is ineffectual. (seeGregorio Araneta, Inc. vs. Tuazon de Paterno, supra; Barton vs.Leyte Asphalt and Mineral Co., 46 Phil. 938 [1924].) The consentof the principal removes the transaction out of the prohibitioncontained in Article 1491(2). (Distajo vs. Court of Appeals, 132SCAD 577, 339 SCRA 52 [2000].)

(1) The incapacity of the agent is only against buying the prop-erty he is required to sell during the existence of the relationship.Therefore, an agent can buy for himself the property after the ter-

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mination of the agency (Valera vs. Velasco, 51 Phil. 695 [1928].) orother properties different from those he has been commissionedto sell. (Moreno vs. Villonea, [C.A.] 40 O.G. 2322.)

(2) Of course, the agent may buy property placed in his handsfor sale or administration if the principal gives his consent thereto.(Cui vs. Cui, 100 Phil. 913 [1957].)

(3) The prohibition does not apply where the sale of the prop-erty in dispute was made under a special power inserted in orattached to the real estate mortgage pursuant to Section 5 of ActNo. 3135, as amended, a special law which governs extra-judicialforeclosure of real estate mortgage. The power to foreclose is not anordinary agency that contemplates exclusively the representationof the principal by the agent but is primarily an authority con-ferred upon the mortgagee for the latter’s own protection. By vir-tue of the exception, the title of the mortgagee-creditor over theproperty cannot be impeached or defeated on the ground that themortgagee cannot be a purchaser at his own sale. (Fiestan vs.Court of Appeals, 185 SCRA 751 [1990].)

Prohibition with respect to executorsand administrators.

The prohibition refers only to properties under the adminis-tration of the executor or administrator at the time of the acquisi-tion and does not extend, therefore, to property not falling withinthis class.

Executors do not administer the hereditary rights of any heir.Such rights do not form part of the property delivered to the ex-ecutor for administration. Consequently, the prohibition in No.(3) of Article 1491 does not apply to a purchase by an executor ofsuch hereditary rights (e.g., 1/10 interest in the estate), even inthose cases in which the executor administers the property per-taining to the estate. (Naval vs. Enriquez, 3 Phil. 669 [1904]; seeGarcia vs. Rivera, 95 Phil. 831 [1954].)

ILLUSTRATIVE CASE:

Administrator sold certain properties of the estate to his son for agrossly low price.


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Facts: S, administrator of the estate of his deceased mother,was authorized by the court to sell certain described propertiesof the estate to settle its outstanding obligations at the best priceobtainable. The sale was made to B, S’s son, for P75,000. On thesame date, B executed a deed of sale of the same property forP80,000 in favor of C. Z, etc., heirs of X, filed an action for theannulment/revocation of the two sales. C claimed that the ac-tual consideration was P225,000 and being a purchaser in goodfaith and for value, his title to the property is indefeasible pur-suant to law. It appears that S entered into a “mutual agree-ment of promise to sell’’ to spouses H and W the property al-ready sold to C for P220,000 for which they paid P70,000 asearnest money.

H and W alleged that both sales to B and C were simulatedand fictitious, made to defraud the estate and other heirs, andthat C supplied the consideration of the sale to B who was notgainfully employed. After several hearings, the court allowedall the interested parties to bid for the property. C offered tobuy for P280,000. H and W counter-offered at P282,000, spotcash, which was increased to P300,000. Later all the parties,except H and W and B, submitted an amicable settlement seek-ing approval of the two sales and accepting the offer of C. Hand W questioned the court’s approval of the amicable settle-ment and the non-acceptance of their offer.

Issue: Did the assent of practically all the heirs to the com-promise agreement justify its approval by the court?

Held: No. (1) Sale is illegal, irregular and fictitious. — As ad-ministrator, S occupies a position of the highest trust and confi-dence. In the discharge of his functions, an administrator shouldact with utmost circumspection to preserve the estate and guardagainst its dissipation so as not to prejudice its creditors andthe heirs of the decedent who are entitled to the net residuethereof. In the case at bar, the sale was made necessary “in or-der to settle other existing obligations of the estate, but it wasmade, of all people, to his son B, and for a grossly low price ofonly P75,000. B had no income whatsoever, was, in fact, still adependent of his father, and not a single centavo of the consid-eration was ever accounted for nor reported by B to the pro-bate court. It was only after the sales were questioned in courtby H and W that B was compelled to admit that the actual con-sideration of the sale to C was P200,000.

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The sale to B was not submitted to the probate court forapproval as mandated by the order authorizing S to sell. Thesale was indubitably illegal, irregular, and fictitious, and thecourt’s approval of the assailed compromise agreement violatedArticle 1409 and “cannot work to ratify a fictitious contractwhich is non-existent and void from the very beginning.”

(2) Consent of heirs not a ground for court’s approval of sale. —The assent of the parties-signatories “to such an illegal schemedoes not legalize the same nor does it impose an obligation uponthe court to approve the same to the prejudice not only of thecreditors of the estate, and of the government by the non-pay-ment of the correct amount of taxes legally due from the estate.”

(3) Offer of H and W more advantageous. — The offer of Hand W “is decidedly more beneficial and advantageous not onlyto the estate, the heirs of the decedent, but more importantly, toits creditors for whose account and benefit the sale was made.No satisfactory and convincing reason appeared given for therejection and non-acceptance of said offer, thus giving rise to awell-grounded suspicion that a collusion of some sort existsbetween the administrator and the heirs to defraud the credi-tors and the government.” (Lao vs. Genato, 137 SCRA 77 [1985].)

Prohibition with respect to public officialsand employees.

The prohibition refers only to properties: (1) belonging to theState, or of any subdivision thereof, or of any government-ownedor -controlled corporation or institution, (2) the administration ofwhich has been entrusted to the public officials or employees.Thus, a provincial governor or treasurer entrusted with the ad-ministration of property belonging to a province cannot buy saidproperty while the school superintendent who has no charge ofthe same is not within the scope of the prohibition.

Note that the prohibition includes judges and governmentexperts who, in any manner, take part in the sale.

ILLUSTRATIVE CASE:

Land foreclosed by GSIS was sold by it at public auction to thewife of a GSIS official.

Facts: For failure to comply with the conditions of sale, GSIScancelled the sale of a parcel of land to MPC and later sold the


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property at public auction to T (as the highest bidder), the wifeof the Chief, Retirement Division, GSIS. MPC questioned thevalidity of the sale to T.

Issue: Does the sale fall under the prohibited transactionsunder Article 1491?

Held: Yes. (1) GSIS official with influence or authority. — “Pub-lic officers who hold positions of trust may not bid directly orindirectly to acquire properties foreclosed by their offices andsold at public auction. A division chief of the GSIS is not anordinary employee without influence or authority. The merefact that the husband of T exercises ample authority with re-spect to a particular activity, i.e., retirement, shows that his in-fluence cannot be lightly regarded. The point is that he is apublic officer and his wife acts for and in his name in any trans-action with the GSIS.

(2) Sale is void. — If he is allowed to participate in the pub-lic bidding of properties foreclosed or confiscated by the GSISthere will always be the suspicion among other bidders andthe general public that the insider official has access to infor-mation and connections with his fellow GSIS officials as to al-low him to eventually acquire the property. It is precisely theneed to forestall such suspicions and to restore confidence inthe public service that the Civil Code declares such transac-tions to be void from the beginning and not merely voidable.

(3) Reasons for prohibition. — The reasons are grounded onpublic order and public policy.2 Assuming the transaction to befair and not tainted with irregularity, it is still looked upon withdisfavor because it places the officer in a position which mightbecome antagonistic to his public duty. (Maharlika BroadcastingCorp. vs. Tagle, 142 SCRA 553 [1986].)

Note: Here, the GSIS official was not entrusted with the ad-ministration of the property in question.

Prohibition with respect to judges, etc.,and lawyers.

The prohibition in Article 1491(5) applies only to the sale orassignment of property which is the subject of litigation to the

2Art. 1409. The following contracts are inexistent and void from the beginning: (1)those whose cause, object or purpose is contrary to law, morals, good customs, publicorder or public policy; x x x.

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persons disqualified therein. For the prohibition to operate, thesale or assignment must take place during the pendency of thelitigation involving the property. (Laig vs. Court of Appeals, 86SCRA 641 [1978]; Valencia vs. Cabanteng, 196 SCRA 302 [1991].)The prohibition applies when, for example, a lawyer has not paidfor the property and it was merely assigned to him in considera-tion of legal services rendered at a time when the property is stillsubject of a pending case. (Ordonio vs. Eduarte, 207 SCRA 229[1992].) The prohibition on purchase is all embracing to includenot only sales to private individuals but also public or judicialsales. (Ramos vs. Ngaseo, 445 SCRA 529 [2004].)

(1) When property considered “in litigation.” — For property tobe considered “in litigation,” it is not required that some contestor litigation over the property should have been tried by the judge.Such property is “in litigation” from the moment it became sub-ject to the judicial action of the judge who afterwards purchasedit. Hence, a purchase made by judge at a public auction of a prop-erty pursuant to an order of execution issued by said judge iswithin the prohibition whether or not the property had been thesubject of litigation in his court. (Gontingco vs. Pobinguit, 35 Phil.81 [1911].)

There is no violation of the prohibition (although it may beimproper under the Canons of Judicial Ethics) where the judgepurchased the property in question after the decision involvingthe property had already become final because none of the par-ties therein filed an appeal within the reglementary period; hence,the same was no longer in litigation. (Macariola vs. Asuncion, 114SCRA 77 [1982].)

(2) Where property acquired by lawyer in foreclosure sale after ter-mination of case. — A lawyer cannot purchase, directly or indirectly,the property or rights which are the subject of litigation in whichhe takes part by virtue of his profession. (see Rubias vs. Satiller,51 SCRA 120 [1973].) The fact that the property in question wasfirst mortgaged by the client to his lawyer and only subsequentlyacquired by the latter in a foreclosure sale long after the termina-tion of the case will not remove it from the scope of the prohibi-tion for at the time the mortgage was executed the relationship oflawyer and client still existed, the very relation of trust and confi-dence sought to be protected by the prohibition, when a lawyer


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occupies a vantage position to press upon or dictate terms to aharassed client. To rule otherwise would be to countenance indi-rectly what cannot be done directly. (Fornilda vs. Regional TrialCourt, 166 SCRA 281 [1988].)

(3) Liability of lawyer for violation of prohibition. — A violationof the prohibition constitutes a breach of professional ethics andmalpractice for which the lawyer may be reprimanded, suspendedor disbarred from the practice of the legal profession. Good faithis not a defense. (In re Attorney Melchor E. Ruste, 70 Phil. 243[1940]; Hernandez vs. Villanueva, 40 Phil. 775 [1920]; Mananquilvs. Villegas, 189 SCRA 335 [1990].)

(4) Where lawyer member of law firm involved. — Contracts ofsale or lease where the vendee or lessee is a partnership, of whicha lawyer is a member, over a property involved in a litigation inwhich he takes by virtue of his profession are covered by the pro-hibition.

(5) Cases not covered. — The prohibition does not include saleof the property of the client effected before it became involved inthe action (Gregorio Araneta, Inc. vs. Tuazon de Paterno, 91 Phil.786 [1952].); nor does it apply to an assignment of the amount ofa judgment made by a person to his attorney in payment of pro-fessional services in other cases (Municipal Council of Iloilo vs.Evangelista, 55 Phil. 290 [1930].); nor to the sale of a parcel ofland, acquired by a client to satisfy a judgment in his favor, to hisattorney as long as the property was not the subject of the litiga-tion. (Daroy vs. Abecia, 100 SCAD 376, 298 SCRA 239 [1998].) Ithas also been held that the law does not prohibit a lawyer fromcharging a contingent fee (to be given in a case the suit is won)based on a certain percentage of the value of the property in liti-gation (Recto vs. Harden, 100 Phil. 427 [1954].), because the pay-ment of said fee is not made during the pendency of the litiga-tion but only after judgment has been rendered in the case han-dled by the lawyer. In fact, under the 1988 Code of ProfessionalResponsibility (Rule 16.03, Canon 10 thereof.), a lawyer may havea lien over funds and property of his client and may apply somuch thereof as may be necessary to satisfy his lawful fees anddisbursements. (Fabillo vs. Intermediate Appellate Court, 195SCRA 28 [1991].)

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Other persons especially disqualified.

Examples of persons especially disqualified by law are:

(1) aliens who are disqualified to purchase private agricul-tural lands (Art. XII, Secs. 3, 7, Constitution; see Krivenko vs.Register of Deeds, 79 Phil. 461 [1947].);

(2) an unpaid seller having a right of lien or having estoppedthe goods in transitu, who is prohibited from buying the goodseither directly or indirectly in the resale of the same at a public orprivate sale which he may make (Art. 1533, par. 5; Art. 1476[4].);and

(3) The officer conducting the execution sale or his deputiescannot become a purchaser, or be interested directly or indirectlyin any purchase at an execution sale. (Sec. 19, Rule 39, Rules ofCourt.)

In the case of aliens, the disqualification is founded on expressprovision of the Constitution and not by reason of any fiduciaryrelationship. It has been held, however, that where a land is soldto an alien who later sold it to a Filipino, the sale to the latter can-not be impugned. In such case, there would be no more publicpolicy to be served in allowing the Filipino seller or his heirs torecover the land as the same is already owned by a qualified per-son. (Herrera vs. Tuy Kim Guan, 1 SCRA 406 [1961]; Godinez vs.Fong Pak Luen, 120 SCRA 223 [1983].)

Effect of sale in violation of prohibition.

If the sale is made, would the transaction be void or merelyvoidable?

(1) With respect to Nos. 1 to 3, the sale shall only be voidablebecause in such cases only private interests are affected. (seeWolfson vs. Estate of Martinez, 20 Phil. 340 [1911].) The defect canbe cured by ratification of the seller. (see Arts. 1392-1396.)

(2) With respect to Nos. 4 to 6, the sale shall be null and void,public interests being involved therein. (see Art. 1409[1]; Rubiasvs. Batiller, 51 SCRA 120 [1973].)

In a case, the Supreme Court affirmed the decision of a lowercourt declaring invalid the sale made by the client in favor of his


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attorney. (Director of Lands vs. Abragat, 53 Phil. 147 [1929]; seeFornilda vs. Regional Trial Court, 166 SCRA 281 [1988].)

Nullity of prohibited contractsdifferentiated.

(1) Public officers, etc., justices, etc., and lawyers. — The nullityof such prohibited contracts, i.e., by public officers and employ-ees of government property entrusted to them and by justices,judges, fiscals, and lawyers of property and rights in litigationssubmitted to or handled by them, under paragraphs (4) and (5) isdefinite and permanent and cannot be cured by ratification. Thepublic interest and public policy remain paramount and do notpermit of compromise or ratification. In this aspect, their disquali-fication is grounded on public policy.

(2) Guardian, agents, and administrators. — The disqualificationof public officers differs from the first three cases of guardians,agents, and administrators, as to whose transactions, it has beenopined that they may be “ratified” by means of and in the formof a new contract, in which case its validity shall be determinedonly by the circumstances at the time of execution of such newcontract.

(a) The causes of nullity which have ceased to exist can-not impair the validity of the new contract. Thus, the objectwhich was illegal at the time of the first contract, may havealready become lawful at the time of the ratification or secondcontract; or the service which was impossible may have be-come possible; or the intention which could not be ascertainedmay have been clarified by the parties.

(b) The ratification or second contract could then be validfrom its execution; however, it does not retroact to the date ofthe first contract. (Director of Lands vs. Abragat, supra.)

ART. 1492. The prohibitions in the two precedingarticles are applicable to sales by virtue of legal re-demption, compromises and renunciations. (n)

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Prohibition extends to sales in legalredemption, etc.

(1) The relative incapacity provided in Articles 1490 and 1491applies also to sales by virtue of legal redemption (see Art. 1619.),compromises, and renunciations.

(a) Compromise is a contract whereby the parties, by recip-rocal concessions, avoid a litigation or put an end to one al-ready commenced. (Art. 2028.) It is the amicable settlement ofa controversy.

(b) By renunciation, a creditor gratuitously abandons hisright against his creditor. The other terms used by the law arecondonation and remission. (see Art. 1270.)

(2) The persons disqualified to buy referred to in Articles 1490and 1491 are also disqualified to become lessees of the thingsmentioned therein. (Art. 1646.)

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Chapter 3

EFFECTS OF THE CONTRACT WHENTHE THING SOLD HAS BEEN LOST

ART. 1493. If at the time the contract of sale is per-fected, the thing which is the object of the contracthas been entirely lost, the contract shall be withoutany effect.

But if the thing should have been lost in part only,the vendee may choose between withdrawing fromthe contract and demanding the remaining part, pay-ing its price in proportion to the total sum agreed upon.(1460a)

Effect of loss of thing at the timeof sale.

The loss or injury referred to in this article is one which hastaken place before or at the time the contract of sale is perfected.It must be distinguished from the loss or injury mentioned inArticles 1480 and 1504 which occurs after the contract is perfectedbut prior to the time of delivery.

(1) Thing entirely lost. — Where the thing is entirely lost at thetime of perfection, the contract is inexistent and void (Art. 1409[3].)because there is no object. (Art. 1318, par. 2.) There being no con-tract, there is no necessity to bring an action for annulment.

(2) Thing only partially lost. — If the subject matter is onlypartially lost, the vendee may elect between withdrawing fromthe contract and demanding the remaining part, paying its pro-portionate price. (Art. 1493, par. 2.)

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EXAMPLES:

(1) S sold his car to B. Unknown to both of them, the carhas been totally destroyed before they agreed on the sale. Inthis case, there is no valid contract of sale for lack of object. S,as owner, bears the loss and B does not have to pay for theprice.

(2) If the car sold is only partially destroyed, there still re-mains of the object. However, since it is not of the character orin the condition contemplated by the parties, the buyer maywithdraw from the contract or demand the delivery of the car,paying its proportionate price.

When a thing considered lost.

The thing is lost when it perishes or goes out of commerce ordisappears in such a way that its existence is unknown or it can-not be recovered. (Art. 1189[2].)

The word “perishes” is sufficiently inclusive as to cover a casewhere there has been material deterioration or complete changein the nature of the thing in such a manner that it loses its formerutility taking into consideration the time the contract was enteredinto. (see 10 Manresa 129.)

ART. 1494. Where the parties purport a sale of spe-cific goods, and the goods without the knowledge ofthe seller have perished in part or have wholly or in amaterial part so deteriorated in quality as to be sub-stantially changed in character, the buyer may at hisoption treat the sale:

(1) as avoided; or

(2) as valid in all of the existing goods or in somuch thereof as have not deteriorated, and as bind-ing the buyer to pay the agreed price for the goods inwhich the ownership will pass, if the sale was divis-ible. (n)

Effect of loss in case of specific goods.

Article 1493 applies to a sale of specific thing. Article 1494, onthe other hand, applies to sales of goods, that is, the object of the

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sale consists of a mass of “specific goods” which means “goodsidentified and agreed upon at the time a contract of sale is made.”(Art. 1636.)

Both articles have actually the same essence providing twoalternative remedies to the buyer in case of deterioration or par-tial loss of the object prior to the sale, namely: to rescind or with-draw from the contract or to give it legal effect, paying the pro-portionate price of the remaining object.

(1) Sale divisible. — The second option is available only if thesale is divisible. (Art. 1494, par. 2.) A contract is divisible when itsconsideration is made up of several parts. (see Art. 1420.) Whenthe consideration is entire and single, the contract is indivisible.

(2) Sale indivisible. — Suppose the sale is not divisible, whatprice is the buyer to pay for the remaining goods if he elects tocontinue with the sale? It is believed that the buyer should bemade to pay only the proportionate price of the remaining goodsas provided for in paragraph 2 of the preceding article. If the saleis indivisible, the object thereof may be considered as a specificthing.

EXAMPLE:

Suppose the subject matter sold was 100 cavans of rice inthe warehouse of S at P1,000.00 per cavan or for a total price ofP100,000.00. If 60 cavans of rice were lost, B may, at his option,withdraw from the contract without the obligation to pay forthe rice; or demand the delivery of the 40 cavans, but bindinghim to pay the agreed price thereof which is P40,000.00.

If the contract is indivisible, that is, the 100 cavans of ricewere sold for P100,000.00 fixed without consideration of thenumber of cavans, B should be made to pay only the propor-tionate price of 40 cavans which is also P40,000.00.

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Chapter 4

OBLIGATIONS OF THE VENDOR

SECTION 1. — General Provisions

ART. 1495. The vendor is bound to transfer theownership of and deliver, as well as warrant the thingwhich is the object of the sale. (1461a)

Principal obligations of the vendor.

The principal obligations of a vendor are:

(1) to transfer the ownership of the determinate thing sold;

(2) to deliver the thing, with its accessions and accessories, ifany, in the condition in which they were upon the perfection ofthe contract (Art. 1537.);

(3) to warrant against eviction and against hidden defects(Arts. 1495, 1547.);

(4) to take care of the thing, pending delivery, with properdiligence (see Art. 1163.); and

(5) to pay for the expenses of the deed of sale, unless there isa stipulation to the contrary. (Art. 1487.)

Obligation to transfer ownership and deliver.

(1) Ownership by vendor at time of perfection of contract not es-sential. — The vendor need not be the owner of the thing at thetime of perfection of the contract; it is sufficient that he has “a rightto transfer the ownership thereof at the time it is delivered.” (Art.1459.) The obligation to transfer ownership and to deliver is re-ally implied in every contract of sale. (see Arts. 1458, 1459, 1547.)

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One who sells something he does not yet own is bound by thesale when he acquires it later. (Bucton vs. Gabar, 55 SCRA 499[1974].)

When a property belonging to a person is unlawfully takenby another, the former has the right of action against the latter forthe recovery of the property. Such right may be transferred by thesale or assignment of the property and the transferee can main-tain such action against the wrongdoer. (Heirs of Q. Seraspi vs.Court of Appeals, 331 SCRA 293 [2000]; Waite vs. Peterson, 8 Phil.235 [1907].)

ILLUSTRATIVE CASE:

Goods which seller warranted as already on the way did not ar-rive.

Facts: B, vendee, gave his consent to the purchase and saleof certain goods on the assertion of S, vendor, stated in the con-tract, that the goods were already on the way. The goods didnot arrive.

Issue: Has S the right to demand from B the payment of theprice?

Held: No. The assertion made by S is a warranty (see Arts.1545, 1546.), the non-fulfillment of which constitutes a breachof contract and deprives him the right to demand of B the pay-ment of the price of the sale. Having elected to bind himself inthat way, S, as vendor, is responsible, even if the prompt trans-portation of the goods does not depend upon him but upon theimporters, for he who contracts and assumes an obligation ispresumed to know the circumstances under which it can becomplied with. (Soler vs. Chesley, 43 Phil. 529 [1922].)

(2) Transfer not essential to perfection of contract. — The trans-fer of ownership and the delivery of the thing sold are not essen-tial to the perfection of the contract. But if the seller does not de-liver at the time stipulated, the buyer may ask for the rescissionof the contract or fulfillment with the right to damages in eithercase. (Art. 1191.)

(3) No obligation to make delivery during period of redemption. —The purchaser in execution sales (see Rules of Court, Rule 39, Secs.30, 35.), however, is not entitled to immediate possession of the

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property sold. The effective conveyance of the land is accom-plished by the deed which is issued only after the period of re-demption has expired. (Flores vs. Lim, 50 Phil. 738 [1927];Gonzales vs. Calimbas and Poblete, 51 Phil. 355 [1927].) In otherwords, the debtor is not obliged to make delivery during the pe-riod of redemption. In all cases of extra-judicial foreclosure sale,the mortgagor may redeem the real property sold within one yearfrom the date of registration of the sale. (see Act No. 3155, Sec. 6.)In judicial foreclosure of real estate mortgage, the general rule isthat the mortgagor cannot exercise his right of redemption afterthe sale is confirmed by the court. (see Rules of Court, Rule 68,Sec. 3.)

(4) Right of vendee to transfer of certificate of title. — In a sale ofregistered land, the vendee has a right to receive and the vendorthe corresponding obligation to transfer to him, not only the pos-session and employment of the land but also the certificate of ti-tle. (Gabila vs. Perez, 169 SCRA 517 [1989].)

(5) Right of buyer to recover the price paid. — The right of a partyto recover the amount given as a consideration has been passedupon in a case where it was held that: “Whenever money is paidupon the representation of the receiver that he has either a cer-tain title in property transferred in consideration of the paymentor a certain authority to receive the money paid, when in fact hehas no such title or authority, then, although there be no fraud orintentional misrepresentation on his part, yet there is no consid-eration for the payment. The money remains, in equity and goodconscience, the property of the payer and may be recovered byhim. (Development Bank of the Phils. vs. Court of Appeals, 65SCAD 82, 249 SCRA 331 [1995], citing Leather ManufacturersNational Bank vs. Merchants National Bank, 128 U.S. 26; 9 S. C.T.5; 32 L. ed., 362.) Therefore, the purchaser is entitled to recoverthe money paid by him where the contract is set aside by reasonof the mutual material mistake of the parties as to the identity orquantity of the land sold. And where the purchaser recovers thepurchase price from a vendor who fails or refuses to deliver thetitle, he is entitled, as a general rule, to interest on the money paidfrom the time of payment. (Ibid., citing Wolfinger vs. Thomas, 22SD 57; 115 NW 100; Robinson vs. Bresslor, 122 Neb. 461; 240 NW564.)

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ART. 1496. The ownership of the thing sold is ac-quired by the vendee from the moment it is deliveredto him in any of the ways specified in articles 1497 to1501, or in any other manner signifying an agreementthat the possession is transferred from the vendor tothe vendee. (n)

Ways of effecting delivery.

The ownership of the thing sold shall be transferred to thevendee upon the delivery thereof (see Art. 1477.) which may beeffected in any of the following ways or modes:

(1) by actual or real delivery (Art. 1497.);

(2) by constructive or legal delivery (Arts. 1498-1501.); or

(3) by delivery in any other manner signifying an agreementthat the possession is transferred to the vendee. (Arts. 1496-1499.)

In all the different modes of delivery, the critical factor whichgives legal effect to the act is the actual intention of the vendor todeliver, and its acceptance by the vendee. The act, without theintention, is insufficient. There is no tradition. (Norkis Distribu-tors, Inc. vs. Court of Appeals, 195 SCRA 694 [1991]; Santos vs.Santos, 156 SCAD 97, 366 SCRA 395 [2001].) Although transfer ofownership is the primary purpose of sale, delivery remains anindispensable requisite as our law does not admit the doctrine oftransfer of ownership of property by mere consent. (People’s In-dustrial & Commercial Corp. vs. Court of Appeals, 88 SCAD 559,274 SCRA 597 [1997].) The delivery must be made to the vendeeor his authorized representative. Where the vendee did not nameany person to whom the delivery shall be made in his behalf, thevendor is bound to deliver exclusively to him. (Lagon vs. HoovenComalco Industries, Inc., 141 SCAD 353, 349 SCRA 363 [2001].)

ILLUSTRATIVE CASE:

For rice sold, vendor was not paid by vendee who sold it to an-other, the second vendee, the latter refusing to return the rice after hewas repaid by first vendee.

Facts: S agreed to sell 170 cavans of rice to B at the price ofP37.25 per cavan, delivery to be made at T’s store. After the

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goods were unloaded at T’s store, S’s driver tried to collect thepurchase price from T as B was nowhere to be found, but Trefused, stating that he had purchased the goods from B atP33.00 per cavan and the price had already been paid to him.

This is a simple case of swindling perpetrated by B at theexpense of S and T. However, three days after delivery, T wasrepaid by B.

Issue: Is T duty bound to return the 170 cavans of rice to Sor to pay its value?

Held: Yes. (1) Sale between B and T voluntarily rescinded by therepayment. — There was a perfected sale. (Art. 1475.) Owner-ship of the rice, too, was transferred to the vendee, B, upon itsdelivery at the place stipulated (Art. 1521.), and pursuant toArticles 1477 and 1496. At the very least, B had a rescissibletitle to the goods for non-payment of the purchase price butwhich had not been rescinded at the time of the sale to T. Hav-ing been repaid the purchase price by B, the sale, as between Band T, had been voluntarily rescinded, and T was thereby di-vested of any claim to the rice. Technically, therefore, he shouldreturn the rice to B.

(2) Rule against unjust enrichment applies. — Since the ricehad not been returned to B who was ready to return the rice toS, it follows that T should return the rice to S. T cannot be al-lowed to unjustly enrich himself at the expense of another byholding on to property no longer belonging to him. (Art. 22.) Inlaw and in equity, therefore, S is entitled to recover the rice, orthe value thereof since he was not paid the price therefor. (Obañavs. Court of Appeals, 135 SCRA 557 [1985].)

Ways of effecting constructive delivery.

(1) Equivalent to actual delivery. — Constructive delivery is ageneral term comprehending all those acts which, although notconferring physical possession of the thing, have been held byconstruction of law equivalent to acts of real delivery. (Banawavs. Mirano, 97 SCRA 517 [1980]; Aguilar vs. Court of Appeals, 129SCAD 274, 335 SCRA 308 [2000].) It may be effected in any of thefollowing ways:

(a) by the execution of a public instrument (Art. 1498,par. 1.);

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(b) by symbolical tradition or traditio symbolica (ibid., par.2.);

(c) by traditio longa manu (Art. 1499.);

(d) by traditio brevi manu (Ibid.);

(e) by traditio constitutum possessorium (Art. 1500.); or

(f) by quasi-delivery or quasi-traditio. (Art. 1501.)

As a specie of constructive delivery, the execution of a publicdocument is also considered a form of symbolic delivery.

(2) Contrary may be stipulated. — The parties, however, maystipulate that ownership in the thing shall pass to the purchaseronly after he has fully paid the price (Art. 1478.) or fulfilled cer-tain conditions. In a contract of absolute sale, ownership is trans-ferred simultaneously with the delivery of the thing sold. (Joseph& Sons Enterprises, Inc. vs. Court of Appeals, 143 SCRA 663[1986].)

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SECTION 2. — Delivery of the Thing Sold

ART. 1497. The thing sold shall be understood asdelivered, when it is placed in the control and pos-session of the vendee. (1462a)

Concept of tradition or delivery.

Tradition is a derivative mode of acquiring ownership by vir-tue of which one who has the right and intention to alienate acorporeal thing, transmits it by virtue of a just title to one who ac-cepts the same. (10 Manresa 122.)

Importance of tradition.

(1) Transfer of ownership. — Article 1496 emphasizes the ne-cessity of tradition for the transfer of ownership of the thing sold.Our law does not admit the doctrine of transfer of property bymere consent. (Chua vs. Court of Appeals, 401 SCRA 54 [2003].)

(a) The ownership over it is not transferred by contractmerely but by delivery, actual or constructive. The critical fac-tor in all the different modes of effecting delivery which giveslegal effect to the act, is the actual intention of the creditor todeliver, and its acceptance by the vendee. (Norkis Distributors,Inc. vs. Court of Appeals, 195 SCRA 494 [1991].)

(b) Contracts only constitute titles or rights to the trans-fer or acquisition of ownership, while delivery or tradition isthe method of accomplishing the same, the title and themethod of acquiring it being different in our law. (Gonzalesvs. Roxas, 16 Phil. 51 [1910].) But, there is no delivery as totransfer ownership where the vendee takes possession of thepersonal property subject matter of the contract of sale by

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stealing the same while in the custody of the vendor or hisagent. (see Aznar vs. Yapdiangco, 13 SCRA 486 [1965].)

(c) It is during the delivery that the law requires the sellerto have the right to transfer ownership of the thing sold. Ingeneral, a perfected contract of sale cannot be challenged onthe ground of the seller’s non-ownership of the thing sold atthe time of the perfection of the contract. (Alcantara-Daus vs.De Leon, 404 SCRA 74 [2003].)

(2) Liability in case of loss. — When the thing subject of the saleis placed in the control and possession of the vendee (Art. 1497.)or his agent, the delivery is complete and the vendee cannot avoidliability in case the thing is subsequently lost without the fault ofthe vendor. (La Fuerza, Inc. vs. Court of Appeals, 23 SCRA 1217[1968]; Phil. Virginia Tobacco Adm. vs. Delos Angeles, 87 SCRA197 [1987]; see Chrysler Phils. Corp. vs. Court of Appeals, 133SCRA 507 [1984].)

(3) Right of vendor to claim payment. — Delivery produces itsnatural effects in law, the principal and most important of whichbeing the transfer of ownership without prejudice to the right ofthe vendor to claim payment of the price. (Ocejo Perez & Co. vs.International Banking Corp., 37 Phil. 631 [1918]; Municipality ofVictorias vs. Court of Appeals, 149 SCRA 32 [1987].)

Where the buyer has not become the owner for lack of deliv-ery, his action is not accion reinvidicatoria but one against the ven-dor for specific performance or rescission, with damages in eithercase. (Art. 1191.)

(4) Consummation of contract. — Delivery of the thing togetherwith the payment of the price, marks the consummation of thecontract of sale.1 (Phil. National Bank vs. Ling, 69 Phil. 611 [1940];

1In a deed of sale of a parcel of land with a deed of mortgage to secure payment ofthe balance of the purchase price, where title has been transferred to the buyer, the rela-tionship between the parties is no longer one of buyer and seller because the contract ofsale has been perfected and consummated. It is already one of a mortgagor and a mort-gagee. In consideration of the buyer’s promise to pay on installment basis the balance ofthe purchase price, the seller has accepted the mortgage as security for the obligation,thereby becoming the mortgagee. The buyer’s (mortgagor’s) breach of the obligationwill not be with respect to the perfected contract of sale but the obligations created bythe mortgage contract. (Suria vs. Intermediate Appellate Court, 151 SCRA 661 [1987].)

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Froilan vs. Pan Oriental Shipping Co., 12 SCRA 276 [1964]; LaFuerza, Inc. vs. Court of Appeals, 23 SCRA 1217 [1968].) Perfec-tion of the contract, on the other hand, relates to the moment whenthe meeting of minds between the parties takes place. (Art. 1475.)

(5) Enjoyment of thing sold. — Delivery is also necessary toenable the vendee to enjoy and make use of the property pur-chased.

Actual delivery of the thing sold.

(1) When deemed made. — There is actual delivery when thething sold is placed in the control and possession of the vendee(Art. 1497.) or his agent. (see Alliance Tobacco Corp., Inc. vs. Phil.Virginia Tobacco Administration, 179 SCRA 336 [1989].) This in-volves the physical delivery of the thing and is usually done bythe passing of a movable thing from hand to hand.

ILLUSTRATIVE CASE:

Bank (pledgee) took possession, as security, of the sugar sold anddelivered by unpaid seller to buyer (pledgor) who subsequently be-came insolvent.

Facts: S sold sugar to B. The sugar was delivered by S intoB’s warehouse, leaving it entirely subject to his control. B, how-ever, failed to make payment after completion of delivery asper agreement. C, a bank, took possession of the sugar pursu-ant to a contract of pledge entered into between the bank and Bto secure the latter’s indebtedness of P20,000. Subsequently, Bbecame insolvent.

Issue: Is S still the owner of the sugar as to entitle him torecovery of its possession?

Held: No. When S delivered the sugar into B’s warehouse,leaving it entirely subject to his control, it is difficult to see howS could have divested himself more completely of the posses-sion of the sugar, or how he could have placed it more com-pletely under the control of the buyer. The fact that the pricehas not yet been paid, in the absence of stipulation, was not,nor could it be an obstacle to the acquisition of ownership by B,without prejudice, of course, to the right of S to claim paymentof the sum due. (Ocejo Perez & Co. vs. International Bank, 37 Phil.631 [1918].)

Art. 1497 OBLIGATIONS OF THE VENDORDelivery of the Thing Sold

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(2) Not always essential to passing of title. — Actual or manualdelivery of an article sold is not always essential to the passing oftitle thereto. (Art. 1475.) The parties to the contract may agreewhen and on what conditions the ownership in the subject of thecontract shall pass to the buyer. As for example, the parties maystipulate that ownership in the thing sold shall pass to the vendeeonly after he has fully paid the price. (Art. 1478.)

ART. 1498. When the sale is made through a pub-lic instrument, the execution thereof shall be equiva-lent to the delivery of the thing which is the object ofthe contract, if from the deed the contrary does notappear or cannot clearly be inferred.

With regard to movable property, its delivery mayalso be made by the delivery of the keys of the placeor depository where it is stored or kept. (1463)

Execution of a public instrumentor document.

(1) Possession transferred to buyer by notarized deed of conveyance.— The execution of a public instrument (i.e., an instrument ordocument attested and certified by a public officer authorized toadminister oath, such as a notary public) as a manner of deliveryapplies to movable as well as immovable property since the lawdoes not make any distinction and it can be clearly inferred bythe use of the word “also” in paragraph 2 of Article 1498. Thismanner of delivery is symbolic. The buyer may use the documentas proof of his ownership of the property sold (Florendo vs. Foz,20 Phil. 388 [1911]; Municipality of Victorias vs. Court of Appeals,149 SCRA 32 [1987]; see Dy, Jr. vs. Court of Appeals, 198 SCRA826 [1991].), for purposes, for example, of mortgaging the same.(Garcia vs. Court of Appeals, 312 SCRA 180 [1999].) Under Arti-cle 1498, possession is transferred to the vendee (or lessee) byvirtue of the notarized deed of conveyance (Ong Ching Po vs.Court of Appeals, 57 SCAD 619, 239 SCRA 341 [1994].) (or lease)including the incorporeal rights appurtenant thereto, e.g., rightto eject tenants or squatters from the property in question. Sincethe execution of the deed of conveyance is deemed equivalent to

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delivery, prior physical delivery or possession is not legally re-quired. Thus, notwithstanding the presence of illegal occupantson the subject property, transfer of ownership by symbolic deliv-ery under Article 1498 can still be effected through the executionof the deed of conveyance. The key word is “control,’’ not pos-session, of the property. (Sabio vs. International Corporate Bank,154 SCAD 377, 364 SCRA 385 [2001].)

(2) Delivery presumptive only. — Under Article 1498, the mereexecution of the deed of sale in a public document is equivalentto the delivery of the property “if from the deed the contrary doesnot appear or cannot clearly be inferred.” Therefore, prior physi-cal delivery or possession is not required. (M.R. Dulay Enterprises,Inc. vs. Court of Appeals, 44 SCAD 297, 225 SCRA 678 [1993].)Article 1498, however, lays down the general rule. It confines it-self to providing that “the execution thereof shall be equivalent”to delivery, which means that there is only a presumptive (notconclusive) delivery which can be rebutted by evidence to thecontrary. (Montenegro vs. Roxas Gomez, 58 Phil. 723 [1932].) Suchpresumption is destroyed when the delivery is not effected be-cause of a legal impediment. Nowhere in the Civil Code is it pro-vided that the execution of a deed of sale is a conclusive presump-tion of delivery of the object of the sale. (Ten Realty and Develop-ment Corp. vs. Cruz, 410 SCRA 484 [2003].)

(a) If it appears from the document or it can be inferredtherefrom that it was not the intention of the parties to makedelivery, no tradition can be deemed to have taken place. Suchwould be the case, for instance, where a certain date is fixedwhen the purchaser should take possession of the thing, orwhere the vendor reserves the right to use and enjoy the prop-erty until a certain period, or where it is stipulated that untilpayment of the last installment is made, the title to the prop-erty should not be deemed to have been transmitted, or wherethe vendor has no control over the thing sold at the momentof the sale, and, therefore, its material delivery could not havebeen made. (Phil. Suburban Dev. Corp. vs. The Auditor Gen-eral, 63 SCRA 397 [1975]; see 10 Manresa 129; Aviles vs. Arcega,44 Phil. 924 [1923]; Addison vs. Felix, 38 Phil. 404 [1918];Masallo vs. Gaspar, 39 Phil. 134 [1918].)


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(b) Presumptive delivery by execution of public instru-ment can also be negated by failure of the vendee to takematerial possession of the land subject of the sale in the con-cept of purchaser-owner. (Danguilan vs. Intermediate Appel-late Court, 158 SCRA 22 [1988]; Pasaqui vs. Villablanca, 68SCRA 18 [1975].) The continued possession by the vendor ofthe property sold may make dubious the contract of sale be-tween the parties. (Santos vs. Santos, 156 SCAD 47, 366 SCRA395 [2001]; Alcos vs. Intermediate Appellate Court, 162 SCRA823 [1988].)

ILLUSTRATIVE CASES:

1. After delivery of possession coupled with execution of thedeed of sale of real property embodied in a public instrument but be-fore its registration and payment of the price, buyer is being maderesponsible for the payment of the realty tax.

Facts: S (PSDC) and B (PHHC, a government corporation)entered into a contract of sale embodied in a public instrumentwhereby S conveyed unto B two parcels of land subject to cer-tain terms and conditions among which that S should registerthe deed of absolute sale and secure a new title in the name ofB before the latter can be compelled to pay the purchase price.

Prior to the signing of the deed, B had acquired possessionof the property with the consent of S. The provincial treasurerrequested B to withhold the amount of P30,000.00 from the pur-chase price to be paid by it to S representing the realty tax dueon the property involved.

Issue: Who is liable to the payment of the real property tax,S or B?

Held: B. When the sale of real property is made in a publicinstrument the execution thereof is equivalent to the deliveryof the thing object of the contract, if from the deed the contrarydoes not appear or cannot clearly be inferred.

(1) Vendee actually placed in possession. — In the case at bar,there is no question that the vendor (S) had actually placed thevendee (B) in possession and control over the property sold,even before the date of the sale.

(2) Payment of price not essential to transfer of ownership. —The condition that S should first register the deed of sale and

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secure a new title in the name of B before the latter shall paythe purchase price, did not preclude the transmission of own-ership. In the absence of an express stipulation to the contrary,the payment of the purchase price of the goods is not a condi-tion precedent to the transfer of title to the buyer, but title passesby the delivery of the goods.

(3) Title transferred to vendee. — Since the delivery of pos-session coupled with the execution of the deed of absolute sale,had consummated the sale and transferred title to B, the pay-ment of the real estate tax after such transfer is the responsibil-ity of the purchaser.2 (Phil. Suburban Dev. Corp. vs. The AuditorGeneral, 63 SCRA 397 [1975].)

———— ———— ————

2. Lessor sold property leased to a third party in violation ofthe “exclusive option to purchase the same,’’ given to lessee who fileda suit for specific performance and annulment of the sale.

Facts: Respondent MT, Inc. leased portions of a commer-cial building together with the land owned by CB, lessor, whichit used as a movie theater. Under two contracts of lease, interalia, MT, Inc. “shall be given 30-days exclusive option to pur-chase the same,’’ if CB should desire to sell the leased premises.

CB sold the building to ERD, petitioner, which receivedrents from MT, Inc. for sometime.

Subsequently, MT, Inc., claiming it had been denied its rightto purchase the leased property in accordance with the leasecontracts with CB, filed a suit for specific performance and an-nulment of sale with prayer to enforce its “exclusive option topurchase’’ the property.

The dispute between MT, Inc., CB and ERD reached theSupreme Court (referred to as “Mother case’’) which rescindedthe absolute sale to ERD, ordered CB to return to ERD the pur-chase price, directed ERD to execute the documents necessaryto return ownership of the disputed lots to CB, and ordered CBto allow MT, Inc. to buy the said lots for P11,300,000. This deci-sion became final and executory on March 17, 1997.

MT, Inc. filed with the trial court a motion for executionwhich was granted. Subsequently, the Clerk of Court of the

2Under Republic Act No. 1322 (Sec. 7 thereof.), however, the PHHC (now NationalHousing Authority) was not subject to real property tax.


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Manila Regional Trial Court, as Sheriff, executed a deed of con-veyance in favor of CB and a deed of sale in favor of MT, Inc.On the basis of these documents, the Registry of Deeds of Ma-nila cancelled ERD’s titles and issued new certificates of title inthe name of MT, Inc.

On September 18, 1997, or after the execution of the deci-sion of the Supreme Court, ERD filed with the Regional TrialCourt an action for collection of a sum of money against MT, towit: (1) the sum of P11,548,941.76 plus legal interest, represent-ing the total amount of unpaid monthly rentals/reasonablecompensation from June 1, 1987 to July 31, 1997; (2) the sums ofP849,567.12 and P458,853.44 a month, plus legal interest asrental/reasonable compensation for the use and occupation ofthe property from August 1, 1997 to May 1, 1997; and (3) thesum of P500,000 as and for attorney’s fees, plus other expensesof litigation, and the costs of the suit.

Issue: Is ERD entitled to back rentals?

Held: No. (1) Rental, a civil fruit of ownership. — “Rent is acivil fruit that belongs to the owner of the property producingit by right of accession. Consequently and ordinarily, the rentalsthat fell due from the time of the perfection of the sale to peti-tioner until its rescission by final judgment should belong tothe owner of the property during that period.’’

(2) Ownership transferred by delivery. — “Ownership of thething sold is a real right, which the buyer acquires only upon de-livery of the thing to him ‘in any of the ways specified in articles1497 to 1501, or in any other manner signifying an agreementthat the possession is transferred from the vendor to the vendee.’This right is transferred, not by contract alone, but by traditionor delivery. Non nudis pactis sed traditione dominia rerumtransferantur. And there is said to be delivery if and when thething sold ‘is placed in the control and possession of the vendee.’Thus, it has been held that while the execution of a public in-strument of sale is recognized by law as equivalent to the de-livery of the thing sold, such constructive or symbolic delivery,being merely presumptive, is deemed negated by the failure ofthe vendee to take actual possession of the land sold.’’

(3) Concept of delivery. — “Delivery has been described asa composite act, a thing in which both parties must join and theminds of both parties concur. It is an act by which one partyparts with the title to and the possession of the property, and

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the other acquires the right to and the possession of the same.In its natural sense, delivery means something in addition tothe delivery of property or title; it means transfer of posses-sion. In the Law on Sales, delivery may be either actual or con-structive, but both forms of delivery contemplate ‘the absolutegiving up of the control and custody of the property on thepart of the vendor, and the assumption of the same by thevendee.’’’

(4) ERD never took actual control and possession of the prop-erty sold to it. — “From the peculiar facts of this case, it is clearthat petitioner never took actual control and possession of theproperty sold, in view of respondent’s timely objection to thesale and the continued actual possession of the property. Theobjection took the form of a court action impugning the salewhich, as we know, was rescinded by a judgment rendered bythis Court in the mother case. It has been held that the execu-tion of a contract of sale as a form of constructive delivery is alegal fiction. It holds true only when there is no impedimentthat may prevent the passing of the property from the hands ofthe vendor into those of the vendee. When there is such im-pediment, ‘fiction yields to reality — the delivery has not beeneffected.’

Hence, respondent’s opposition to the transfer of the prop-erty by way of sale to ERD’s was a legally sufficient impedi-ment that effectively prevented the passing of the property intothe latter’s hands.’’

(5) Presumption of delivery by execution of public instrumentis only prima facie. — “The execution of a public instrument givesrise, therefore, only to a prima facie presumption of delivery.Such presumption is destroyed when the instrument itself ex-presses or implies that delivery was not intended; or when byother means it is shown that such delivery was not effected, because athird person was actually in possession of the thing. In the lattercase, the sale cannot be considered consummated.’’

(6) ERD did not acquire rights to fruits of property. — “How-ever, the point may be raised that under Article 1164 of the CivilCode, ERD, as buyer, acquired a right to the fruits of the thingsold from the time the obligation to deliver the property to pe-titioner arose. That time arose upon the perfection of the Con-tract of Sale on July 30, 1978, from which moment the laws pro-vide that the parties to a sale may reciprocally demand per-


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formance. Does this mean that despite the judgment rescind-ing the sale, the right to the fruits belonged to, and remainedenforceable by, ERD?

Article 1385 of the Civil Code answers this question in thenegative, because ‘[r]escission creates the obligation to returnthe things which were the object of the contract, together withtheir fruits, and the price with its interest; x x x.’ Not only theland and building sold, but also the rental payments paid, ifany, had to be returned by the buyer.’’

(7) Rental payments by MT, Inc. did not mean recognition ofERD’s title. — “The fact that MT, Inc. paid rentals to ERD’s dur-ing the litigation should not be interpreted to mean either ac-tual delivery or ipso facto recognition of ERD’s title. ERD as al-leged buyer of the disputed properties and as alleged succes-sor-in-interest of CB rights as lessor — submitted two ejectmentsuits against MT, Inc. Filed in the Metropolitan Trial Court ofManila, the first was docketed as Civil Case No. 121570 on July9, 1987; and the second, as Civil Case No. 131944 on May 28,1990. MT, Inc. eventually won them both. However, to be ableto maintain physical possession of the premises while await-ing the outcome of the mother case, it had no choice but to paythe rentals. The rental payments made by MT, Inc., should notbe construed as a recognition of ERD as the new owner. Theywere made merely to avoid imminent eviction.’’

(8) General principle that rescissible contract is valid until re-scinded not applicable. — “At bottom, it may be conceded that,theoretically, a rescissible contract is valid until rescinded. How-ever, this general principle is not decisive to the issue of whetherERD ever acquired the right to collect rentals. What is decisiveis the civil law rule that ownership is acquired, not by mereagreement, but by tradition or delivery. Under the factual envi-ronment of this controversy as found by this Court in the mothercase, ERD was never put in actual and effective control or pos-session of the property because of MT, Inc. timely objection.

As pointed out by Justice Holmes, general propositions donot decide specific cases. Rather, ‘laws are interpreted in thecontext of the peculiar factual situation of each case. Each casehas its own flesh and blood and cannot be decided on the basisof isolated clinical classroom principles.’ ”

(9) Sale of ERD not consummated. — “In short, the sale toERD may have been valid from inception, but it was judicially

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rescinded before it could be consummated. Petitioner never ac-quired ownership, not because the sale was void, as errone-ously claimed by the trial court, but because the sale was notconsummated by a legally effective delivery of the property sold.’’

(10)Benefits precluded by ERD’s bad faith. — “Furthermore,assuming for the sake of argument that there was valid deliv-ery, petitioner is not entitled to any benefits from the ‘rescinded’Deed of Absolute Sale because of its bad faith. This being thelaw of the mother case decided in 1996, it may no longer bechanged because it has long become final and executory. x x x.’’(Equatorial and Realty Development, Inc. vs. Mayfair Theater, Inc.,158 SCAD 783, 370 SCRA 56 [2001].)

(3) Sale of thing not subject to control of vendor. — Symbolicdelivery by the execution of a public instrument is equivalent toactual delivery only where the thing is subject to the control ofthe vendor and there is no impediment that may prevent the pass-ing of the property from the hands of the vendor into those of thevendee. Hence, the vendor who executes said public instrumentfails in his obligation to deliver it, if the vendee cannot enjoy itsmaterial possession because of the opposition or resistance of athird person (e.g., squatter) who is in actual possession. The legalfiction yields to reality. It is not enough to confer upon the pur-chaser the ownership and the right of possession. The thing sold mustbe placed in his control in order that it can be said that deliveryhas been effected. (Addison vs. Felix Tioco, 38 Phil. 404 [1918];Power Commercial & Industrial Corp. vs. Court of Appeals, 84SCAD 67, 274 SCRA 597 [1997].)

In other words, a seller cannot deliver constructively if hecannot actually deliver even if he wants to. Of course, if the salehad been made under the express agreement of imposing uponthe vendee the obligation to take the necessary steps to obtain thematerial possession of the thing sold and if it were proven thathe knew that the thing was in the possession of a third personclaiming to have property rights thereon, such agreement wouldbe perfectly valid. (Ibid.)

(4) Sale of registered land. — The provisions of Article 1498 re-garding passing of title upon delivery by execution of a publicinstrument must be deemed modified by the provisions of the


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Property Registration Decree (Pres. Decree No. 1529.) insofar asregistered land is concerned. Section 51 of the decree is very clearthat no deed purporting to convey or affect registered land, shalltake effect as a conveyance or bind the land (as against third per-sons) until its registration. In accordance with this section, no actof the parties can transfer the ownership of real estate under theTorrens System. That is done by the act of registration of the con-veyance which the parties have made. (see Tuazon vs. Raymundo,28 Phil. 635 [1914]; Manuel vs. Rodriguez, 109 Phil. 1 [1960].)

(5) Possession of a part as constructive possession of whole. —Where apart from the delivery de jure of a land sold by symbolictradition resulting from the execution of a public instrument ofsale, the evidence shows that the purchaser took actual posses-sion of the considerable portion of the land sold by the exerciseof possessory acts of clearing the area of trees and of cultivatingthe same through tenants, such possession and cultivation of apart is logically and legally constructive possession of the whole.(Ramos vs. Director of Lands, 39 Phil. 175 [1918].)

Symbolic tradition.

Constructive delivery is symbolic when to effect the delivery,the parties make use of a token symbol to represent the thingdelivered.

The delivery of the key where the thing sold is stored or keptis equivalent to the delivery of the thing (par. 2.) because the keyrepresents the thing. Similarly, there is symbolic delivery of goodsto vendee upon delivery to him of delivery orders (see Art.1636[1].) which would authorize him to withdraw the goods froma warehouse. Upon withdrawal, there is actual delivery (supra.)which consummates the sale. (Lim Yhi Luya vs. Court of Appeals,99 SCRA 668 [1980].)

ART. 1499. The delivery of movable property maylikewise be made by the mere consent or agreementof the contracting parties, if the thing sold cannot betransferred to the possession of the vendee at the timeof the sale, or if the latter already had it in his posses-sion for any other reason. (1463a)

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Traditio longa manu.

The first part of Article 1499 refers to traditio longa manu.

This mode of delivery takes place by the mere consent oragreement of the contracting parties as when the vendor merelypoints to the thing sold which shall thereafter be at the controland disposal of the vendee.

It should be noted that delivery “by the mere consent or agree-ment of the contracting parties” is qualified by the phrase “if thething sold cannot be transferred to the possession of the vendeeat the time of the sale.”

Traditio brevi manu.

This mode of legal delivery happens when the vendee hasalready the possession of the thing sold by virtue of another titleas when the lessor sells the thing leased to the lessee. Instead ofturning over the thing to the vendor so that the latter may, in turn,deliver it, all these are considered done by action of law.

ART. 1500. There may also be tradition constitutumpossessorium. (n)

Traditio constitutum possessorium.

This mode of delivery is the opposite of traditio brevi manu.

It takes place when the vendor continues in possession of theproperty sold not as owner but in some other capacity, as for ex-ample, when the vendor stays as a tenant of the vendee. In thiscase, instead of the vendor delivering the thing to the vendee sothat the latter may, in turn, deliver it back to the vendor, the lawconsiders that all these have taken place by mere consent or agree-ment of the parties. (see Amig vs. Teves, 96 Phil. 252 [1954];Bautista vs. Sioson, 39 Phil. 615 [1919]; Carbonell vs. Court ofAppeals, 69 SCRA 99 [1970]; see 10 Manresa 124.)

ART. 1501. With respect to incorporeal property,the provisions of the first paragraph of article 1498shall govern. In any other case wherein said provi-sions are not applicable, the placing of the titles of

Arts. 1500-1501 OBLIGATIONS OF THE VENDORDelivery of the Thing Sold

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ownership in the possession of the vendee or the useby the vendee of his rights, with the vendor’s con-sent, shall be understood as a delivery. (1464)

Quasi-traditio.

Tradition can only be made with respect to corporeal things.In the case of incorporeal things, delivery is effected:

(1) by the execution of a public instrument; or

(2) when that mode of delivery is not applicable, by the plac-ing of the titles of ownership in the possession of the vendee; or

(3) by allowing the vendee to use his rights as new owner withthe consent of the vendor.

This mode of delivery of incorporeal things or rights is knownas quasi-traditio. Thus, the delivery to a person of a negotiabledocument of title in which it is stated that the goods referred totherein will be delivered to the bearer amounts to delivery of thegoods to such person. (Arts. 1507, 1508.)

ILLUSTRATIVE CASES:

1. Property, title papers to which were delivered by debtor tocreditor as security for a debt, was included in the inventory of theestate of debtor upon his death.

Facts: S owed B money and as security therefor deliveredto B the title papers over four parcels of land. It was orally agreedthat since S had no money, B was to have the land, permitting Sto cultivate upon condition that, after deducting expenses, 1/2of the products was to go to B.

Then S died and the four parcels were included in the in-ventory of the estate of S. B brought action to exclude themfrom the inventory.

Issue: Is there delivery of the property in contemplation oflaw?

Held: Yes. The land should have been excluded in the in-ventory. The contract made between S and B although not inwriting, was valid and the delivery of the title deeds of the prop-erty was equivalent in its effect to a delivery of the propertyitself. (Marella vs. Reyes & Paterno, 12 Phil. 1 [1908].)

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2. Before the sale at public auction, the property in questionwas sold by the owner who merely delivered the title deeds thereof tothe first purchaser.

Facts: The lot and warehouse standing thereon belongingto S were sold at public auction by the sheriff to B. D claimedthat the property was sold by S long before the auction sale toC who, in turn, sold it to D. S merely delivered the title deedsto C but remained in possession as lessee. C also delivered thetitle deeds to D. D brought action for the recovery of the lotand warehouse.

Issue: Is there delivery of the property in contemplation oflaw?

Held: Yes. Although there was no material delivery of theproperty, “the placing of the titles of ownership in the posses-sion of the vendee or the use which he may make of his rightwith the consent of the vendor shall be considered as deliv-ery.” (Tablante vs. Aquino, 28 Phil. 35 [1914].)

Note: The Supreme Court in both cases cited Article 1464 ofthe Spanish Civil Code. (Art. 1501 of our Civil Code.) It is sub-mitted that Article 1501 refers to delivery merely of incorpo-real rights. The result arrived at, however, may be sustained inthat the delivery of the title deeds may be considered a sym-bolical delivery, as the delivery of the key to a house consti-tutes a delivery of said house.

Intention to deliver and to accepta transfer of possession.

(1) In all the forms of delivery, it is necessary that the act becoupled with the intention of delivering the thing. For instance,there is no constructive delivery, where the keys to the place wherethe thing is deposited are delivered to the vendee in order onlythat he may examine it or the titles of ownership of property areplaced in the possession of the vendee for his study or inspectionbut not with the intention of making the delivery. The act, with-out the intention to deliver, is insufficient. (see 10 Manresa 132.)Similarly, the issuance of a sales invoice does not prove transferof ownership of the thing sold to the buyer. An invoice is nothingmore than a detailed statement of the nature, quality and cost of


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the thing sold and has been considered not a bill of sale. (NorkisDistributors, Inc. vs. Court of Appeals, 193 SCRA 694 [1991]; P.T.Cerna Corp. vs. Court of Appeals, 221 SCRA 19 [1993].)

(2) For the same reason, any act, although not provided forin the preceding articles, but accompanied by the evident inten-tion of the vendor to deliver or of the vendee to receive the thingsold, will be considered as constituting tradition. It is the inten-tion which is essential. (ibid.) It is a well-established rule that amere contract for the sale of goods, where nothing remains to bemade by the vendor, as when the parties agreed that the deliveryof the logs should be made alongside a vessel of the vendee andthat was done by the vendor, transfers the right of property al-though the price has not been paid, nor the thing sold actuallydelivered to the vendee whose employees attempted to load themin the vessel but failed to do so for want of the proper loadingequipment. (Bean Admir vs. Cadwallader Co., 10 Phil. 606 [1908].)

In other words, in all the different modes of effecting deliv-ery, it is the real intention of the parties, to deliver on the part ofthe vendor, and to accept on the part of the vendee, which giveslegal effect to the act. Without such intention, there is no tradi-tion. (see Abuan vs. Garcia, 14 SCRA 759 [1965]; Norkis Distribu-tors, Inc. vs. Court of Appeals, supra.)

ART. 1502. When goods are delivered to the buyer“on sale or return” to give the buyer an option toreturn the goods instead of paying the price, the own-ership passes to the buyer on delivery, but he mayrevest the ownership in the seller by returning or ten-dering the goods within the time fixed in the contract,or, if no time has been fixed, within a reasonable time.(n)

When goods are delivered to the buyer on approvalor on trial or on satisfaction, or other similar terms,the ownership therein passes to the buyer.

(1) When he signifies his approval or acceptanceto the seller or does any other act adopting the trans-action;

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(2) If he does not signify his approval or accept-ance to the seller, but retains the goods without giv-ing notice of rejection, then if a time has been fixedfor the return of the goods, on the expiration of suchtime, and, if no time has been fixed, on the expirationof a reasonable time. What is a reasonable time is aquestion of fact. (n)

Contract of sale or return, and of sale ontrial or approval or satisfaction.

(1) In general. — It is evidently possible for the parties to agreethat the buyer shall temporarily take the goods into his posses-sion to see whether they are satisfactory to him and that if theyare not, he may refuse to become owner. It is clear also that thesame object may be attained by an agreement that the propertyshall pass to the buyer on delivery but that he may return thegoods if they are unsatisfactory. The question is one of fact in everycase whether the parties intend to make approval a condition,without which the ownership shall not pass, or whether their in-tent is that the ownership shall pass at once with the right to re-turn the goods.3 (see 2 Williston, op. cit., pp. 30-33.)

The question of what is a reasonable time for the return of theproperty is one of fact to be determined upon the particular cir-cumstances of the case. The duty of the buyer with regard to thereturn of the goods requires, ordinarily, that they be returned inthe same or substantially the same condition in which they werewhen the contract was made. Undoubtedly, if they are injured ordamaged substantially through negligence or misuse of the buyer,his right to return is lost and the sale becomes absolute. (Ray vs.Thompson, 12 Cush [Mass.] 281, 59 Am. Dec. 187.)

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


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(2) Sale or return. — It is a contract by which property is soldbut the buyer, who becomes the owner of the property on deliv-ery, has the option to return the same to the seller instead of pay-ing the price.

(a) Under this contract, the option to purchase or returnthe goods rests entirely on the buyer without reference to thequality of the goods. The buyer may revest the ownership inthe seller by returning or tendering the goods within the timefixed in the contract, or, if no time has been fixed, within areasonable time (Art. 1502, par. 1.); otherwise, the sale becomesabsolute and the buyer is liable for the price. The seller can-not, in this type of sale, prevent the revesting of title by refus-ing to accept the return of the property.

(b) Since title passes to the buyer on delivery, the loss ordestruction of the property prior to the exercise of the buyer’soption to return falls upon him and renders him responsibleto the seller for the purchase price or such part thereof as re-mains unpaid. (Art. 1504; 46 Am. Jur. 647.) The word “return”itself implies a previous transfer of title.

(3) Sale on trial or approval. — It is a contract in the nature ofan option to purchase if the goods prove satisfactory, the approvalof the buyer being a condition precedent. (77 C.J.S. 938.)

(a) In this kind of contract, the title shall continue in theseller until the sale has become absolute either by the buyer’sapproval of the goods, or by his failing to comply with theexpress or implied conditions of the contract as to giving no-tice of dissatisfaction or as to returning the goods (Ibid., 655;Art. 1502, Nos. 1 and 2.), or by his doing any other act adopt-ing the transaction such as mortgaging the property or sell-ing it to a third person.

(b) For the reason that the title to the goods does not passand the relationship between the seller and the purchaser isthat of bailor and bailee, the risk of loss or injury to the articlepending the exercise by the buyer of his option to purchaseor return it, is upon the seller except as the buyer may be atfault in respect of the care and condition of the article, or mayhave agreed to stand the loss. (see 67 Am. Jur. 2d 430-431.)

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(c) The buyer cannot accept part and reject the rest of thegoods since this falls outside the normal intent of the parties.(Industrial Textile Manufacturing Co. vs. LPJ Enterprises, Inc.,supra.)

“Sale or return” distinguished from sale on trial.

The distinctions are the following:

(1) “Sale or return” is a sale subject to a resolutory condition,while sale on trial is subject to a suspensive condition;

(2) “Sale or return” depends entirely on the will of the buyer,while sale on trial depends on the character or quality of the goods;

(3) In “sale or return,” the ownership of the goods passes tothe buyer on delivery and subsequent return of the goods revertsownership in the seller, while in sale on trial, the ownership re-mains in the seller until the buyer signifies his approval or accept-ance to the seller; and

(4) In “sale or return,” the risk of loss or injury rests upon thebuyer, while in sale on trial, the risk still remains with the seller.

Note: Article 1502 uses the phrase “on sale or return.” If thecontract uses instead the phrase “for sale or return,” the inten-tion may be to enter into a contract of agency.

ART. 1503. Where there is a contract of sale ofspecific goods, the seller may, by the terms of thecontract, reserve the right of possession or owner-ship in the goods until certain conditions have beenfulfilled. The right of possession or ownership maybe thus reserved notwithstanding the delivery of thegoods to the buyer or to a carrier or other bailee forthe purpose of transmission to the buyer.

Where goods are shipped, and by the bill of lad-ing the goods are deliverable to the seller or his agent,or to the order of the seller or of his agent, the sellerthereby reserves the ownership in the goods. But if,except for the form of the bill of lading, the ownershipwould have passed to the buyer on shipment of the


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goods, the seller’s property in the goods shall bedeemed to be only for the purpose of securing per-formance by the buyer of his obligations under thecontract.

Where goods are shipped, and by the bill of lad-ing the goods are deliverable to the order of the buyeror of his agent, but possession of the bill of lading isretained by the seller or his agent, the seller therebyreserves a right to the possession of the goods asagainst the buyer.

Where the seller of goods draws on the buyer forthe price and transmits the bill of exchange and bill oflading together to the buyer to secure acceptance orpayment of the bill of exchange, the buyer is boundto return the bill of lading if he does not honor the billof exchange, and if he wrongfully retains the bill oflading he acquires no added right thereby. If, how-ever, the bill of lading provides that the goods aredeliverable to the buyer or to the order of the buyer,or is indorsed in blank, or to the buyer by the con-signee named therein, on who purchases in good faith,for value, the bill of lading, or goods from the buyerwill obtain the ownership in the goods, although thebill of exchange has not been honored, provided thatsuch purchaser has received delivery of the bill of lad-ing indorsed by the consignee named therein, or ofthe goods, without notice of the facts making thetransfer wrongful. (n)

When ownership not transferredupon delivery.

This article relates to a sale of specific goods. (see Arts. 1494,1636.) As a general rule, the ownership in the goods sold passesto the buyer upon their delivery to the carrier. There are, how-ever, certain exceptions and they are:

(1) if a contrary intention appears by the terms of the contract(Arts. 1523, par. 1; 1503, par. 1; see Art. 1478.);

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(2) in the cases provided in the second and third paragraphsof Article 1523; and

(3) in the cases provided in the first, second, and third para-graphs of Article 1503.

Transfer of ownership where goods solddelivered to carrier.

(1) General rule. — As stated above, the general rule is thatdelivery, be it only constructive, passes title in the thing sold (seeArt. 1496.); and delivery to the carrier is deemed to be a deliveryto the buyer. (Art. 1523, par. 1.) The risk of loss, therefore, as be-tween the buyer and the seller, falls upon the buyer. The theoryupon which the law is based is perfectly simple. If a seller con-signs goods to another specified person it indicates an intentionto deliver to the carrier as bailee for the person named, and, if suchshipment was authorized by that person as a buyer, the owner-ship vests in him. The same result follows it, after the goods havebeen shipped without a named consignee, the carrier at the con-signor’s request, agrees to deliver to a specified person.

(2) Where right of possession or ownership of specific goods soldreserved. — On the other hand, if the seller directs the carrier toredeliver the goods at their destination to the seller himself, or tohis order, it indicates an intention that the carrier shall be the baileefor the seller and the ownership will remain in the latter. (see 2Williston, op. cit., p. 147.) The seller may, by the terms of the con-tract, reserve the right of possession or ownership in the goodsuntil certain conditions are fulfilled. (Art. 1505, par. 1.)

Where seller or his agent is consignee.

(1) Carrier becomes bailee for seller. — Where goods are shippedand by the bill of lading4 (see Art. 1507.), the goods are deliver-

4Logically, since a bill of lading acknowledges receipt of goods to be transported,delivery of the goods to the carrier normally precedes the issuance of the bill; or to someextent, delivery of the goods and issuance of the bill are regarded in commercial prac-tice as simultaneous acts. However, except as may be prohibited by law, there is nothingto prevent an inverse order of events, that is, the execution of the bill even prior to actualpossession and control by the carrier of the cargo to be transported. There is no suchlaw. (Saludo, Jr. vs. Court of Appeals, 207 SCRA 198 [1992].)


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able to the seller or his agent or to the order of the seller or hisagent, the seller thereby reserves the ownership in the goods (par.2.) and the carrier is a bailee for him and not the buyer. This prin-ciple is applicable even though the goods are shipped on the buy-er’s vessel.

(2) Rights of seller. — The seller may not only retain the goodsuntil the buyer performs his obligation under the contract, buthe may, even in violation of the contract, dispose of them to thirdpersons. If the seller does this, of course, he is liable for damagesto the buyer but the second purchaser from the seller acquires abetter right. (see 2 Williston, op. cit., pp. 152-153.)

Where seller’s title only for purposeof security.

(1) Form of bill of lading not conclusive. — The form in whichthe bill of lading is taken is not always conclusive. The specifica-tion in the bill of lading to the effect that the goods are deliver-able to the order of the seller or his agent does not necessarilynegate the passing of title to the goods upon delivery to the car-rier. (Butuan Sawmill, Inc. vs. Court of Tax Appeals, 16 SCRA 715[1966].)

(2) Where ownership would have passed but for the form of bill oflading. — The circumstances may be such that were it not for theform of the bill of lading, the ownership would have passed tothe buyer or shipment of the goods. (par. 2, 2nd sentence.) This istrue when the object of the seller in reserving ownership is sim-ply to secure himself in regard to the performance by the buyerof the latter’s obligation. By shipping the goods, the seller hasdefinitely lost all use of them to the buyer. If the shipper could beperfectly sure that the buyer would fulfill his obligation, it canhardly be doubted that he would have made a straight consign-ment to the latter. (see 2 Williston, op. cit., pp. 155-156.)

Significance where title heldmerely as security.

The importance of distinguishing between a title held merelyfor the purpose of security and the ordinary case where the sellerretains ownership are two-fold:

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(1) Risk of loss on buyer. — In the first place, the beneficialowner (buyer), not the one who holds for security (seller), will besubject to the risk of loss or deterioration (see Lawyers Coopera-tive Publishing Co. vs. Tabora, 13 SCRA 762 [1965].) from the timethe goods are delivered to the carrier even though the legal titleremains in the seller. That the risk should be borne by the buyerif the seller retains title merely to secure performance by the buyerof his obligations under the contract is a consequence of the theorythat such a bargain is, in effect, although not in form, a sale to thebuyer and a mortgage back by him of the goods to secure the price.The title does not pass to the buyer until he receives the order billof lading properly indorsed. (2 Williston, op. cit., p. 219.)

(2) Buyer’s right of action based on ownership. — In the secondplace, the buyer has more than a mere contract right in regards tothe goods. (Ibid., p. 157.) As beneficial owner, he may, as againstany one except an innocent purchaser for value of the bill of lad-ing from the consignee, bring an action based on ownership onmaking tender of the price.

Where buyer or his agent is consigneebut seller retains order bill of lading.

Where goods are shipped and by the bill of lading the goodsare deliverable to the order of the buyer or of his agent, but pos-session of the bill of lading is retained by the seller or his agent,the seller thereby retains a right to the possession of the goods asagainst the buyer. (par. 3.)

(1) Effect of retention. — Although the property in the goodswill ordinarily pass to the buyer on delivery, the latter is unableto obtain the goods without the bill. The effect of the retention ofthe bill of lading, under such circumstances, controlling as it doesthe possession of the goods, is, therefore, closely analogous to theretention of a lien by the seller after the property has passed tothe buyer. (Ibid., p. 163.)

(2) Surrender of order bill necessary. — The carrier cannot becompelled to surrender possession of the goods until the orderbill (properly indorsed) has been surrendered. In an order bill, itcannot with certainty be determined who is the person named to


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whose order the goods are deliverable unless the bill of ladingitself is presented.

(3) Identification of consignee sufficient in case of straight bill. —On the other hand, the shipper who issues a straight bill of lad-ing (goods are by its terms deliverable not to the order of the con-signee but to the consignee only) ordinarily does not require thesurrender of the bill by the consignee in order for the latter to getthe goods. The consignee need only to identify himself. Hence,where the buyer is the consignee, the seller must use an order billof lading. (see Ibid., pp. 162-163.)

Where a third person who retainsthe bill is consignee.

Two devices have already been considered by which the sellerof goods retains a hold upon them by means of the bill of ladingafter he has shipped them; first, by consigning the goods to him-self, either by an order bill or a straight bill and second, by con-signing the goods to the order of the buyer and retaining posses-sion of the bill of lading.

A third method also in common use is to consign the goodsto a third person (usually a banker) requesting the latter to retainthe bill of lading or goods until payment of the price. When theprice is paid, the consignee of the goods indorses the bill or de-livers the goods to the buyer.

(1) Immaterial whether bill an order or straight bill. — For thesuccess of this third device, it is immaterial, so far as the protec-tion of the seller is concerned, whether the bill is a straight bill oran order bill.

(a) If it is an order bill, the carrier will not deliver the goodsuntil the bill is surrendered and the buyer cannot get it so asto make the necessary surrender except from the holder, theconsignee.

(b) Even if it is not an order bill, the carrier, though it maynot require the surrender of the bill of lading, will deliver onlyto the consignee. Accordingly, the buyer in either event, isunable to get them except by obtaining an order from theholder of the bill of lading.

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(2) Legal title vested in third person. — By naming a third per-son as consignee of the bill of lading, the seller vests a legal titlein the third person. This title is held merely for the benefit of theseller if the third person is the seller’s agent only and has notadvanced money of his own to the seller. Frequently, however,the third person is a banker and by discounting a draft drawn onthe buyer by the shipper, or under an arrangement with the buyerby paying or accepting a draft drawn on himself, has acquired apersonal interest in the goods. (Ibid., pp. 164-165.)

(3) Risk of loss on buyer. — The buyer as is true where the sellerconsigns the goods to himself, or his agent, or to a third person,bears the risk of loss.

Where bill of lading sent forwardwith draft attached.

Where the seller draws on the buyer for the price and trans-mits the bill of exchange and the bill of lading together to the buyerto secure acceptance or payment of the bill of exchange (par. 4.),the title is regarded as retained in the seller until the bill of ex-change is paid. The fact that the bill of lading and a bill of exchangeare attached together indicates that the seller intends to make thedelivery of the goods conditional upon the payment or accept-ance of the draft.

(1) Duty of buyer if draft not paid. — The buyer is bound to re-turn the bill of lading if he does not honor the bill of exchange. Ifhe wrongfully retains the bill of lading, he acquires no additionalright thereby. In carrying out the device in question, it is custom-ary to send the bill of lading with the draft attached thereto tosome person other than the buyer, for if the bill of lading and thedraft are sent directly to the buyer, the latter may obtain the goodswithout paying the draft and the seller, even if he has a good rightof action against the buyer on this account, is compelled to enterupon litigation in order to enforce his rights, whereas if the bill oflading and draft are sent through the third person, ordinarily abank, the buyer is unable to obtain the goods without paying theprice. (see Ibid., pp. 178-180.)

(2) Effect of buyer obtaining possession of bill of lading withouthonoring draft. — As regard third persons, however, if the bill of


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lading provides that the goods are deliverable to the buyer or tothe order of the buyer (Art. 1507.), or is indorsed in blank (Art.1508[2].), or is indorsed to the buyer by the consignee namedtherein (Art. 1509.), a purchaser in good faith for value of the billof lading or goods from the buyer will obtain the ownership inthe goods although the bill of exchange has not been honored.

Distinctions in regard to the formof the bill of lading.

They must here be observed:

(1) If the seller has named the buyer as consignee, the prop-erty has passed to the consignee or at least it seems to have beenso to one who inspects the document;

(2) If the bill of lading, though naming the seller as consignee,is indorsed by him to the buyer or in blank, the possession of thedocument by the buyer gives him, if not the actual title, at leastan apparent ownership; and

(3) If the bill of lading names the seller or a third person asconsignee and no indorsement of the document had been made,possession by the buyer would not indicate that the buyer hadtitle.

Where the document gives the buyer apparent ownership anda third person purchases the goods relying thereon, it seems clearon broad principles of justice that since one of two innocent par-ties must suffer, he should suffer whose act has brought about theloss. Consequently, the seller ought not to be allowed to recoverthe goods from the third person. (see Ibid., pp. 191-192.)

ART. 1504. Unless otherwise agreed, the goodsremain at the seller’s risk until the ownership thereinis transferred to the buyer, but when the ownershiptherein is transferred to the buyer, the goods are atthe buyer’s risk whether actual delivery has been madeor not, except that:

(1) Where delivery of the goods has been made tothe buyer or to a bailee for the buyer, in pursuance ofthe contract and the ownership in the goods has been

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195

retained by the seller merely to secure performanceby the buyer of his obligations under the contract,the goods are at the buyer’s risk from the time of suchdelivery;

(2) Where actual delivery has been delayedthrough the fault of either the buyer or seller the goodsare at the risk of the party in fault. (n)

Risk of loss generally attends title.

As a general rule, if the thing is lost by fortuitous event, therisk is borne by the owner of the thing at the time of the loss un-der the principle of res perit domino. (see Chrysler Phils. Corp. vs.Court of Appeals, 133 SCRA 567 [1984].) Article 1504 above statesthe exceptions.

(1) Where the seller reserves the ownership of the goodsmerely to secure the performance by the buyer of his obligationsunder the contract, the ownership is considered transferred to thebuyer who, therefore, assumes the risk from the time of delivery.(see Lawyers Cooperative Publishing Co. vs. Tabora, 13 SCRA 762[1965].)

(2) Where actual delivery had been delayed through the faultof either the buyer or seller, the goods are at the risk of the partyat fault with respect to any loss which might not have occurredbut for such fault. In this case, the law punishes the party at fault.

Risk of loss by fortuitous event afterperfection but before delivery.

(1) Conflict between Article 1480 and Article 1504. — UnderArticle 1480, if the thing sold is lost after perfection of the con-tract but before its delivery, that is, even before the ownership istransferred to the buyer, the risk of loss by fortuitous event with-out the seller’s fault is borne by the buyer as an exception to therule of res perit domino. Consequently, the buyer’s obligation topay the price subsists if he has not yet paid the same or if he had,he cannot recover it from the seller although the latter’s obliga-tion to deliver the thing is extinguished by its loss.


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However, the first paragraph of Article 1504 which has beeninserted in our Civil Code presents a contrary rule. Taken fromthe American law on sales (Sec. 22 of the Uniform Sales Act.), itprovides that: “Unless otherwise agreed, the goods remain at theseller’s risk until the ownership therein is transferred to thebuyer.” By Article 1480, as already pointed out, the risk of loss ofthe thing after perfection is shifted from the seller to the buyereven though the buyer has not yet acquired ownership thereof.

(2) Solution suggested to avoid conflict. — A solution has beensuggested to avoid the conflict, to wit: Article 1504 should be re-stricted in its application to sale of “goods” as this term is definedin Article 1636, and Article 1480, to sales of “things” which can-not be called “goods,” as for the example, to sales of real estate.This would make Article 1480 the general rule on risk of loss andArticle 1504, the exception. By this conclusion, it is claimed, thecardinal rule of statutory construction that all provisions of a lawshould, as much as possible, be given effect is satisfied; for to saythat there is an irreconcilable conflict between Article 1480 andArticle 1504 is to render either of them useless.

(3) Article 1480 states the correct rule. — It is submitted thatArticle 1480 is the correct rule governing loss of thing sold afterthe perfection of the contract in view of the following:

(a) The opinion of Manresa (an eminent Spanish commen-tator on the Spanish Civil Code upon which our Civil Code isbased) that the obligation of the buyer to pay the price is notextinguished by the loss of the thing before delivery is the set-tled construction of Article 1452 (now Art. 1480.) and this opin-ion is well known to the Code Commission which preparedthe draft of the Civil Code. It is to be presumed that Congress,which passed the Civil Code, a majority of whose memberswere lawyers, was likewise familiar with Manresa’s opinion.Aside from Manresa, “many writers on the Spanish Civil Codeincluding Castan, Fabres, Von Tuhr, Bonet, and De Buen, be-lieve that the buyer bears the loss and he must pay the price”(A.M. Tolentino, Civil Code of the Philippines, 1959 ed., Vol.V, p. 22.);

(b) Article 1480 follows the Roman Law rule “that risk ofthe thing sold passes to the buyer even though the thing hasnot yet been delivered to the buyer”;

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(c) A reading of Article 1189 in relation to Article 1538 (in-fra.), shows that Article 1480 is in consonance with Article 1189(see Art. 1538.);

(d) Article 1504 cannot be reconciled with Articles 1480and 1189, unless Article 1504 is applied only to sale of “goods.”It must be noted, however, that Article 1480 applies also to saleof fungible goods. (par. 2.) Furthermore, there is nothing tojustify the exclusion of “goods” from the sales of “things” asthe latter term is used in Article 1480 and several scatteredprovisions of our present law on sales;

(e) In case of improvement, the rule is that it should per-tain to the buyer. (Art. 1189[5].) This is a counterpart of the riskwhich the buyer assumes for the loss of the thing;

(f) Furthermore, under Article 1537 (infra.), the fruits per-tain to the vendee from the perfection of the contract. The sameright is given to the vendee under Article 1164 which togetherwith Articles 1165 and 1262, is referred to in Article 1480 asgoverning the question being discussed;

(g) Article 1165, paragraph 3, states:

“If the obligor delays, or has promised to deliver the samething to two or more persons who do not have the same in-terest, he shall be responsible for any fortuitous event until hehas effected the delivery.”

Arguing a contrario, if the obligor (seller) is not guilty of delayand has not promised to deliver the thing sold to two or morepersons, he shall not be responsible for loss due to a fortuitousevent;

(h) Article 1262, paragraph 1, provides:

“An obligation which consists in the delivery of a deter-minate thing shall be extinguished if it should be lost or de-stroyed without the fault of the debtor and before he has in-curred in delay;

In this connection, Article 1269 (Civil Code) says:

“The obligation having been extinguished by the loss ofthe thing, the creditor shall have the rights of action which thedebtor may have against third persons by reason of the loss.”


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It is very clear that the creditor (buyer) may not have a rightof action against third persons unless he suffers a loss which isthe price he has paid or the price the law requires him to pay thedebtor (seller) if he has not paid the same.

(4) Contrary view. — On this question, a recognized authorityon Civil Law supports the contrary view as follows:

“A contrary view to that expressed above, is held by otherwriters on the Spanish Civil Code, like Perez and Alguer, who say:This solution is not absolutely certain and perhaps the contraryview is more in harmony with equity and with the nature of re-ciprocal obligations.”

To our mind, the latter view is really more logical: the vendorin the case given, should bear the loss and the vendee should notbe bound to pay the price. The following arguments may be ad-vanced to support this view:

(a) It is fundamental in the Civil Code, expressed in Arti-cles 1477 and 1496, that ownership is transferred by delivery;hence, before delivery, the vendor owns the thing and shouldsuffer its loss: res perit domino. If he is allowed to recover theprice, he suffers no loss, which is imposed upon the vendeewho has not yet acquired ownership;

(b) The obligations of vendor and vendee are reciprocal,and, therefore, one depends upon the other. If the obligationof the vendor to deliver is extinguished, the correlative obli-gation of the vendee to pay, which depends upon it, cannotremain subsisting;

(c) Article 1480, paragraph 3, is not an exception but is anexpression of the general rule that the risk is not imputed tothe vendee until after delivery. That paragraph considers thedelivery completed only when the fungibles have beenweighed, counted, or measured because it is only then that thething becomes determinate. Before such completion of deliv-ery, the vendor bears the risk; and

(d) Purchase and sale is an onerous contract, where thecause, with respect to the vendee, is the thing. If he cannot havethe thing, it is juridically illogical and unjust to make him payits price.

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In the French code, the risk of loss is upon the buyer from theperfection of the contract, because ownership in that code is trans-ferred by mere contract, without need for delivery. Res perit domino.The vendee suffers the loss and must pay the price of the thingeven if he does not receive it. But where the ownership is trans-ferred by delivery, as in our Code, the application of the axiomres perit domino, imposes the risk of loss upon the vendor; hence,if the thing is lost by fortuitous event before delivery, the vendorsuffers the loss and cannot recover the price from the vendee.(A.M. Tolentino, op. cit., pp. 23-27.)

(5) Legislation necessary to avoid irreconcilable conflict. — Thecontrary view is really “more in harmony with equity” consider-ing that, while the vendee has a mere contract right to the thingsold, the vendor has not only the ownership but also the posses-sion or control of it and even the power to dispose of it to theprejudice of the vendee; and having in mind also the reciprocalcharacter of the contract of sale, the vendor should, therefore, bethe one to shoulder the loss and not the vendee. But until the law-making body adopts the contrary view, the correct rule, it is be-lieved, is that contained in Article 1480 under which the vendeebears the risk of loss, and he is bound to pay the price which rulehas already been shown, is sustained and confirmed by otherprovisions of the Civil Code.

ART. 1505. Subject to the provisions of this Title,where goods are sold by a person who is not the ownerthereof, and who does not sell them under authorityor with the consent of the owner, the buyer acquiresno better title to the goods than the seller had, unlessthe owner of the goods is by his conduct precludedfrom denying the seller’s authority to sell.

Nothing in this title, however, shall affect:

(1) The provisions of any factors’ acts, recordinglaws, or any other provision of law enabling the ap-parent owner of goods to dispose of them as if hewere the true owner thereof;

(2) The validity of any contract of sale under statu-


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tory power of sale or under the order of a court ofcompetent jurisdiction;

(3) Purchases made in a merchant’s store, or infairs, or markets, in accordance with the Code of Com-merce and special laws. (n)

Sale by a person not the owner.

It is a fundamental doctrine of law that no one can give whathe has not or transfer a greater right to another than he himselfhas. Sale is a derivative mode of acquiring ownership and thebuyer gets only such rights as the seller had. (see Arts. 1458-1459.)A derivative right cannot exist higher than its source.5 (Reyes vs.Sierra, 73 SCRA 472 [1979].) The exceptions to the rule are givenbelow.

(1) Where the owner of the goods is, by his conduct, precluded fromdenying the seller’s authority to sell. — Thus, where a parcel of landis sold by one not the owner or the agent of the owner, but thereal owner thereof upon being questioned in a criminal case in-stituted against the vendor states that he authorized such salesso that the vendor was acquitted of the charge against him, apurchaser in good faith acquires a valid title to the property as itis not lawful nor permissible for said owner to deny or retract hisformer sworn statement that he had consented to said sale.(Gutierrez Hermanos vs. Orense, 28 Phil. 571 [1914]; see Arts. 1437,1438.)

(2) Where the law enables the apparent owner to dispose of the goodsas if he were the true owner thereof. — The Philippines, unlike otherjurisdictions as England and several states of the United States,has no such law as the Factors’ Act. The law referred to here, there-fore, must be found in the provisions of our Civil Code on agency.(C. Alvendia, Law on Sales, 1950 ed., p. 153.)

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

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(a) Factors Acts are designed to protect third persons who(under specified conditions) deal with an agent (e.g., a personto whom the owner delivered goods for sale or as security, orentrusted documentary evidence of title thereto) believing himto be the owner of goods. (Babb & Martin, Business Law, 1952ed., p. 117.)

(b) Examples of the recording laws which may have a bear-ing on the validity of a sale made by a person who is not theowner or the agent of the owner are: P.D. No. 1529 (PropertyRegistration Decree), R.A. No. 4136 (Land Transportation andTraffic Code), and the Revised Administrative Code with re-gards to the sale of large cattle (Sec. 529.) and sale of vessels.(Sec. 1171.) Examples of “any other provision of law” referredto in No. (1) are Act No. 2031 (Negotiable Instruments Law)and Act No. 2137. (Warehouse Receipts Law) (see Arts. 1507-1520.)

(c) In a case, the car in question which was acquired bythe respondent by purchase from its registered owner for avaluable consideration under a notarial deed of absolute salewas seized and impounded by land transportation agents asstolen property. It was held that the acquirer or the purchaserin good faith of a chattel or movable property is entitled to berespected and protected in his possession as if he were the trueowner thereof until a competent court rules otherwise. In themeantime, he cannot be compelled to surrender possessionnor to be required to institute an action for the recovery of thechattel, whether or not an indemnity bond is issued in hisfavor. The filing of an information charging that the chattelwas illegally obtained through estafa from its true owner bythe transferor of the bona fide possessor does not warrant dis-turbing the possession of the chattel against the will of thepossessor. Finally, under Section 60 of R.A. No. 4136, the rightof the Land Transportation Commission to impound motorvehicles is only good for the proper enforcement of lien uponmotor vehicles of unpaid fees for registration, re-registration,or delinquent registration of motor vehicles. (Edu vs. Gomez,129 SCRA 601 [1984].)

(d) With respect to real property, it has been ruled that a“fraudulent and forged document of sale may become the root


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of a valid title if the certificate of title has already been trans-ferred from the name of the true owner to the name indicatedby the forger.” Every person dealing in good faith and forvaluable consideration with registered land may safely relyupon what appears in the certificate of title and does not haveto inquire further. If the rule were otherwise, the efficacy andconclusiveness of Torrens Certificates of Titles would be fu-tile and nugatory.” (Duran vs. Intermediate Appellate Court,138 SCRA 489 [1985].) The remedy of the person prejudiced isto bring an action for damages against those who employedthe fraud, within four (4) years after the discovery of the de-ception (see Art. 1391.), and if the latter are insolvent, an ac-tion against the Treasurer of the Philippines may be filed forrecovery of damages against the Assurance Fund. (Veloso vs.Court of Appeals, 73 SCAD 303, 260 SCRA 593 [1996]; DelosReyes vs. Court of Appeals, 285 SCRA 81 [1998].)

(3) Where the sale is sanctioned by statutory or judicial authority.— According to Article 559 of the Civil Code, “the possession ofmovable property acquired in good faith is equivalent to title.Nevertheless, one who has lost any movable, or has been unlaw-fully deprived therefor, may recover it from the person in pos-session of the same. If the possessor of a movable lost or of whichthe owner has unlawfully been deprived has acquired it in goodfaith at a public sale, the owner cannot obtain its return withoutreimbursing the price paid therefor.” (see Art. 1537, par. 2.)

Different laws apply to different types of forced or involuntarysales under our jurisdiction, namely: (a) an ordinary execution sale,which is governed by the pertinent provisions of Rule 39 of theRules of Court on Execution, Satisfaction and Effect of Judgments;(b) judicial foreclosure sales, which are governed by Rule 68 of theRules of Court, captioned “Foreclosure of Mortgage’’; and (c) ex-tra-judicial foreclosure sales of real estate mortgages, which aregoverned by Act No. 3135, as amended by Act No. 4118, otherwiseknown as “An Act to Regulate the Sale of Property Under SpecialPowers Inserted in or Annexed to Real Estate Mortgages.’’ (Supenavs. De la Rosa, 78 SCAD 409, 267 SCRA 1 [1997].)

The government, however, does not warrant the title to prop-erties sold by the sheriff at public auction or judicial sales. (seeArt. 1570.)

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(4) Where the sale is made at merchant’s stores, fairs or markets.— No. 3 of Article 1505 is a case of an imperfect or void title rip-ening into a valid one as a result of some intervening due causes.The sale is necessary not only to facilitate commercial sales onmovables but also to give stability to business transactions espe-cially in a country like the Philippines, where free enterprise pre-vails, for a buyer cannot be reasonably expected to look behindthe title of every article when he buys at a store. (Sun BrothersCo. vs. Velasco, [C.A.] 54 O.G. 5103.)

(5) Where the seller has a voidable title which has not been avoidedat the time of the sale. — See Article 1506.

(6) Where seller subsequently acquires title. — When a personconveys property to another of which at the time he is not theowner, his subsequent acquisition of title validates his previousconveyance. (Llacer vs. Munoz, 12 Phil. 328 [1908]; Abella vs.Gonzaga, 56 Phil. 132 [1931]; see Art. 1434.) This doctrine is equallyapplicable to conveyance of usufructs as well as to transfers offull ownership. (Feria vs. Silva, [C.A.] No. 6151-R, Aug. 10, 1951.)

ILLUSTRATIVE CASE:

Unpaid books were sold by the impostor-buyer to another whoacted in good faith and with proper care.

Facts: X, identifying himself as Professor JC, placed an or-der by telephone with petitioner EDCA for 406 books payableon delivery. EDCA, petitioner, prepared the corresponding in-voice and delivered the books for which X issued a personalcheck covering the purchase price, which was dishonored. Xsold the books to Y who, after verifying the seller’s ownershipfrom the invoice X showed her, paid X.

Petitioner argues that the impostor acquired no title to thebooks that he could have validly transferred to Y, the privaterespondent. Its reason is that as the payment check bouncedfor lack of funds, there was a failure of consideration that nul-lified the contract of sale between it and X.

Issue: Has EDCA been unlawfully deprived of the booksbecause the check issued by the impostor X in payment thereforwas dishonored?

Held: No. (1) Contract of sale is consensual. — “The contractof sale is consensual and is perfected once agreement is reached


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between the parties on the subject matter and the considera-tion. According to the Civil Code:

‘ART. 1475. The contract of sale is perfected at the momentthere is a meeting of minds upon the thing which is the objectof the contract and upon the price.

From that moment, the parties may reciprocally demandperformance, subject to the provisions of the law governing theform of contracts.

x x x

ART. 1477. The ownership of the thing sold shall be trans-ferred to the vendee upon the actual or constructive deliverythereof.

ART. 1478. The parties may stipulate that ownership in thething shall not pass to the purchaser until he has fully paid theprice.’”

(2) Ownership of thing sold is transferred upon delivery. — “Itis clear from the above provisions, particularly the last onequoted, that ownership in the thing sold shall not pass to thebuyer until full payment of the purchase price only if there is astipulation to that effect. Otherwise, the rule is that such own-ership shall pass from the vendor to the vendee upon the ac-tual or constructive delivery of the thing sold even if the pur-chase price has not yet been paid.

Non-payment only creates a right to demand payment orto rescind the contract, or to criminal prosecution in the case ofbouncing checks. But absent the stipulation above noted, de-livery of the thing sold will effectively transfer ownership tothe buyer who can in turn transfer it to another.”

(3) There is no unlawful deprivation of personal property. —“In Asiatic Commercial Corporation vs. Ang (40 O.G.S. No. 15, p.102.), the plaintiff sold some cosmetics to Francisco Ang, who,in turn, sold them to Tan Sit Bin. Asiatic, not having been paidby Ang, sued for the recovery of the articles from Tan, whoclaimed he had validly bought them from Ang, paying for thesame in cash. Finding that there was no conspiracy betweenTan and Ang to deceive Asiatic, the Court of Appeals declared:

‘Yet the defendant invoked Article 464 (now Art. 559.) ofthe Civil Code providing among other things that ‘one whohas been unlawfully deprived of personal property may recoverit from any person possessing it. We do not believe that the

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plaintiff has been unlawfully deprived of the cartons of GlocoTonic within the scope of this legal provision. It has voluntarilyparted with them pursuant to a contract of purchase and sale.The circumstance that the price was not subsequently paid didnot render illegal a transaction which was valid and legal atthe beginning.

In Tagatac vs. Jimenez (53 O.G. No. 12, p. 3792.), the plaintiffsold her car to Feist, who sold it to Sanchez, who sold it toJimenez. When the payment check issued to Tagatac by Feistwas dishonored, the plaintiff sued to recover the vehicle fromJimenez on the ground that she had been unlawfully deprivedof it by reason of Feist’s deception. In ruling for Jimenez, theCourt of Appeals held:

‘The point of inquiry is whether plaintiff-appellant Trini-dad C. Tagatac has been unlawfully deprived of her car. At firstblush, it would seem that she was unlawfully deprived thereof,considering that she was induced to part with it by reason ofthe chicanery practiced on her by Warner L. Feist. Certainly,swindling, like robbery, is an illegal method of deprivation ofproperty. In a manner of speaking, plaintiff-appellant was “il-legally deprived” of her car, for the way by which Warner L.Feist induced her to part with it is illegal and is punished bylaw. But does this unlawful deprivation come within the scopeof Article 559 of the New Civil Code?

x x x The fraud and deceit practiced by Warner L. Feist ear-marks this sale as a voidable contract. (Article 1390, N.C.C.)Being a voidable contract, it is susceptible of either ratificationor annulment. If the contract is ratified, the action to annul it isextinguished (Article 1392, N.C.C.) and the contract is cleansedfrom all its defects (Article 1396, N.C.C.); if the contract is an-nulled, the contracting parties are restored to their respectivesituation before the contract and mutual restitution follows asa consequence. (Article 1398, N.C.C.)

However, as long as no action is taken by the party enti-tled, either that of annulment or of ratification, the contract ofsale remains valid and binding. When plaintiff-appellant Trini-dad C. Tagatac delivered the car to Feist by virtue of said void-able contract of sale, the title to the car passed to Feist. Of course,the title that Feist acquired was defective and voidable. Never-theless, at the time he sold the car to Felix Sanchez, his title onthe latter, provided he brought the car in good faith, for valueand without notice of the defect in Feist’s title. (Article 1506,


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N.C.C.) There being no proof on record that Felix Sanchez actedin bad faith, it is safe to assume that he acted in good faith.’

(4) JC acquired ownership over the books sold. — Actual de-livery of the books having been made, JC acquired ownershipover the books which could then validly transfer to the privaterespondents. The fact that he had not yet paid for them to EDCAwas a matter between him and EDCA and did not impair thetitle acquired by the private respondents to the books.

One may well imagine the adverse consequences if thephrase “unlawfully deprived” were to be interpreted in themanner suggested by the petitioner. A person relying on theseller’s title who buys a movable property from him would haveto surrender it to another person claiming to be the originalowner who had not yet been paid the purchase price therefor.The buyer in the second sale would be left holding the bag, soto speak, and would be compelled to return the thing boughtby him in good faith without even the right to reimbursementof the amount he had paid for it.”

(5) EDCA was negligent. — “It bears repeating that in thecase before us, Y took care to ascertain first that the books be-longed to X before she agreed to purchase them. The EDCAinvoice X showed her assured her that the books had been paidfor on delivery. By contrast, EDCA was less than cautious — infact, too trusting — in dealing with the impostor. Although ithad never transacted with him before, it readily delivered thebooks he had ordered (by telephone) and as readily acceptedhis personal check in payment. It did not verify his identityalthough it was easy enough to do this. It did not wait to clearthe check of this unknown drawer. Worse, it indicated in thesales invoice issued to him, by the printed terms thereon, thatthe books had been paid for on delivery, thereby vesting own-ership in the buyer.”

(6) Private respondent acted in good faith and with proper care.— “Surely, the private respondent did not have to go beyondthat invoice to satisfy herself that the books being offered forsale by X belonged to him; yet she did. Although the title of Xwas presumed under Article 559 by his mere possession of thebooks, these being movable property, Y nevertheless demandedmore proof before deciding to buy them.

It would certainly be unfair now to make the private re-spondents bear the prejudice sustained by EDCA as a result of

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its own negligence. We cannot see the justice in transferringEDCA’s loss to Y who had acted in good faith, and with propercare, when they bought the books from X.

While we sympathize with the petitioner for its plight, it isclear that its remedy is not against the private respondent butagainst X, who has apparently caused all this trouble.” (EDCAPublishing & Distributing Corp. vs. Santos, 184 SCRA 614 [1990].)

ART. 1506. Where the seller of goods has a void-able title thereto, but his title has not been avoided atthe time of the sale, the buyer acquires a good title tothe goods, provided he buys them in good faith, forvalue, and without notice of the seller’s defect of title.(n)

Sale by one having a voidable title.

(1) Requisites for acquisition of good title by buyer. — If the sellerhas only a voidable title to the goods, the buyer acquires a goodtitle to the goods provided he buys them: (a) before the title ofthe seller has been avoided; (b) in good faith for value; and (c)without notice of the seller’s defect of title. (see Arts. 1385, 1388.)

(2) Basis of rule. — Article 1506 seems to be predicated on theprinciple that where loss has happened which must fall on one oftwo innocent persons, it should be borne by him who is the occa-sion of the loss. It is similar to the rule in P.D. No. 1529 (PropertyRegistration Decree) referring to an innocent purchaser for valuein good faith (Sec. 51 thereof.) and to the rule in Act No. 2031(Negotiable Instruments Law) referring to a holder in due courseto whom a negotiable instrument is negotiated for value and ingood faith. (see Sec. 57 thereof.)

EXAMPLES:

(1) S, a minor, sold his television set to B, a person of ma-jority age. Under the law (see Art. 1390, Civil Code.), the con-tract is voidable or annullable because a minor is incapable ofgiving consent to a contract. B, in turn, sold the television set toC who acted in good faith.


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In this case, C acquires a valid title to the television set af-ter its delivery if the contract had not yet been annulled by aproper action in court.

(2) B bought in good faith for value a car which was stolenfrom C, the lawful owner. As against B, C has a better right tothe car. Article 1506 is clearly inapplicable where the seller hadno title at all. (Aznar vs. Yapdiangco, 13 SCRA [1965].)

C may recover the car without paying any indemnity, ex-cept when B acquired it in a public sale. (Art. 559, supra.)

ART. 1507. A document of title in which it is statedthat the goods referred to therein will be delivered tothe bearer, or to the order of any person named insuch document is a negotiable document of title. (n)

Definition of terms.

(1) Document of title to goods. — Includes any bill of lading,dock warrant, “quedan,” or warehouse receipt or order for thedelivery of goods, or any other document used in the ordinarycourse of business in the sale or transfer of goods, as proof of thepossession or control of the goods, or authorizing or purportingto authorize the possessor of the document to transfer or receive,either by indorsement or by delivery, goods represented by suchdocument. (Art. 1636[1].)

(2) Goods. — Included all chattels personal but not things inaction or money of legal tender in the Philippines. The term in-cludes growing fruits or crops. (ibid.)

(3) Order. — Relating to documents of title means an orderby indorsement on the documents. (ibid.)

Nature and function of documents of title.

(1) Receipts of, or orders upon, a bailee of goods represented. —Documents of title refer to goods and not to money. They all havethis in common: that they are receipts of a bailee, or orders upona bailee. A different name is given in popular speech to the docu-ment when it is issued by a carrier and when it is issued by awarehouseman, but in substance the nature of the document isthe same in both cases. (see 2 Williston, op. cit., p. 505.)

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(2) Evidence of transfer of title and possession of the goods and con-tract between the parties. — A document of title is symbol of thegoods covered by it, serving as evidence of (a) transfer of title and(b) transfer of possession. It also serves as an evidence of the (c)contract between the parties who are bound by its terms. So faras concerns the transfer of property between the parties, theirintention would be effectual without the document, but wherethird parties’ rights are involved, the form of the document (i.e.,negotiable or non-negotiable) becomes important.

Most common forms of documentsof title.

There are three most common forms or documents of title,namely:

(1) Bill of lading. — It is a contract and a receipt for the trans-port of goods and their delivery to the person named therein, toorder, or to bearer. It usually involves three persons — the car-rier, the shipper, and the consignee. The shipper and the consigneemay be one and the same person. Its acceptance generally consti-tutes the contract of carriage even though not signed.

Such instrument may be called a shipping receipt, a forward-er’s receipt, or receipt for transportation. The designation, how-ever, is immaterial (Saludo, Inc. vs. Court of Appeals, 207 SCRA498 [1992].);

(2) Dock warrant. — It is an instrument given by dock ownersto an importer of goods warehoused on the dock as a recognitionof the importer’s title to the said goods, upon production of thebill of lading (see Bouvier’s Law Dictionary, p. 911.); and

(3) Warehouse receipt. — a contract or receipt for goods depos-ited with a warehouseman containing the latter’s undertaking tohold and deliver the said goods to a specified person, to order, orto bearer. Quedan is a warehouse receipt usually for sugar receivedby a warehouseman.

Laws governing documents of title.

The following laws govern documents of title:

(1) The Civil Code (in Arts. 1507 to 1520, 1532 [2nd par.], 1535


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[2nd par.], and 1749.) primarily governs documents of title otherthan warehouse receipts;

(2) The Warehouse Receipts Law (Act No. 2137.) primarilygoverns warehouse receipts; and

(3) The Code of Commerce subsidiarily governs bills of lad-ing issued by common carriers (in Arts. 350 to 354 for land carri-ers and in Arts. 706 to 718 for maritime carriers).

The provisions in the Civil Code on documents of title arereproduced practically verbatim from the Uniform Sales Act whichis in force in many states in the United States.

Classes of documents of titles.

Documents of title may be either:

(1) Negotiable documents of title or those by the terms of whichthe bailee undertakes to deliver the goods to the bearer and thoseby the terms of which the bailee undertakes to deliver the goodsto the order of a specified person (Art. 1508.); or

(2) Non-negotiable documents of title or those by the terms ofwhich the goods covered are deliverable to a specified person.(Art. 1511.)

ART. 1508. A negotiable document of title may benegotiated by delivery:

(1) Where by the terms of the document the car-rier, warehouseman or other bailee issuing the sameundertakes to deliver the goods to the bearer; or

(2) Where by the terms of the document the car-rier, warehouseman or other bailee issuing the sameundertakes to deliver the goods to the order of a speci-fied person, and such person or a subsequentindorsee of the document has indorsed it in blank orto the bearer.

Where by the terms of a negotiable document oftitle the goods are deliverable to bearer or where anegotiable document of title has been indorsed inblank or to bearer, any holder may indorse the same

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to himself or to any specified person, and in such casethe document shall thereafter be negotiated only bythe indorsement of such indorsee. (n)

Negotiation of negotiable documentby delivery.

A negotiable document of title is negotiable by delivery if thegoods are deliverable to the bearer, or when it is indorsed in blankor to the bearer by the person to whose order the goods are deliv-erable or by a subsequent indorsee. An indorsement is in blankwhen the holder merely signs his name at the back of the receiptwithout specifying to whom the goods are to be delivered.

If the document is specially indorsed, it becomes an orderdocument of title and negotiation can only be effected by the in-dorsement of the indorsee. A special indorsement specifies theperson to whom or to whose order the goods are to be delivered.

Article 1508 is similar to Section 37 of the Warehouse ReceiptsLaw (Act No. 2137.) except that the latter treats only of a negoti-able receipt which may be issued by a warehouseman.

ART. 1509. A negotiable document of title may benegotiated by the indorsement of the person to whoseorder the goods are by the terms of the documentdeliverable. Such indorsement may be in blank, tobearer or to a specified person. If indorsed to a speci-fied person, it may be again negotiated by the indorse-ment of such person in blank, to bearer or to anotherspecified person. Subsequent negotiations may bemade in like manner. (n)

Negotiation of negotiable documentby indorsement.

A negotiable document of title by the terms of which the goodsare deliverable to a person specified therein may be negotiatedonly by the indorsement of such person.

(1) If indorsed in blank or to bearer, the document becomesnegotiable by delivery. (Art. 1508.)


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(2) If indorsed to a specified person, it may be again negoti-ated by the indorsement of such person in blank, to bearer, or toanother specified person. Delivery alone is not sufficient.

A party is liable only as guarantor and not as indorser if hisindorsement is made for the purpose of identification only. (seeAmerican Bank vs. Macondray & Co., 4 Phil. 695 [1905].)

Article 1509 is similar to Section 38 of the Warehouse ReceiptsLaw.

ART. 1510. If a document of title which containsan undertaking by a carrier, warehouseman or otherbailee to deliver the goods to bearer, to a specifiedperson or order of a specified person or which con-tains words of like import, has placed upon it thewords “not negotiable” “non-negotiable,” or the like,such document may nevertheless be negotiated bythe holder and is a negotiable document of title withinthe meaning of this Title. But nothing in this Title con-tained shall be construed as limiting or defining theeffect upon the obligations of the carrier, warehouse-man, or other bailee issuing a document of title orplacing thereon the words “not negotiable,” “non-negotiable,” or the like. (n)

Negotiable documents of title marked“non-negotiable.”

Under Article 1510, the words “not negotiable,” “non-negoti-able” and the like when placed upon a document of title in whichthe goods are to be delivered to “order” or to “bearer” have noeffect and the document continues to be negotiable. (Roman vs.Asia Banking Corp., 46 Phil. 705 [1924].)

Under the Warehouse Receipts Law, any provision insertedin a negotiable receipt that it is non-negotiable is declared void.(Sec. 5, par. 2.)

When the document of title is to order, the bailee is obliged totake it up before delivering the goods. Accordingly, he is liable tothe holder of an order document if the goods are delivered to the

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consignee without surrender of the document even though thelatter was marked “not negotiable.”

Note: The first sentence of Article 1510 should read “to a speci-fied person or order or to the order of a specified person.” This ishow Section 30 of the Uniform Sales Act, from which Article 1510was adopted, is worded.

ART. 1511. A document of title which is not in suchform that it can be negotiated by delivery may be trans-ferred by the holder by delivery to a purchaser ordonee. A non-negotiable document cannot be negoti-ated and the indorsement of such a document givesthe transferee no additional right. (n)

Transfer of non-negotiable documents.

A non-negotiable document of title cannot be negotiated.Nevertheless, it can be transferred or assigned by delivery. In sucha case, the transferee or assignee acquires only the rights statedin Article 1514. Even if the document is indorsed, the transfereeacquires no additional right.

Article 1511 is exactly the same as Section 39 of the WarehouseReceipts Law.

ART. 1512. A negotiable document of title may benegotiated:

(1) By the owner thereof; or

(2) By any person to whom the possession or cus-tody of the document has been entrusted by the owner,if, by the terms of the document the bailee issuing thedocument undertakes to deliver the goods to the or-der of the person to whom the possession or custodyof the document has been entrusted, or if at the timeof such entrusting the document is in such form thatit may be negotiated by delivery. (n)

Persons who may negotiate a document.

It will be noticed that the provision does not give a power tonegotiate documents of title equal to that allowed under the Ne-


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gotiable Instruments Law (Act No. 2031.) in the case of bills ofexchange and promissory notes inasmuch as neither a thief nor afinder is within the terms of the article. (but see Art. 1518.) How-ever, if the owner of the goods permits another to have the pos-session or custody of negotiable receipts running to the order ofthe latter or to bearer, it is a representation of title upon whichbona fide purchasers for virtue are entitled to rely despite breachesof trust or violations of agreement on the part of the apparentowner. As between two innocent persons, the loss must fall uponhim whose misplaced confidence made the loss possible. (SiyCong Bieng & Co. vs. Hongkong & Shanghai Banking Corp., 56Phil. 598 [1932].)

Article 1512 is similar to Section 40 of the Warehouse ReceiptsLaw. Compare this article with Article 1518.

ART. 1513. A person to whom a negotiable docu-ment of title has been duly negotiated acquiresthereby:

(1) Such title to the goods as the person negotiat-ing the document to him had or had ability to conveyto a purchaser in good faith for value and also suchtitle to the goods as the person to whose order thegoods were to be delivered by the terms of the docu-ment had or had ability to convey to a purchaser ingood faith for value; and

(2) The direct obligation of the bailee issuing thedocument to hold possession of the goods for himaccording to the terms of the document as fully as ifsuch bailee had contracted directly with him. (n)

Rights of person to whom documenthas been negotiated.

This article specifies the rights of a person to whom a negoti-able document of title has been duly negotiated, either by deliv-ery, in the case of a document of title to bearer, or by indorsementand delivery, in the case of a document of title to order. Such per-son acquires:

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(1) The title of the person negotiating the document, over thegoods covered by the document;

(2) The title of the person (depositor or owner) to whose or-der by the terms of the document the goods were to be delivered,over such goods; and

(3) The direct obligation of the bailee (warehouseman or car-rier) to hold possession of the goods for him, as if the bailee hadcontracted directly with him.

One who purchases, therefore, a negotiable document of titleissued to a thief acquires no right over the goods as the thief hasno right to transfer, notwithstanding that such purchaser is inno-cent. But the purchaser acquires a good title where the owner, byhis conduct, is estopped from asserting his title.

A provision similar to Article 1513 is found in Section 41 ofthe Warehouse Receipts Law.

ART. 1514. A person to whom a document of titlehas been transferred, but not negotiated, acquiresthereby, as against the transferor, the title to thegoods, subject to the terms of any agreement withthe transferor.

If the document is non-negotiable, such personalso acquires the right to notify the bailee who issuedthe document of the transfer thereof, and thereby toacquire the direct obligation of such bailee to holdpossession of the goods for him according to theterms of the document.

Prior to the notification to such bailee by thetransferor or transferee of a non-negotiable documentof title, the title of the transferee to the goods and theright to acquire the obligation of such bailee may bedefeated by the levy of an attachment of executionupon the goods by a creditor of the transferor, or by anotification to such bailee by the transferor or a sub-sequent purchaser from the transferor of a subse-quent sale of the goods by the transferor. (n)


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Rights of person to whom documenthas been transferred.

This article refers to the rights of a person to whom a negoti-able document of title (not duly negotiated) has been transferred(par. 1.) or of the transferee of a non-negotiable document. (pars.2 and 3.) Such person acquires:

(1) The title to the goods as against the transferor;

(2) The right to notify the bailee of the transfer thereof; and

(3) The right, thereafter, to acquire the obligation of the baileeto hold the goods for him.

The right of the transferee is not absolute as it is subject to theterms of any agreement with the transferor. He merely steps intothe shoes of the transferor.

Attachment of goods coveredby document transferred.

(1) The transfer of a non-negotiable document of title does noteffect the delivery of the goods covered by it. Accordingly, beforenotification, the bailee is not bound to the transferee whose rightmay be defeated by a levy of an attachment or execution uponthe goods by the creditor of the transferor or by a notification tosuch bailee of the subsequent sale of the goods.

(2) If the document is negotiable, the goods cannot be attachedor be levied under an execution unless the document be first sur-rendered to the bailee or its negotiation enjoined. (Art. 1519.)


Note: The word “of” between “attachment” and “execution”in the third paragraph should more properly read “or”. This ishow Section 34 of the Uniform Sales Act, from which Article 1514was adopted, is worded.

ART. 1515. Where a negotiable document of titleis transferred for value by delivery, and the indorse-ment of the transferor is essential for negotiation, thetransferee acquires a right against the transferor to

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compel him to indorse the document unless a con-trary intention appears. The negotiation shall take ef-fect as of the time when the indorsement is actuallymade. (n)

Transfer of order document withoutindorsement.

This article specifies the rights of a person to whom an orderdocument of title, which may not properly be negotiated by meredelivery, has been delivered, without indorsement. They are:

(1) The right to the goods as against the transferor (Art. 1514.);and

(2) The right to compel the transferor to indorse the indorse-ment. (see Art. 1357.)

If the intention of the parties is that the document should bemerely transferred, the transferee has no right to require thetransferor to indorse the document.

Rule where document subsequentlyindorsed.

For the purpose of determining whether the transferee is apurchaser for value in good faith without notice (see Arts. 1506,1513.), the negotiation shall take effect as of the time when theindorsement is actually made, not at the time the document isdelivered. The reason is that the negotiation becomes completeonly at the time of indorsement. So, if by that time the purchaseralready had notice that the title of the seller was defective, he can-not be considered a purchaser in good faith though he had no suchnotice when he bought the document.

A provision similar to Article 1515 is found in Section 43 ofthe Warehouse Receipts Law. (Sec. 49 of the Negotiable Instru-ments Law is to the same effect.)

ART. 1516. A person who for value negotiates ortransfers a document of title by indorsement or deliv-ery, including one who assigns for value a claim se-cured by a document of title unless contrary inten-tion appears, warrants:


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(1) That the document is genuine;

(2) That he has a legal right to negotiate or trans-fer it;

(3) That he has knowledge of no fact which wouldimpair the validity or worth of the document; and

(4) That he has a right to transfer the title to thegoods and that the goods are merchantable or fit fora particular purpose, whenever such warranties wouldhave been implied if the contract of the parties hadbeen to transfer without a document of title the goodsrepresented thereby. (n)

Warranties on sale of documents.

This article treats of the warranties or liabilities of a personnegotiating or transferring a document. They are similar to thoseof a person negotiating an instrument by delivery or by a quali-fied indorsement under the Negotiable Instruments Law. (see Sec.65 thereof.) The liability is limited only to a violation of the fourwarranties set forth in Article 1516. (see Art. 1517.) Thus, the per-son negotiating or transferring a document could be held liableas when, for example, the document was a forgery, or he had sto-len it, or he had knowledge that the document was invalid forwant of consideration, or that the goods had been damaged.

One who assigns for value a claim secured by a document oftitle is also liable for the violation of the four warranties enumer-ated unless a contrary intention appears.

It is the duty of every indorsee to know that all previous in-dorsements are genuine; otherwise, he will not acquire a valid titleto the instrument. (Great Eastern Life Ins. Co. vs. Hongkong &Shanghai Banking Corporation, 43 Phil. 678 [1922].) Under theNegotiable Instruments Law, the last indorser warrants that allprevious indorsements are genuine. (see Secs. 65, 66 thereof.)

Article 1516 is similar to Section 44 of the Warehouse ReceiptsLaw. (see Sec. 65 of the Negotiable Instruments Law, which is alsosimilar.)

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ART. 1517. The indorsement of a document of titleshall not make the indorser liable for any failure onthe part of the bailee who issued the document or pre-vious indorsers thereof to fulfill their respective obli-gations. (n)

Indorser not a guarantor.

The indorsement of a negotiable instrument has a double ef-fect. It is at the same time a conveyance of the instrument and acontract of the indorser with the indorsee that on certain condi-tions the indorser will pay the instrument if the party primarilyliable fails to do so.

The indorsement of a document of title amounts merely to aconveyance by the indorser, not a contract of guaranty. (see 2Williston, op. cit., pp. 627-628.) Accordingly, an indorser of a docu-ment of title shall not be liable to the holder if, for example, thebailee fails to deliver the goods because they were lost due to hisfault or negligence.


ART. 1518. The validity of the negotiation of a ne-gotiable document of title is not impaired by the factthat the negotiation was a breach of duty on the partof the person making the negotiation, or by the factthat the owner of the document was deprived of thepossession of the same by loss, theft, fraud, accident,mistake, duress, or conversion, if the person to whomthe document was negotiated or a person to whomthe document was subsequently negotiated paid valuetherefor in good faith without notice of the breach ofduty, or loss, theft, fraud, accident, mistaken, duressor conversion. (n)

When negotiation not impaired by fraud,mistake, duress, etc.

Under this article, a negotiable document may be negotiatedby any person in possession of the same, however such posses-


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sion may have been acquired. (see National Bank vs. Producers’Warehouse Association, 42 Phil. 608 [1922]; Hill vs. Veloso, 31 Phil.160 [1915].) In other words, it may be negotiated even by a thiefor finder and the holder thereof would acquire a good title theretoif he paid value therefor in good faith without notice of the sell-er’s defect of title. (see Art. 1506.) It will be remembered that un-der Article 1512, neither a thief nor a finder may negotiate a ne-gotiable document of title. The two provisions thus appear con-tradictory to each other.

Under the Warehouse Receipts Law, it is provided:

“Sec. 47. When negotiation not impaired by fraud, mistake orduress. — The validity of the negotiation of a receipt is notimpaired by the fact that such negotiation was a breach of dutyon the part of the person making the negotiation or by the factthat the owner of the document was induced by fraud, mistakeor duress to entrust the possession or custody thereof to such per-son, if the person to whom the document was negotiated or aperson to whom the document was subsequently negotiatedpaid value therefor, without notice of the breach of duty orfraud, mistake or duress.”

Clearly, under Section 40 (see Art. 1512.) and Section 47 of theWarehouse Receipts Law, the negotiation is invalidated by the factthat the owner of the document was deprived of its possessionby loss or theft.

It should be noted that Article 1518 speaks of theft of the docu-ment and not of the goods covered by such document. In the lattercase, it needs no argument to show that even a bona fide holder ofa document issued over such stolen goods cannot acquire title.(see Art. 1513.)

ART. 1519. If goods are delivered to a bailee bythe owner or by a person whose act in conveying thetitle to them to a purchaser in good faith for valuewould bind the owner and a negotiable document oftitle is issued for them they cannot thereafter, whilein possession of such bailee, be attached by garnish-ment or otherwise or be levied under an execution

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unless the document be first surrendered to the baileeor its negotiation enjoined. The bailee shall in no casebe compelled to deliver up the actual possession ofthe goods until the document is surrendered to himor impounded by the court.

Attachment or levy upon goods coveredby a negotiable document.

The bailee has the direct obligation to hold possession of thegoods for the original owner or to the person to whom the nego-tiable document of title has been duly negotiated. (see Art. 1513.)While in the possession of such bailee, the goods cannot be at-tached or levied under an execution unless the document be firstsurrendered, or its negotiation prohibited by the court.

The bailee cannot be compelled to deliver up the possessionof the goods until the document is surrendered to him or im-pounded by the court. This prohibition is for the protection of thebailee since he could be made liable to a subsequent purchaserfor value in good faith.

Where depositor not owner.

The provisions of Article 1519 do not apply if the person de-positing is not the owner of the goods (like a thief) or one whohas no right to convey title to the goods binding upon the owner.Neither does it apply to actions for recovery or manual deliveryof goods by the real owner nor to cases where the attachment ismade before the issuance of the negotiable document of title.

The rights acquired by attaching creditors cannot be defeatedby the issuance of a negotiable document of title thereafter. (seeInternational vs. Terminal Warehouse Co., 126 Atl. 902.)

A similar provision in the Warehouse Receipts Law is Section25. (see also Sec. 54.)

ART. 1520. A creditor whose debtor is the ownerof a negotiable document of title shall be entitled tosuch aid from courts of appropriate jurisdiction byinjunction and otherwise in attaching such document


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or in satisfying the claim by means thereof as is al-lowed at law or in equity in regard to property whichcannot readily be attached or levied upon by ordinarylegal process. (n)

Creditor’s remedies to reach negotiabledocuments.

Inasmuch as the goods themselves cannot readily be attachedor levied upon by ordinary legal process, as limited by the pre-ceding article, this article expressly gives the court full power toaid by injunction and otherwise a creditor seeking to get a nego-tiable document covering such goods. However, if an injunctionis issued but the negotiable document of title is negotiated to aninnocent person, the transfer is nevertheless effectual.


ART. 1521. Whether it is for the buyer to take pos-session of the goods or for the seller to send them tothe buyer is a question depending in each case onthe contract, express or implied, between the parties.Apart from any such contract, express or implied, orusage of trade to the contrary, the place of delivery isthe seller’s place of business if he has one, and if not,his residence; but in case of a contract of sale of spe-cific goods, which to the knowledge of the partieswhen the contract or the sale was made were in someother place, then that place is the place of delivery.

Where by a contract of sale the seller is bound tosend the goods to the buyer, but no time for sendingthem is fixed, the seller is bound to send them withina reasonable time.

Where the goods at the time of sale are in the pos-session of a third person, the seller has not fulfilledhis obligation to deliver to the buyer unless and untilsuch third person acknowledges to the buyer that heholds the goods on the buyer’s behalf.

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223

Demand or tender of delivery may be treated asineffectual unless made at a reasonable hour. What isa reasonable hour is a question of fact.

Unless otherwise agreed, the expenses of and in-cidental to putting the goods into a deliverable statemust be borne by the seller. (n)

Place of delivery of goods sold.

Should the buyer take possession of the goods or should theseller send them? In other words, where is the place of delivery?

The following are the rules:

(1) Where there is an agreement, express or implied, the placeof delivery is that agreed upon;

(2) Where there is no agreement, the place of delivery is thatdetermined by usage of trade;

(3) Where there is no agreement and there is also no preva-lent usage, the place of delivery is the seller’s place of business;

(4) In any other case, the place of delivery is the seller’s resi-dence; and

(5) In case of specific goods, which to the knowledge of theparties at the time the contract was made were in some other place,that place is the place of delivery, in the absence of any agreementor usage of trade to the contrary. (see Art. 1251.)

From the above, it can be seen that the presumption is thatthe buyer must take the goods from the seller’s place of businessor residence rather than the seller to deliver them to the buyer.

Wherever the proper place of delivery may be, either partyacquires a right of action by being ready and willing at that placeto perform his legal duty, if the other party is not there present oreven if present, is not prepared to perform in a proper mannerwith what is incumbent upon him. (see Art. 1169, par. 3.) Where,however, the delivery was not effected at the place specified inthe contract but the buyer accepted the goods nevertheless with-out complaint, the buyer would be deemed to have waived theseller’s failure to deliver according to the terms of the contract,and would be liable to pay the price agreed upon. (Sullivan vs.Gird, 22 Ariz. 332.)


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Time of delivery of goods sold.

The time of delivery is also determined by the agreement ofthe parties or, in the absence thereof, by the usage of trade.

(1) If no time is fixed by the contract, then the seller is bound tosend the goods to the buyer within a reasonable time. (par. 2.)What is a reasonable time is properly a question of fact as it isdependent upon the circumstances attending the particular trans-action, such as the character of the goods, the purpose for whichthey are intended, the ability of the seller to produce the goods ifthey are to be manufactured, the facilities available for transpor-tation and distance the goods must be carried, and the usualcourse of business in the particular trade. (Smith Bell & Co. vs.Sotelo Matti, 44 Phil. 874 [1923].) Thus, where the goods are to bemanufactured, the time reasonably necessary to manufacture anddeliver them furnishes the test. Where the goods are at the timeof the bargain in a deliverable state (see Art. 1636[3].) and perish-able in nature, a reasonable time for delivery would be a very shorttime.

(2) If the contract provides a fixed time for performance, the ques-tion is whether time is of the essence, and if so, whether correctperformance was offered within that time. (see Art. 1169, par. 2;see Soler vs. Chesley, 43 Phil. 529 [1922].) If time is not of the es-sence, the question is whether correct performance was offeredwithin a reasonable time. (2 Williston, op. cit., p. 714.)

(3) Where the contract does not specify the time for delivery so thatdelivery is to be made within a reasonable time, time is not of theessence. (MC Cutcheon vs. Kimbal, 135 Misc. 299, 238 N.Y.S. 192.)In such case, the buyer cannot make time the essence of the con-tract without giving the seller notice of his intention to cancelunless delivery is made on or before a fixed time. (Robinson DayProducts Co. vs. Thatcher, 150 N.Y.S. 658.)

Delivery of goods in possessionof a third person.

It is important to observe a distinction between the deliverywhich will satisfy the seller’s duty to the buyer and the deliverywhich is necessary to protect the buyer against third persons.

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The seller can hardly be discharged from his obligation wherethe goods are in the possession of a third person by simply tell-ing the buyer that they are there or by notifying the bailee to de-liver to the buyer. It is not enough to discharge the seller that thebailee has become by operation of law the agent for the buyer. (2Williston, op. cit., pp. 706-707.) To affect third persons, the personholding the goods must acknowledge being the bailee for thebuyer.

Hour of delivery of goods sold.

The demand or tender of delivery to be effectual must be madeat a reasonable hour of the day. (par. 4.)

(1) What is a reasonable hour is a question of fact largely de-pendent upon the circumstances. Generally, however, where allthat is required of the other party is to receive a payment or per-formance which can readily be accepted, it seems probable thatany hour when the debtor could find the creditor would be rea-sonable for that purpose.

(2) In case of goods which are bulky or needed special care,an hour might be unreasonable which would not be so in an or-dinary payment of a small sum of money.

(3) Where the question is not merely one of tender but also ofdemand, reasonableness will depend on the justifiable expecta-tion that the hour is reasonable for giving as well as receiving.(Ibid., op. cit., pp. 711-712.)

Duty of seller to put goods in deliverablecondition.

Unless otherwise agreed, the seller bears the expenses to placethe thing in a deliverable state (par. 5.), that is, in such a state thatthe buyer would, under the contract, be bound to take deliveryof them. (Art. 1636[2].) This provision is a necessary consequenceof the duty of the seller to deliver the goods bargained for. (seeArt. 1247.)

The buyer is not bound to make tender of payment until theseller has complied with his obligations.


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ART. 1522. Where the seller delivers to the buyer aquantity of goods less than he contracted to sell, thebuyer may reject them, but if the buyer accepts or re-tains the goods so delivered, knowing that the selleris not going to perform the contract in full, he mustpay for them at the contract rate. If, however, the buyerhas used or disposed of the goods delivered beforehe knows that the seller is not going to performhis contract in full, the buyer shall not be liable formore than the fair value to him of the goods so re-ceived.

Where the seller delivers to the buyer a quantityof goods larger than he contracted to sell, the buyermay accept the goods included in the contract andreject the rest. If the buyer accepts the whole of thegoods so delivered he must pay for them at the con-tract rate.

Where the seller delivers to the buyer the goodshe contracted to sell mixed with goods of a differentdescription not included in the contract, the buyer mayaccept the goods which are in accordance with thecontract and reject the rest.

In the preceding two paragraphs, if the subjectmatter is indivisible, the buyer may reject the wholeof the goods.

The provisions of this article are subject to anyusage of trade, special agreement, or course of deal-ing between the parties. (n)

Delivery of goods less than quantitycontracted.

Where the seller is under a contract to deliver a specific quan-tity of goods and he delivers a smaller quantity as full perform-ance of his obligation, the buyer may reject the goods so deliv-ered. (see Art. 1233.) The buyer may, however, accept the goodsin which case he must pay for their (1) price at the contract rate ifhe knew that no more were to be delivered or (2) the fair value to

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him of the goods, if he did not know that the seller is going to beguilty of a breach of contract. (par. 1.)

“Fair value to him” should be interpreted to mean the benefitwhich the buyer may have received from the goods. It is not nec-essarily the market value. Since the defaulting seller is the wrong-doer, the buyer is not required to pay the contract price if suchprice for the goods is more than fair value to him of the goods.

EXAMPLE:

S sold to B 200 cavans of rice at P1,000.00 per cavan or for atotal price of P200,000.00, delivery to be made at the place ofbusiness of B.

If S delivers only 120 cavans, B can refuse to accept them. Ifhe accepts them knowing that B is not going to perform thecontract in full, he is liable to pay at the rate agreed upon forthe 120 cavans or P120,000. But if B was not aware that fulldelivery would not be made, he would be liable only for thefair value to him of the goods at the time of delivery even if itshould be less than the contract price.

Of course, B cannot be liable, in any case, for more than thecontract price of P120,000.00 with respect to the 120 cavans ac-tually received by him.

ILLUSTRATIVE CASE:

Some of the goods contracted to be sold were missing throughfault of carrier.

Facts: S, a domestic corporation, alleges that B, a generalpartnership, refused to pay the price of various automotiveproducts, with the latter claiming that it had not received themerchandise. It appears that upon receipt of the Bill of Lading,B initiated, but did not pursue, steps to take delivery as it wasadvised by NN Company, owner of the vessel on which thespare parts were loaded by S’s forwarding agent, that becausesome parts were missing, they would just be informed as soonas the missing parts were located.

It was only four years later when a warehouseman of NNfound in its bodega, parts of the shipment in question, but al-ready deteriorated and valueless.


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Issue: Under the circumstances, can B be faulted for not ac-cepting or refusing to accept the shipment from NN four yearsafter shipment?

Held: No. NN could not produce the merchandise nor as-certain its whereabouts at the time B was ready to take deliv-ery. From the evidentiary record, NN was the party negligentin failing to deliver the complete shipment to B who was neverplaced in the control and possession of the same. Where theseller delivers to the buyer a quantity of goods less than hecontracted to sell, the buyer may reject them. (Chrysler Phils.Corp. vs. Court of Appeals, 133 SCRA 567 [1984].)

Delivery of goods more than quantitycontracted.

Where the seller delivers a quantity larger than that contractedfor, the buyer may accept the quantity contracted for and rejectthe excess. However, if he accepts all the goods delivered, hemakes himself liable for the price of all of them. (par. 2; see Art.1540 re sale of immovable property.)

The offer of a quantity not contracted for is a manifestation ofthe seller’s willingness to sell that quantity; and the act of thebuyer in knowingly taking them is sufficient evidence of assent.If by the terms of the original contract, the price of the goods wasbased on their number, weight, or measure, the same must be paidfor the larger quantity.

EXAMPLE:

In the preceding example, if S delivered 250 cavans of rice,B may accept only 200 and reject the rest. If he accepts the en-tire delivery, he may pay for them at the same contract rate ofP1,000.00 per cavan or P250,000.00 for the 250 cavans.

ILLUSTRATIVE CASE:

See facts.

Facts: The contract calls for the delivery of a quantity ofalmaciga (mastic) of less than 500 piculs.

Issue: Is the delivery of 500 piculs sufficient compliance withthe contract?

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

Delivery of goods mixed with others.

Where the goods delivered are mixed with goods of differentdescription not included in the contract, the buyer may acceptthose which are in accordance with the contract and reject the rest.The buyer, of course, may accept them all if he so desires.

This case is analogous to the preceding topic and the discus-sion there suffices.

Effect of indivisibility of subject matter.

If the subject matter of the sale is indivisible, in case of deliv-ery of a larger quantity of goods (par. 2.) or of mixed goods (par.3.), the buyer may reject the whole of the goods. (par. 4.)

It can be inferred from our law that the buyer has the right ofrejecting the whole of the goods delivered in the last two casesmentioned only if the subject matter is indivisible.

EXAMPLES:

(1) S agreed to sell to B a live carabao with a weight of notless than 100 kilos but not more than 120 kilos. S delivered acarabao weighing 130 kilos. B may reject the carabao.

(2) If the agreement is for S to deliver “wagwag” rice mixedwith corn of a particular variety and the rice or corn deliveredis of a different variety, B may reject the whole of the goods.

Application of usage of trade, specialagreement, or course of dealing.

The provision of the 5th paragraph of Article 1522 permittingevidence of usage of trade special agreement or course of dealingbetween the parties is but a special application of the general rulesconcerning contracts.

(1) A usage of trade is any practice or method of dealing hav-ing such regularity of observance in a place, vocation or trade as


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to justify an expectation that it will be observed with respect tothe transaction in question. The existence and scope of such ausage are to be proved as facts. (Uniform Commercial Code, Sec.205[2].)

(2) A course of dealing is a sequence of previous conduct be-tween the parties to a particular transaction which is fairly to beregarded as establishing a common basis of understanding forinterpreting their expressions and other conduct. (Ibid., Sec.205[1].)

Under modern methods of doing business especially in regardto such fungible goods as grains and oil, and other commoditieswhich are dealt in the same way, it is very common to minglegoods of different owners and to constitute a co-ownership in awhole mass of a specified quantity. Where such method of busi-ness prevails, it would be a natural consequence that a tender ofa right in the mass would be a good delivery. (see 2 Williston, op.cit., p. 732.)

ART. 1523. Where, in pursuance of a contract ofsale, the seller is authorized or required to send thegoods to the buyer, delivery of the goods to a carrier,whether named by the buyer or not, for the purposeof transmission to the buyer is deemed to be a deliv-ery of the goods to the buyer, except in the cases pro-vided for in article 1503, first, second and third para-graphs, or unless a contrary intent appears.

Unless otherwise authorized by the buyer, theseller must make such contract with the carrier onbehalf of the buyer as may be reasonable, having re-gard to the nature of the goods and the other circum-stances of the case. If the seller omits so to do, andthe goods are lost or damaged in course of transit,the buyer may decline to treat the delivery to the car-rier as a delivery to himself, or may hold the sellerresponsible in damages.

Unless otherwise agreed, where goods are sentby the seller to the buyer under circumstances inwhich the seller knows or ought to know that it is usual

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231

to insure, the seller must give such notice to the buyeras may enable him to insure them during their transit,and, if the seller fails to do so, the goods shall bedeemed to be at his risk during such transit. (n)

Delivery to carrier on behalf of buyer.

(1) General rule. — Where the seller is authorized or requiredto send the goods to the buyer (Art. 1521, par. 1.), the general ruleis that delivery of such goods to the carrier6 constitutes deliveryto the buyer, whether the carrier is named by the buyer or not.(see Behn, Meyer & Co., [Ltd.] vs. Yangco, 38 Phil. 602 [1918].) Insuch case, the delivery of the goods on board the carrying vesselpartakes the nature of actual delivery since from that time, thebuyer assumes the risk of loss of the goods. (Filipino MerchantInsurance Co., Inc. vs. Court of Appeals, 179 SCRA 638 [1989].)

(2) Exceptions. — They are those provided for in paragraphs1, 2, and 3 of Article 1503 and when a contrary intent appears,that is, the parties did not intend the delivery of the goods to thebuyer through the carrier. The seller is not responsible for misde-livery by the carrier where the carrier was chosen and authorizedby the buyer to make the delivery. (Smith Bell and Co. [Phils.],Inc. vs. Jimenez, 8 SCRA 407 [1963].)

Paragraphs 2 and 3 are in accordance with mercantile usages.

Seller’s duty after delivery to carrier.

The fact that the ownership in the goods may have passed tothe buyer does not mean that the seller has already fulfilled hisduty to the buyer.

(1) To enter on behalf of buyer into such contract reasonable underthe circumstances. — The seller must make such contract with the

6There is delivery to the carrier when the goods are ready for and have been placedin the exclusive possession, custody and control of the carrier for the purpose of theirimmediate transportation and the carrier has accepted them. Where such delivery hasthus been accepted by the carrier, its liability commences eo instanti. Ordinarily, a receiptis not essential to a complete delivery of goods to the carrier for transportation but,when issued is competent and prima facie but not conclusive evidence of delivery to thecarrier. (Saludo, Jr. vs. Court of Appeals, 207 SCRA 498 [1992].)


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carrier on behalf of the buyer as may be reasonable under the cir-cumstances. If he omits to do so, the buyer may decline to treatthe delivery to the carrier as a delivery to himself in case the goodsare lost or damaged in course of transit, or the buyer may holdthe seller responsible in damages. (par. 2.) If the buyer exercisesthe first right, the transfer of ownership will be deemed not to havetaken place.

The law does not make a carrier for all purposes the agent ofthe buyer to whom goods are consigned. The agency relates tothe transmission of the merchandise only.

(2) To give notice to buyer regarding necessity to insure goods. —The seller must give notice to the buyer as may enable him to in-sure the goods during their transit if under the circumstances itis usual to insure them. If the seller fails to do so, the risk will beborne by him. But the seller who had failed to give notice is notliable for loss of goods, if the buyer had all the information nec-essary to insure.

The two preceding obligations of the seller are respectivelysubject to specific instructions of the buyer or any agreement tothe contrary.

Definition of shipping terms.

Three commonly used terms are, namely:

(1) C.O.D. — The initials stand for the words, “collect on de-livery.” If the goods are marked C.O.D., the carrier acts for theseller in collecting the purchase price. The buyer must pay for thegoods before he can obtain possession. C.O.D. terms do not pre-vent title from passing to the buyer on delivery to the carrier wherethey are solely intended as security for the purchase price (see Art.1503.);

(2) F.O.B. — The initials stand for the words, “free on board”.They mean that the goods are to be delivered free of expense tothe buyer to the point where they are F.O.B. In general, the pointof F.O.B., either the point of shipment or the point of destination,determines when the ownership passes. (Behn, Meyer & Co. [Ltd.]vs. Yangco, 38 Phil. 602 [1918].) Here, title presumably passeswhen the goods are so delivered F.O.B.; and

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233

(3) C.I.F. — The initials stand for the words, “cost, insuranceand freight.” They signify that the price fixed covers not only thecost of the goods, but the expense of freight and insurance to bepaid by the seller (ibid.) up to the point of destination. Title passesto the buyer at the moment of delivery to the point especiallynamed.

Presumption arising from paymentof freight.

Both the terms “F.O.B.” and “C.I.F.” merely make rules ofpresumption which yield to proof of contrary intention.

If the buyer is to pay the freight, it is reasonable to supposethat he does so because the goods become his at the point of ship-ment. On the other hand, if the seller is to pay the freight, the in-ference is equally strong that the duty of the seller is to have thegoods transported to their ultimate destination and that title toproperty does not pass until the goods have reached their desti-nation. (Ibid.; see General Foods Corp. vs. National Coconut Corp.,100 Phil. 337 [1956].)

ART. 1524. The vendor shall not be bound to de-liver the thing sold, if the vendee has not paid him theprice, or if no period for the payment has been fixedin the contract. (1466)

Delivery, simultaneous with paymentof price.

As a general rule, the obligation to deliver the thing subjectmatter of a contract arises from the moment of its perfection andfrom that time the obligation may be enforced. (see Art. 1315.) Butthe contract of purchase and sale is bilateral and from it arises notonly the obligation to deliver the thing but also that of paying theprice. The obligations are reciprocal.

Consequently, if the vendor is bound to deliver the thing sold,it is no less certain that the vendee must pay the price. If the vendeedoes not pay the price, the consideration for the obligation of thevendor is absent and if the consideration is absent, the obligation


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likewise does not exist or at least is suspended. (10 Manresa 138;see Lafont vs. Pascacio, 5 Phil. 391 [1905].) The vendor is not alsoobliged to make delivery if no period has been fixed in the con-tract and the vendee has not paid the price.

A vendor who continued to effect sales and deliveries to thevendee even without promptly getting paid is considered for allintents and purposes, to have sold on credit. (Castro vs. Mendoza,44 SCAD 995, 226 SCRA 611 [1993].)

When delivery must be made beforepayment of price.

The provisions of Article 1524 contain a rule and an excep-tion: the rule is that the thing shall not be delivered unless the pricebe paid; and the exception is that the thing must be deliveredthough the price be not first paid, if time for such payment hasbeen fixed in the contract. (see Warner, Barnes & Co. vs. Inza, 43Phil. 505 [1922]; Ocejo, Perez & Co. vs. International Bank, 37 Phil.631 [1918]; Lafont vs. Pascasio, supra.)

If this period was fixed, the vendor notwithstanding suchperiod has not terminated, nor, consequently, that he has not col-lected the price, is obliged to deliver the thing sold. The vendor’sobligation to convey the thing arises from the force and validityof the contract. (Florendo vs. Foz, 20 Phil. 388 [1911]; 10 Manresa131-134.) But even if a period has been fixed for the payment ofthe price, the vendor is not bound to deliver in case the vendeehas lost the right to make use of the period and still has not paidthe price. (Art. 1536.)

EXAMPLE:

S sold to B the former’s horse for P10,000.00. No date isfixed by the parties for performance of their respective obliga-tions.

In this case, S is not bound to deliver the horse, if B himselfdoes not pay the price. But if a time of payment has been fixedin the contract, say, within two (2) months, then S is obliged todeliver the horse where the term of credit has not expired al-though B has not paid the price.

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ART. 1525. The seller of goods is deemed to be anunpaid seller within the meaning of this Title:

(1) When the whole of the price has not been paidor tendered;

(2) When a bill of exchange or other negotiableinstrument has been received as conditional payment,and the condition on which it was received has beenbroken by reason of the dishonor of the instrument,the insolvency of the buyer, or otherwise.

In articles 1525 and 1535 the term “seller” includesan agent of the seller to whom the bill of lading hasbeen indorsed, or a consignor or agent who has him-self paid, or is directly responsible for the price, orany other person who is in the position of a seller. (n)

Meaning of unpaid seller.

An unpaid seller is one who has not been paid or tendered thewhole price or who has received a bill of exchange or other nego-tiable instrument as conditional payment and the condition onwhich it was received has been broken by reason of the dishonorof the instrument.

The term “unpaid seller” within the scope of Articles 1525 upto 1535 includes: (1) an agent of the seller; (2) a consignor or agentwho has himself paid or is directly responsible for the price; or(3) any other person in the position of the seller. A seller is un-paid within the definition whether title has or has not passed. (seeArt. 1526.)

Where whole of price has not been paid.

(1) Tender of payment by buyer. — Although tender of paymentis not the same as performance, and a seller to whom the price ofgoods has been tendered is strictly unpaid, and can, therefore,bring an action subsequently for the price, which he has refused,yet tender destroys the seller’s lien. Accordingly, so far as con-cerns his rights against the goods, he is not an unpaid seller afterthe tender of the price.


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(2) Payment of part of price. — Payment of a part only of theprice does not destroy a seller’s lien. (2 Williston, op. cit., pp. 96-97.) The seller remains an unpaid seller even if title has passed tothe buyer.

(3) Payment by negotiable instrument. — According to para-graph 2 of Article 1249 (Civil Code), “the delivery of promissorynotes payable to order, or bills of exchange or other mercantiledocuments shall produce the effect of payment only when theyhave been cashed or when through the fault of the creditor theyhave been impaired.”

ART. 1526. Subject to the provisions of this Title,notwithstanding that the ownership in the goods mayhave passed to the buyer, the unpaid seller of goods,as such, has:

(1) A lien on the goods or right to retain them forthe price while he is in possession of them;

(2) In case of the insolvency of the buyer, a rightof stopping the goods in transitu after he has partedwith the possession of them;

(3) A right of resale as limited by this Title;

(4) A right to rescind the sale as likewise limitedby this Title.

Where the ownership in the goods has not passedto the buyer, the unpaid seller has, in addition to hisother remedies, a right of withholding delivery simi-lar to and co-extensive with his rights of lien and stop-page in transitu where the ownership has passed tothe buyer. (n)

Special remedies of an unpaid sellerof goods.

Article 1526 gives the unpaid seller of goods certain remediesbut they do not cover an action for the purchase price. (see Art.1595.) Even if the ownership in the goods has already passed tothe buyer, the unpaid seller may exercise the following rights:

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(1) A lien on the goods or right to retain them for the pricewhile in his possession (Arts. 1527-1529.);

(2) A right of stopping the goods in transitu in case of insol-vency of the buyer (Art. 1530.);

(3) A right of resale (Art. 1533.); and

(4) A right to rescind the sale. (Art. 1534.)

If the unpaid seller still retains ownership in the goods, hecannot be said to have a lien (on his goods). But he does have, inaddition to his other remedies, right of withholding delivery. (Art.1526, par. 2.)

Nature of unpaid seller’s possessorylien on the goods.

The right given by this article though denominated as a lien,is in truth greater than a lien.

The seller’s position is very nearly that of a pledgee (see Art.2112.) with power to sell at private sale in case of default, and thepower survives till payment of the price. An action for the priceis not inconsistent with the later enforcement of the lien thoughthe buyer must be credited with any payment of the price in re-duction of the lien. (D’Oprile vs. TurnerLooker Co., 147 N.E. 15;see Art. 1529, par. 2.)

Unpaid seller’s lien on the price.

The possessory lien referred to in Articles 1527 to 1529 shouldbe distinguished from the preferred claim or lien as provided forin Article 2241(3) of the Civil Code.

The possessory lien entitles the seller to retain possession of thegoods as security for the purchase price. Where the goods are inthe possession of the buyer (see Art. 1529[2].), the seller has nomore possessory lien but his claim for the unpaid price is a prefer-red claim or lien. Simply stated, upon delivery, the seller’s posse-ssory lien on the goods is lost, but his lien on the price remains.

Basis of rights of unpaid seller.

The ground upon which an unpaid seller is allowed a lien andkindred remedies is the inherent injustice of depriving him of


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goods with which he has not finally parted where it is evidentthat he has not been or will not be paid the price for them when itis due.

The same principle of justice is applicable in every case wherea possessor of goods is entitled to receive a price on the surren-der of the goods. Accordingly, the term “unpaid seller’’ has awider meaning than the literal language would import. (Art. 1525,par. 2; 3 Williston, op. cit., p. 99.)

ART. 1527. Subject to the provisions of this Title,the unpaid seller of goods who is in possession ofthem is entitled to retain possession of them untilpayment or tender of the price in the following cases,namely:

(1) Where the goods have been sold without anystipulation as to credit;

(2) Where the goods have been sold on credit, butthe term of credit has expired;

(3) Where the buyer becomes insolvent.

The seller may exercise his right of lien notwith-standing that he is in possession of the goods asagent or bailee for the buyer. (n)

When unpaid seller’s possessory lienmay be exercised.

(1) Sale without stipulation as to credit. — In a credit sale, theseller binds himself to give the goods over to the buyer withoutreceiving at that time payment for them. Where there is a “stipu-lation as to credit” (No. 1.), a period for payment of the price hasbeen fixed in the contract. (see Art. 1193.)

In the absence of any stipulation as to the credit, the seller isentitled to the payment of the price at the same time that he trans-fers the possession of the goods. (Art. 1524; see Distributors, Inc.vs. Flores, 92 Phil. 145 [1952].) Accordingly, the seller has alwaysa lien upon the goods which he sells until payment or tender ofthe entire price. (3 Williston, op. cit., pp. 103-104.)

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(2) Expiration of term of credit. — Even where the parties agreeupon a sale on credit, the seller’s right of lien may be exercised.By the nature of a credit sale, the buyer is entitled to possessionof the goods without paying the price; but if he fails to exercisehis right until the term of credit has expired and the price becomesdue, he loses the right which he theretofore had. (Ibid., p. 104.) Inthis case, the obligation of the buyer to pay will also be governedby Article 1524.

(3) Insolvency of the buyer. — The insolvency of the buyer isanother situation where the lien of the seller in possession is re-vived even though the time for payment of the price has not yetarrived. This doctrine is only an application of a general princi-ple in the law of contracts that when one party to a bilateral con-tract is incapacitated from performing his part of the agreement,the other party also is excused from performing. It should benoticed that insolvency does not dissolve the bargain; it merelyrevives the seller’s lien. (Ibid., p. 105.)

The insolvency of the debtor is one of the grounds for the lossof the right to make use of the period fixed in an obligation. (Art.1198[1].) A person is “insolvent” who either has ceased to pay hisdebts in the ordinary course of business or cannot pay his debtsas they become due, whether insolvency proceedings have beencommenced or not. (Art. 1636[2].)

Unpaid seller as bailee for the buyer.

It is immaterial that the seller holds the goods as bailee forthe buyer. Indeed, this always is the situation where the seller’slien is in question: for the property having passed, the seller isnecessarily holding the buyer’s goods and, therefore, acting asbailee for him. And though he has charged the buyer storage forthe goods, the lien may still be asserted.

ART. 1528. Where an unpaid seller has made partdelivery of the goods, he may exercise his right oflien on the remainder, unless such part delivery hasbeen made under such circumstances as to show anintent to waive the lien or right of retention. (n)


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Lien generally not lost by partdelivery.

When part of the goods are delivered, the unpaid seller has alien upon the remainder for the proportion of the price which isdue on account of the goods so retained. However, if the deliveryof the part is intended as symbolical delivery of the whole, and,therefore, a waiver of any right of retention as to the remainder,the lien is lost. (Art. 1529[3].)

The intent to make such waiver may be inferred from the cir-cumstances.

ART. 1529. The unpaid seller of goods loses hislien thereon:

(1) When he delivers the goods to a carrier or otherbailee for the purpose of transmission to the buyerwithout reserving the ownership in the goods or theright to the possession thereof;

(2) When the buyer or his agent lawfully obtainspossession of the goods;

(3) By waiver thereof.

The unpaid seller of goods, having a lien thereon,does not lose his lien by reason only that he has ob-tained judgment or decree for the price of the goods.(n)

When unpaid seller loses possessory lien.

(1) Delivery to agent or bailee of buyer. — An unconditional de-livery to an agent or bailee for the buyer is, so far as the seller’slien is concerned, the same as delivery to the buyer himself. It istrue that the seller may stop the goods while on their way to thebuyer after delivery to a bailee for the buyer but it cannot be saidthat the seller has still any lien upon them.

(2) Possession by buyer or his agent. — If the goods are alreadyin the possession of the buyer at the time of the bargain, it is plainthat when the ownership is transferred, the seller has no lien sim-ply because he has no possession necessary for a lien. The wrong-

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ful taking, however, of the goods by the buyer without the sell-er’s consent does not destroy the lien. Thus, if the goods are putinto the possession of the buyer merely for the purpose of allow-ing the latter to examine them, this would not amount to an as-sent to a surrender of the lien. (3 Williston on Sales, op. cit., p. 111.)

(3) Waiver of the lien. — The seller may lose his lien either byexpress agreement to surrender it. Thus, it has been held thatwhere the buyer was allowed to alter the character of the goodsand make them much more valuable, the seller could no longerassert a lien. (Ibid., p. 115.)

Note that mere judgment by a court obtained by the unpaidseller for the price of the goods is not a ground for the loss of hislien. (Art. 1529, par. 2.)

Revival of lien after delivery.

(1) If the buyer refuses to receive the goods after they havebeen delivered to a carrier or other bailee on his behalf, thoughthe seller has parted with both the ownership and the possession,he may reclaim the goods and revest himself with his lien. (seeArt. 1531, par. 1[2].)

(2) Likewise, if the buyer returns the goods in wrongful re-pudiation of the sale, the lien is revived.

ART. 1530. Subject to the provisions of this Title,when the buyer of goods is or becomes insolvent, theunpaid seller who has parted with the possession ofthe goods has the right of stopping them in transitu,that is to say, he may resume possession of the goodsat any time while they are in transit, and he will thenbecome entitled to the same rights in regard to thegoods as he would have had if he had never partedwith the possession. (n)

Right of seller to stop goods in transitu.

If the unpaid seller has already parted with the possession ofthe goods, he may still exercise the second right of stoppage intransitu (Art. 1520[2].), that is, he may resume possession of the


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goods while they are in transit, when the buyer is or becomesinsolvent. The right is exercised either by obtaining actual pos-session of the goods or by giving notice of his claim to the carrieror other bailee in possession. (Art. 1532.) The unpaid seller exer-cising his right of stoppage in transitu becomes entitled to the samerights to the goods as if he had never parted with the possessionthereof.

Take note that the buyer’s insolvency need not be judiciallydeclared. (see Art. 1636[2].) An insolvent debtor forfeits his rightsto the period stipulated for payment. (see Art. 1536.)

Requisites for the exercise of rightof stoppage in transitu.

The following are the requisites for the existence of the right:

(1) The seller must be unpaid (Art. 1525.);

(2) The buyer must be insolvent;

(3) The goods must be in transit (Art. 1531.);

(4) The seller must either actually take possession of the goodssold or give notice of his claim to the carrier or other person inpossession (Art. 1532, par. 1.);

(5) The seller must surrender the negotiable document of ti-tle, if any, issued by the carrier or bailee (Ibid., par. 2.); and

(6) The seller must bear the expenses of delivery of the goodsafter the exercise of the right. (Ibid.)

Basis and nature of right of stoppagein transitu.

(1) The essential basis of the right of stoppage in transitu isclearly the injustice of allowing the buyer to acquire ownershipand possession of the goods when he has not paid and, owing tohis insolvency, cannot pay the price which was to be given in re-turn for the goods. In other words, the fundamental basis of theright is the far-reaching principle allowing rescission and restitu-tion where there is actual or prospective failure of consideration.(3 Williston, op. cit., p. 122.)

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(2) This right does not proceed from any agreement of theparties but is independently conferred by law. It may be regardedas a legal extension of the unpaid seller’s lien.

ART. 1531. Goods are in transit within the mean-ing of the preceding article:

(1) From the time when they are delivered to a car-rier by land, water, or air, or other bailee for the pur-pose of transmission to the buyer, until the buyer, orhis agent in that behalf, takes delivery of them fromsuch carrier or other bailee;

(2) If the goods are rejected by the buyer, and thecarrier or other bailee continues in possession ofthem, even if the seller has refused to receive themback;

Goods are no longer in transit within the meaningof the preceding article:

(1) If the buyer, or his agent in that behalf, obtainsdelivery of the goods before their arrival at the ap-pointed destination;

(2) If, after the arrival of the goods at the appointeddestination, the carrier or other bailee acknowledgesto the buyer or his agent that he holds the goods onhis behalf and continues in possession of them asbailee for the buyer or his agent; and it is immaterialthat further destination for the goods may have beenindicated by the buyer;

(3) If the carrier or other bailee wrongfully refusesto deliver the goods to the buyer or his agent in thatbehalf.

If the goods are delivered to a ship, freight train,truck, or airplane chartered by the buyer, it is a ques-tion depending on the circumstances of the particu-lar case, whether they are in the possession of thecarrier as such or as agent of the buyer.


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If part delivery of the goods has been made to thebuyer, or his agent in that behalf, the remainder of thegoods may be stopped in transitu, unless such partdelivery has been under such circumstances as toshow an agreement with the buyer to give up posses-sion of the whole of the goods. (n)

When goods are in transit.

The goods are not yet in transit until they are delivered to acarrier or other bailee for the purpose of transmission to the buyer.The goods are in transit —

(1) after delivery to a carrier or other bailee and before thebuyer or his agent takes delivery of them; and

(2) if the goods are rejected by the buyer, and the carrier orother bailee continues in possession of them. (par. 1.)

When goods considered no longerin transit.

The right of stoppage in transitu arises solely when an unpaidseller has shipped goods to an insolvent buyer. The right to re-take continues only while the goods are in transit. The goods areno longer in transit in the following cases:

(1) After delivery to the buyer or his agent in that behalf;

(2) If the buyer or his agent obtains possession of the goodsat a point before the destination originally fixed;

(3) If the carrier or bailee acknowledges to hold the goods onbehalf of the buyer; and

(4) If the carrier or bailee wrongfully refuses to deliver thegoods to the buyer. (par. 2.)

Attornment by the bailee.

The right to stop the goods may be terminated not simply bydelivery to the buyer, but by attornment of the bailee to the buyer.(Art. 1531, par. 2[2].)

At the time when a carrier first receives goods consigned tothe buyer, the carrier is agent for the seller for the purpose of car-

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rying out the transit between the seller and the buyer. In order toterminate the seller’s right to stop, the carrier must enter into anew relation, distinct from the original contract of carriage, to holdthe goods for the buyer as his agent not for the purpose of expe-diting them to the place of original destination, pursuant to thatcontract, but in a new character for the purpose of custody on thebuyer’s account. (see 3 Williston, op. cit., pp. 134-135.)

Effect of refusal of carrier to attornor deliver the goods.

The carrier is not allowed to enlarge the seller’s right bywrongfully refusing to deliver or attorn as the buyer’s agent. (Art.1531, par. 2[3].) But a rightful refusal by the carrier, based for in-stance, on the refusal of the buyer or his agent to pay the freightwill not terminate the right to stop. (Ibid., pp. 135-136.)

Delivery to a ship, etc., charteredor owned by buyer.

(1) Chartered by the buyer. — The mere fact that the carrier ischartered by the buyer does not make a delivery to the carrier adelivery to the buyer. Whether delivery to a carrier chartered bythe buyer means possession by the carrier as such or possessionby the carrier as agent of the buyer, in which case, the goods areno longer in transit, is a question depending on the circumstancesof the particular case. (par. 3.)

(2) Owned by the buyer. — As delivery to an agent, other thanone whose only duty is to forward the goods, is a delivery to theprincipal, delivery to the buyer’s servant who is under a generalduty to obey his master’s order, is necessarily a delivery to thebuyer. Hence, delivery to a vessel belonging to the buyer is deliv-ery to the buyer. (see Ibid., p. 145.)

Effect of partial delivery.

The mere fact that part of the goods has been delivered doesnot deprive the seller of the right to stop with respect to the re-mainder (par. 4.) just as the seller may still exercise his right oflien on the remainder after part of the goods had been delivered.


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(Art. 1528.) However, it may be shown that the seller has an agree-ment with the buyer to give up possession of the whole of thegoods.

ART. 1532. The unpaid seller may exercise his rightof stoppage in transitu either by obtaining actual pos-session of the goods or by giving notice of his claimto the carrier or other bailee in whose possession thegoods are. Such notice may be given either to theperson in actual possession of the goods or to hisprincipal. In the latter case, the notice, to be effectual,must be given at such time and under such circum-stances that the principal, by the exercise of reason-able diligence, may prevent a delivery to the buyer.

When notice of stoppage in transitu is given bythe seller to the carrier, or other bailee in possessionof the goods, he must redeliver the goods to, or ac-cording to the directions of, the seller. The expensesof such delivery must be borne by the seller. If, how-ever, a negotiable document of title representing thegoods has been issued by the carrier or other bailee,he shall not be obliged to deliver or justified in deliv-ering the goods to the seller unless such documentis first surrendered for cancellation. (n)

Ways of exercising the right to stop.

The seller may exercise the right of stoppage in transitu either:

(1) by taking actual possession of the goods. — The seller’s powerto stop in transitu includes not only the power to counter deliveryto the buyer but to order redelivery to himself. (par. 2, 1st and 2ndsentences.) The duty imposed on the carrier by the exercise of thepower is, however, qualified by the existence of a lien of the car-rier on the goods for charges due for their carriage. The seller hasthe obligation to pay the freight on them and other necessary ex-penses of the delivery (3 Williston, op. cit., pp. 156-157.); or

(2) by giving notice of his claim to the carrier or bailee. — To makea notice effective as a stoppage in transitu, it must be given at such

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time, and under such circumstances that the principal, by theexercise of reasonable diligence, may communicate it to his agentto prevent the delivery to the buyer. There is no form of noticewhich is essential; it is only necessary that the goods be sufficientlydescribed for identification.

Effect of outstanding bill of lading.

If the goods are covered by a negotiable document of title, thecarrier or bailee has no obligation to deliver the goods to the sellerunless such document is first surrendered for cancellation. (par.2, 3rd sentence; see Art. 1519.)

Should the carrier surrender the goods to the seller and after-wards the bill of lading be negotiated to an innocent purchaserfor value, the latter would be entitled to demand delivery of thegoods. (Art. 1518.) The only way in which the carrier can be as-sured that no subsequent purchaser can arise is by requiring asurrender of the document of title. The right of the purchaser forvalue in good faith to whom such document has been negotiatedis superior to the seller’s unpaid lien or stoppage in transitu evenwhen such purchaser acquired the same after notice of stoppagewas given by the seller to the carrier. (see Art. 1535, par. 2.)

ART. 1533. Where the goods are of perishable na-ture, or where the seller expressly reserves the rightof resale in case the buyer should make default, orwhere the buyer has been in default in the payment ofthe price for an unreasonable time, an unpaid sellerhaving a right of lien or having stopped the goods intransitu may resell the goods. He shall not thereafterbe liable to the original buyer upon the contract ofsale for any profit made by such resale, but may re-cover from the buyer damages for any loss occa-sioned by the breach of the contract of sale.

Where a resale is made, as authorized in this arti-cle, the buyer acquires a good title as against the origi-nal buyer.

It is not essential to the validity of a resale thatnotice of an intention to resell the goods be given by


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the seller to the original buyer. But where the right toresell is not based on the perishable nature of thegoods or upon an express provision of the contractof sale, the giving or failure to give such notice shallbe relevant in any issue involving the questionwhether the buyer had been in default for an unrea-sonable time before the resale was made.

It is not essential to the validity of a resale thatnotice of the time and place of such resale should begiven by the seller to the original buyer.

The seller is bound to exercise reasonable careand judgment in making a resale, and subject to thisrequirement may make a resale either by public orprivate sale. He cannot, however, directly or indirectlybuy the goods. (n)

Unpaid seller’s right of resale.

(1) When resale allowable. — The third right of an unpaid selleris the right of resale. (Art. 1526[3].) An unpaid seller can exercisethe right to resell only when he has either a right of lien (Ibid., [1].)or a right to stop the goods in transitu (Ibid., [2].) and under anyof the three following cases:

(a) where the goods are perishable in nature;

(b) where the right to resell is expressly reserved in casethe buyer should make a default; and

(c) where the buyer delays in the payment of the price foran unreasonable time. (see Hanlon vs. Haussermann andBeam, 40 Phil. 796 [1920].)

Article 1533 provides that the seller having the right “mayresell the goods.” The language is permissive in nature rather thanmandatory.

(2) Effect of resale. — In case of resale, the seller is not liablefor any profit made by such resale; but if he sells for less than theprice, he has a right to sue for the balance. (par. 1.) As against theoriginal buyer, the new buyer acquires a good title to the goods.(par. 2.)

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ILLUSTRATIVE CASE:

Seller resold tractor for failure of buyer to take delivery and paythe price.

Facts: S sold to B a tractor, payable at P5,000.00 upon deliv-ery and the balance of P7,000.00 within 60 days. B failed to takedelivery of the tractor and pay the purchase price. S was forcedto sell the same to a third person for only P10,000.00.

Issue: Is B liable for the difference of P2,000.00?

Held: Yes. In a contract of sale which is executory as to bothparties, the vendor is entitled to resell the goods if the purchaserfails to take delivery and pay the purchase price. If he is obligedto sell for less than the contract price, he holds the buyer for thedifference; if he sells for as much as or more than the contractprice, the breach of contract by the original buyer is damnumabsque injuria.

There is no need of an action for rescission to authorize thevendor, who is still in possession, to dispose of the propertywhere the buyer fails to pay the price and take delivery. (Katigbakvs. Court of Appeals, 4 SCRA 243 [1962], citing Hanlon vs.Hausserman, supra.)

(3) Notice of resale not essential. — The seller’s right to resellthe goods for the buyer’s account may depend to some extent uponthe length of time the buyer has been in default. A notice by theseller of his intention to resell may operate to fix the time withinwhich it is reasonable that the buyer should perform his obliga-tions. It is, therefore, provided in paragraph 3, that except in thecase of perishable goods, which it is obvious may require an ex-peditious sale, and where the right to resell is reserved, the fail-ure to give notice shall be relevant upon the question whether thebuyer has been in default for an unreasonable time. What is rea-sonable time will vary according to the circumstances of the case.

Though the seller is not bound to give notice of his intentionto resell and of the time and place where the resale will be held(par. 4.), it is however, prudent to give the buyer such notice, asthe giving or failure to give it may be important evidence in re-gard to the fairness of the sale. (3 Williston, op. cit., p. 172.)

(4) Manner of resale. — Any absolute rule requiring the formal-ity of an auction sale might bear harshly on the seller in case where


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the goods are of small value and the buyer is financially irrespon-sible. The law “is satisfied with a fair sale made in good faith ac-cording to the established business methods with no attempt totake advantage of the vendee.” (Ibid., pp. 168-169.) The seller isonly required to exercise reasonable care and judgment in mak-ing a resale. He cannot, however, directly or indirectly, buy thegoods. (see Art. 1491[6].)

ART. 1534. An unpaid seller having the right of lienor having stopped the goods in transitu, may rescindthe transfer of title and resume the ownership in thegoods, where he expressly reserved the right to doso in case the buyer should make default, or wherethe buyer has been in default in the payment of theprice for an unreasonable time. The seller shall notthereafter be liable to the buyer upon the contract ofsale, but may recover from the buyer damages for anyloss occasioned by the breach of the contract.

The transfer of title shall not be held to have beenrescinded by an unpaid seller until he has manifestedby notice to the buyer or by some other overt act anintention to rescind. It is not necessary that such overtact should be communicated to the buyer, but the giv-ing or failure to give notice to the buyer of the inten-tion to rescind shall be relevant in any issue involv-ing the question whether the buyer had been in de-fault for an unreasonable time before the right of re-scission was asserted. (n)

Unpaid seller’s right of rescission.

(1) When seller may rescind. — The fourth right of an unpaidseller is the right to rescind the sale. (Art. 1526[4].) An unpaid sellerhas a right to rescind only if he has either a right of lien (Ibid., No.1.) or a right to stop the goods in transitu (Ibid., No. 2.) and undereither of two situations:

(a) where the right to rescind is expressly reserved in casethe buyer should make a default; or

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(b) where the buyer delays in the payment of the price foran unreasonable time. (see Ocejo, Perez & Co. vs. InternationalBank, 37 Phil. 631 [1918].)

(2) Effect of rescission. — In the case of rescission, the sellerresumes ownership in the goods. While the seller shall not be li-able to the buyer upon the contract of sale, the latter, however,may be made liable to the seller for damages for any loss occa-sioned by the breach of contract. (par. 1; see Art. 1533, par. 1.)

(3) Manner of rescission. — An election by the seller to rescindmay be manifested by notice to the buyer or by some other overtact showing an intention to rescind. Communication of such elec-tion to the buyer is not necessary. But, as in regard to resale (Art.1533, par. 3.), the giving or failure to give notice is relevant indetermining the reasonableness of the time given the buyer tomake good his obligations under the contract. (par. 2.)

ART. 1535. Subject to the provision of this Title,the unpaid seller’s right of lien or stoppage in tran-situ is not affected by any sale, or other dispositionof the goods which the buyer may have made, unlessthe seller has assented thereto.

If, however, a negotiable document of title has beenissued for goods, no seller’s lien or right of stoppagein transitu shall defeat the right of any purchaser forvalue in good faith to whom such document has beennegotiated, whether such negotiation be prior or sub-sequent to the notification to the carrier, or other baileewho issued such document, of the seller’s claim to alien or right of stoppage in transitu. (n)

Effect of sale of goods subject to lienor stoppage in transitu.

(1) Where goods not covered by negotiable document of title. — Itis fundamental, as a general rule, that a seller can give no largerright than he has. When, therefore, goods are subject to a legallien, as they are when an unpaid seller is in possession of them, apurchaser from the original buyer can acquire only such right asthe buyer then had. (3 Williston, op. cit., pp. 188-189.)


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(2) Where goods covered by negotiable document of title. — If,however, the goods are covered by a negotiable document of ti-tle, the seller’s lien cannot prevail against the rights of a purchaserfor value in good faith to whom the document has been indorsed.(see Arts. 1506, 1518, 1532 [2nd par.].) The reason for this provi-sion rests upon the nature of a negotiable document of title whichin legal fiction operates as a delivery of the goods describedtherein when indorsed. The rule protects a purchaser withoutnotice after the seller had stopped the goods either by virtue ofhis right of lien or stoppage in transitu.

The term “purchaser,” as used in Article 1534, includes mort-gagee and pledgee. (Roman vs. Asia Banking Corporation, 46 Phil.705 [1924].)

ART. 1536. The vendor is not bound to deliver thething sold in case the vendee should lose the right tomake use of the term as provided in article 1198.(1467a)

Right of vendor to withhold deliveryin sale on credit.

In a contract of sale, the obligation to pay the price is correla-tive to the obligation to deliver the thing sold. Accordingly, thevendor is not bound to make delivery if the vendee has not paidhim the price. (Art. 1524.) If, however, a period has been fixed forpayment, the vendor must deliver the thing sold though the pricebe not first paid. (see Art. 1527[1].) But even if the vendee wasgiven the benefit of a period, the vendor may not be compelledto make delivery, in case the vendee should lose the right to makeuse of the term as provided in Article 1198 of the Civil Code andsuch vendee has not yet paid the price. Said article states:

“The debtor [vendee] shall lose every right to make use ofthe period:

(1) When after the obligation has been contracted, he be-comes insolvent, unless he gives a guaranty or security for thedebt [price];

(2) When he does not furnish to the creditor [vendor] theguaranties or securities which he has promised;

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(3) When by his own acts he has impaired said guaran-tiesor securities after their establishment, and when through a for-tuitous event they disappear, unless he immediately gives newones equally satisfactory;

(4) When the debtor [vendee] violates any undertaking,in consideration of which the creditor agreed to the period;

(5) When the debtor [vendee] attempts to abscond.”

EXAMPLE:

S sold to B a car on credit. S has a right to withhold deliv-ery in any of the following situations:

(1) B becomes insolvent, unless B gives sufficient guarantyor security; or

(2) B promised to mortgage his house to secure the pur-chase price and he failed to furnish said security as promised;or

(3) If the payment of the purchase price is secured by amortgage on the house of B, but the house was partially burnedbecause of B’s fault; or was totally destroyed without B’s fault,unless B gives a new security, equally satisfactory; or

(4) Where in consideration of the sale on credit, B obligedhimself, say, to repair the piano of S, and B failed to complywith such undertaking; or

(5) Where B shows an intent not to pay the price after thecar is delivered to him.

ART. 1537. The vendor is bound to deliver the thingsold and its accessions and accessories in the con-dition in which they were upon the perfection of thecontract.

All the fruits shall pertain to the vendee from theday on which the contract was perfected. (1468a)

Condition of thing to be delivered.

In entering into a contract of sale, the parties take into con-sideration not only the particular thing which is the subject mat-ter of the contract, but also its condition at the time such contract


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was perfected. The vendor is, therefore, obliged to preserve thething pending delivery (see Arts. 1163, 1164.) because the thingsold and its accessions and the accessories must be in the condi-tion in which they were upon the perfection of the contract. (Art.1537, par. 1.)

It is the seller’s duty to deliver the thing sold in a conditionsuitable for its enjoyment by the buyer for the purposes contem-plated. Thus, a subdivision lot seller should not shift to the buyerthe burden of providing access to and from the subdivision. It isseller’s duty to construct the necessary roads in the subdivisionthat could serve as outlets. Proper access to the residence is es-sential to its enjoyment. (Consing vs. Court of Appeals, 177 SCRA14 [1989].)

While a sale of a determinate thing (e.g., land) includes all itsaccessions (e.g., house) and accessories even though they may nothave been mentioned (see Art. 1166.), a sale of the latter is notsufficient to convey title or right to the former. (see Pornellosa vs.Land Tenure Administration, 1 SCRA 375 [1961].)

Note: Accessions are the fruits of a thing; or additions to, orimprovements upon, a thing such as the young of animals, houseor trees on a land, etc.

Accessories are anything attached to a principal thing for itscompletion, ornament, or better use such as picture frame, key ofa house, etc.

Right of vendee to the fruits.

(1) When vendee entitled. — The vendee has a right to the fruitsof the thing sold from the time the obligation to deliver it arises.(Art. 1164.) The obligation to deliver arises upon the perfectionof the contract of sale. (see Art. 1475.)

EXAMPLE:

S sold his horse to B for P8,000.00. No date or conditionwas stipulated for the delivery of the horse. While still in thepossession of S, the horse gave birth to a colt. Who has a rightto the colt?

(1) B is entitled to the colt which was born after the perfec-tion of the contract. This holds true even if the delivery is sub-

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ject to a suspensive period (e.g., next month) or a suspensivecondition (e.g., upon demand) if B has paid the purchase price.

(2) But S has a right to the colt if it was born before hisobligation to deliver the horse has arisen (Art. 1164.) and B hasnot yet paid the purchase price. In this case, upon the fulfillmentof the condition or the arrival of the period, S does not have togive the colt and B is not obliged to pay legal interests since thecolt and the interests are deemed to have been mutually com-pensated. (see Art. 1187.)

(2) When vendee not entitled. — In the following cases, thevendee is not entitled to the fruits:

(a) When the rule provided in Article 1537 (par. 2.) ismodified by agreement of the parties, their agreement shall,of course, govern;

(b) If the vendee rescinds the contract of sale instead of ex-acting the fulfillment thereof, he is entitled only to damageslike interest, attorney’s fees and costs but he may not also claimthe fruits of the thing sold (Hodges vs. Granada, 59 Phil. 429[1934]; see Art. 1385.); and

(c) In a contract of promise to sell, the vendee is not enti-tled to the fruits. The only right of the contracting parties is toreciprocally demand the fulfillment of the contract. Prior to thesale and conveyance of the subject matter of the contract, thepromisee or would-be vendee acquires no right to the fruitsthereof. (De Vera vs. De Vera, [C.A.] O.G. 3318, Sept., 1948.)

ART. 1538. In case of loss, deterioration or im-provement of the thing before its delivery, the rules inarticle 1189 shall be observed, the vendor being con-sidered the debtor. (n)

Rules in case of loss, deterioration, or improve-ment of thing before delivery.

Article 1189 of the Civil Code states:

“When the conditions have been imposed with the inten-tion of suspending the efficacy of an obligation to give, thefollowing rules shall be observed in case of the improvement,


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loss or deterioration of the thing during the pendency of thecondition:

(1) If the thing is lost without the fault of the debtor, theobligation shall be extinguished;

(2) If the thing is lost through the fault of the debtor, heshall be obliged to pay damages; it is understood that the thingis lost when it perishes, or goes out of commerce, or disappearsin such a way that its existence is unknown or it cannot berecovered;

(3) When the thing deteriorates without the fault of thedebtor, the impairment is to be borne by the creditor;

(4) If it deteriorates through the fault of the debtor, thecreditor may choose between the rescission of the obligationand its fulfillment, with indemnity for damages in either case;

(5) If the thing is improved by its nature, or by time, theimprovement shall inure to the benefit of the creditor;

(6) If it is improved at the expense of the debtor, he shallhave no other right than that granted to the usufructuary.”

A reading of the above article shows that it is in consonancewith Article 1480 (supra.) which provides for the rules governinginjury to, or benefit from, the thing sold after the contract has beenperfected but before its delivery. Both under Articles 1480 (pars. 1and 2.) and 1538, the loss shall be at the risk of the vendee pend-ing delivery. As heretofore pointed out, Article 1504 (supra.), whichhas been taken from the American law on sales, provides anotherrule governing risk of loss which is contrary to Articles 1480 and1538.

EXAMPLE:

S sold to B his car. If before delivery —

(1) the car is lost or destroyed without the fault of S (as-suming S is not guilty of delay and there is no contrary stipula-tion that he shall be liable), the obligation to deliver is extin-guished and B shall be obliged to pay the price if he has notpaid the same;

(2) if the loss is through S’s fault, he shall be liable to paydamages to B;

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(3) if the car suffers damages without the fault of S, B shallhave to suffer the impairment;

(4) if the damage was due to S’s fault, B may choose, be-tween the rescission (cancellation) of the contract with dam-ages or the delivery of the car also with damages;

(5) if the market value of the car increased, the increaseshall inure to the benefit of B inasmuch as he suffers the dete-rioration in case of a fortuitous event;

(6) if S had the car painted and its seat cover changed athis expense, he shall have the rights of a usufructuary with re-spect to the improvements.7

ART. 1539. The obligation to deliver the thing soldincludes that of placing in the control of the vendeeall that is mentioned in the contract, in conformity withthe following rules:

If the sale of real estate should be made with astatement of its area, at the rate of a certain price fora unit of measure or number, the vendor shall beobliged to deliver to the vendee, if the latter shoulddemand it, all that may have been stated in the con-tract; but, should this be not possible, the vendee maychoose between a proportional reduction of the priceand the rescission of the contract, provided that, inthe latter case, the lack in the area be not less thanone-tenth of that stated.

The same shall be done, even when the area is thesame, if any part of the immovable is not of the qual-ity specified in the contract.

The rescission, in this case, shall only take placeat the will of the vendee, when the inferior value of

7Art. 579. The usufructuary may make on the property held in usufruct such usefulimprovements or expenses for mere pleasure as he may deem proper, provided he doesnot alter its form or substance; but he shall have no right to be indemnified therefor. Hemay, however, remove such improvements, should it be possible to do so without dam-age to the property.

Art. 580. The usufructuary may set off the improvements he may have made on theproperty against any damage to the same.


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the thing sold exceeds one-tenth of the price agreedupon.

Nevertheless, if the vendee would not have boughtthe immovable had he known of its smaller area orinferior quality, he may rescind the sale. (1469a)

Sale of real property by unitof measure or number.

(1) Entire area stated in contract must be delivered. — If the saleof real estate should be made with a statement of its area, at therate of a certain price per unit of measure or number, the cause ofthe contract with respect to the vendee is the number of such unitsor, if you wish, the thing purchased as determined by the stipu-lated number of units. The vendor must deliver the entire prop-erty agreed upon. (pars. 1 and 2.) Thus, if the parcel of land isstated in the contract as having an area of 500 square meters andsold at P1,000.00 per square meter, the vendor must deliver theentire area as stated. (see Santa Ana, Jr. vs. Hernandez, 18 SCRA973 [1966].) Furthermore, the immovable must be of the qualityspecified in the contract. (par. 3.)

(2) Where entire area could not be delivered. — If all that is in-cluded within the stipulated boundaries is not delivered, then theobject of the contract, its cause as far as the vendee is concerned,is not delivered. Hence, he is entitled to rescind it. He may, how-ever, enforce the contract with the corresponding decrease in price.(Teran vs. Villanueva Viuda de Riosa, 56 Phil. 677 [1932].)

When vendee entitled to rescindsale of real property.

Under the above article, the right of rescission is available tothe vendee in the following cases:

(1) If the lack in area is at least 1/10th than that stated or stipu-lated. (par. 2.) The 1/10th mentioned must be based on the areastipulated in the contract, and not on the real area which the thingmay actually have (see 10 Manresa 149-154.);

(2) If the deficiency in the quality specified in the contractexceeds 1/10th of the price agreed upon (par. 3.); and

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(3) If the vendee would not have brought the immovable hadhe known of its smaller area or inferior quality irrespective of theextent of the lack in area or quality. (pars. 4 and 5.)

The above remedies are also available under the second para-graph of Article 1542.

Note that in case of fulfillment, the vendee is entitled only toa proportionate reduction of the price where there is a deficiencyin area or number. (par. 2; see Azarraga vs. Gray, 52 Phil. 599[1928].) The rule is different where there is a violation of the war-ranty against hidden defects. (Art. 1571.) The vendor is also li-able for damages. (Art. 1567; see Art. 1191, par. 2.)

ART. 1540. If, in the case of the preceding article,there is a greater area or number in the immovablethan that stated in the contract, the vendee may ac-cept the area included in the contract and reject therest. If he accepts the whole area, he must pay for thesame at the contract rate. (1470a)

Where immovable of a greater areaor number.

If the area or number in the immovable is greater than thatstipulated in the contract, the vendee may accept the area includedin the contract and reject the rest. If he accepts the whole, he makeshimself liable for the price of the same at the contract rate. (seecomments under Article 1522, par. 2.)

The vendee may not withdraw from the contract.

ART. 1541. The provisions of the two precedingarticles shall apply to judicial sales. (n)

Application of Articles 1539 and 1540to judicial sales.

The provisions of Articles 1539 and 1540 are applicable to bothprivate (voluntary) and judicial sales when the immovable soldis lacking in area or is of inferior quality or is greater in area thanstated in the contract. (see Arts. 1552 and 1570.) The reason is that


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the rules they contain are derived from the very nature of thecontract of sale.

The rules, however, may be varied or suppressed by agree-ment between the contracting parties. (10 Manresa 138.)

ART. 1542. In the sale of real estate, made for alump sum and not at the rate of a certain sum for aunit of measure or number, there shall be no increaseor decrease of the price, although there be a greateror less area or number than that stated in the con-tract.

The same rule shall be applied when two or moreimmovables are sold for a single price; but if, besidesmentioning the boundaries, which is indispensablein every conveyance of real estate, its area or numbershould be designated in the contract, the vendor shallbe bound to deliver all that is included within saidboundaries, even when it exceeds the area or numberspecified in the contract; and should he not be ableto do so, he shall suffer a reduction in the price, inproportion to what is lacking in the area or number,unless the contract is rescinded because the vendeedoes not accede to the failure to deliver what has beenstipulated. (1471)

Sale of real estate madefor a lump sum.

(1) Mistake in area stated in contract immaterial. — If the sale ismade for a lump sum, and not so much per unit of measure ornumber, the cause of the contract is the thing sold independentand irrespective of its number or measure. (see 10 Manresa 145.)In this case, the law presumes that the purchaser had in mind adeterminate price for the real estate and that he ascertained itsarea and quality before the contract was perfected. (Teran vs.Villanueva, 56 Phil. 677 [1932].)

In other words, it is presumed that the purchaser intended tobuy a determinate object in its entirety and not just any unit ofmeasure or number, and the price is determined with relation to

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it; hence, its greater or lesser area cannot influence the increase ordecrease of the price agreed upon, whether the object be singlerealty or whether they are two or more immovables. The bounda-ries of the land stated in the contract determine the effects andscope of the sale, not the area thereof. (Semira vs. Court of Ap-peals, 49 SCAD 93, 230 SCRA 577 [1994]; 10 Manresa 156-157.)Hence, the vendor is obligated to deliver all the land includedwithin the boundaries, regardless of whether the real area shouldbe greater or smaller than that recited in the deed (Balantakbo vs.Court of Appeals, 65 SCAD 74, 249 SCRA 323 [1995].) inasmuchas it is the entirety thereof that distinguishes the determinate ob-ject. (Roble vs. Arbasa, 152 SCAD 115, 362 SCRA 69 [2001], citingTolentino Civil Code of the Philippines, Vol. V, 1992 ed., p. 94.)

The possibility of error is a hazard which the parties must bepresumed to have assumed. This hazard is not one-sided butworks both ways. (Gonzales-Mondragon vs. Santos, 87 Phil. 471[1950].) The rule in Article 1542, however, admits of exceptions.(infra.)

(2) Where area or number stated together with boundaries. — Ifthe vendor cannot deliver to the vendee all that is included withinthe boundaries mentioned in the contract, the latter has the op-tion to reduce the price in proportion to the deficiency or to setaside the contract. (Art. 1542, par. 2.) The phrase “should he notbe able to do so” refers to a situation when the vendor, either be-cause a part or parcel of the real estate does not belong to him,cannot deliver all that is included within the boundaries. (see 10Manresa 145-154.)

EXAMPLE:

S sold to B a parcel of land for the lump sum (or a cuerpocierto) of P300,000.00. The contract states that the area is 500square meters. Subsequently, it was ascertained that the areaincluded within the boundaries is really 600 square meters.

In this case, S is bound to deliver all the 600 square meterswhich are included within said boundaries without increase inprice. If S does not deliver also the extra 100 square meters, Bhas the right to rescind the contract or pay a proportionatelyreduced price, namely: 5/6 of the original price or P250,000.00.


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ILLUSTRATIVE CASES:

1. The area of land sold for a lump sum is less than that statedin the contract.

Facts: S sold to B lot No. 20, Calle San Jose, Ermita, Manilafor the sum of P3,200.00. The document recites that the tractcontains 152.46 square meters. On the date assigned for theexecution of the final deed of sale, B refused to pay the agreedprice claiming that the land was actually less in area than thatstated in the contract.

B claimed a proportional reduction of the price or else hewould not buy. So S brought action for specific performance.

Issue: Is B relieved from the obligation of paying the price?

Held: No. The fact that the specified parcel of land boughtby B at the price of P3,200.00 is not as large as he thought, doesnot relieve him from the obligation of paying its price. If heintended to buy by the meter, he should have so stated in thecontract. (Goyena vs. Tambunting, 1 Phil. 490.) In the matter ofsales of land made for a lump sum and not so much a unit ofmeasure or number, the boundaries of said land stated in thecontract, not the area thereof, are the determining factor of theeffects, scope, or meaning of said contract. The real and truearea of the land must prevail over that given in the document.(Pacia vs. Lagman, 68 Phil. 351 [1939]; see Gov’t. vs. Abaya, 52Phil. 261 [1928]; Gov’t. vs. Abad, 47 Phil. 573.)

———— ———— ————

2. In a sale of land for a lump sum, the deficiency in the statedarea to which the parties paid particular attention when they enteredinto that contract was almost 1/3.

Facts: S sold to B the hacienda Maria which, according to S,contained an area of 25 hectares more or less, the standing cropthereon capable of yielding not less than 2,000 piculs of sugar.During the negotiations, B always doubted the correctness ofthe area and the amount of crop given by S who always as-sured B that they were correct.

In short, the parties made the sale with particular attentionto the area.

It turned out that the land contained only 18 hectares andthe crop yielded only 800 piculs of sugar.

Issue: Has B the right to ask for rescission of the sale or theproportionate reduction of the price?

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Held: Yes. While it is true that in a sale of land for a lumpsum, the vendee may not ask for the rescission of the sale orthe proportional reduction in the price if the area delivered beless than that stated in the contract, the rule does not apply ifthe deficiency is so material as to go to the essence of the con-tract for, under such circumstances, gross mistake may be in-ferred which is the duty of a court of equity to correct. In thecase at bar, the parties paid particular attention to the area ofthe land when they made the contract. The use of “more orless” or similar words in designating quantity covers only areasonable excess or deficiency. The vendee does not therebyipso facto take all risks of quantity in the land. (Asian vs. Jalandoni,45 Phil. 296 [1923].)

———— ———— ————

3. In a sale for a lump sum of a fishpond of which buyer hadbeen in possession as a lessee for two years, the deficiency is about 1/4 of the stated area.

Facts: S sold to B a fishpond for the lump sum of P14,000.00.The deed of sale recited that the area of the fishpond was “11hectares, 38 ares, and 77 centares, more or less.” It was subse-quently discovered that its area was only 8 hectares or about1/4 less than that stated in the contract. B had been leasing thefishpond for about two years.

S brought action to recover the purchase price.

Issue: Is B relieved from paying the price?

Held: Although the shortage amounts to practically 1/4 ofthe total area, B clearly intended to take the risk of quantityand that the area has been mentioned in the contract merely forthe purpose of description, considering that B had been in pos-session of the fishpond as a lessee for two years and, therefore,can rightly be presumed to have acquired a good estimate ofits value and area. (Garcia vs. Velasco, 72 Phil. 248 [1941].)

Note: In other words, the parties in this case did not takeinto consideration the area of the fishpond in question whenthey made the contract.

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


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thereof has been proven. (Government vs. Abaya, 52 Phil. 261[1928].) That which really defines a piece of ground is not the area,calculated with more or less certainty mentioned in its descrip-tion, but the boundaries therein laid down as enclosing the landand indicating its limits. It is not of vital consequence that a con-tract on sale of land should disclose the area with mathematicalaccuracy. It is sufficient if its extent is objectively indicated withsufficient precision to enable one to identify it. An error as to thesuperficial area is immaterial. (Erico vs. Heirs of Chigas, 98 SCRA575 [1980]; Dichoso vs. Court of Appeals, 192 SCRA 169 [1990].)

(4) Where identity of erroneously designated property clearly es-tablished. — Where the identity of the disputed property has beenclearly established by both parties’ pleadings, the mistake in des-ignating the property in the deed of sale “does not vitiate con-sent of the parties or affect the validity and binding effect of thecontract. The reason is that when one sells or buys real property— a piece of land, for example — one sells or buys the propertyas he sees it in its actual setting and by its physical metes andbounds, and not by the mere lot number assigned to it in the cer-tificate of title.” (Dihiansen vs. Court of Appeals, 153 SCRA 712[1987]; Atilano vs. Atilano, 28 SCRA 231 [1969].) The remedy forsuch a situation is to have the document reformed. (Art. 1359, etseq.)

(5) Where words “about,’’ “more or less,” etc. are used. — Thewords when used in connection with quantity or distance, arewords of safety and caution, intended to cover some slight orunimportant inaccuracy, and, while enabling an adjustment to theimperative demands of fixed monuments, they do not weaken ordestroy the statements of distance and quantity when no otherguides are furnished. The rule in measuring distances is thatwords of qualification (e.g., “50 feet, more or less’’) should be dis-regarded and the exact distance adopted. The words “about,’’“approximately,” and “more or less’’ in connection with coursesand distances may be disregarded if not controlled or explainedby monuments, boundaries and other expressions of intention.In a case, the petitioner insists that there should have been an al-lowance of around 300 meters since the technical description ofthe land in question states that the boundary line should be foraround 16,000 meters more or less; held: The disputed gap of 300

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meters is not an insignificant distance. Thus, the petitioner can-not capitalize on the phrase “around 16,000 meters more or less’’for the words “more or less’’ only cover an incidental and insub-stantial inaccuracy. (Sta. Ines Melale Forest Products Corp. vs.Macaraig, Jr., 299 SCRA 491 [1998].)

In another case, an area of “644 square meters more’’ was heldnot a reasonable excess or deficiency, to be deemed included inthe deed of sale relating to a piece of land with an “approximatearea of 240 square meters more or less.’’ A vendee of land whensold in gross or with the description “more or less’’ with refer-ence to its area, does not thereby ipso facto take all risk of quantityin the land for such description or similar words in designatingquantity covers only a reasonable excess or deficiency. (Roble vs.Arbasa, 152 SCAD 115, 362 SCRA 69 [2001].)

Conflict between area stated and boundaries.

(1) Where boundaries given are sufficiently certain. — The propo-sition of law is to the effect that “where it appears that the land isso described by boundaries as to put its identification beyonddoubt,” an erroneous statement relative to the area of the ques-tioned parcel may be disregarded because what really defines apiece of ground is not the area mentioned in its description butthe boundaries therein laid down as enclosing the land and indi-cating its limits. (Vda. De Tan vs. Intermediate Apppellate Court,213 SCRA 95 [1992]; Loyola vs. Bartolome, 39 Phil. 546 [1919].) Thisproposition, however, holds true only where the boundaries givenare sufficiently certain, and the identity of the land proved by theboundaries clearly indicates that an erroneous statement concern-ing the area can be disregarded or ignored. (Paterno vs. Salud, 9SCRA 81 [1963].)

(2) Where boundaries do not identify land or overlapping of bounda-ries exists. — The above rule is not applicable where the bounda-ries relied upon do not identify the land beyond doubt. (Buiservs. Cabrera, 81 Phil. 669 [1948].) In such case, the area stated inthe document should be followed. (Paterno vs. Salud, supra.)

In a case, the deed of sale did not even indicate with particu-larity the area of the land covered thereby. The parties merelypointed at boundaries which were even beyond what could have


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been bought by the vendee. An area delimited by boundariesproperly identifies a parcel of land. However, in controversialcases, where there appeared to be an overlapping of boundaries,the actual size of the property gains importance. It is well-settledthat anyone who claims that he has a better right to a propertymust prove both ownership and identity of the said property.(Oclarit vs. Court of Appeals, 52 SCAD 337, 238 SCRA 239 [1994].)

(3) Where discrepancy in measurement is so great. — In a casewhere petitioner claimed in his application to be entitled for reg-istration of a parcel of land whose area after the survey turnedout to be 626 hectares while the grant given to him only mentions92 hectares, the court rejected the claim ruling that “when the landsought to be registered is almost seven times as much as that de-scribed in the deed, the evidence as to natural boundaries must bevery clear and convincing before that rule (that natural boundarieswill prevail over area) can be applied.” (Pamintuan vs. InsularGov‘t., 8 Phil. 512 [1907]; see also Paras vs. Insular Gov‘t., 11 Phil.378 [1908]; Carillo vs. Insular Gov‘t., 11 Phil. 379 [1908]; Waldorfvs. Castañeda, 25 Phil. 50 [1913]; Sales vs. Director of Lands, 61Phil. 759 [1935].)

In another case, the court properly rejected the contention ofthe plaintiff that the property sought to be recovered was origi-nally a portion of a bigger portion of land belonging to him, itappearing that “it is only on the north and south sides of the prop-erty in question where the natural boundaries are identical be-cause on the east and west sides there are no natural boundaries.. . The discrepancy in the measurement . . . is so great that therecould hardly be any room to suppose that a 30-hectare land areamight have been wrongly or inaccurately estimated to be only1,200 square meters.” (Paterno vs. Salud, supra.)

ART. 1543. The actions arising from articles 1539and 1542 shall prescribe in six months, counted fromthe day of delivery. (1472a)

Prescription of actions.

The actions based on Articles 1539 and 1542 for either res-cission of the contract or proportionate reduction of the price

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must be brought within six months counted from the day of de-livery.

ART. 1544. If the same thing should have been soldto different vendees, the ownership shall be trans-ferred to the person who may have first taken pos-session thereof in good faith, if it should be movableproperty.

Should it be immovable property, the ownershipshall belong to the person acquiring it who in goodfaith first recorded it in the Registry of Property.

Should there be no inscription, the ownership shallpertain to the person, who in good faith was first inthe possession; and, in the absence thereof, to theperson who presents the oldest title, provided thereis good faith. (1473)

Rules as to preference of ownershipin case of a double sale.

If the same property is sold by the same vendor to differentvendees, the conflicting rights of said vendees shall be resolvedin accordance with the following rules:

(1) If the property sold is movable, the ownership shall beacquired by the vendee who first takes possession in good faith(see Villa Rey Transit, Inc. vs. Ferrer, 25 SCRA 861 [1968].);

(2) If the property sold is immovable, the ownership shallbelong, in the order hereunder stated, to:

(a) The vendee who first registers the sale in good faith inthe Registry of Property (Registry of Deeds) has a preferredright over another vendee who has not registered his title evenif the latter is in actual possession of the immovable property.More credit is given to registration than to actual possession.(see Paylago vs. Jarabe, 22 SCRA 1247 [1968]; Beatriz vs.Cedeña, 4 SCRA 617 [1962]; Carbonell vs. Court of Appeals,69 SCRA 99 [1976]; Barretto vs. Arevalo, 99 Phil. 771 [1956];Nuguid vs. Court of Appeals, 171 SCRA 213 [1989]; Tañedo vs.


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Court of Appeals, 67 SCAD 57, 252 SCRA 80 [1996]; Balatbatvs. Court of Appeals, 73 SCAD 660, 261 SCRA 128 [1996].)

When a conveyance has been properly recorded, suchrecord is constructive notice to the whole world of its contentsand all interests, legal and equitable, included therein. Becauseof this principle of constructive notice, one who deals withregistered property which is the subject of an annotated levyor attachment cannot invoke the rights of a purchaser in goodfaith. (Biñan Steel Corporation vs. Court of Appeals, 391 SCRA90 [2002].) However, the mere registration is not enough; goodfaith must concur with the registration. To be entitled to pri-ority, the second purchaser must have also acted in good faith,without knowledge of the previous alienation by the vendorto another. (Bautista vs. Court of Appeals, 48 SCAD 629, 230SCRA 446 [1994].) The defense of indefeasibility of torrens ti-tle does not extend to a transferee who takes the certificate oftitle in bad faith with notice of its flaw. (Occeña vs. Esponilla,431 SCRA 116 [2004].)

The requirement of the law then is two-fold: acquisitionin good faith and registration in good faith. (Gabriel vs.Mabanta, 399 SCRA 73 [2003]; San Lorenzo DevelopmentCorporation vs. Court of Appeals, 449 SCRA 99 [2005].) Therule applies to the annotation of an adverse claim in doublesales. (Bucad vs. Court of Appeals, 216 SCRA 423 [1992].)

The governing principle is prius tempore, patior jure (firstin time, stronger in right). Knowledge by the first buyer of thesecond sale cannot defeat the first buyer’s right except whenthe second first registers in good faith the second sale.(Olivares vs. Gonzales, 159 SCRA 33 [1988].) Conversely,knowledge gained by the second buyer of the first sale defeatshis rights even if he is first to register, since such knowledgetaints his registration with bad faith. (Astorga vs. Court ofAppeals, 133 SCRA 748 [1984]; Santiago vs. Court of Appeals,63 SCAD 636, 247 SCRA 336 [1995].)

(b) In the absence of registration, the vendee who firsttakes possession in good faith; and

(c) In the absence of both registration and possession, the

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vendee who presents the oldest title (who first bought theproperty) in good faith.

Article 1544 has no application to lands not registered withthe Torrens system. If the sale is not registered, it is binding onlyas between the seller and the buyer; it does not affect innocentthird persons.

Possession of property sold.

The taking of possession of the property sold may be in anyof the ways provided in Articles 1497 to 1501.

The phrase “who first took possession” is equivalent to tradi-tion, real or symbolic, such as that which is acquired by the ex-ecution of a public instrument. Thus, after the sale of realty bymeans of a public instrument, the vendor, who resells it to anotherdoes not transmit anything to the second vendee, and if the lat-ter, by virtue of this second sale, takes material possession of thething, he does it as mere detainer, and it would be unjust to pro-tect this detention as against the rights to the thing lawfully ac-quired by the first vendee. (Quimson vs. Rosete, 89 Phil. 159 [1950];Navera vs. Court of Appeals, 184 SCRA 584 [1990].)

Registration of immovable sold.

(1) Sale merely presented for registration. — The mere presenta-tion to the office of the register of deeds of a document on whichacknowledgment of receipts is written is not equivalent to regis-tration. Registration in its juridical aspect must be understood asthe entry made in a book or public registry of deeds. (Po Sun Tunvs. Price Prov. Gov’t. of Leyte, 54 Phil. 192 [1912].)

(2) Sale registered in bad faith. — Article 1544 does not declarevoid a deed of sale registered in bad faith. It does not mean, how-ever, that said contract is not void. Article 1544 specifically pro-vides who shall be the owner in case of a double sale of an im-movable property. To give full effect to this provision, the statusof the two contracts must be determined and clarified. One con-tract must be declared valid so that one vendee may exercise allthe rights of an owner, while the other contract must be declaredvoid to cut off all rights which may arise from said contract.(Caram, Jr. vs. Laureta, 102 SCRA 7 [1981].)


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Accordingly, where the second purchaser had knowledge ofthe other sale, prior to or at the time of the sale to him, his knowl-edge taints his purchase with bad faith. The applicable rule in thiscase would be that the ownership shall pertain to the person who,in good faith, first entered into possession of the property or inthe absence of possession, to the person who presents the oldesttitle, provided there is good faith. (Gatmaitan vs. Court of Appeals,200 SCRA 37 [1992]; Berico vs. Court of Appeals, 44 SCAD 84, 225SCRA 469 [1993].)

(3) Issuance of transfer certificate of title noted/not noted on origi-nal certificate of title. — In a case, it appears that the issuance of atransfer certificate of title to the first buyers was never noted onthe original certificate of title which was not cancelled at all,whereas the issuance of a transfer certificate of title to the secondbuyers was noted in the original certificate of title which was can-celled by virtue of said issuance. It was held that the second buy-ers acquired ownership over the disputed lot since they were thefirst to register in good faith their sale in the registry of property.(Astorga vs. Court of Appeals, 133 SCRA 748 [1984].)

(4) Immovable registered/not registered. — Article 1544 (2nd and3rd pars.) covers all kinds of immovables, including land, andmakes no distinction as to whether the immovable is registeredor not. But insofar as registered land is concerned, the rule is inperfect accord with Section 508 of the Land Registration Law (ActNo. 496.) which provides that no deed, mortgage, lease or othervoluntary instrument, except a will, purporting to convey or af-fect registered land shall take effect as a conveyance or bind theland until its registration. (Revilla vs. Galindez, 107 Phil. 480[1960].) One who buys from a person who is not the registeredowner of property is not a purchaser in good faith. (Liu vs. Lay,Jr., 405 SCRA 316 [2003].)

The peculiar force of a title under Act No. 496 is exhibited onlywhen the purchaser has sold to innocent third parties the landdescribed in the conveyance. (Medina vs. Imaz and Warner BarnesCo., 27 Phil. 314 [1914].) With respect to banks, the rule that per-sons dealing with registered lands can rely solely on the certifi-

8Now Section 51 of the Property Registration Decree. (Pres. Decree No. 1529.)

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cate of title does not apply to banks because their business is oneaffected with public interest keeping in trust money belonging totheir depositors. They are expected to exercise greater case andprudence before entering into a contract involving registeredlands. (Navarro vs. Second Laguna Development Bank, 398 SCRA227 [2003].)

Note: The defense of indefeasibility of torrens title refers to saleof lands, and not to sale of properties situated therein. Thus, themere fact that the lot where a factory and disputed propertiesstand is in a person’s name does not automatically make suchperson the owner of everything found therein. (Tsai vs. Court ofAppeals, 156 SCAD 28, 366 SCRA 324 [2001].)

(5) Property attached while still registered in the name of judgmentdebtor. — A sale of real estate, whether made as a result of a pri-vate transaction or of a foreclosure or execution sale, becomeslegally effective against third persons only from the date of itsregistration. Consequently, where the property was actually at-tached and levied upon at a time when said properties stood inthe official records of the Registry of Deeds as still owned by andregistered in the name of the judgment debtor, the attachment,levy and subsequent execution sale made in favor of the judgmentcreditor transferred to him all the rights of the judgment debtorin the said property, unaffected by any prior transfer orunencumbrance not so recorded therein.

While purchasers at execution sales should bear in mind thatthe rule of caveat emptor applies to such sales (see Art. 1566.), thatthe sheriff does not warrant the title to real property sold by himas sheriff, and that it is not incumbent upon him to place the pur-chaser in possession of such property, still the rule applies that aperson dealing with registered land is not required to go behindthe register to determine the condition of the property and he ismerely charged with notice of the burdens on the property whichare noted on the face of the register or the certificate of title.(Campillo vs. Court of Appeals, 129 SCRA 513 [1984].) Accord-ingly, in case of a conflict between a vendee and an attaching credi-tor who registers the order of attachment and the sale of the prop-erty to him as the highest bidder, the latter acquire a valid title tothe property as against the former who had previously bought


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the same property from the registered owner but who failed toregister his deed of sale, but where the attaching creditor hasknowledge of a prior existing interest which is unregistered at atime he acquired a right to the same land, his knowledge of thatprior unregistered interest has the effect of registration as to him.(Ruiz, Sr. vs. Court of Appeals, 152 SCAD 86, 362 SCRA 40 [2001].)

(6) Unregistered property sold at execution sale was previously soldby judgment debtor. — A sale of unregistered land which sale hasnot been registered in the office of the register of deeds is validand binding as between the parties themselves. (Galasicao vs.Austria, 97 Phil. 83 [1955].) The rule in Article 1544 applies to landscovered by Torrens title, where the prior sale is neither recordednor known to the execution purchaser prior to the levy.

But where the land is not registered under the Torrens Sys-tem, the rule is different. While under Article 1544, registrationin good faith prevails over possession in the event of a double saleby the vendor of the same piece of land to different vendees, saidarticle is of no application even if the latter vendee, at a sheriff’sexecution sale which was registered, was ignorant of the prior salemade by his judgment debtor in favor of another vendee. Thereason is that the purchaser of unregistered land at a sheriff’sexecution sale only steps into the shoes of the judgment debtor,and merely acquires the latter’s interest in the property sold as ofthe time the property was levied upon. This is specifically pro-vided by Section 35 of Rule 39 of the Rules of Court. (Carumbavs. Court of Appeals, 31 SCRA 558 [1970]; see Hernandez vs.Katigbak, 69 Phil. 744 [1940]; Executive Commission vs. Abadilla,74 Phil. 68 [1943].)

(7) Notice of adverse claim was registered previous to sale to pos-sessor. — Since the owner’s copy of the certificate of title was notdelivered in due time to the first buyer despite the promise bythe seller (attorney-in-fact) to deliver the same in a few days, thebuyer registered with the Register of Deeds on September 6, 1982his notice of adverse claim as vendee over the property sold. Thesecond sale was registered only on November 11, 1982 wherebya new title was issued in favor of the second buyer. The first buyerhas a superior right to the property in question. Article 1544 isclear that a prior right is accorded to the vendee who first recorded

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his right in good faith over an immovable property. (Valdez vs.Court of Appeals, 194 SCRA 360 [1991].)

(8) Sale was registered before the execution sale but after its levy.— The doctrine is that a levy on execution duly registered takespreference over a prior unregistered sale, and that even if the priorunregistered sale is subsequently registered before the sale onexecution but after the levy was duly made, the validity of theexecution sale should be maintained because it retroacted to thedate of the levy. This rule applies by analogy as regards encum-brances made after the registration of the levy on execution. Thereason therefor is that if the rule were otherwise, the preferenceenjoyed by the levy on execution in a case would be meaninglessand illusory.

In short, the priority enjoyed by the levy on execution extendswith full force and affect to the buyer at the auction sale conductedby virtue of such levy. (First Integrated Bonding & Insurance Co.vs. Court of Appeals, 73 SCAD 731, 261 SCRA 203 [1996]; BiñanSteel Corporation vs. Court of Appeals, 391 SCRA 90 [2002]; Duvs. Stronghold Insurance Co., Inc., 432 SCRA 43 [2004].)

Requirement of good faith.

The fundamental premise of the preferential rights establishedby Article 1544 is good faith (Bernas vs. Bolo, 81 Phil. 16 [1948];see Manacop vs. Cansino, 1 SCRA 572 [1961]; Paylago vs. Jarabe,22 SCRA 247 [1968].), that is to say, ignorance of the rights of thefirst vendee. (Gallardo vs. Gallardo, [CA] 46 O.G. 5568.) He isdeemed a possessor in good faith who is not aware that there existsin his title or mode of acquisition any flaw which invalidates it.(Art. 526.)

(1) Mere registration of sale not enough. — Good faith is an es-sential requisite of registration to acquire new title because “publicrecords cannot be converted into instruments of fraud and oppres-sion by one who secures an inscription thereon in bad faith.”(Leung Yee vs. F.L. Strong Machinery Co., 37 Phil. 644 [1918];Fernandez vs. Mercader, 43 Phil. 581 [1922]; Cagaoan vs. Cagaoan,43 Phil. 554 [1922].) Bad faith renders the registration nothing butan exercise in futility. (Cardente vs. Intermediate Appellate Court,155 SCRA 685 [1987].)


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It does not vest title to an immovable property, it is merelyevidence of such title. (Berico vs. Court of Appeals, 44 SCAD 84,225 SCRA 469 [1993].) The law will not protect anything done inbad faith. (Palanca vs. Director of Lands, 43 Phil. 149 [1922].)

It is presumed, however, that the registration of sale was madein good faith.

(2) Purchase must be for valuable consideration. — And it is notonly required that the purchaser of real property who has regis-tered the same should have done so in good faith, but also for avaluable consideration. (Arcenas vs. Del Rosario, 67 Phil. 238[1939].) Thus, a “purchaser in good faith” is defined as one whobuys property of another, without notice that some other personhas a right to, or interest in, such property and pays a full andfair price for the same at the time of such purchase, or before hehas notice of the claim or interest of some other person in the prop-erty. (Cui vs. Henson, 57 Phil. 696 [1932]; David vs. Malay, 115SCAD 820, 318 SCRA 711 [1999]; Tanongon vs. Samson, 167 SCAD455, 382 SCRA 130 [2002]; Castro vs. Miat, 397 SCRA 271 [2003].)One cannot close his eyes to facts that should put a reasonableperson on guard and still claim to have acted in good faith. Thus,a person engaged in business would be wary of buying from acompany that is closing shop because it may be dissipating itsassets to defraud its creditors. (Tanongon vs. Samson, supra.)

(3) Continuation of good faith. — The mere fact that the secondcontract of sale was perfected in good faith is not sufficient if,before title passes, the second vendee acquires knowledge of thefirst transaction. The good faith or innocence of the posteriorvendee needs to continue until his contract ripens into ownershipby tradition or registration. (Gallardo vs. Gallardo, supra; Palancavs. Director of Lands, 46 Phil. 149, supra.) The second buyer mustshow that he acted in good faith throughout (i.e., ignorance of thefirst sale and the first buyer’s right) — from the time of acquisi-tion until the title is transferred to him or registration or, failingregistration, by delivery of possession. (Cruz vs. Cabana, 129SCRA 656 [1984]; Uraca vs. Court of Appeals, 86 SCAD 734, 278SCRA 702 [1997]; Bautista vs. Court of Appeals, 118 SCAD 327,322 SCRA 365 [2000]; Tan vs. Court of Appeals, 369 SCRA 255[2001]; Consolidated Rural Bank, Inc. vs. Court of Appeals, 448SCRA 347 [2005].) In other words, where title to the property is

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recorded in the Register of Deeds, the requirement of the law, asmentioned before, is two-fold: acquisition in good faith and re-cording in good faith. (Martin vs. Court of Appeals, 358 SCRA 38[2001].)

(4) Burden of proof. — Good faith is always presumed. It isupon those who allege the bad faith on the part of the possessorrests the burden of proof. But the burden of proving the status ofone as a purchaser in good faith and for value lies upon him whoasserts that status where the seller had none to transmit to thepurchaser and the other claimant is himself a purchaser in goodfaith from the successor-in-interest of the original title holder. Indischarging that burden, it is not enough to invoke the ordinaryor legal presumption of good faith, i.e., that every one is presumedto act in good faith. The good faith that is essential here is an in-tegral part with the very status which must be proved. (Baltazarvs. Court of Appeals, 168 SCRA 354 [1988]; see Mathay vs. Courtof Appeals, 98 SCAD 489, 295 SCRA 556 [1998]; Aguirre vs. Courtof Appeals, 421 SCRA 310 [2004].) Insinuations and inferences willnot overcome the presumption that a sale was concluded in allgood faith, for value, and without secret reservations. (see Naguitvs. Deang, [C.A.] No. 6319-R, August 13, 1952.)

In a case, the first buyer failed to prove that the second buyerknew of the prior sale to the former. Since the second buyer wasconsidered to have registered his deed of sale in good faith, it washeld that the ownership of the disputed property should belongto them. (Bucad vs. Court of Appeals, 216 SCRA 423 [1992].)

(5) Good faith/bad faith, a question of intention. — “Good faithor the want of it is not a visible, tangible fact that can be seen ortouched but rather a state or condition of mind which can onlybe judged by actual or fancied tokens or signs.” (Leung Yee vs.F.L. Strong Machinery Co., 37 Phil. 644 [1918]; Manacop, Jr. vs.Cansino, 1 SCRA 572 [1961].) It consists in an honest intention toabstain from taking any unconscientious advantage of another.It is the opposite of fraud and bad faith and its non-existence maybe established by competent proof. (Cui vs. Henson, 57 Phil. 696[1932]; Fule vs. De Legare, 7 SCRA 351 [1963]; Lizardo vs. Herrera,98 Phil. 603 [1956].) Bad faith does not simply connote bad judg-ment or negligence; it imputes a dishonest purpose, some moral


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obliquity and conscious doing of a wrong. It partakes of the na-ture of fraud. (Llorente, Jr. vs. Sandiganbayan, 92 SCAD 418, 287SCRA 382 [1998].)

In ascertaining the intention by which one is actuated on agiven occasion, the courts are necessarily controlled by the evi-dence as to the conduct and outward acts by which alone, theinward motive may, with safety, be determined. (Dayao vs. Diaz,91 Phil. 919 [1952].) The purchaser is obligated to make a reason-able investigation as to the identity of the thing sold and the sell-er’s title thereto. He cannot close his eyes to facts which shouldput a reasonable man upon his guard and then claim that he actedin good faith under the belief that there was no defect in the titleof the vendor. (see J.M. Tuazon & Co., Inc. vs. Court of Appeals,93 SCRA 146 [1979]; Vital vs. Anore, 90 Phil. 855 [1952]; Cruz vs.Pahati, 98 Phil. 788 [1956]; Conspecto vs. Fruto, 51 Phil. 144 [1927];Leung Yee vs. F.L. Strong Machinery Co., supra; Republic vs. Courtof Appeals, 148 SCRA 480 [1987]; Cardente vs. Intermediate Ap-pellate Court, 155 SCRA 685 [1987].)

(6) Property purchased already peaceably possessed by another. —A purchaser cannot close his eyes to facts which should put a rea-sonable man upon his guard, and then claim that he acted in goodfaith under the belief that there was no defect in the title of thevendor. Thus, the vendee who purchased property which wasalready peaceably possessed by another, without inquiring intothe status of the property or the vendor’s title thereto, takes therisks and losses consequential to such failure. He is required togo beyond the certificate of title and make inquiries concerningthe rights of the actual possessor. (Salvoro vs. Tanega, 87 SCRA349 [1978]; Lucena vs. Court of Appeals, 111 SCAD 227, 313 SCRA47 [1999]; see also Caram, Jr. vs. Laureta, 103 SCRA 7 [1981]; Heirsof T. de Leon Vda. de Roxas vs. Court of Appeals, 422 SCRA 101[2004].) The absence of such inquiry will remove him from therealm of bona fide acquisition. (Bautista vs. Court of Appeals, 48SCAD 629, 230 SCRA 446 [1994]; Heirs of Ramon Durano, Sr. vs.Sps. Uy, 137 SCAD 111, 344 SCRA 238 [2000].)

A cautious and prudent purchaser would usually make anocular inspection of the premises, this being standard practice inthe real estate industry. Should such prospective buyer find out

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that the land he intends to buy is being occupied by anybody otherthan the seller, who is not in actual possession, it would then beincumbent upon him to verify the extent of the occupant’spossessory rights. The failure of a prospective buyer to take suchprecautionary steps would mean negligence on his part andwould thereby preclude him from claiming or invoking the rightsof a purchaser in good faith. (Dela Merced vs. GSIS, 365 SCRA 11[2001]; Heirs of Amado Celestial vs. Heirs of Editha Celestial, 408SCRA 293 [2003]; Occeña vs. Esponilla, 431 SCRA 116 [2004].)

(7) Purchaser with notice of right of repurchase which has alreadyelapsed. — Similarly, one who buys property with notice that it issubject to right of repurchase from his vendor (the vendee a retroin a previous sale of the property), although such right has alreadyelapsed and there is no annotation of any repurchase by the ven-dor a retro but the title has not yet been cleared of the encumbrance,without looking into the right of redemption inscribed on the ti-tle, cannot be said to be a purchaser in good faith for he has no-tice that some other person could have a right or interest in theproperty. (Conde vs. Court of Appeals, 119 SCRA 245 [1982].)Actual notice is equivalent to, and indeed more binding than,presumed notice by registration. (Guzman, Bocaling & Co. vs.Bonnevie, 206 SCRA 668 [1992].)

(8) Adverse claim previously annotated on title of property sold. —A subsequent sale of land cannot prevail over an annotated ad-verse claim which was previously annotated in the certificate oftitle of the property. A prior judicial determination of the validityof the adverse claim before it can flaw the title of subsequent trans-ferees is not required. A contrary rule contradicts the very essenceof adverse claims. The annotation of an adverse claim is a meas-ure designed to protect the interest of a person over a piece of realproperty, and serves as a notice and warning to third parties deal-ing with said property that someone is claiming an interest in thesame or has a better right than the registered owner thereof.(Gardner vs. Court of Appeals, 131 SCRA 585 [1984].)

It has been held, however, that a buyer cannot be consideredas being aware of a flaw which invalidates his acquisition wherethe alleged flaw, the notice of lis pendens, was already being or-dered cancelled at the time of the purchase. (Po Lam vs. Court ofAppeals, 347 SCRA 86 [2000].)


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(9) Purchaser examined only the latest certificate of title. — Inorder that a purchaser may be considered as a purchaser in goodfaith, it is enough that he examines the latest certificate of title.He is not bound by the original certificate of title but only by thecertificate of title of the person from whom he purchased the prop-erty. (Cangas and Basco vs. Tan Chuan Leung, 110 Phil. 168 [1960].)Good faith is presumed. (Art. 527.) Under the established princi-ples of land registration law, the presumption is that the trans-feree of registered land is not aware of any defect in the title ofthe property he purchased. (Lopez vs. Court of Appeals, 169 SCRA271 [1989].) He may rely on the Torrens title of the seller. In theabsence of anything to excite suspicion, the buyer is not obligatedto look beyond the certificate to investigate the title of the sellerappearing on the face of the certificate. (Republic vs. Intermedi-ate Appellate Court, 209 SCRA 90 [1992]; Heirs of Spouses B.Gavino and J. Euste vs. Court of Appeals, 95 SCAD 358, 291 SCRA495 [1998]; AFP Mutual Benefit Association, Inc. vs. Court ofAppeals, 122 SCAD 389, 327 SCRA 203 [2000].) Where the selleris not the registered owner himself, the law requires a higher de-gree of prudence, even if the land object of the transaction is reg-istered. (Bautista vs. Court of Appeals, supra.) The principle un-der the torrens system does not apply where the vendee has ac-tual knowledge of facts and circumstances that would impel areasonably cautious man to make an inquiry with respect to thetitle in his vendor. (Domingo vs. Rocos, 401 SCRA 197 [2003].)

EXAMPLES:

(1) S sold to B a cash register. The register, however, wasallowed to remain in the hands of S. Subsequently, S sold thesame register to C who bought it in good faith and took posses-sion thereof. Under the first paragraph of Article 1544, C shouldbe considered as the owner of the property sold. (see Olsen vs.Yearsly, 11 Phil. 178 [1908].)

(2) S sold a parcel of land to B. Later, S sold the same land to Cwho, in good faith, first registered the deed of sale. In case ofdouble registration, the title should remain in the name of theperson first securing registration in good faith. (see Legardaand Prieto vs. Laleeby, 31 Phil. 500 [1915]; Reyes & Nadres vs.Director of Lands, 50 Phil. 791 [1927]; Granados vs. Monton, 86Phil. 429 [1950].)

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The ownership belongs to C even if B is in actual posses-sion of the land. (see Paylago vs. Jarabe [1968].) The remedy ofB is to sue S for breach of warranty against eviction. (Art. 1548.)

If C had knowledge of the previous unregistered sale to B,such knowledge is equivalent to registration. C is not a buyerin good faith. (Leung Yee vs. F.L. Strong Machinery, 37 Phil.644 [1918]; Winkleman vs. Veluz, 43 Phil. 604 [1922]; Bernas vs.Bolo, 81 Phil. 16 [1948]; Cruz vs. Cabana, 129 SCRA 656 [1984].)To be considered a purchaser in bad faith, it is not required thatC had actual knowledge of the sale to B. It is sufficient that hehas knowledge of facts which should put him upon inquiryand investigation as to possible defects of title of S and he failsto make such inquiry and investigation. (Paylago vs. Jarabe,supra.)

If neither sale was registered and C first took possession ofthe land, in good faith, the ownership shall also belong to him.

In the absence of registration and possession by B and C,the ownership shall pertain to B, his title being older than thatof C.

(3) Suppose in the same example, S sold the parcel of landto B and then to C, who both acted in good faith. After acquir-ing knowledge of the second sale to C, B registered the sale. Inthis case, B, as the first vendee, has still a better right. His goodfaith when he purchased the land subsisted and continued toexist when he registered the sale. (Carbonell vs. Court of Ap-peals, 49 SCRA 99 [1976], infra.)

Assume now that it is C who registered the sale to him, butafter he has acquired knowledge of the previous sale to B. Assecond vendee, good faith at the time of purchase is not suffi-cient. He must have also acted in good faith in recording hissale. Here, the rule of caveat emptor applies. (see Art. 1566.)Hence, the registration by C is considered registration in badfaith and will not confer upon him any right. (Salvoro vs.Tañega, 87 SCRA 349 [1978].)

ILLUSTRATIVE CASES:

1. Sale of land to vendee a retro who never took material pos-session was executed in a public instrument which was not recorded,while sale to second buyer who took material possession was made bymeans of a private document after lapse of period for repurchase.


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Facts: S sold a parcel of land to B under pacto de retro. Thesale was executed in a public instrument but was not recordedin the registry of deeds. B never took material possession of theland. The period for repurchase elapsed without S making useof it. Later on, S sold the same land by means of a private docu-ment to C, who immediately took material possession thereof.

B brought action for recovery of the land.

Issue: Who has a better right to the land, B or C?

Held: B. He was the first to take possession of the land, andconsequently, the sale executed in his favor is preferable. Thepossession mentioned in Article 1544 includes not only mate-rial but also the symbolic possession, which is acquired by theexecution of a public instrument. (Sanchez vs. Ramos, 40 Phil.614 [1919].)

Note: In case of double sale, symbolical tradition is equiva-lent to physical possession. (see Bautista vs. Sioson, 39 Phil.615; Olsen vs. Yearsly, 11 Phil. 187 [1908]; Williams vs.McMicking, 16 Phil. 412 [1910].) An unrecorded public instru-ment transfers symbolic possession to the vendee. (Quimzonvs. Rosete, 87 Phil. 159 [1950].) However, the execution of apublic instrument does not have the effect of symbolic deliverywhere it contains a stipulation that the vendor is to continue inpossession. (Aviles and Villafuerte vs. Arcega and de Leon, 44 Phil.924 [1923], infra.)

———— ———— ————

2. Second purchaser who first registered sale to him executed aquitclaim and subsequently “cancelled” it.

Facts: S sold a parcel of land to two persons, first to B, andthen to C, who registered the sale to him ahead of B. Later, Cexecuted a quitclaim deed relinquishing his rights to the prop-erty.

Issue: Does the subsequent “cancelling” of the quitclaim re-vive C’s preferential right as against B?

Held: No. C’s preferential right is extinguished and this istrue even if the quitclaim is not recorded in the registry of prop-erty. (Casica vs. Villaseca, [Unrep.], 101 Phil. 1205 [1957].)

———— ———— ————

3. First buyer of land in a private document registered her ad-verse claim such after learning of the second sale in a public instru-

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ment of same land to another but before registration of the secondsale.

Facts: S executed on January 27 a private memorandum ofsale of a land in favor of B who assumed and paid the mort-gage indebtedness of S with a bank, out of the purchase price.On February 2, S sold the same property for a higher price to C,this time executing a formal registerable deed of sale in favorof the latter. When B saw S on January 31, bringing the formaldeed of sale for S’s signature and the balance of the agreed cashpayment, S told B that he could not proceed anymore with thesale because had already formalized the sale of the lot to C.

On February 5, B saw C erecting a wall around the lot witha gate. On the advice of a lawyer, B registered on February 8her adverse claim as first buyer entitled to the property. C reg-istered the deed of sale in her favor ten days later on February12, and, therefore, the transfer certificate of title issued in herfavor carried the duly annotated adverse claim of B as the firstbuyer.

Issue: Who is legally entitled to the property, B or C?

Held: B. Under the first and third paragraphs of Article 1544,good faith must characterize the prior possession. Under thesecond paragraph, good faith must characterize the act of ante-rior registration. If there is no inscription, what is decisive isprior possession. If there is inscription, prior registration in goodfaith is a precondition to superior title.

When B bought the lot in question from S on January 27,she was the only buyer thereof and the title of S was still in hisname, solely encumbered by bank mortgage duly annotatedthereon. B was not aware — and she could not have been aware— of any sale to C as there was no such sale to C. Hence, B’sprior purchase of the land was made in good faith. Her goodfaith subsisted and continued to exist when she recorded heradverse claim four (4) days prior to registration of C’s deed ofsale. B’s good faith did not cease after S told her on January 31of his second sale of the same lot to C. Because of that informa-tion, B wanted an audience with C who refused to see her. So Bdid the next best thing to protect her right — she registered heradverse claim. Under the circumstances, this recording of heradverse claim should be deemed to have been done in goodfaith and should emphasize C’s bad faith when she registered


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her deed of sale four (4) days later, on February 12. (Carbonellvs. Court of Appeals, supra.)

Teehankee, J., concurring: Both these registrations were ingood faith.9 As the first registrant, B is legally entitled to theproperty. The fact that she registered only an adverse claim isof no moment. B had to register such claim as first buyer other-wise the subsequent registration of C’s deed of sale would haveobliterated her legal rights and enable S to achieve his fraudu-lent act of selling the property a second time for a better pricein derogation of her prior right thereto. The fact that S informedB that the former had sold the property to C did not convert B’sprior registration of her adverse claim into one of bad faith.The fraudulent act of S of informing B that he has wrongfullysold his property for a second time cannot work out to his ownadvantage and to the detriment of the first buyer (by being con-sidered as an “automatic registration” of the second sale) anddefeat the first buyer’s right of priority, in time, in right, and inregistration.

Knowledge gained by the first buyer of the second sale can-not defeat the first buyer’s rights except only as provided inArticle 1544 and that is where the second buyer first registersin good faith the second sale ahead of the first. Such knowledgeof the first buyer does not bar her from availing of her rightsunder the law, among them, to register first her purchase asagainst the second buyer. But in converso knowledge gained bythe second buyer of the first sale defeats his rights even if he isfirst to register the second sale since such knowledge taints hisprior registration with bad faith.

This is the price exacted by Article 1544 for the second buyerbeing able to displace the first buyer; that before the secondbuyer can obtain priority over the first, he must show that heacted in good faith throughout (i.e., in ignorance of the first saleand of the first buyer’s rights) — from the time of acquisitionuntil the title is transferred to him by registration or, failingregistration, by delivery of possession. The second buyer mustshow continuing good faith and innocence or lack of knowl-edge of the first sale until his contract ripens into full owner-ship through prior registration as provided by law.

Art. 1544

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

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Muñoz-Palma, J., dissenting: The two purchasers, B and C,are both purchasers in good faith. That C is likewise a buyer ingood faith is supported by express findings of fact of the trialcourt and the Court of Appeals which findings are generallybinding and conclusive. The question to be resolved is who ofthe two first registered her purchase or title in good faith. Thisrequirement of good faith is not only applicable to the secondor subsequent purchaser but to the first as well.

The notation of B’s adverse claim was not accomplished ingood faith as she was cognizant of facts which impaired hertitle to the property in question, to wit: that S informed her thatS had already given the lot to C; that B saw C erecting a wallaround the lot with a gate; that she consulted a lawyer whoadvised her to present her adverse claim, and that being in-formed that the sale in favor of C had not yet been registered,the said lawyer prepared the notice of adverse claim which wassigned and sworn to and registered by B. The annotation of theadverse claim did not produce any legal effects as to place herin a preferential situation to that of C, for the simple reasonthat a registration made in bad faith is equivalent to no regis-tration at all.

The act of registration of C’s deed of sale on February 12was but a formality, in the sense that it simply formalized whathad already been accomplished earlier, that is, the registrationof C’s purchase as against B when the latter acquired knowl-edge of the second sale on January 31. The long-accepted ruleis that knowledge is equivalent to registration. What would bethe purpose of registration other than to give notice to inter-ested parties and to the whole world of the existence of rightsor liens against the property under question?

———— ———— ————

4. Both first and second sales were made by means of a publicdocument but second buyer was first to take material possession, be-cause by virtue of stipulation in the first sale, vendor continued inpossession.

Facts: S sold the same house erected on a leasehold landto B and subsequently, to C, in public documents. None ofthe sales is registered. In the sale to B, it is stipulated that Sshall continue in possession of the house for four (4) months.


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C took possession of the property immediately after thesale to him, B never having taken possession thereof. Both saleswere not registered.

Issue: Who has a better right to the house?

Held: C. The execution of the public document in favor of Bdoes not have the effect of the symbolic delivery of the housesold. (see Art. 1498.) In view of the stipulation in his documentof sale, B does not acquire any title to the property, unless heshould have taken possession of the same after the lapse of thefour (4)-month period. This being so, C, the second purchaser,to whom the property was sold after the said period, acquiredtitle thereto, either by taking physical possession thereof, or byvirtue of the symbolic delivery which ordinarily takes placeupon the execution of the public document. (Aviles vs. Arcega,44 Phil. 924 [1923]; Note: This is a 5 to 4 decision.)

———— ———— ————

5. First sale was made before registration of land under the Tor-rens System in the name of the seller, while subsequent execution salein favor of seller’s judgment creditor took place after registration.

Facts: While his application for the registration of a parcelof land under the Torrens System was pending, S sold the prop-erty to B who thereafter took possession thereof and made sub-stantial improvements therein. A month later, an original cer-tificate of title covering the land was issued in the name of Sfree from all liens and encumbrances. The following year, a levywas made upon the land in favor of C, judgment creditor of S.S did not exercise his right of redemption.

The corresponding notice of levy, certificate of sale, and thesheriff’s certificate of final sale in favor of C were duly regis-tered. C sold all its rights and title to the property to DTC.

Issue: Who has a better right to the land, B or DTC?

Held: B. (1) Judgment creditor merely acquired right and inter-est of judgment debtor. — If the property covered by the conflict-ing sales were unregistered land, B would have a better right. Ifduly registered land, DTC would have a better right because incase of conveyance of registered real estate, the registration ofthe deed of sale is the operative act that gives validity to thetransfer. The present case, however, does not fall within eithersituation. Here, the sale in favor of B was executed before theland was originally registered, while the conflicting sale in favorof DTC was executed after the same property had been regis-

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tered. What should determine the issue are the provisions ofthe last paragraph of Section 35, Rule 39 of the Rules of Courtto the effect that upon execution and delivery of the final cer-tificate of sale in favor of the purchaser of land sold in execu-tion sale, which purchaser “shall be substituted to and acquireall the right, title, interest and claim of the judgment debtor tothe property as of the time of the levy.” S had no more interestand claim on the property at the time of the levy which he hadalready conveyed for a considerable time prior thereto to B“fully and irretrievably.”

(2) Unregistered sale, not cancelled by subsequent issuance ofTorrens title. — The unregistered sale and the consequent con-veyance of title in favor of B could not have been cancelled andrendered of no effect upon the subsequent issuance of the Tor-rens title over the land. “In the inevitable conflict between a rightof ownership already fixed and established under the Civil Law— which cannot be affected by any subsequent levy or attach-ment or execution — and a new law or system which wouldmake possible the overthrowing of such ownership on admit-tedly artificial and technical grounds, the former must be up-held and applied.” (Dagupan Trading Co. vs. Macam, 14 SCRA179 [1965].)

———— ———— ————

6. Purchaser bought registered land from seller who is not theregistered owner and could not show any title or capacity to make thetransfer.

Facts: Pursuant to a free patent issued to S in 1956, an origi-nal certificate of title was entered under her name. X enteredthe land and cultivated it. In 1962, S sold the land to B. Subse-quently, X sold his rights to Y. When Y bought the land from X,the latter could not and did not, at any time, produce any titleor application to said land.

Issue: Is Y a purchaser in good faith?

Held: No. Well settled is the rule that, “The law protects toa greater degree a purchaser who buys from the registeredowner himself. Corollarily, it requires a higher degree of pru-dence from one who buys from a person who is not the regis-tered owner, although the land object of the transaction is reg-istered. x x x.”

If such degree of prudence is required of a purchaser ofregistered land from one who shows a certificate of title but


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

Other rulings on application of rules.

(1) Contract to sell/promise to sell. — Article 1544 is applicablenot only to a contract of sale but also to a contract to sell becausein the Civil Law, where tradition is necessary for the transfer ofownership, there is no real distinction between a contract of saleand a contract to sell. (Alterado vs. Jimenez, [C.A.] 57 O.G. 9213;see Dela Merced vs. GSIS, 154 SCAD 816, 365 SCRA 1 [2001].) Ithas been held, however, that the provision does not apply to acase where there was a sale to one party of the land itself whilethe other contract was a mere promise to sell the land or at mostan actual assignment of the right to repurchase the same land.There is no double sale of the same land in this case. (Dichoso vs.Roxas, 11 Phil. 768 [1908]; San Lorenzo Development Corp. vs.Court of Appeals, 449 SCRA 99 [2005].)

(2) Donation. — It applies to donations. A deed of donationexecuted with all the formalities of the law is on the same footingas a deed of sale in the form of a public instrument. (Cagaoan vs.Cagaoan, 43 Phil. 554 [1922]; Ortiz vs. Court of Appeals, 97 Phil.46 [1955]; see Art. 744.)

(3) Subsequent mortgage registered under Act No. 3344. — Anunrecorded sale of a house of a prior date is preferred to a recordedmortgage of the same house of a later date for the reason that, ifthe original owner had parted with his ownership of the thingsold, then he no longer had the ownership and full disposal ofthat thing so as to be able to mortgage it. The registration of amortgage under Act No. 3344 is without prejudice to the betterright of third parties. (Lanuza vs. De Leon, 20 SCRA 361 [1967].)

(4) Subsequent mortgage of land registered under the torrens sys-tem, registered by mortgagee. — In a case, Z, after selling his land toM (under a contract to sell) which sale was not registered, mort-

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gaged the same property to GSIS which registered the mortgageand acquired the property as the highest bidder in the extrajudi-cial foreclosure sale. The registered right of GSIS as mortgagee ofthe property was held inferior to the unregistered right of M, theprevious buyer, the unrecorded sale between M as the vendee,and Z, the original owner, is preferred for the reason that if Z hadparted with his ownership of the land sold, then he no longer hadownership and free disposal of the same so as to be able to mort-gage it.10 (Dela Merced vs. GSIS, supra.)

(5) Sale of unregistered land. — A bona fide purchaser of a regis-tered land at an execution sale acquires a good title as against aprior transferee, if such transfer was unrecorded. However, if theland is unregistered, a different rule applies. Under Act No. 3344,registration of documents affecting unregistered land is “withoutprejudice to a third party with a better right.” The quoted phrasehas been held to mean that the mere registration of a sale in one’sfavor does not give him any right over the land if the vendor wasnot anymore the owner of the land, having previously sold thesame to somebody else, even if the earlier sale was unrecorded.Article 1544 has no application to land not registered under theland registration law. (Pres. Decree No. 1529, formerly Act No.496.) Thus, it cannot be invoked to benefit the purchaser at theexecution sale, though the latter was a buyer in good faith andeven if the second sale was registered. (Radiowealth FinanceCompany vs. Palileo, 197 SCRA 245 [1991]; Carumba vs. Court ofAppeals, 31 SCRA 558 [1970].)

10“Respondents cannot even assert that as mortgagee of land registered under theTorrens System, GSIS was not required to do more than rely upon the certificate of title.As a general rule, where there is nothing on the certificate of title to indicate any cloudor vice in the ownership of the property, or any encumbrance thereon, the purchaser isnot required to explore further than what the Torrens Title upon its face indicates inquest for any hidden defect or inchoate right that may subsequently defeat his rightthereto. This rule, however, admits of an exception as where the purchaser or mortga-gee has knowledge of a defect or lack of title in the vendor, or that he was aware ofsufficient facts to induce a reasonably prudent man to inquire into the status of theproperty in litigation. (Ibid., citing State Investment House, Inc. vs. Court of Appeals,254 SCRA 368 [1996].) When the purchaser or mortgagee is a bank or financing institu-tion, the general rule that a purchaser or mortgagee of land is not required to look fur-ther than what appears on the face of the title does not apply. (Sunshine Finance andInvestment, Corp. vs. Intermediate Appellate Court, 203 SCRA 210 [1991]; PhilippineNational Bank vs. Office of the President, 252 SCRA 52 [1996].)


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Registration, however, by the first buyer under Act No. 3344can have the effect of constructive notice to the second buyer thatcan defeat his right as such buyer in good faith (see Arts. 708-709;Revilla vs. Galindez, 107 Phil. 480 [1960]; Taguba vs. Peralta, 132SCRA 700 [1984]; Santiago vs. Court of Appeals, 63 SCAD 636,247 SCRA 336 [1995], citing Vitug, supra.) On account of the reg-istration under Act No. 3344 by the first buyer, necessarily thereis absent good faith in the subsequent registration of the secondsale by the second buyer for said registration has the effect ofconstructive notice to the second buyer that can defeat his rightas such buyer. (Bayoca vs. Nogales, 340 SCRA 154 [2000].)

If the property in dispute is already registered under the Tor-rens system, the registration of the sale under Act No. 3344 is noteffective for purposes of Article 1544. (Abrigo vs. De Vera, 432SCRA 544 [2004].)

(6) Sale to different vendees. — Clearly, Article 1544 applies toa situation where the same property is sold to different vendees.There must be at least two (2) deeds of sale over the same prop-erty. It is not applicable where there is only one sale. (Remalentevs. Tibe, 158 SCRA 138 [1988].) Thus, in a case, although the deedof extra-judicial partition which merely mentioned the alleged salein favor of petitioners of the subject property was registered whilethe pacto de retro sale in favor of private respondents was not, butthe alleged deed of sale was never offered in evidence by the pe-titioners, it was held that such registration did not operate as aregistration of the deed of sale because insofar as third personsare concerned, what could validly transfer or convey the vendee’sright to the property to petitioners was the deed of sale and notthe deed of extra-judicial partition which only mentioned theformer. (Vda. de Alcantara vs. Court of Appeals, 67 SCAD 347,252 SCRA 457 [1996].) There is, of course, no double sale whereafter the sale of the property in favor of a person, the vendor didnot anymore execute another sale over the same property in favorof another. (Land Authority vs. De Leon, 120 SCRA 128 [1983].)

Article 1544 cannot be involved when two different contractsof sale are made to two different persons, one of them not beingthe owner of the property sold, and even if the sale was made bythe same person, if the second sale was made when such person

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was no longer the owner of the property. (Consolidated RuralBank, Inc. vs. Court of Appeals, 449 SCRA 347 [2005].)

(7) Pacto de retro sale. — It is not applicable to a case whichinvolves an earlier pacto de retro sale of an unregistered land andthe subsequent donation thereof by the vendor a retro to anotherwho, in turn, sold it to a third party while the property was stillin the possession of the vendee a retro who had already acquiredtitle before the donation because of the failure of the vendor a retroto repurchase the same. There being no title to the property whichthe vendor a retro could convey to the supposed donee, since hewas no longer the owner thereof, no title could be conveyed bythe donee by the sale of the property. (De Guzman, Jr. vs. Courtof Appeals, 156 SCRA 701 [1987].)

(8) Contract of sale fictitious or forged, or seller without right tosell. — It does not apply if the contract of sale first registered isfictitious or forged or if the vendor is not the owner of the prop-erty sold and had no right to sell the same. (see Espiritu vs. Valerio,9 SCRA 761 [1963]; Cruzado vs. Bustos & Escolar, 34 Phil. 17[1917].)

But a forged deed of sale of registered land can legally be theroot of a valid title when an innocent purchaser for value inter-venes. A deed of sale executed by an impostor without authorityof the owner of the land sold is a nullity, and registration will notvalidate what otherwise is an invalid document. However, thecertificate of title was already transferred from the name of thetrue owner to the forger, and, while it remains that way, the landis subsequently sold to an innocent purchaser, the vendee has theright to rely upon what appears in the certificate and, in the ab-sence of anything to excite suspicion, is under no obligation tolook beyond the certificate and investigate the title of the vendorappearing on the face of said certificate. The remedy of the trueowner is to bring an action for damages against the one whocaused or employed the fraud and if the latter is insolvent, anaction against the Treasurer of the Philippines may be filed forrecovery of damages against the Assurance Fund. (Tenio-Obsequio vs. Court of Appeals, 49 SCAD 68, 230 SCRA 550 [1994].)

(9) Sale of property to one party and assignment of right to the prop-erty to another. — The provisions of paragraph 3, Article 1544 do


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not apply to a case where the sale in favor of one party was theproperty itself, while the transaction in favor of another was a merepromise to assign or, at most, an actual assignment of the right torepurchase the same property. (Dichoso vs. Roxas, 5 SCRA 781[1962].)

(10) Sale of property subject of contract to sell/conditional sale to athird person. — In a contract to sell, there being no previous saleof the property, a third person buying such property despite thefulfillment of the suspensive condition such as the full paymentof the purchase price, for instance, cannot be deemed a buyer inbad faith and the prospective buyer cannot seek the relief of re-conveyance of the property. There is no double sale in such case.Title to the property will transfer to the buyer after registrationbecause there is no defect in the owner-seller’s title per se, but thelatter, of course, may be sued for damages by the intending buyer.

In a conditional contract of sale, however, upon the fulfillmentof the suspensive condition, the sale becomes absolute and thiswill definitely affect the seller’s title thereto. In fact, if there hadbeen previous delivery of the subject property, the seller’s own-ership or title to the property is automatically transferred to thebuyer such that, the seller will no longer have any title to transferto any third person. Applying Article 1544 of the Civil Code, suchsecond buyer of the property who may have had actual or con-structive knowledge of such defect in the seller’s title, or at leastwas charged with the obligation to discover such defect, cannotbe a registrant in good faith. Such second buyer cannot defeat thefirst buyer’s title. In case a title is issued to the second buyer, thefirst buyer may seek reconveyance of the property subject of thesale. (Coronel vs. Court of Appeals, 75 SCAD 141, 263 SCRA 15[1996].)

— oOo —

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SECTION 3. — Conditions and Warranties

ART. 1545. Where the obligation of either party toa contract of sale is subject to any condition which isnot performed, such party may refuse to proceed withthe contract or he may waive performance of the con-dition. If the other party has promised that the condi-tion should happen or be performed, such first men-tioned party may also treat the non-performance ofthe condition as a breach of warranty.

Where the ownership in the thing has not passed,the buyer may treat the fulfillment by the seller of hisobligation to deliver the same as described and aswarranted expressly or by implication in the contractof sale as a condition of the obligation of the buyer toperform his promise to accept and pay for the thing.(n)

Meaning of condition.

A condition, as used in Article 1545, means an uncertain eventor contingency on the happening of which the obligation (or right)of the contract depends. In such a case, the obligation of the con-tract does not attach until the condition is performed. (see Art.1462, par. 2.)

(1) The term, in the context of a perfected contract of sale, per-tains, in reality, to the compliance by one party of an undertak-ing, the fulfillment of which would beckon, in turn, thedemandability of the reciprocal prestation of the other party.(Romero vs. Court of Appeals, 65 SCAD 621, 250 SCRA 223 [1995].)

291

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(2) The term is not used in the sense of a “promise” with thepossible exception of the buyer’s promise to accept and pay forthe thing sold which is conditioned on the seller’s performanceof his promise to deliver the thing as described and warranted.(Art. 1545, par. 2.)

Effect of non-fulfillment of condition.

A contract of sale may be absolute or conditional. (Art. 1458.)

(1) If the obligation1 of either party is subject to any conditionand such condition is not fulfilled, such party may either:

(a) refuse to proceed with the contract; or

(b) proceed with the contract, waiving the performance ofthe condition.

(2) If the condition is in the nature of a promise that it shouldhappen, the non-performance of such condition may be treatedby the other party as a breach of warranty. (see Art. 1546.)

EXAMPLES:

(1) B (buyer) entered into a contract with S for the pur-chase of certain machinery. The arrival of the goods to beshipped from Japan is made a condition of the bargain, therebeing no promise by S that the goods will arrive. If the machin-ery does not arrive, S is not guilty of breach of contract.

But if S promises or warrants that the machinery will beshipped or that it was already on its way, the non-arrival con-

1A distinction must be made between a condition imposed on the perfection of acontract and a condition imposed merely on the performance of an obligation. The fail-ure to comply with the first condition would prevent the juridical relation itself fromcoming into existence, while failure to comply with the second merely gives the optioneither to refuse to proceed with the sale or to waive the condition. (Romero vs. Court ofAppeals, 65 SCAD 621, 250 SCRA 223 [1995]; Lim vs. Court of Appeals, 75 SCAD 574,263 SCRA 560 [1996]; Babasa vs. Court of Appeals, 94 SCAD 679, 290 SCRA 532 [1998];see Art. 1458.)

It has been held that a subdivision developer can rightly seek to ensure that theproperty continues to meet the conditions and requirements, like building specifica-tions and easement provisions stipulated in, and made part of the individual contractswhich its buyers. As developer of the property, it has its own agreed undertakings infavor of the buyers which could well survive the transfer of ownerships and provide itwith such genuine stake in the controversy as would sufficiently clothe it with personal-ity. (Fajardo, Jr. vs. Freedom to Build, Inc., 347 SCRA 474 [2000].)

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stitutes a breach of contract. B is entitled to claim damages. (seeMcCullough vs. Berger, 43 Phil. 828 [1922]; Soler vs. Chesley,43 Phil. 529 [1922].)

(2) S promised to sell his parcel of land to B, should S wina case pending in the Supreme Court. S lost the case. S mayeither refuse to sell the parcel of land or he may waive the per-formance of the condition and sell the parcel of land.

(3) S sold to B certain subdivision lots, with S promisingto construct the necessary roads that would serve as outlets forentrance and egress to and from the lots in accordance with therequirements of existing laws and regulations. B may treat thenon-performance of S’s promise as a breach of warranty. It isthe seller’s duty to deliver the thing sold in a condition suit-able for its enjoyment by the buyer for the purposes contem-plated. In this case, proper access to his residence is essential tothe enjoyment by B of the lots purchased. (see Limus vs. De losSantos, 8 SCRA 798 [1963].)

(4) S agrees to sell to B a parcel of land, subject to the con-dition that the balance of the purchase price shall be paid by B10 days after the removal of all squatters from the property by Swithin 45 days after the signing of the contract. If after 45 daysfrom the signing of the contract, S shall not be able to removethe squatters, the down payment made by B shall be returnedby S.

May S demand the rescission of the contract for the sale ofthe land for his own failure to have the squatters evicted withinthe stipulated period?

No. The ejectment of the squatters is a condition, the opera-tive act which sets into motion the period of compliance by Bof his own obligation. S’s failure to comply with the conditiondoes not result in the failure of the contract; it only gives B theoption either to refuse to proceed with the agreement or waivethat condition. This option clearly belongs to B and not to Swho is not the injured party.2

It would be the height of inequity for S to invoke the con-tinued occupation by the squatters of the property as a justifi-cation to ignore his obligation to evict them. The performanceof his obligation should not be made subject to the will and

2The right of a party to rescind an obligation under Article 1191 of the Civil Code ispredicated on the non-compliance by the other party with what is incumbent upon himthat violates the reciprocity between them.

Art. 1545 OBLIGATIONS OF THE VENDORConditions and Warranties

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

ART. 1546. Any affirmation of fact or any promiseby the seller relating to the thing is an express war-ranty if the natural tendency of such affirmation orpromise is to induce the buyer to purchase the same,and if the buyer purchases the thing relying thereon.No affirmation of the value of the thing, nor any state-ment purporting to be a statement of the seller’s opin-ion only, shall be construed as a warranty, unless theseller made such affirmation or statement as an ex-pert and it was relied upon by the buyer. (n)

Meaning of warranty.

A warranty is a statement or representation made by the sellerof goods, contemporaneously and as a part of the contract of sale,having reference to the character, quality, or title of the goods, andby which he promises or undertakes to insure that certain factsare or shall be as he then represents them. (see Black L.D. vs. Estes,122 Ga. 807.)

Terminology used by parties not controlling.

It is not necessary that the word “warranty” or “warrant” beused by the seller to constitute a warranty. Any word is sufficientto show the intention of the parties to consider the representationor promise as an express warranty; and the fact that a stipulationin the contract of sale is specially called a “warranty” does not ofitself establish that the agreement thus referred to is a warranty.

Kinds of warranty.

Warranties by the seller may be express, as in the above arti-cle, or implied, as in Article 1547.

The seller is liable for his express warranties (Art. 1546.) andfor the implied warranties of title (Art. 1547.), absence of hiddendefects (Ibid.), fitness or merchantability (Art. 1562.), description(Arts. 1481, 1562.), and sample. (Arts. 1481, 1565.)

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Meaning of express warranty.

An express warranty is any affirmation of fact or any promiseby the seller relating to the thing, the natural tendency of whichis to induce the buyer to purchase the thing and the buyer thusinduced, does purchase the same.

Effect of express warranty.

Under the definition, statements not only relating to qualityor title of the thing but relating to other incidents to it may bewarranties.

A warranty being a part of the contract of sale, it is immate-rial whether the seller did not know that it was true or false. Nointent is necessary to make the seller liable for his warranty. It isthe natural consequences of what the seller says and the reliancethereon by the buyer that alone are important. (see 1 Williston,op. cit., pp. 498-501.) Accordingly, where the seller (importer-as-sembler) expressly intimated to the buyer that the taxes and cus-toms duties on two (2) assembled trucks were already paid, suchrepresentation shall be considered, as a seller’s warranty underArticle 1546 which covers any affirmation of fact or any promiseby the seller which induces the buyer to purchase the object ofsale and actually purchases it relying on the affirmation or prom-ise. (Harrison Motors Corporation vs. Navarro, 125 SCAD 673,331 SCRA 202 [2000].)

It has been held that where there is no dispute that the de-fendant (seller), in bad faith and with gross negligence, infringedthe express warranty made by it to the general public with respectto its products sold to and installed in the house of the plaintiff(buyer), who relied on the warranty, the identity of the individualwho actually dealt with the defendant and asked the latter to makethe delivery and installation by its workers is pointless. (DelRosario vs. Court of Appeals, 78 SCAD 542, 267 SCRA 158 [1997].)

EXAMPLE:

S sells to B an automobile for P90,000.00, telling the latterthat it is a 1977 model and that it is worth about P100,000.00. Bsees the automobile and after a test run, expresses satisfaction


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over its condition. The automobile is really of 1976 vintage andis only worth about P80,000.00.

In this case, B has no right of action for breach of warrantybecause the inducing cause of the purchase is not the errone-ous statement as to its model and value, but B’s reliance on itsappearance and demonstrated condition. But the statement thatthe automobile is in excellent running condition constitutes aviolation of warranty if such is not the fact.

Effect of expression of opinion.

A mere expression of opinion, no matter how positively as-serted, does not import a warranty unless the seller is an expertand his opinion was relied upon by the buyer. Thus, assertionsthat things are fine or valuable or better than products of rivalmanufacturers are in their nature so dependent on individualopinion that no matter how positive the seller’s assertion may be,they are not held to create a warranty.

The tendency of the courts, however, is in the direction ofgreater strictness against the seller’s untruthful puffing of hiswares. (see Ibid., pp. 517-518.)

The following provisions of law are pertinent:

“The usual exaggerations in trade, when the other partyhad an opportunity to know the facts, are not in themselvesfraudulent.” (Art. 1340.)

“A mere expression of an opinion does not signify fraudunless made by an expert and the other party has relied on theformer’s special knowledge.” (Art. 1341.)

“Misrepresentation made in good faith is not fraudulentbut may constitute error.” (Art. 1343.)

EXAMPLES:

(1) Expressions or advertisements like: “the cigarette thatwill give you utmost smoking pleasure”, “the most effectivepain reliever”; “you like it, it likes you”, etc. are mere “salestalk” or “seller’s puffing.”

They are not construed as warranties because the buyerknows that they are mere exaggerations.

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(2) S, a farmer, found a ring which he sold to B, honestlybelieving and representing to B that it was a diamond ring. Itturned out that the ring was ordinary glass.

Here, S merely expressed an opinion. Since the misrepre-sentation was made in good faith, it is considered a mere erroror mistake. But if S is an expert, and his statement was reliedupon by B, the same shall be construed as a warranty even ifexpressed in the form of an opinion.

ILLUSTRATIVE CASES:

1. The number of coconut trees is less than that stated in thecontract but it appeared that buyer inspected land and estimatednumber of trees thereon.

Facts: B exchanged his property in Pasay City with S’s co-conut plantation. In the deed of exchange, S stated that therewere no less than 6,000 coconut trees in his plantation.

Issue: Is S liable for breach of warranty?

Held: No. Where it does not appear that defendant (S) de-liberately violated the truth when he stated his belief that therewere no less than 6,000 coconut trees on the land, and it ap-pears that the plaintiff (B) inspected said land and estimatedthe number of trees thereon before the exchange, no action willlie for the rescission of the contract or for damages. (Gochingcovs. Dean, 47 Phil. 687 [1925].)

———— ———— ————

2. Sugar cane crops sold yielded less than that represented butseller made no guarantee of yield.

Facts: S sold his sugar cane crop to B for P12,000.00. Previ-ous to the sale, S represented that the crop would yield 3,000piculs. It yielded only 2,017 piculs instead. It was shown, how-ever, that S did not and in fact refused to guarantee the quan-tity of sugar which would be produced.

S bought action for the balance of the purchase price.

Issue: Is S guilty of misrepresentation?

Held: No. The law allows considerable latitude to seller’sstatements, or dealer’s talk; and experience teaches that it isexceedingly risky to accept it at its face value. The refusal ofthe seller to warrant his estimate indicated that it was put forth


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

ART. 1547. In a contract of a sale, unless a con-trary intention appears, there is:

(1) An implied warranty on the part of the sellerthat he has a right to sell the thing at the time whenthe ownership is to pass, and that the buyer shall fromthat time have and enjoy the legal and peaceful pos-session of the thing;

(2) An implied warranty that the thing shall be freefrom any hidden faults or defects, or any charge orencumbrance not declared or known to the buyer.

This article shall not, however, be held to renderliable a sheriff, auctioneer, mortgagee, pledgee, orother person professing to sell by virtue of authorityin fact or law, for the sale of a thing in which a thirdperson has a legal or equitable interest. (n)

Meaning of implied warranty.

An implied warranty is that which the law derives by implica-tion or inference from the nature of the transaction or the relativesituation or circumstances of the parties (Black L.D. vs. Estes, 122Ga. 807.), irrespective of any intention of the seller to create it.

Implied warranties in sale.

The term implied warranty is reserved for cases where the lawattaches an obligation to the seller which is not expressed in anywords. (1 Williston, op. cit., p. 498.) Implied warranties underArticles 1547 and 1562 are:

(1) Implied warranty as to seller’s title. — that the seller guaran-tees that he has a right to sell the thing sold and to transfer own-ership to the buyer who shall not be disturbed in his legal andpeaceful possession thereof (Art. 1548.);

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(2) Implied warranty against hidden defects or unknown encum-brance. — that the seller guarantees that the thing sold is free fromany hidden faults or defects or any charge or encumbrance notdeclared or known to the buyer (Art. 1561.); and

(3) Implied warranty as to fitness or merchantability. — that theseller guarantees that the thing sold is reasonably fit for the knownparticular purpose for which it was acquired by the buyer or,where it was bought by description, that it is of merchantablequality. (Art. 1562.)

The right of the seller to sell the thing need not reside in himat the time the contract is perfected. It is sufficient that the ven-dor has a right “at the time when the ownership is to pass.” (Art.1547[1].) This complements Article 1459 that “the vendor musthave a right to transfer the ownership thereof at the time it isdelivered” and Article 1562 which allows the sale of “futuregoods” or of goods the acquisition of which depends upon a con-tingency.

ILLUSTRATIVE CASE:

Seller of agricultural land warranted as “free from all liens andencumbrances” was occupied by a tenant.

Facts: G sold a parcel of agricultural land to ID, Inc. war-ranting that the land was “free from all liens and encum-brances.” ID, Inc., in turn, sold the land to AA, Inc. to whichID, Inc. warranted that the land was “free from all liens, ad-verse claims, encumbrances, claims of any tenant and/or agri-cultural workers, whether arising as compensation for distur-bance or from improvements.” When G bought the land fromthe original owner, it was forced to stop cultivating the landbecause of the bulldozing caused by AA, Inc.

G filed a complaint against ID, Inc., AA, Inc. for disturbancecompensation under the land reform law. ID, Inc. in return, fileda cross-claim against G in case of a judgment adverse to it whileAA, Inc. filed a cross-claim against ID, Inc.

Issue: Did G violate his warranty to ID, Inc.?

Held: No. The term “hidden faults or defects” in Article 1547pertains only to those that make the object of the sale unfit forthe use for which it was intended at the time of the sale. Since


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the object of the sale by G to ID, Inc. is an agricultural land, theexisting tenancy relationship with respect to the land cannotbe a “hidden fault or defect.” It is not a lien or encumbrancethat the vendor warranted did not exist at the time of the sale.It is a relationship which any buyer of agricultural land shouldreasonably expect to be present and which it is his duty to spe-cifically look into and provide for. AA, Inc. saw to it that thewarranty was specific when it, in turn, purchased the land. Thedifference in the phraseology of the two warranties is not anidle one. (Investment & Development, Inc. vs. Court of Appeals,162 SCRA 636 [1988].)

Nature of implied warranty.

An implied warranty is a natural, not an essential, element ofa contract, because it is presumed to exist even though nothinghas been said in the contract on the subject. It is, therefore, deemedas incorporated in the contract of sale.

An implied warranty may, however, be waived or modifiedby express stipulation. (see Arts. 1548, 1566.)

When implied warranty not applicable.

(1) “As is and where is” sale. — The phrase “as is and whereis” (which has been adopted from dispositions of army surplusproperty) means nothing more than that the vendor makes nowarranty as to the quality or workable condition of the goods, andthat the vendee takes them in the conditions in which that theyare found and from the place where they are located. It does notextend to liens or encumbrances unknown to the vendee andcould not be disclosed by a physical examination of the goodssold. (Monfort vs. Willis, [C.A.] No. 6963-R, Oct. 15, 1951.)

The term “as is” in public auction of (imported) goods refersto the physical condition of the merchandise and not to the legalsituation in which it was at the time of the sale. It has no bearingat all on the obligation of the seller (Bureau of Customs) underArticle 1495 “to transfer the ownership and deliver, as well aswarrant the thing which is the object of sale.” This warranty is asto the right to sell and capacity to deliver. (Auyong Hian vs. Courtof Tax Appeals, 109 SCRA 470 [1981].)

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(2) Sale of second-hand articles. — There is no implied warrantyas to the condition, adaptation, fitness or suitability for the pur-pose for which made, or the quality of an article sold as and for asecond-hand article. But such articles might be sold under suchcircumstances as to raise an implied warranty. A certification is-sued by the vendor that a second-hand machine was in A-1 con-dition is an express warranty binding on the vendor. (Moles vs.Intermediate Appellate Court, 169 SCRA 777 [1989].)

(3) Sale by virtue of authority in fact or law. — No warranty oftitle is implied in a sale by one not professing to be the owner.Accordingly, the rule on implied warranty does not apply to asheriff, auctioneer, mortgagee, pledgee or other person who sellsby virtue of authority in fact or law. (see Art. 1570.) In other words,they are not liable to a person with a legal or equitable interest inthe thing sold. (Art. 1547, par. 2.) They do not warrant the title ofthe person who is supposed to own the thing sold. (see Art. 1552.)

The risk of defective title here is on the purchaser, the circum-stances surrounding such sales being sufficient to put him onnotice as to interests of third persons in the thing sold. (Babb &Martin, op. cit., p. 94.) The persons enumerated are, however, liable foractual representations, fraud or negligence in the exercise of their du-ties. (1 Williston, op. cit., p. 567.)

(a) The purchaser of a property sold at public auction fortax delinquency takes all the chances. There is no warranty onthe part of the state. (Government vs. Adriano, 41 Phil. 112[1920].) The purchaser of real estate at a tax sale obtains onlysuch title as that held by the taxpayer. (Serfino vs. Court ofAppeals, 154 SCRA 19 [1987].)

(b) The rule of caveat emptor (buyer beware) applies to ex-ecution sales. (see Art. 1570.) The sheriff does not guaranteethe title to real property sold by him as sheriff and it is notincumbent upon him to place the purchaser in possession ofsuch property. (Pabico vs. Ong Pauco, 43 Phil. 572 [1922]; JuanLim vs. Laag, 51 Phil. 930 [1928].) It is elementary that a pur-chaser at a sheriff’s sale acquires no better title or greater rightthan the judgment debtor has. (Villegas vs. Tan, 57 Phil. 656[1932]; Laxamana vs. Carlos, 57 Phil. 722 [1932]; Ruiz vs.Fieldman’s Insurance Co., 9 C.A. Rep. 2d, 105 [1966].)


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ILLUSTRATIVE CASE:

Lessor who, by virtue of stipulation in a contract of lease withlessee, acquired ownership over jalousies sold on credit and deliveredto buyer (lessee) by seller, seeks nullification of sheriff’s sale of saiditems levied upon by seller who was the highest bidder.

Facts: P leased to B a building with a stipulation in the leasecontract that all permanent improvements made by B on theleased premises shall belong to P and as part of the considera-tion of the monthly rental. Subsequently, B purchased on creditfrom S glass and wooden jalousies which were delivered andinstalled in the leased premises by S, replacing the existing win-dows.

For failure of B to pay for the items purchased, the samewas levied upon and sold at public auction with S as the high-est bidder. P filed an action to nullify the sheriff’s sale.

Issue: Will the action prosper?

Held: Yes. When the items in question were delivered andinstalled in the leased premises, B became the owner thereofeven if the purchase price has been made on credit (see Arts.1477, 1496, 1497.), and by virtue of the lease contract when levywas made, B, the judgment debtor, was no longer the ownerthereof. The power of the court in execution of judgment ex-tends only to properties unquestionably belonging to the judg-ment debtor only, and the purchaser acquires only the right asthe debtor has at the time of the auction sale. (Sampaguita Pic-tures, Inc. vs. Jalwindor Manufactures, Inc., 93 SCRA 419 [1979].)

SUBSECTION 1. — Warranty in Case of Eviction

ART. 1548. Eviction shall take place whenever bya final judgment based on a right prior to the sale oran act imputable to the vendor, the vendee is deprivedof the whole or of a part of the thing purchased.

The vendor shall answer for the eviction eventhough nothing has been said in the contract on thesubject.

The contracting parties, however, may increase,diminish, or suppress this legal obligation of the ven-dor. (1475a)

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303

Meaning of eviction.

Eviction may be defined as the judicial process, whereby thevendee is deprived of the whole or part of the thing purchasedby virtue of a final judgment based on a right prior to the sale oran act imputable to the vendor.

Essential elements of warrantyagainst eviction.

The essential elements are:

(1) The vendee is deprived in whole or in part of the thingpurchased;

(2) He is so deprived by virtue of a final judgment (Art. 1557.);

(3) The judgment is based on a right prior to the sale or anact imputable to the vendor;

(4) The vendor was summoned in the suit for eviction at theinstance of the vendee (Art. 1558.); and

(5) There is no waiver on the part of the vendee.

EXAMPLES:

(1) S sells a parcel of land to B. Subsequently, C files anaction for the recovery of possession, claiming that he is theowner of the land. At the instance of B, S was summoned todefend his title. The court renders final judgment, declaringthat C has a better right. Accordingly, B is evicted.

In this case, S is liable to B for failure to comply with hiswarranty against eviction. Here, the judgment is based on aright of a third person prior to the sale.

(2) In the same example, suppose S was really the ownerof the parcel of land. However, B did not have the sale regis-tered. Immediately, S sold the same land to C who, in goodfaith, registered the sale.

Here, the right upon which C based his claim is posteriorto the sale. Nevertheless, B can sue S for damages because ofthe breach of warranty against eviction, the act giving rise toC’s right being imputable to the vendor.


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Trespass contemplated by warrantyagainst eviction.

Mere trespass in fact does not give rise to the application of thedoctrine of eviction. (see Art. 1590.) In such case, the vendee hasa direct action against the trespasser in the same way as the les-see has such right. (Art. 1664.)

The disturbance referred to in the case of eviction is a distur-bance in law which requires that a person go to the courts of jus-tice claiming the thing sold, or part thereof, and invoking reasons.If final judgment is rendered depriving the vendee of the thingsold or any part thereof, the doctrine of eviction becomes appli-cable. (10 Manresa 184.)

Vendor’s liability is waivable.

Warranty is not an essential element of a contract of sale andmay, therefore, be increased, diminished, or suppressed by agree-ment of the parties. (Art. 1548, par. 3.)

Any stipulation, however, exempting the vendor from theobligation to answer for eviction shall be void if he acted in badfaith. (Art. 1553.)

ART. 1549. The vendee need not appeal from thedecision in order that the vendor may become liablefor eviction.

Vendee has no duty to appealfrom judgment.

The vendee’s right against the vendor is not lost because he,the vendee, did not appeal. With a judgment becoming finalwhatever be the cause of finality, the requirement of the law isdeemed satisfied.

Furthermore, the vendor, having been notified of the action,could have very well followed up the case and made use of allpossible remedies. If he did not do that, he should suffer for hisomission. In reality, he does not have the right to demand of thevendee such diligence that he himself did not have and which he

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was more obliged to observe, especially if the cause of evictionwas anterior to the sale. (Canizares Tiana vs. Torrejon, 21 Phil. 127[1912].)

ART. 1550. When adverse possession had beencommenced before the sale but the prescriptive pe-riod is completed after the transfer, the vendor shallnot be liable for eviction. (n)

Effect of prescription.

By prescription, one acquires ownership and other real rightsthrough the lapse of time in the manner and under the conditionsprescribed by law. In the same way, rights and actions are lost byprescription. (Art. 1106.)

(1) Completed before sale. — The vendee may lose the thingpurchased to a third person who has acquired title thereto byprescription. When prescription has commenced to run againstthe vendor and was already complete before the sale, the vendeecan enforce the warranty against eviction. In this case, the depri-vation is based on a right prior to the sale and an act imputable tothe vendor.

(2) Completed after sale. — Even if prescription has startedbefore the sale but has reached the limit prescribed by law afterthe sale, the vendor is not liable for eviction. The reason is thatthe vendee could easily interrupt the running of the prescriptiveperiod by bringing the necessary action.

If the property sold, however, is land registered under theTorrens system, Article 1550 will have no application. Under theTorrens system, ownership of land is not subject to prescription.

EXAMPLES:

(1) S sold to B a parcel of land which is claimed by C, whohas been in possession of the property in the concept of ownerpublicly and continuously for 30 years. Under the law, C isdeemed to have acquired ownership over the land by prescrip-tion without need of title or of good faith. (see Art. 1137.)

In this case, S shall be liable to B in case of eviction.


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(2) If, in the same example, C was in adverse possessionof the land for only 25 years at the time of the sale, and theprescriptive period is completed after the sale, S shall not beliable to B in case of eviction as B could have brought actionagainst C during the remaining five-year period to recover theproperty.

ART. 1551. If the property is sold for nonpaymentof taxes due and not made known to the vendee be-fore the sale, the vendor is liable for eviction. (n)

Deprivation for nonpayment of taxes.

If the vendee is deprived of the ownership of the propertybecause it is sold at public for nonpayment of taxes due from thevendor, the latter is liable for eviction for an act imputable to him.It is required, however, that at the time of the sale, the non-pay-ment of taxes was not known to the vendee.

ART. 1552. The judgment debtor is also responsi-ble for eviction in judicial sales, unless it is otherwisedecreed in the judgment. (n)

Liability of judgment debtor.

While the rule on implied warranty does not apply to a sher-iff who sells by virtue of authority in law (Art. 1549, par. 2.), thejudgment debtor is responsible for eviction (Art. 1552.) and hid-den defects (Art. 1570.) even in judicial sales, unless otherwisedecreed in the judgment.

Article 1552 is based on the general principle that a personmay not enrich himself at the expense of another. Thus, if thepurchaser of real property sold on execution be evicted therefrombecause the judgment debtor had no right to the property sold,the purchaser is entitled to recover the price paid with interestfrom the judgment debtor. If the sale was effected by the judg-ment creditor, the latter should not be permitted to retain the pro-ceeds of the sale, at the expense of the purchaser. (Bonzon vs.Standard, Bill Co. & Osorio, 27 Phil. 142 [1942].)

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307

ART. 1553. Any stipulation exempting the vendorfrom the obligation to answer for eviction shall be void,if he acted in bad faith. (1476)

Stipulation waiving warranty.

(1) Effect of vendor’s bad faith. — The vendor’s bad faith underArticle 1553 consists in his knowing beforehand at the time of thesale, of the presence of the fact giving rise to eviction, and its pos-sible consequence. (10 Manresa 194; Angelo vs. Pacheco, 56 Phil.29 [1931].) Thus, if the vendor after selling his property to another,sold it again to another purchaser, he cannot even by stipulation,be exempt from warranty against eviction, because he acted inbad faith.

(2) Effect of vendee’s bad faith. — It is a requisite, however, thatthe vendee is not himself guilty of bad faith in the execution ofthe sale. If he knew the defect of title at the time of sale, or hadknowledge of the facts which should have put him upon inquiryand investigation as might be necessary to acquaint him with thedefects of the title of the vendor, he cannot claim that the vendorhas warranted his legal and peaceful possession of the propertysold on the theory that he proceeded with the sale with the as-sumption of the danger of eviction. He is not, therefore, entitledto the warranty against eviction, nor is he entitled to recover dam-ages. (J.M. Tuazon & Co., Inc. vs. Court of Appeals, 94 SCRA 413[1979]; Aspiras vs. Dalon, [C.A.] 53 O.G. 8854.)

ART. 1554. If the vendee has renounced the rightto warranty in case of eviction, and eviction shouldtake place, the vendor shall only pay the value whichthe thing sold had at the time of the eviction. Shouldthe vendee have made the waiver with knowledge ofthe risks of eviction and assumed its consequences,the vendor shall not be liable. (1477)

Kinds of waiver of eviction.

Article 1554 treats of two kinds of waiver, namely:

(1) Consciente, that is, the waiver is voluntarily made by the

Arts. 1553-1554 OBLIGATIONS OF THE VENDORConditions and Warranties

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vendee without the knowledge and assumption of the risks ofeviction; and

(2) Intencionada, that is, the waiver is made by the vendee withknowledge of the risks of eviction and assumption of its conse-quences.

Effect of waiver by vendee.

(1) If the waiver was only conscious, the vendor shall pay onlythe value which the thing sold had at the time of eviction. This isa case of solutio indebiti. The sole effect of a waiver unaccompaniedby the knowledge and assumption of the danger of eviction is todeprive the purchaser of the benefits mentioned in Nos. 2, 3, 4, and5 of Article 1555. (Ibid.; Lavina vs. Veloso, [C.A.] 40 O.G. 2331.)

(2) In the second kind of waiver, the vendor is exempted fromthe obligation to answer for eviction, provided he did not act inbad faith. (Art. 1553; see Andaya vs. Manansala, 107 Phil. 1151[1960].)

Presumption as to kind of waiver.

From the terms of Article 1554, every waiver is presumed tobe consciente while the contrary is not proven, but to consider itintencionada, it is necessary besides the act of waiver that it beaccompanied by some circumstance which reveals the vendee’sknowledge of the risks of eviction and his intention to submit toits consequences. (10 Manresa 180-181; Phil. National Bank vs.Silo, 72 Phil. 141 [1941].)

ART. 1555. When the warranty has been agreedupon or nothing has been stipulated on this point, incase eviction occurs, the vendee shall have the rightto demand of the vendor:

(1) The return of the value which the thing soldhad at the time of the eviction, be it greater or lessthan the price of the sale;

(2) The income or fruits, if he has been ordered todeliver them to the party who won the suit againsthim;

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(3) The costs of the suit which caused the evic-tion and, in a proper case, those of the suit broughtagainst the vendor for the warranty;

(4) The expenses of the contract, if the vendee haspaid them;

(5) The damages and interests and ornamentalexpenses, if the sale was made in bad faith. (1478)

Rights and liabilities in case evictionoccurs.

The provisions of the above article specify in detail the rightsand liabilities of the vendor and the vendee in the event evictiontakes place “when the warranty has been agreed upon or noth-ing has been stipulated on this point,” that is, in the absence ofwaiver of eviction by the vendee. (Art. 1554.)

(1) Return of value of thing. — If at the time of the eviction thevalue of the property is really more or less than its value at thetime of the sale, by reason of improvements or deterioration, it isbut just that the vendor should pay the excess or not suffer thedamage. (see Sta. Romana vs. Imperio, 12 SCRA 625 [1965].) Allkinds of improvements whether useful or necessary or even rec-reational expense voluntarily incurred by the vendee (Arts. 546-548.) or caused by nature or time (Art. 551, ibid.) insofar as theymay affect the value of property, are taken into account in deter-mining the increase in value. (10 Manresa 199-200.) Note that thelaw does not speak of interest. Undoubtedly, the law had intendedthat the interest on the price shall be set off against the fruits re-ceived by the vendee from the thing while in his possession. (Ibid.)

(2) Income or fruits of thing. — The vendee is liable to the partywho won the suit against him for the income or fruits receivedonly if so decreed by the court. The obvious inference from thisprovision is that to the vendee belongs the use, free of any liabil-ity, of the subject matter of the sale. And this benefit is not by anymeans gratuitous. It is offset by the use without interest of themoney of the vendee by the vendor. (Ibid., 207; Lovina vs. Veloso,[C.A.] 40 O.G. 2331.)

(3) Costs of the suit. — The vendee is also entitled to recover


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the expense of litigation (see Rules of Court, Rule 142, Sec. 1.) re-sulting in eviction, including the costs of the action broughtagainst the vendor to enforce his warranty. “Costs of the suit”mentioned in No. (3) does not include travelling expenses incurredby the vendee in defending himself in the action. (see Orense vs.Jaucian, 18 Phil. 553 [1911].) He is not entitled to recover damagesunless the sale was made by the vendor in bad faith. (No. 5.)

(4) Expenses of the contract. — In the absence of any stipula-tion to the contrary, the expenses in the execution and registra-tion of the sale are borne by the vendor. However, if the vendeeshould have paid for such expenses, he shall have the right todemand the same from the vendor.

(5) Damages and interests. — The right of the vendee to demand“damages and interests and ornamental expenses” is qualified bythe condition that the sale was made in bad faith. If good faith ispresumed, the vendee is not entitled to recover damages unlessbad faith on the part of the vendor is shown in making the sale.(see Pascual vs. Lesaca, 91 Phil. 920 [1952].) The word “interests”does not cover interest on the purchase price as in lieu thereof thevendee is entitled to the fruits of the thing, and in cases he hasbeen ordered by a court to deliver the fruits to the successful party,the vendor must indemnify him. (see No. 2.)

ILLUSTRATIVE CASE:

Buyer purchased land after having been informed of prior rightof another to purchase the same based on prior occupancy.

Facts: In 1952, S executed in favor of B a contract to sell alot. At the time of the execution of the contract, the parties knewthat a portion of the lot was occupied by T. It was the under-standing of the parties that T would be ejected by S from thepremises. After the installments were paid, the deed of sale wasexecuted. In 1958, S filed a complaint for ejectment against T,but the court ruled against S, owing to a compromise agree-ment in another case between S and D.

B filed an action against S to enforce the vendor’s warrantyagainst eviction or recover the value of the land. It appears thatthe compromise agreement with D was sanctioned by the courtand the prior right of T to purchase the lot in question wasbased more on his prior occupancy of the same since 1949 about

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which B was informed by S. The execution of the compromiseagreement merely recognized this prior right of T.

Issue: Is B entitled to the vendor’s warranty against evic-tion and damages under Article 1555?

Held: No. One who purchases real estate with knowledgeof a defect or lack of title in his vendor cannot claim that he hasacquired title thereto in good faith, as against the true owner ofthe land or of an interest therein; and the same rule must beapplied to one who has knowledge of the facts which shouldhave put him upon such inquiry and investigation as might benecessary to acquaint him with the defects in the title of hisvendor. A purchaser cannot close his eyes to facts which shouldput a reasonable man upon his guard and then claim that heacted in good faith under the belief that there was no defect inthe title of the vendor. Without being shown to be a vendee ingood faith, B is not entitled to the warranty against eviction,nor is he entitled to recover damages.

“However, for justice’s sake, and in consonance with thesalutary principle of non-enrichment at another’s expense, Sshould compensate B in the total sum of P126,000, representingthe aggregate value of the 1,050 square meters (which S was ju-dicially ordered to sell to T at the year 1958 at the prevailing rateof P60 per sq.m.) at the value of P120 per square meter, doublingthe price, due to the reduced purchasing power of the peso withthe legal rate of interest from the date B filed his complaint.” (J.M.Tuazon, Inc. vs. Court of Appeals, 94 SCRA 413 [1979].)

Right of second purchaser to whomwarranty assigned.

Where a warranty against eviction was expressly agreed uponin a contract of sale and the vendee sold the same land to anotherexpressly assigning to him the right to warranty, the second pur-chaser has a right of action against the first vendor to make goodthe warranty against eviction.

The rule that a contract binds only the parties, their assignsand heirs (see Art. 1311, par. 2.) is not applicable to this case. Thebasis of the second purchaser’s action is the first vendee’s trans-fer to him of the right to the warranty, a right which the latter hadagainst the seller and which the former exercises by virtue of thetransfer. (De la Riva vs. Escobar, 51 Phil. 243 [1927].)


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ART. 1556. Should the vendee lose, by reason ofthe eviction, a part of thing sold of such importance,in relation to the whole, that he would not have boughtit without said part, he may demand the rescission ofthe contract; but with the obligation to return the thingwithout other encumbrances than those which it hadwhen he acquired it.

He may exercise this right of action, instead ofenforcing the vendor’s liability for eviction.

The same rule shall be observed when two or morethings have been jointly sold for a lump sum, or for aseparate price for each of them, if it should clearlyappear that the vendee would not have purchased onewithout the other. (1479a)

Alternative rights of vendee in caseof partial eviction.

This article contemplates of partial eviction, while Article 1554treats of total eviction. It states the rule that if there is partial evic-tion, the vendee has the option either to enforce the vendor’s liabil-ity for eviction (Art. 1555.) or to demand rescission of the contract.

The above rule is applicable —

(1) When the vendee is deprived of a part of the thing sold ifsuch part is of such importance to the whole that he would nothave bought the thing without said part (par. 1.); or

(2) When two or more things are jointly sold whether for alump sum or for a separate price for each, and the vendee wouldnot have purchased one without the other. (par. 2.)

EXAMPLE:

S sells to B a parcel of land, represented by S as containing500 square meters, at the rate of P200.00 per square meter. Bneeds a lot of at least 500 square meters on which to build a fac-tory. B is evicted from a 20-square-meter portion of the land. Bwould not have bought the land had he known of its smaller area.

Under the facts, B can either sue for damages for breach ofwarranty or demand rescission of the contract. He can also ex-

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

Remedy of rescission not availablein case of total eviction.

In case the vendee is totally evicted from the thing sold, hecannot avail of the remedy of rescission, because this remedy con-templates that the one demanding it is able to return whateverhe has received under the contract. (Art. 1385.) This is not so whenthe vendee loses only a part of the thing sold because there stillremains a portion of the thing.

In case of rescission, the vendee can return the thing but it mustnot be subject to “other encumbrances than those which it hadwhen he acquired it.” (see Art. 1556.)

ART. 1557. The warranty cannot be enforced untila final judgment has been rendered, whereby thevendee loses the thing acquired or a part thereof.(1480)

Final judgment of evictionessential.

The above article merely reiterates two of the essential ele-ments for the enforcement of warranty in case of eviction, namely:(1) deprivation of the whole or of a part of the thing sold; and (2)existence of a final judgment. (Art. 1548.)

Eviction may take place by virtue of a final judgment ofan administrative office or board, and it is not indispensablethat it be rendered by a court, provided it was rendered by com-petent authority and in conformity with the procedure prescribedby law. (Bonzon vs. Standard Oil Co. of New York, 27 Phil. 141[1914].)

ART. 1558. The vendor shall not be obliged to makegood the proper warranty, unless he is summoned inthe suit for eviction at the instance of the vendee.(1481a)


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Formal summons to vendor essential.

Another essential requisite before a vendor may be legally li-able for eviction is that, he should be summoned in the suit foreviction at the instance of the vendee. (see Jovellano vs. Lualhati,47 Phil. 371 [1975]; City of Manila vs. Lack, 19 Phil. 324 [1911].)

(1) Vendor to be made party in suit for eviction. — The phrase“unless he is summoned in the suit for eviction” means that thevendor should be made a party to the suit either by way of ask-ing that the former be made a co-defendant (Art. 1559.) or by thefiling of a third-party complaint against said vendor.

(a) Furnishing the vendor by registered mail with a copyof the opposition the vendee filed in the eviction suit is not thekind of notice prescribed by Articles 1558 and 1559. (Escalervs. Court of Appeals, 138 SCRA 1 [1985].)

(b) It is evident that the notification must be given in theaction brought by the third party against the vendee, becauseit is there that the vendor must defend the vendee’s peacefuland legal possession, for which he is responsible, and not inthe action to enforce the warranty itself which already sup-poses the eviction. (De la Riva vs. Escobar & Bank of P.I., 51Phil. 243 [1928].)

(2) Object of the law. — The object is to give the vendor anopportunity to intervene and defend the title that he has trans-ferred, for, after all, he alone would know the circumstances orreasons behind the claim of the plaintiff and be in a position todefend the validity of his title. (10 Manresa 219-220; De la Rivavs. Escobar & Bank of P.I., supra.) In the absence of such opportu-nity, the vendor is not bound to his warranty. (Jovellano vs.Lualhati, supra; Angelo vs. Pacheco, 56 Phil. 70 [1931].)

ILLUSTRATIVE CASE:

In the eviction suit which was a mere incident in a land registra-tion proceedings for the cancellation of title, the vendee merely fur-nished the vendor with a copy of the former’s opposition to the peti-tion for cancellation.

Facts: B, vendee, bought from S, vendor, 24 hectares of landwhich S had purchased from R. At the time of the sale, the prop-erty was still covered by OCT in the name of R. Subsequently,

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the Register of Deeds filed a petition for the cancellation of theOCT in the name of R on the ground that the land in questionhad been previously registered in the name of T.

B filed an opposition to the petition for cancellation furnish-ing S and R by registered mail with copies of said opposition.The lower court declared void the title of R and those derivedtherefrom like the titles of S and B. B sued S to enforce the war-ranty against eviction contained in the deed of sale executed byS.

Issue: Could B enforce the warranty against S?Held: No. The requisite — that of the vendor being sum-

moned in the suit for eviction (case for cancellation) at the in-stance of the vendee — is not present. Furnishing the vendor S,by registered mail, with a copy of the opposition the vendee Bfiled in the eviction suit is not the kind of notice prescribed byArticles 1558 and 1559.

R. Aquino, C.J., dissenting: It was not possible for B to com-ply strictly with Articles 1558 and 1559. The eviction took place,not in an ordinary suit wherein the vendor can be made a co-defendant, but as an incident in the cancellation of title in aland registration proceeding. In such a case, the furnishing ofthe vendor with a copy of the opposition was a substantial com-pliance with Articles 1558 and 1559. It was notice to the ven-dor. S’s vendor, R, was first notified of the cancellation pro-ceeding. It was not the fault of B that the eviction case assumedthe shape of a mere incident in the land registration proceed-ing and not an ordinary contentious civil action. S could not bemade a co-defendant in that incident for cancellation of title, asummary proceeding. A contrary view would enable S to en-rich himself unjustly at the expense of B. (Escaler vs. Court ofAppeals, 138 SCRA 1 [1985].)

ART. 1559. The defendant vendee shall ask, withinthe time fixed in the Rules of Court for answering thecomplaint, that the vendor be made a co-defendant.(1482a)

Vendor to be made co-defendant.

As previously stated, the notification required by Article 1559refers to a case where the vendee is the defendant in a suit insti-tuted to deprive him of the thing purchased.


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The defendant vendee threatened with eviction who wishesto preserve his right of warranty, should call in the vendor todefend the action which has been instituted against him.(Jovellano vs. Lualhati, 47 Phil. 371 [1925].) He should ask thecourt within the time allowed him to answer (Rules of Court, Rule11, Sec. 1.), that the vendor be made a co-defendant to answer thecomplaint of the plaintiff who seeks to deprive him (the vendee)of the property purchased.

ART. 1560. If the immovable sold should be en-cumbered with any non-apparent burden or servitude,not mentioned in the agreement, of such a nature thatit must be presumed that the vendee would not haveacquired it had he been aware thereof, he may ask forthe rescission of the contract, unless he should pre-fer the appropriate indemnity. Neither right can beexercised if the non-apparent burden or servitude isrecorded in the Registry of Property, unless there isan express warranty that the thing is free from all bur-dens and encumbrances.

Within one year, to be computed from the execu-tion of the deed, the vendee may bring the action forrescission, or sue for damages.

One year having elapsed, he may only bring anaction for damages within an equal period, to becounted from the date on which he discovered theburden or servitude. (1483a)

Where immovable sold encumberedwith non-apparent burden.

(1) Right of vendee. — Although the vendee is not deprived ofthe thing sold, totally or partially, the vendee may still rescind thecontract or ask for indemnity, if the thing sold should be encum-bered with any non-apparent burden or servitude, not mentionedin the agreement of such a nature that the vendee would not haveacquired it had he been aware thereof.

The lack of knowledge on the part of the vendor is not adefense. The contract can still be invalidated on the ground of

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mistake. (Art. 1331; see Arts. 1556, 1566; see Pineda vs. Santos, 56Phil. 583 [1982].)

Note: A servitude (or easement) is an encumbrance imposedupon an immovable for the benefit of another immovable belong-ing to a different owner. (Art. 615.) An example of an apparentservitude is a right of way establishing a permanent passage (Art.649, par. 2.), which is continually kept in view by external sign.An example of a non-apparent easement is a party wall (Art. 659.)which has no exterior sign. (Art. 660.)

(2) When right cannot be exercised. — The alternative rightsgranted by Article 1560 cannot be exercised in the following cases:

(a) If the burden or servitude is apparent, that is, “madeknown and is continually kept in view by external signs thatreveal the use and enjoyment of the same’’ (Art. 615, par. 4.);

(b) If the non-apparent burden or servitude is registered;and

(c) If the vendee had knowledge of the encumbrance,whether it is registered or not.

The registration of the non-apparent burden or servitude inthe Registry of Property operates as a constructive notice to thevendee. Hence, the vendor is relieved from liability unless thereis an express warranty that the immovable is free from any suchburden or encumbrance. If the burden is known to the vendee,there is no warranty. (par. 1.)

(3) When action must be brought. — The action for rescission ordamages must be brought within one year from the execution ofthe deed of sale. If the period has already elapsed, the vendee mayonly bring an action for damages within one year from the date ofthe discovery of the non-apparent burden or servitude. (pars. 2 and3.)

SUBSECTION 2. — Warranty Against Hidden Defectsof, or Encumbrances Upon, the Thing Sold

ART. 1561. The vendor shall be responsible forwarranty against the hidden defects which the thingsold may have, should they render it unfit for the usefor which it is intended, or should they diminish its


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fitness for such use to such an extent that, had thevendee been aware thereof, he would not have ac-quired it or would have given a lower price for it; butsaid vendor shall not be answerable for patent defectsor those which may be visible, or for those which arenot visible if the vendee is an expert who, by reasonof his trade or profession, should have known them.(1484a)


(1) Redhibition is the avoidance of a sale on account of somevice or defect in the thing sold, which renders its use impossible,or so inconvenient and imperfect that it must be supposed thatthe buyer would not have purchased it had he known of the vice.(Civil Code La., Art. 2406.)

(2) Redhibitory action is an action instituted to avoid a sale onaccount of some vice or defect in the thing sold which renders itsuse impossible, or so inconvenient and imperfect that it must besupposed that the buyer would not have purchased it had heknown of the vice. (Cyc., Law Dictionary, 3rd ed., 945.) The ob-ject is the rescission of the contract. If the object is to procure thereturn of a part of the purchase price paid by the vendee, the rem-edy is known as accion quanti minoris or estimatoris. (10 Manresa226-227; see Art. 1567.)

(3) Redhibitory vice or defect is a defect in the article sold againstwhich defect the seller is bound to warrant. (see Cyc., Law Dic-tionary, 3rd ed., 1945.) The vice or defect must constitute an im-perfection, a defect in its nature, of certain importance; and aminor defect does not give rise to redhibition. The mere absenceof a certain quality in the thing sold which the vendee thought itto contain is not necessarily a redhibitory defect. One thing is thatthe thing lacks certain qualities and another thing is that it posi-tively suffers from certain defects. (10 Manresa 227-228.)

Requisites for warranty againsthidden defects.

The following requisites must concur for the existence of thewarranty against hidden defects:

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(1) The defect must be important or serious;

(2) It must be hidden;

(3) It must exist at the time of the sale;

(4) The vendee must give notice of the defect to the vendorwithin a reasonable time (Art. 1586.);

(5) The action for rescission or reduction of the price must bebrought within the proper period — 6 months from the deliveryof the thing sold (Art. 1571.) or within 40 days from the date ofthe delivery in case of animals (Art. 1577, par. 1.); and

(6) There must be no waiver of warranty on the part of thevendee. (Art. 1548, par. 3.)

When defect important.

The defect is important if: (1) it renders the thing sold unfit forthe use for which it is intended; or (2) if it diminishes its fitnessfor such use to such an extent that the vendee would not haveacquired it had he been aware thereof or would have given a lowerprice for it. (see Bryan vs. Hankins, 44 Phil. 87 [1922]; Gochangcovs. Dean, 47 Phil. 687 [1925].)

The use contemplated must be that stipulated, and in the ab-sence of stipulation, that which is adopted to the nature of thething and to the business of the purchaser. (see 10 Manresa 227-280.)

An imperfection or defect of little consequence does not comewithin the category of being redhibitory. But where an expertwitness categorically established that a printing machine sold isin A-1 condition, required major repairs before it could be used,plus the fact that the buyer never made appropriate use of themachine from the time of purchase until an action was filed, at-test to the major defects in said machine justifying rescission ofthe contract. (Moles vs. Intermediate Appellate Court, 169 SCRA777 [1989].)

When defect hidden.

The defect is hidden (or latent) if it was not known and couldnot have been known to the vendee. (see McCullough vs. Aenille


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& Co., 3 Phil. 284 [1904].) It is one which is hidden to the eyes andcannot be discovered by ordinarily careful inspection or exami-nation. Hence, there is no warranty if the defect is patent or vis-ible. For the same reason, the vendor’s liability for warranty can-not be enforced although the defect is hidden if the vendee is anexpert who, by reason of his trade or profession, should haveknown it.

The same defect, therefore, may be hidden with respect to oneperson, but not hidden with respect to another.

EXAMPLE:

S sold to B a house. After the sale, B discovered that themain posts of the house and other interior parts had been de-stroyed by “anay” and “bukbok” and as a result, many parts ofthe house were in danger of collapsing. The defects of the housewere hidden and concealed and were unknown to B until acloser inspection was made by him.

Under the circumstances, S is liable for the defects eventhough he was not aware thereof (Art. 1566.) and B may electbetween the rescission of the contract and a proportionate re-duction of the price, with damages in either case. (Art. 1567.)

ILLUSTRATIVE CASE:

Buyer refused, three years after acceptance, to pay balance of pur-chase price of tobacco claiming it was not of good quality.

Facts: S sold to B at a fixed price certain quantity of tobaccowithout specification as to quality. After receiving the merchan-dise, B fully examined the same by opening many of the bun-dles and examining the contents thereof and admitted the quan-tity and the price.

Without making any allegation of fraud, B made a partialpayment. After a lapse of three years, B refused to pay the bal-ance, claiming that the tobacco was not of good quality.

Issue: Is B liable for the balance of the purchase price?

Held: Yes. In the absence of an express warranty, the ven-dor only impliedly warrants the legal and peaceful possessionof the thing sold and that there are no hidden defects. (see Art.1547.) B is, therefore, liable for the balance of the purchase price.

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

Where defect patent or made known.

(1) A warranty, in general terms, does not cover defects whichthe buyer must have observed. Thus, if the seller of a horse whichis obviously blind and which both parties know to be blind, saysit is sound, the meaning of “sound” as used in that connectionmust be sound except as to its eyes.

(2) The same rule is applicable to a defect which is not obvi-ous but of which the seller tells the buyer, or which the buyerknows or should have known. A well-recognized limitation onany doctrine freeing the seller from liability for statements orpromises in regard to obvious defects is that, if the seller success-fully uses art to conceal the defects, the seller is liable. (see 1Williston, op. cit., Sec. 207.)

(3) As a general rule, there is no implied warranty againsthidden defects in the sale of second-hand goods. Again, as anexception, the seller shall be liable if he has been shown to havemade misrepresentation or acted in bad faith. (see Peralta vs.Jornada Enterprises, Inc., 7 C.A. Rep. 2d, 270 [1965].)

(4) The seller may bind himself against patent or obviousdefects (manifest upon casual inspection) if the intent to do so isclearly evident. In such a case, the seller cannot allege as a defensethat inspection (which the buyer failed to make) would have dis-closed the defect or that the buyer relied on his own judgment.(Babb & Martin, op. cit., pp. 92-93.)

ILLUSTRATIVE CASE:

Buyer refused to pay balance of purchase price of a steel door onground of hidden defects.

Facts: Under a contract, S manufactured and installed a steeldoor on B’s building. B complained of defects on the door andrepairs were made by S’s employees. Subsequently, S made anew door but B refused to accept the same. B claimed that thedefect of the steel door in question was hidden within the con-templation of Article 1561, and, therefore, he was not liable topay the balance of the purchase price.


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The steel door has transparent glass frames, with no hid-den parts nor intricate mechanism that could not have beenseen by B by means of cursory examination at the time of itsdelivery.

Issue: Is B’s claim tenable?Held: No. If the steel door had any defect, it could not be

hidden within the contemplation of implied warranty againsthidden defects, but rather patent and visible for which S is notanswerable pursuant to Article 1561. It appeared that the firstcomplaint of defect was due to the fact that the door was usedbefore the cement placed to secure its anchor clips had hard-ened, thereby completely loosening the steel frame and subse-quently, the breakage of the glass panels was due to extraordi-nary force occasionally applied in closing the door or to thehard blow of the wind. There was no showing that the proxi-mate cause of the glass breakage was defect in the steel dooritself. (Hahn vs. Hercules Steel Works, 5 C.A. Rep. 2d 118 [1964].)

ART. 1562. In a sale of goods, there is an impliedwarranty or condition as to the quality or fitness ofthe goods, as follows:

(1) Where the buyer, expressly or by implication,makes known to the seller the particular purpose forwhich the goods are acquired, and it appears that thebuyer relies on the seller’s skill of judgment (whetherhe be the grower or manufacturer or not), there is animplied warranty that the goods shall be reasonablyfit for such purpose.

(2) Where the goods are bought by descriptionfrom a seller who deals in goods of that description(whether he be the grower or manufacturer or not),there is an implied warranty that the goods shall be ofmerchantable quality. (n)

Implied warranties of quality.

Quality of goods includes their state or condition. (Art. 1636.)The purpose of holding the seller on his implied warranties is topromote high standard in business and to discourage sharp deal-

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ings. They are based on the principle that “honesty is the bestpolicy.” (see Bekkevold vs. Potts, 216 N.W. 790.)

(1) Implied warranty of fitness. — There is no implied warrantyas to the quality or fitness for any particular purpose of goodsunder a contract of sale, except as follows: where: (a) the buyer,expressly or by implication, manifests to the seller the particularpurpose for which the goods are required, and (b) the buyer re-lies upon the seller’s skill or judgment. Then, whether he be thegrower or manufacturer or not — there is an implied warrantythat the goods are reasonably fit for such purpose. (Babb & Mar-tin, op. cit., p. 94.)

(a) Particular purpose of goods. — It is not some purposenecessarily distinct from a general purpose. For example, thegeneral purpose for which all food is bought is to be eaten, andthis would also be the particular purpose in a specific instance.It is, in fact, the purpose expressly or impliedly communicatedto the seller for which the buyer buys the goods; and it mayappear from the very description of the article as, for exam-ple, “coatings” or a “hot water bottle.” But where an article iscapable of being applied to a variety of purpose, the buyermust particularize the specific purpose he has in view. (1Williston, op. cit., p. 661.)

(b) Test. — It is whether the buyer justifiably relied uponthe seller’s judgment that the goods furnished would fulfillthe desired purpose, or whether relying on his own judgment,the buyer ordered or bought what is frequently called “aknown, described, and definite article.” (Ibid., p. 607; see Art.1563; Co Cho Chit vs. Henson, Oath & Stevenson, Inc., 103Phil. 956 [1958].) The occupation of the seller is importantevidence of the justifiableness of the buyer’s reliance. Andwhere the buyer has had no opportunity for previous inspec-tion, he is entitled to rely, and will naturally be presumed tohave relied, upon the seller’s skill and judgment.

(2) Implied warranty of merchantability. — Where goods arebought by description, the seller impliedly warrants that the goodsare of merchantable quality.

(a) Merchantability. — It is not a warranty of quality in thesense of requiring a particular grade, but it does require iden-


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tity between what is described in the contract and what is ten-dered, in the sense that the latter is of such quality to havesome value. Judicial synonyms for “merchantability” include“salable’’ (or “saleable,”) “standard,” or “average quality” ofgoods sold under a particular description. (Babb & Martin, op.cit., p. 95.)

(b) Causes of unmerchantability. — Goods may be unmer-chantable not because of any defect in their physical conditionbut because of some other circumstances, e.g., their infringe-ment of trademarks of others renders them unsalable. Othergoods than food may be unmerchantable because the use ofthem is dangerous or injurious in ways not to be expected fromthe goods of the kind. Thus, if an ingredient of a face powderis such as to cause irritation of the skin, the goods are notmerchantable. Cases of this sort may often involve the ques-tion whether the difficulty is due to peculiar sensitiveness ofthe buyer and if so, whether there is ground for a right of ac-tion when goods would not be injurious to most persons.

(c) Saleability in a particular market. — The requirement ofmerchantable quality carries with it no implication that thegoods shall be saleable in a particular market. (1 Williston, op.cit., pp. 641-643.)

(d) Applicability to goods in that description. — It must bemade clear that the warranty that the goods are ofmerchantable quality applies to all goods bought from a sellerwho deals in goods in that description, whether they are soldunder a patent or trade name or otherwise. (Ibid., p. 611.)

Warranty of merchantability distinguishedfrom warranty of fitness.

A warranty of merchantability is a warranty that goods are rea-sonably fit for the general purpose for which they are sold. Onthe other hand, a warranty of fitness is a warranty that the goodsare suitable for the special purpose of the buyer which will notbe satisfied by mere fitness for general purposes. (Dunfor Bros.Co. vs. Consolidated Iron-Steel Mfg. Co., C.C.A. Comm. 1928, 23F. 2nd 461.)

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Fitness for a particular purposeand merchantability.

It should be noticed that fitness for a particular purpose maybe merely the equivalent of merchantability. Thus, the particularpurpose for which a reaping machine is generally designed isreaping. If it will not fulfill this purpose, it is not merchantable.

The particular purpose, however, may be narrower. Thus, amachine may be desired for operation on rough ground andthough it may be a good reaping machine, it may yet be impossi-ble to make it work satisfactorily in the place where the buyerwishes to use it. (1 Williston, op. cit., p. 467.)

Note: The word “of” before “judgment” in Article 1562(1)should read “or.”

ILLUSTRATIVE CASE:

Machine purchased was in accordance with specifications in con-tract but did not give the result expected by buyer.

Facts: Under a contract of sale, S delivered and installed inB’s establishment a refrigerating machine. The machine was inperfect accord with the description made in the contract but itdid not give the result expected by B. S brought action to re-cover the balance of the purchase price.

Issue: Is B’s action in refusing to pay such balance justifi-able considering that he could not use the machine satisfacto-rily in his establishment?

Held: No. The inability of B to use the machine satisfacto-rily cannot be attributed to any defect in the machine nor to S’sfault since the machine was strictly in accordance with the speci-fications in the written contract of sale. (Pacific Commercial Co.vs. Ermita Market & Cold Stores, 56 Phil. 617 [1932].)

ART. 1563. In the case of contract of sale of a speci-fied article under its patent or other trade name, thereis no warranty as to its fitness for any particular pur-pose, unless there is a stipulation to the contrary. (n)

Sale under a patent or trade name.

Under Article 1562(1), the buyer makes known to the sellerthe particular purpose for which the goods are desired. Article


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1563 is naturally a provision limiting the application of Article1562.

(1) By exactly defining what he wants, the buyer has exercisedhis own judgment instead of relying upon that of the seller. Thisdefinition may be given by means of a trade name or in any otherway. The description must be the buyer’s choice, or the goodsmust not only be described and definite but known, in order topreclude warranty of fitness. (Williston, op. cit., p. 612.)

(2) Article 1563 provides an exception in case of “a stipula-tion to the contrary.” Thus, there is still an implied warranty offitness for particular purpose where the buyer relied upon theseller’s judgment rather than the patent or trade name. “Particu-lar purpose,” as used in Article 1563, means a usage different fromthe ordinary uses the article was made to meet. (Grant Mfg. Co.vs. Yates American Machine Co., 111 F. 2d. 360.)

(3) The provision does not preclude an implied warranty ofmerchantability or fitness for a purpose for which such specifiedarticle is ordinarily or generally sold. Thus, if the seller is a dealerin food, and the buyer is buying for immediate consumption andrelies on the seller’s skill or judgment, there is an implied war-ranty that the article sold is fit for human consumption. (Babb &Martin, op. cit., p. 93.)

EXAMPLE:

B went to Western Motors, Inc. to buy a car. After he wasshown cars of different models and makes, he chose a Cougarcar model 1982. B intended to enter the car in a race but thisfact was not made known to the seller.

If the car should not run as fast as B had expected, WesternMotors, Inc. is not liable because in buying the Cougar car, Brelied upon his own judgment. But if the seller was informedof the purpose of B and B was assured that the car had a maxi-mum speed of, say, 150 kilometers per hour, there is an expresswarranty for a particular purpose and Western Motors is liableif the car should not be fit for such purpose.

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

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Effect of usage of trade.

A warranty as to the quality or fitness for a particular purposemay be attached by usage to a contract containing no expressprovision in regard to warranty, though in the absence of usageno warranty would be implied. The usage is relied on for thepurpose of showing the intention of the parties. If there is no us-age, the parties would naturally express their intention.

A usage in order to bind both parties must be known to bothor, if unknown to one, the other must be justified in assumingknowledge on the part of the person with whom he is dealing.(see 1 Williston, op. cit., pp. 566-655; see Art. 1522.) The presump-tion is that the parties are aware of the usage of trade.

ART. 1565. In the case of a contract of sale by sam-ple, if the seller is a dealer in goods of that kind, thereis an implied warranty that the goods shall be freefrom any defect rendering them unmerchantablewhich would not be apparent on reasonable exami-nation of the sample. (n)

Merchantability of goods soldby sample.

(1) Where sample not merchantable. — As a general rule, all thebuyer is entitled to, in case of a sale or contract to sell by sample,is that the goods be like the sample, so he has no right to have thegoods merchantable if the sample which he has inspected is not.

The reason upon which this rule is based is identical with thatwhich generally denies an implied warranty to a buyer who hasinspected the goods which he buys. (see PMC vs. Go Juco, 48 Phil.621 [1926]; Chang Yong Tek vs. Santos, 31 Phil. 152 [1915].)

(2) Where sample subject to latent defect. — Where the defect inthe goods is of such a character that inspection will not reveal it,so in the case of a sale by sample, if the sample is subject to a la-tent defect, and the buyer reasonably relies on the seller’s skill orjudgment, the buyer is entitled not simply to goods like the sam-ple, but to goods like those which the sample seems to represent,that is, merchantable goods of that kind and character. (1 Williston,op. cit., pp. 678-679.)


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Under Article 1481, the contract may be rescinded where thebulk of the goods delivered do not correspond with the sample.

ART. 1566. The vendor is responsible to the vendeefor any hidden faults or defects in the thing sold, eventhough he was not aware thereof.

This provision shall not apply if the contrary hasbeen stipulated, and the vendor was not aware of thehidden faults or defects in the thing sold. (1485)

Responsibility of vendor for hidden defects.

(1) Effect of ignorance of vendor. — The ignorance of the ven-dor does not relieve him from liability to the vendee for any hid-den faults or defects in the thing sold. (see Bryan vs. Hankins, 44Phil. 87 [1922].) In other words, good faith cannot be availed of asa defense by the vendor.

(2) Exception. — The parties, however, may provide otherwisein their contract (see Art. 1581, par. 3.) provided the vendor actedin good faith, that is, he was unaware of the existence of the hid-den fault or defect. (Arts. 1566, par. 2; 1553.)

(3) Where vendee aware of the defect. — If the vendee is awareof the defect in the thing he buys or lack of title in the vendor, hecannot later complain thereof. He is deemed to have wilfully andvoluntarily assumed the risk attendant to the sale. (Martinez vs.Court of Appeals, 56 SCRA 647 [1974].)

Doctrines of “caveat venditor”and “caveat emptor.”

At early common law, the implied warranty of quality wasnot recognized and the rule was then caveat emptor3 (let the buyerbeware). The seller’s liability for defects of the goods sold wasthen confined to cases of express promise to warrant the qualityof such goods and to those in which the seller had knowledge of

3A basic premise of this doctrine is that there be no misrepresentation by the seller.This ancient defense of caveat emptor belongs to a by-gone age, and has no place in con-temporary business ethics. (Erquiaga vs. Court of Appeals, 156 SCAD 810, 367 SCRA357 [2001].)

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the hidden defects and the sale was made without the seller re-vealing them, but in the latter cases, the basis of the seller’s liabil-ity was for fraud. The Roman Law, like the English law, startedwith the doctrine of caveat emptor.

(1) The old Civil Code, following the Roman Law, rejected themaxim caveat emptor. (see Art. 1547.) The doctrine of caveat vendi-tor (let the seller beware) was adopted in accordance with which“the vendor is liable to the vendee for any hidden faults or de-fects in the thing sold, even though he was not aware thereof.” (Art.1585, now Art. 1566 of our new Civil Code.) The doctrine is basedon the principle that a sound price warrants a sound article.

A manufacturer or seller of a product cannot be held liablefor any damage allegedly caused by the product in the absenceof any proof that the product in question was defective. The de-fect must be present upon delivery or manufacture of the prod-uct, or when the product left the seller’s or manufacturer’s con-trol; or when the product was sold to the purchaser; or the prod-uct must have reached the user or consumer without substantialchange in the condition it was sold. Tracing the defect to the selleror manufacturer requires some evidence that there was no tam-pering with, or changing of the product. (Nutrimix Feeds Corpo-ration vs. Court of Appeals, 441 SCRA 357 [2004].)

(2) The maxim caveat emptor is still applicable, however, insheriff’s sales (Pabico vs. Ong Pauco, 43 Phil. 57 [1922]; AllureManufacturing, Inc. vs. Court of Appeals, 199 SCRA 285 [1991].),sales of animals under Article 1574, and tax sales (see Art. 1547,last par.) for there is no warranty of title or quality on the part ofthe seller in such sales. It also applies in double sales of propertywhere the issue is who between two vendees has a better right tothe property. (see Art. 1544.)

The rule of caveat emptor requires the purchaser to be awareof the supposed title of the vendor and one who buys withoutchecking the vendor’s title takes all the risks and losses consequentto such failure. (Salvoso vs. Tanega, 87 SCRA 349 [1978].) But aperson dealing with registered land is merely charged with no-tice of the burdens on the property which are noted on the face ofthe register or the certificate of title. (Campillo vs. Court of Ap-peals, 129 SCRA 513 [1984].)


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ART. 1567. In the cases of articles 1561, 1562, 1564,1565, and 1566, the vendee may elect between with-drawing from the contract and demanding a propor-tionate reduction of the price, with damages in eithercase. (1486a)

Alternative remedies of the buyerto enforce warranty.

Under this article, the vendee has the option either: (1) to with-draw from the contract, or (2) demand a proportionate reductionof the price, with a right to damages in either case. This first isknown as accion redhibitoria (action for rescission), while the sec-ond is known as accion quanti minoris. The remedies are alterna-tive as they are incompatible with each other.

The same right is given to the vendee in the sale of animalswith redhibitory defects. (Art. 1580.)

The vendee must present proof that he suffered damage as aresult of the breach of the vendor’s warranty to be entitled to ac-tual damages. (De Vera, Jr. vs. Court of Appeals, 157 SCAD 14,367 SCRA 534 [2001].)

Note: The word “and” before “demanding” in Article 1567should read “or.”

ART. 1568. If the thing sold should be lost in con-sequence of the hidden faults, and the vendor wasaware of them, he shall bear the loss, and shall beobliged to return the price and refund the expensesof the contract, with damages. If he was not aware ofthem, he shall only return the price and interestthereon, and reimburse the expenses of the contractwhich the vendee might have paid. (1487a)

Effect of loss of thing sold on accountof hidden defects.

(1) Vendor aware of hidden defects. — If the vendor was awareof the hidden defects in consequence of which the thing sold was

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lost, he shall bear the loss because he acted in bad faith. In suchcase, the vendee has the right to recover:

(a) the price paid;

(b) the expenses of the contract; and

(c) damages.

(2) Vendor not aware of hidden defects. — If the vendor was notaware of them, he shall be obliged only to return:

(a) the price paid;

(b) interest thereon; and

(c) expenses of the contract if paid by the vendee. He isnot made liable for damages because he is not guilty of badfaith.

ART. 1569. If the thing sold had any hidden faultat the time of the sale, and should thereafter be lostby a fortuitous event or through the fault of the vendee,the latter may demand of the vendor the price whichhe paid, less the value which the thing had when itwas lost.

If the vendor acted in bad faith, he shall pay dam-ages to the vendee. (1488a)

Effect of loss of defective thing sold.

If the thing sold had no hidden defects, its loss through a for-tuitous event or through the fault of the vendee is, of course, tobe borne by the vendee. However, the vendor is obliged to returnthe price paid less the value of the thing at the time of its loss incase where hidden defects existed. In other words, under Article1569, the vendor is still made liable on his warranty.

The difference between the price paid for the thing and thevalue at the time of the loss, represents the damage suffered bythe vendee and is at the same time the amount with which thevendor enriched himself at the expense of the vendee. (10 Manresa238.) If the vendor acted in bad faith, he shall also be liable fordamages.


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EXAMPLE:

S sold to B a vessel for P5,000,000.00. The defects of theconstruction of the vessel were hidden and concealed and wereunknown to B until an official inspection was made. To makethe vessel seaworthy, an investment of P500,000.00 for repairswas necessary.

If through the fault of B, the vessel was burned, S is never-theless bound to return the purchase price of P5,000,000.00 paidby B less P4,500,000.00 the value of the vessel at the time of theloss.

ART. 1570. The preceding articles of this Subsec-tion shall be applicable to judicial sales, except thatthe judgment debtor shall not be liable for damages.(1489a)

Warranty in judicial sales.

(1) As to judgment debtor. — In a judicial sale, it is not reallythe sheriff who sells but the judgment debtor. Hence, the provi-sions regarding warranty are also applicable to judicial sales. (seeArt. 1574.) The buyer can avail either of the alternative remediesto enforce the warranty and the provisions of Articles 1568 and1569. However, since the judgment debtor is forced to sell, therecan be no liability for damages. The publicity surrounding a ju-dicial sale and the fact that the seller does not take an active partin the sale and in the determination of the price precludes theexistence of bad faith on his part. (see 10 Manresa 242.) While involuntary sales or transactions the vendor or transferor can beexpected to defend his title because of his warranty to the vendee,no such obligation is owed by the owner whose land is sold atexecution sale. (Santiago Land Development Corp. vs. Court ofAppeals, 78 SCAD 476, 276 SCRA 674 [1997].)

In a case, a land was sold at public auction for unpaid realtytaxes. It was held that the sale by the buyer of the land to a pur-chaser in good faith for value was valid even if there was no com-pliance with all the requirements of the law concerning tax saleof delinquent property. (Reyes vs. Intermediate Appellate Court,135 SCRA 214 [1985].) But an auction sale conducted to satisfy a

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judgment which is null and void, necessarily is also null and void.(Ver vs. Quetulio, 163 SCRA 80 [1988].)

(2) As to government. — In judicial sales, the principle of ca-veat emptor applies, according to which the purchaser acquires byhis purchase no higher or better title or right than that of the judg-ment debtor. If the latter has no right, interest, or lien in and tothe property sold, the purchaser acquires none. (Lanci vs. Yangco,52 Phil. 563 [1928]; Laxamana vs. Carlos, 57 Phil. 722 [1929];Parreno vs. Ganancial, 29 SCRA 786 [1969]; Tay Chun Suy vs.Court of Appeals, 47 SCAD 139, 229 SCRA 151 [1994].) The ruleof caveat emptor which governs sheriff’s sales puts the purchaserupon inquiry as to the debtor’s title, there being no warranty oftitle, such sales being involuntary as distinguished from volun-tary transactions, and if he buys, he must do so at his own peril(Enriquez vs. De Delgado, [C.A.] No. 24466 R, Dec. 8, 1961.), andit is not incumbent on the sheriff to place the purchaser in pos-session of the property. (Pabico vs. Ong Pauco, 43 Phil. 572 [1923].)

Right of purchaser in judicial sales.

(1) The purchaser of property on sale under execution andlevy takes as assignee only. (Pacheco vs. Court of Appeals, 153SCRA 382 [1987].) Indeed, at a sheriff’s sale what is sold is not theproperty advertised, but simply the interest of the debtor in theproperty; if it afterwards develops that he has none, the purchaseris still liable on his bid because he has offered so much for thedebtor’s interest in open market and it is for him to determinebefore he bids what the debtor’s interest is worth. (Leyson vs.Tañada, 109 SCRA 66 [1981], citing 30 Am. Jur. 2d, pp. 691-692.)

(2) Where a judicial sale is voided or set aside without faultof the purchaser, the latter is entitled to reimbursement of thepurchase money paid by him subject to set-off for benefits enjoyedwhile he had possession of the property. As a general rule, a judi-cial sale can only be set aside upon the return to the buyer of thepurchase price with simple interest and other expenses incurredby him. He is ordinarily entitled to a lien on the property until heis repaid whatever may be due him. (Seven Brothers ShippingCorp. vs. Court of Appeals, 62 SCAD 546, 246 SCRA 33 [1995].)


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ART. 1571. Actions arising from the provisions ofthe preceding ten articles shall be barred after sixmonths, from the delivery of the thing sold. (1490)

Prescription of actions in casesof implied/express warranty.

(1) The action for rescission of the contract or reduction of thepurchase price (Art. 1567.) prescribes six months from the date ofdelivery of the thing sold. Outside this period the action is barred.It follows that a vendee should not be permitted to offer as adefense, hidden defects in the thing sold six months after he hadreceived it. (Gaba vs. Almonidovar, [C.A.] No. 24703-R, Feb. 24,1960.) If the action is not for breach of warranty but quasi-delict ornegligence, the prescriptive period is four (4) years. (see Art.1146[2].)

The ten preceding articles referred to define the vendor’s li-ability for the defects in the thing sold. (Ibid.) A cursory readingof said articles reveals that Article 1571 may be applied only incases of implied warranty.

(2) With respect to an express warranty, in accordance withthe general rule on rescission of contract, the prescriptive pe-riod which is four (4) years, shall apply (Moles vs. IntermediateAppellate Court, 169 SCRA 777 [1989]; Villostas vs. Court ofAppeals, 210 SCRA 490 [1992].) unless another period is speci-fied in the express warranty. (Engineering & Machinery Corp.vs. Court of Appeals, 67 SCAD 113, 252 SCRA 156 [1996]; Isidorovs. Nissan Motor Philippines, Inc., 116 SCAD 702, 319 SCRA757 [1999].)

ART. 1572. If two or more animals are sold together,whether for a lump sum or for a separate price foreach of them, the redhibitory defect of one shall onlygive rise to its redhibition, and not that of the others;unless it should appear that the vendee would nothave purchased the sound animal or animals withoutthe defective one.

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The latter case shall be presumed when a team,yoke, pair, or set is bought, even if a separate pricehas been fixed for each one of the animals compos-ing the same. (1491)

Sale of two or more animals together.

When two or more animals have been sold at the same timeand the redhibitory defect (Art. 1576.) is in one, or some of thembut not in all, the general rule is that the redhibition will not af-fect the others without it. It is immaterial whether the price hasbeen fixed for a lump sum for all the animals or for a separateprice for each.

The exception is when it can be shown by the vendee that hewould not have purchased the sound ones without those whichare defective. (see Art. 1556, par. 1.) Such intention need not beestablished by the vendee but shall be presumed when a team,yoke, pair or set is bought unless the vendor proves the contrary.

Although Article 1572 provides only for redhibitory actions,it does not bar the right of the vendee to bring an action quantiminoris. (see Arts. 1580, 1567.)

EXAMPLE:

S sold to B two carabaos for P10,000.00. If one carabao isdefective, S is liable for his warranty on the defective animalonly. In other words, B is not entitled to return the sound carabaounless he can show that he would not have purchased it with-out the defective one.

Such intention is presumed when the carabaos bought area male and a female but S may prove the contrary as, for exam-ple, B has no present need or use for two carabaos.

In any event, B can accept the defective carabao and de-mand a proportionate reduction of the price.

ART. 1573. The provisions of the preceding articlewith respect to the sale of animals shall in like man-ner be applicable to the sale of other things. (1492)


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Sale of two or more things together.

The points considered in the preceding article apply also tosale of two or more things where only one or more of them butnot all have hidden defects.

ART. 1574. There is no warranty against hiddendefects of animals sold at fairs or at public auctions,or of livestock sold as condemned. (1493a)

Sale of animals at fairs or at publicauctions or as condemned.

This article is a limitation to the provisions of Article 1570. Itis based on the assumption that the defects must have been clearlyknown to the buyer.

Since the law does not make any distinction, the public auc-tions referred to may be judicial or extrajudicial. Sale of animalsas condemned precludes all idea of warranty against hidden de-fects. (Art. 1561.) Such animals are bought not because of theirquality or capacity for work.

ART. 1575. The sale of animals suffering from con-tagious diseases shall be void.

A contract of sale of animals shall also be void ifthe use or service for which they are acquired hasbeen stated in the contract, and they are found to beunfit therefor. (1494a)

When sale of animals void.

The article declares the class of animals which cannot be theobject of commerce — animals suffering from contagious diseasesand those found unfit for the use or service stated. The sale of suchanimals is void as against public interest and not merely subjectto rescission or reduction of the price. (Art. 1567.) It is to be gov-erned by the rules relating to nullity of contracts. (see Art. 1409.)

Even if the animals are found fit for the use or service statedin the contract, the vendee may still rescind the contract under

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Article 1561. This article contemplates a sale that has been per-fected and consummated.

ART. 1576. If the hidden defect of animals, even incase a professional inspection has been made, shouldbe of such a nature that expert knowledge is not suf-ficient to discover it, the defect shall be consideredas redhibitory.

But if the veterinarian, through ignorance or badfaith, should fail to discover or disclose it, he shall beliable for damages. (1495)

What constitutes redhibitory defectof animals?

Article 1576 is another rule especially applicable to animals.

To be considered redhibitory, the defect must not only be hid-den. It must be of such a nature that expert knowledge is not suf-ficient to discover it. However, if the veterinarian failed to dis-cover it through his ignorance, or failed to disclose it to the vendeethrough bad faith, he shall be liable for damages. The responsi-bility is his and not the vendor’s.

ART. 1577. The redhibitory action, based on thefaults or defects of animals, must be brought withinforty days from the date of their delivery to the vendee.

This action can only be exercised with respect tofaults and defects which are determined by law or bylocal customs. (1496a)

Limitation of action in sale of animals.

The redhibitory action based on the faults of animals shall bebarred unless brought within forty days from the date of theirdelivery to the vendee.

According to the second paragraph, what should be consid-ered redhibitory defects in the sale of animals are only those de-termined by law or by local customs. If the defects are patent, there


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is no warranty against such defects although there exists a redhibi-tory vice.

ART. 1578. If the animal should die within threedays after its purchase, the vendor shall be liable ifthe disease which caused the death existed at time ofthe contract. (1497a)

Responsibility of vendor where animaldies.

If the animal sold is suffering from any disease at the time ofthe sale, the vendor is liable should it die of said disease withinthree days from the date of the sale (not date of delivery). Thisclaim of the vendee must be based on a finding of an expert thatthe disease causing the death existed at the time of the contract.

If the death occurs after three days or the defect is patent orvisible, he is not liable. If the loss is caused by a fortuitous eventor by the fault of the vendee, and the animal has vices, Article 1569should be applied.

ART. 1579. If the sale be rescinded, the animal shallbe returned in the condition in which it was sold anddelivered, the vendee being answerable for any injurydue to his negligence, and not arising from redhibi-tory fault or defect. (1498)

Liability of buyer in case sale of animalis rescinded.

If the vendee avails himself of the remedies granted by Arti-cle 1567 (see Art. 1580.), the vendee must return the animal in thecondition in which it was sold and delivered. In case of injury dueto his negligence, the vendee shall be responsible but this wouldbe no obstacle to the rescission of the contract due to the redhibi-tory defect or fault of the animal. (see Art. 1569.)

Under Article 1556, the buyer may not ask for rescission wherehe has created new encumbrances upon the thing sold.

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ART. 1580. In the sale of animals with redhibitorydefects, the vendee shall also enjoy the right men-tioned in article 1567; but he must make use thereofwithin the same period which he has been fixed forthe exercise of the redhibitory action. (1499)

Alternative remedies of vendeein sale of animals.

The vendee has the same right to bring at his option, either aredhibitory action or an action quanti minoris. The action must bebrought within forty days from the date of the delivery of theanimals to the vendee. (Art. 1577.)

ART. 1581. The form of sale of large cattle shall begoverned by special laws. (n)

Form of sale of large cattle.

The special law governing the sale of large cattle is Act No.4117, now found in Sections 511 to 536 of the Revised Adminis-trative Code, as amended, providing for the registration, brand-ing, conveyance, and slaughter of large cattle.

The sale must appear in a public document. (see Art. 1358.)

— oOo —


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Chapter 5

OBLIGATIONS OF THE VENDEE

ART. 1582. The vendee is bound to accept deliv-ery and to pay the price of the thing sold at the timeand place stipulated in the contract.

If the time and place should not have been stipu-lated, the payment must be made at the time and placeof the delivery of the thing sold. (1500a)

Principal obligations of vendee.

The principal obligations of the vendee are:

(1) to accept delivery; of the thing sold; and

(2) to pay the price1 of the thing sold at the time and placestipulated in the contract; and

(3) to bear the expenses for the execution and registration ofthe sale and putting the goods in a deliverable state, if such is thestipulation. (Arts. 1488, 1521, last par.)

A grace period granted the vendee in case of failure to paythe amount/s due is a right, not an obligation. When uncondi-

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

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tionally conferred, it is effective without further need of demandeither calling for the payment of the obligation or for honoringthe right. The grace period must not be likened to an obligation,the non-payment of which, under Article 1169 of the Civil Code,would generally still require judicial or extrajudicial demandbefore “default” can be said to arise. (Bricktown Dev’t. Corp. vs.Amor Tierra Dev’t. Corp., 57 SCAD 437, 239 SCRA 126 [1994].)

The general rule is that an agreement to extend the time ofpayment in order to be valid, must be for a definite time. Althoughno precise date is fixed, it is sufficient that the time can readily bedetermined. The fact that the seller did not act on the request forwhat amounts to an indefinite extension may be construed justas logically as a denial thereof. (City of Cebu vs. Heirs of C. Rubi,106 SCAD 61, 306 SCRA 408 [1999].)

Pertinent rules.

In connection with the above obligations, the following rulesmust be borne in mind:

(1) In a contract of sale, the vendor is not required to deliverthe thing sold until the price is paid nor the vendee to pay theprice before the thing is delivered in the absence of an agreementto the contrary (La Font vs. Pascacio, 5 Phil. 591 [1906]; see Art.1524.);

(2) If stipulated, then the vendee is bound to accept deliveryand to pay the price at the time and place designated;

(3) If there is no stipulation as to the time and place of pay-ment and delivery, the vendee is bound to pay at the time andplace of delivery;

(4) In the absence also of stipulation, as to the place of deliv-ery, it shall be made wherever the thing might be at the momentthe contract was perfected (Art. 1251.); and

(5) If only the time for delivery of the thing sold has been fixedin the contract, the vendee is required to pay even before the thingis delivered to him; if only the time for payment of the price hasbeen fixed, the vendee is entitled to delivery even before the priceis paid by him. (see Art. 1524.)

Art. 1582 OBLIGATIONS OF THE VENDEE

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EXAMPLES:

(1) S sold to B a specific refrigerator for P7,000.00. S is notbound to deliver the refrigerator until payment by B; neither isB required to pay P7,000.00 until delivery by S. From the mo-ment either party performs his obligation, the other must com-ply with his part; otherwise, he will be guilty of delay. (Art.1169, par. 3.)

(2) If it has been stipulated that B must accept the refrig-erator and pay the price at the house of S on October 10, then Bis bound to accept delivery and to pay the price on October 10at the house of S.

(3) If there is no stipulation, as to the time and place ofdelivery and S delivers the refrigerator at the house of B onOctober 10, then B is bound to accept the refrigerator and topay the price at the same time and place.

(4) If there is also no stipulation, S is not required to de-liver the refrigerator at the house of B because in such case theplace of delivery shall be where the refrigerator was at themoment the contract was perfected. So if it was at the house ofS at that time, then that is the place of delivery and also theplace of payment. (Art. 1582, par. 2.)

(5) If the obligation of S to deliver is subject to a periodwhich has not yet arrived, B is bound to pay even before therefrigerator is delivered to him. On the other hand, if the sale ison credit, B is entitled to its delivery though the price be notfirst paid.

Liability of vendee for obligationsof company bought out.

(1) Obligation not of considerable amount or value. — In somecases, when one company buys out another and continues thebusiness of the latter company, the buyer may be said to assumethe obligations of the company bought out when said obligationsare not of considerable amount or value, especially when incurredin the ordinary course of trade and when the business of the lat-ter company is continued.

(2) Obligation of considerable amount or value. — When saidobligations are of extraordinary value and the company wasbrought out not to continue its business but to stop its operation

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in order to eliminate competition, it cannot be said that the vendeeassumed all the obligations of the rival company. (Phil. Air Lines,Inc. vs. Balinquit, 99 Phil. 486 [1956].)

ILLUSTRATIVE CASE:

See No. (2) above.

Facts: PAL purchased and acquired a majority of the sharesof FEATI. These two airlines were, previous to the said pur-chase, then competing in various air routes throughout thePhilippines with the result that both companies were losingand it became necessary to maintain only one airline. The pur-chase gave rise to the problem of what to do with the FEATIemployees. After some negotiations, the parties finally reachedan agreement on May 21, 1947, whereby PAL agreed to absorbsome 70% of the FEATI employees under the same terms andconditions as they worked for the FEATI until such time as theycome to a definite understanding.

Under the collective agreement on August 1, 1946 betweenFEATI and its employees, through their union, the latter weregranted vacation and sick leaves with pay every year. On July9, 1947, PAL reached a “definite understanding” with the un-ion whereby they entered into an agreement cancelling theagreements of May 21, 1947 and August 1, 1946. It also pro-vided for the laying off of all the FEATI employees as of June 15,1947 and the payment of 1-1/2 months separation pay whichamounted roughly to P150,000.00.

The FEATI employees union filed a petition with the (de-funct) Court of Industrial Relations praying that PAL be orderedto pay vacation and sick leave with pay from August 1, 1946,which had already accrued at the time they were laid-off on June15, 1947. The employees claim that when PAL bought out FEATI,the former assumed all the obligations and rights of the latter.

Issue: Is PAL legally liable for the payment of the moneyequivalent of the vacation and sick leave earned from FEATI?

Held: No. As the obligation of FEATI is of considerablevalue, which in this case amounts to P100,000.00, and FEATIwas bought out by PAL not to continue its business but to stopits operation in order to eliminate competition, as shown bythe fact that all the employees of FEATI were laid-off, it cannotbe said that PAL assumed the obligations of FEATI, its rival


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airline. The final agreement of July 9, 1947 failed to make anymention whatsoever about the money equivalent of the vaca-tion and sick leave. This leave was earned by the employeesfrom FEATI for services rendered from August 1, 1946 up toMay 21, 1947 when they ceased to render said service to FEATI.For those employees who were absorbed by PAL from May 21,1947 to June 15, 1947, when they were laid-off, they may besaid to have earned the corresponding leave from PAL.

Had the employees insisted on the payment of the leavealready earned from FEATI in the execution of the agreementof July 9, 1947, FEATI could perhaps have been made to payunless, of course, PAL agreed to assume the obligation. Whenthey failed to raise the question or have it embodied in the agree-ment, said failure may be regarded as a waiver of their right.(Ibid.)

ART. 1583. Unless otherwise agreed, the buyer ofgoods is not bound to accept delivery thereof byinstallments.

Where there is a contract of sale of goods to bedelivered by stated installments, which are to be sepa-rately paid for, and the seller makes defective deliver-ies in respect of one or more installments, or the buyerneglects or refuses without just cause to take deliv-ery of or pay for one or more installments, it dependsin each case on the terms of the contract and the cir-cumstances of the case, whether the breach of con-tract is so material as to justify the injured party inrefusing to proceed further and suing for damagesfor breach of the entire contract, or whether the breachis severable, giving rise to a claim for compensationbut not a right to treat the whole contract as broken.(n)

Rules governing delivery in installments.

(1) General rule. — In an ordinary contract for the sale of goods,the buyer is not bound to receive delivery of the goods ininstallments. He is entitled to delivery of all the goods at the sametime and, it may be added, is bound to receive delivery of all at

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the same time. Similarly, a buyer has no right to pay the price ininstallments. Neither can he be required to make partial payments.By agreement, however, the goods may be deliverable byinstallments or the price payable in installments. (see Art. 1248.)

(2) Where separate price has been fixed for each installment. —Where the contract provides for the delivery of goods byinstallments and a separate price has been agreed upon for eachinstallment, it depends in each case on the terms of the contractand the circumstances of the case whether the breach thereof isseverable or not.

(a) Where breach affects whole contract. — If the seller makesdefective, partial or incomplete deliveries or the buyer wrong-fully neglects or refuses to accept delivery or fails to pay anyinstallment, the injured party may sue for damages for breachof the entire contract if the breach is so material (e.g., breachof one installment prevents the further performance of thecontract) as to affect the contract as a whole.

(b) Where breach severable. — Where the breach is severable,it will merely give rise to a claim for compensation for the par-ticular breach but not a right to treat the whole contract asbroken.

ILLUSTRATIVE CASE:

Seller, after making partial deliveries, flatly refused to make anymore delivery.

Facts: S agreed to deliver to B monthly for a period of tenyears a specified amount of water gas tar and coal gas tar. Sfailed to make delivery up to a certain date and “flatly refusedto make any delivery under the contract.”

Issue: May B sue for breach of the entire contract?

Held: Yes. As a general rule, a contract to do several thingsat several times is divisible in nature, so as to entitle the injuredparty to damages from time to time for breaches as they occur.But an unqualified and positive refusal to perform a contract,though the performance thereof is not yet due, may be treatedas a complete breach entitling and requiring the injured partyto recover all his damages in one suit. (Blossom & Co. vs. ManilaGas Corporation, 55 Phil. 226 [1930].)


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ART. 1584. Where goods are delivered to the buyerwhich he has not previously examined, he is notdeemed to have accepted them unless and until hehas had a reasonable opportunity of examining themfor the purpose of ascertaining whether they are inconformity with the contract, if there is no stipulationto the contrary.

Unless otherwise agreed, when the seller tendersdelivery of goods to the buyer, he is bound, on re-quest, to afford the buyer a reasonable opportunityof examining the goods for the purpose of ascertain-ing whether they are in conformity with the contract.

Where goods are delivered to a carrier by the seller,in accordance with an order from or agreement withthe buyer, upon the terms that the goods shall not bedelivered by the carrier to the buyer until he has paidthe price, whether such terms are indicated by mark-ing the goods with the words “collect on delivery,” orotherwise, the buyer is not entitled to examine thegoods before the payment of the price, in the absenceof agreement or usage of trade permitting such ex-amination. (n)

Buyer’s right to examine the goods.

Acceptance, as used in Article 1584, is assent to become ownerof the specific goods when delivery of them is offered to the buyer.(3 Williston, op. cit., p. 31.)

(1) Actual delivery contemplated. — The delivery referred to insaid article, as can be gathered from its context, is actual delivery.In other words, the ownership of the goods shall be transferredonly upon actual delivery subject to a reasonable opportunity ofexamining them to determine if they are in conformity with thecontract. (par. 1; see Arts. 1481, 1501, par. 2.)

The right of examination or inspection under paragraph 1 isthus a condition precedent to the transfer of ownership unless there isa stipulation to the contrary.

(2) Goods delivered C.O.D./not C.O.D. — Where, in pursuanceof a contract of sale, the seller is authorized or required to send

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the goods to the buyer, delivery of the goods to a carrier for thepurpose of transmission to the buyer is deemed to be delivery tothe buyer. (see Art. 1523, par. 1.)

(a) Although title passes to the buyer by the mere deliv-ery to the carrier, the buyer unless the goods are sent C.O.D.which is the normal procedure in importations, has the rightto examine the goods before paying. In this case, the right toexamine the goods is a condition precedent to paying the priceafter ownership has passed.

(b) It should be noted that even in a C.O.D. sale, the buyeris allowed to examine the goods before payment of the priceshould it have been so agreed upon or if it is permitted byusage. (par. 3.)

(3) Right of examination not absolute. — The buyer does not havean absolute right of examination since the seller is bound to af-ford the buyer a reasonable opportunity of examining the goodsonly “on request.” (par. 2.) If the seller refused to allow opportu-nity for the inspection, the buyer may rescind the contract andrecover the price or any part of it that he has paid.

(4) Right to be exercised within reasonable time. — While Article1584 accords the buyer the right to a reasonable opportunity toexamine the goods to ascertain whether they are in conformitywith the contract, such opportunity to examine should be availedof within a reasonable time in order that the seller may not sufferundue delay or prejudice. (Grageda vs. Intermediate AppellateCourt, 155 SCRA 95 [1987].)

(5) Waiver of right to examine before payment. — The right ofinspection may, of course, be given up by the buyer by stipula-tion. (Ibid.) The waiver, however, need not be in express terms.An illustration of a bargain inconsistent with examination of thegoods before payment is a contract by which goods are to be sentto the buyer C.O.D. (par. 3.) But the buyer is still entitled to ex-amine the goods after their delivery and payment of the price. (par.1.) Here, the right of examination is a condition subsequent aftertransfer of ownership and payment of the price.

ART. 1585. The buyer is deemed to have acceptedthe goods when he intimates to the seller that he has


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accepted them, or when the goods have been deliv-ered to him, and he does any act in relation to themwhich is inconsistent with the ownership of the seller,or when, after the lapse of a reasonable time, he re-tains the goods without intimating to the seller thathe has rejected them. (n)

Modes of manifesting acceptance.

Article 1585 expresses a definition of acceptance. It may bemanifested either expressly or impliedly.

(1) Express acceptance takes place when the buyer, after deliv-ery of the goods, intimates to the seller, verbally or in writing, thathe has accepted them.

(2) Implied acceptance takes place:

(a) when the buyer, after delivery of goods, does any actinconsistent with the seller’s ownership, as when he sells orattempts to sell the goods, or he uses (see Smith Bell & Co.[Phils.], Inc. vs. Gimenez, 8 SCRA 407 [1963]; Pan Pacific Com-pany [Phils.] vs. Advertising Corporation, 23 SCRA 977[1968].) or makes alteration in them in a manner proper onlyfor an owner; or

(b) when the buyer, after the lapse of a reasonable time,retains the goods without intimating his rejection. Thus, thefailure of the buyer to interpose any objection to the invoicesissued to it, to evidence delivery of the materials ordered asper agreement with the seller and which contained the con-ditions in question, should be deemed as an implied accept-ance by the buyer of the said conditions. (Naga Developmentvs. Court of Appeals, 41 SCRA 106 [1971]; Sy vs. Mina, 164SCRA 312 [1988].)

The retention of the goods is a strong evidence that thebuyer has accepted ownership of the goods. While retentionmay be considered an act inconsistent with the ownership ofthe seller, it is stated as a separate mode of manifesting accept-ance as it is merely a negative indication which may be duemerely to carelessness.

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Delivery and acceptance, separate acts.

Delivery and acceptance are two distinct and separate acts ofdifferent parties.

(1) Acceptance, not a condition to complete delivery. — Deliveryis an act of the vendor. Thus, one of the obligations of the vendoris the delivery of the thing sold. (Art. 1495.) The vendee has noth-ing to do with the act of delivery by the vendor.

On the other hand, acceptance is an obligation on the part ofthe vendee. (Art. 1582.) Consequently, acceptance cannot be re-garded as a condition to complete delivery. (La Fuerza, Inc. vs.Court of Appeals, 23 SCRA 1217 [1968].) In other words, the sellermust comply with his obligation to deliver although there is noacceptance yet by the buyer.

(2) Acceptance and actual receipt do not imply the other. — Ac-ceptance of the buyer may precede actual delivery. There may bean actual receipt without any acceptance and there may be accept-ance without any receipt. (1 Williston, 4th ed., op. cit., pp. 129-130.)

ART. 1586. In the absence of express or impliedagreement of the parties, acceptance of the goods bythe buyer shall not discharge the seller from liabilityin damages or other legal remedy for breach of anypromise or warranty in the contract of sale. But, if,after acceptance of the goods, the buyer fails to givenotice to the seller of the breach in any promise ofwarranty within a reasonable time after the buyerknows, or ought to know of such breach, the sellershall not be liable therefor. (n)

Acceptance, not a bar to actionfor damages.

Acceptance, as used in this article, has the meaning explainedpreviously — assent to receive delivery as transferring possessionand ownership in the goods; but it does not carry with it the ad-ditional agreement that the property in the goods shall be takenin full satisfaction of all obligations. (3 Williston, op. cit., p. 37.)

Therefore, unless otherwise agreed, acceptance of the goodsby the buyer (Art. 1585.) does not discharge the seller from liabil-


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ity in damages or other legal remedy (like rescission) for breachof any promise (Art. 1546.) or warranty (Art. 1547; see Ker & Co.vs. De la Rama, 11 Phil. 453 [1908].) in the contract of sale. (seeArt. 1599[1, 2].)

Notice to seller of breach of promiseor warranty.

(1) Necessity. — Article 1586 requires the buyer, in order tohold the seller liable for breach of promise or warranty, to givenotice to the seller of any such breach within a reasonable time.(2nd sentence.) Time is counted not simply from the moment thebuyer knows of the defect, but from the time when he ought tohave known it. Prompt exercise of opportunity for discoveringdefects is, therefore, essential.

(2) Purpose. — The purpose is to protect the seller againstbelated claims which prevent him from making prompt investi-gation to determine the cause and extent of his liability and alsoto enable him to take any other immediate steps that his interestmay require.

Note: The word “of’’ before “warranty” in Article 1586 shouldread “or.”

ART. 1587. Unless otherwise agreed, where goodsare delivered to the buyer, and he refuses to acceptthem, having the right so to do, he is not bound toreturn them to the seller, but it is sufficient if he noti-fies the seller that he refuses to accept them. If hevoluntarily constitutes himself a depositary thereof,he shall be liable as such. (n)

Where buyer’s refusal to acceptjustified.

(1) Duty of buyer to take care of goods without obligation to return.— If the goods have been sent to the buyer and he rightfullyrefuses to accept them, as in the case where the goods are of notthe kind and quality agreed upon, he is in the position of a baileewho has had goods thrust upon him without his assent. Doubt-less, he has the obligation to take reasonable care of the goods,

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but nothing more can be demanded of him. Accordingly, he isunder no obligation to return the goods to the seller.

(2) Duty of seller to take delivery of goods. — After notice thatthe goods have not been and will not be accepted, the seller musthave the burden of taking delivery of said goods.

(3) Seller’s risk of loss of goods. — While the goods remain inthe buyer’s possession under these circumstances, they are, ofcourse, at the seller’s risk. But the buyer is not deemed and is notliable as a depositary, unless he voluntarily constitutes himself assuch.

(4) Right of buyer to resell goods. — Should the seller, whennotified to take delivery of the goods fails to do so, the buyer mayresell the goods. The provisions governing resale by the sellerwhen the buyer is in default, it seems, will generally apply. (seeArt. 1533.)

ART. 1588. If there is no stipulation as specified inthe first paragraph of article 1523, when the buyer’srefusal to accept the goods is without just cause, thetitle thereto passes to him from the moment they areplaced at his disposal. (n)

Where buyer’s refusal to accept wrongful.

Under this article, the buyer’s refusal to accept the goods iswithout just cause while under Article 1587, the refusal is with aright to do so.

As a general rule, the delivery of the goods to a carrier isdeemed to be a delivery of the goods to the buyer. (Art. 1523, par.1.) This is true even if the buyer refuses to accept the goods in casehis refusal is without just cause. The title passes to the buyer and,therefore, the risk of loss is borne by him (Art. 1504.) from themoment they are placed at his disposal. (Art. 1588.) In those caseswhere the right of the buyer to inspect goods at the time of deliv-ery is a condition precedent to transfer of ownership (Art. 1584,par. 1.), the ownership passes by operation of law after such in-spection.


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ART. 1589. The vendee shall owe interest for theperiod between the delivery of the thing and the pay-ment of the price, in the following three cases:

(1) Should it have been so stipulated;

(2) Should the thing sold and delivered producefruits or income;

(3) Should he be in default, from the time of judi-cial or extrajudicial demand for the payment of theprice. (1501a)

Liability of vendee for interest wherepayment is made after delivery.

This article presupposes that the delivery of the thing sold andthe payment of the price were not made simultaneously but thething sold was delivered, first followed by the payment of theprice after the lapse of a certain period of time. The vendee is li-able to pay interest from the delivery of the thing until the pay-ment of the price.

(1) Interest expressly stipulated. — In such case, the rate stipu-lated governs. The stipulation of the parties to pay interest maybe oral. Article 1956 of the Civil Code which provides that “nointerest shall be due unless it has been expressly stipulated inwriting” should be construed as applicable only to contracts ofloan.

If the parties failed to fix the rate, then the legal rate of inter-est shall be due.

(2) Fruits or income received by vendee from thing sold. — UnderNo. 2, two conditions must exist: (a) that the thing sold has beendelivered, and (b) that it produces fruits or income. If the vendeewould not be bound to pay interest for the use of the money, whichhe should have paid, the principle of bilaterality which charac-terizes a contract of sale would no longer exist.

Since the law makes no distinction, the vendee is still boundto pay interest even if a term has been fixed for the payment ofthe price. (see 10 Manresa 278.)

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(3) Vendee guilty of default. — If the vendee incurs delay in thepayment of the agreed price (see Art. 1169.), the interest is duefrom the time of judicial or extrajudicial demand by the vendorfor the payment of the price. This demand by the vendor is thestarting point for the commencement of default or delay on thepart of the vendee. (10 Manresa 278.) Under Nos. 1 and 2 of Arti-cle 1589, no demand is necessary. (see Art. 1169[1].)

ART. 1590. Should the vendee be disturbed in thepossession or ownership of the thing acquired, orshould he have reasonable grounds to fear such dis-turbance, by a vindicatory action or a foreclosure ofmortgage, he may suspend the payment of the priceuntil the vendor has caused the disturbance or dan-ger to cease, unless the latter gives security for thereturn of the price in a proper case, or it has beenstipulated that, notwithstanding any such contin-gency, the vendee shall be bound to make the pay-ment. A mere act of trespass shall not authorize thesuspension of the payment of the price. (1502a)

Right of vendee to suspendpayment of price.

(1) When vendee has right. — The vendee, under this article, maysuspend the payment of the price in two cases only:

(a) if he is disturbed in the possession or ownership of thething bought; or

(b) if he has a well-grounded fear that his possession orownership would be disturbed by a vindicatory action or fore-closure of mortgage.

Under the circumstances provided for by Article 1590, thevendee is only entitled to retain the price that has not been paidto the vendor. He is not entitled to recover what has already beenpaid. Under the second case, it is not necessary that an action bebrought against the vendee.

It has been held that a buyer of a condominium unit is justi-fied in suspending payment of his monthly amortizations where


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the seller fails to give him a copy of the contract to sell despiterepeated demands therefor. A buyer is entitled to a copy of thecontract to sell; otherwise, he would not be informed of his rightsand obligations under the contract. (Gold Loop Properties, Inc.vs. Court of Appeals, 142 SCAD 238, 350 SCRA 371 [2001].)

(2) When vendee has no right. — In the following cases, thevendee cannot suspend the payment of the price even if there isdisturbance in his possession or ownership of the thing sold:

(a) if the vendor gives security for the return of the pricein a proper case;

(b) if it has been stipulated that notwithstanding any suchcontingency, the vendee must make payment (see Art. 1548,par. 3.);

(c) if the vendor has caused the disturbance or danger tocease (see Bareng vs. Court of Appeals, 107 Phil. 641 [1960].);

(d) if the disturbance is a mere act of trespass; and

(e) if the vendee has fully paid the price.

If the thing sold is in the possession of the vendee and the priceis already in the hands of the vendor, the sale is a consummatedcontract and Article 1590 is no longer applicable. Article 1590presupposes that the price or any part thereof has not yet beenpaid and the contract has not yet been consummated. (10 Manresa286-287.)

Right of vendee to demand rescission.

Under the provisions of Article 1590, the vendee has no causeof action for rescission before final judgment the reason being thatotherwise, the vendor might become the victim of machinationsbetween the vendee and the third person. (Bachrach Motor Co.,Inc. vs. Santos, 6 C.A. Rep. 706.) It must be noted that the distur-bance must be in the possession or ownership of the thing ac-quired.

The remedy of the buyer is rescission, not suspension of pay-ment where the disturbance is caused by the existence of a non-apparent servitude. (see Art. 1560.)

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ART. 1591. Should the vendor have reasonablegrounds to fear the loss of immovable property soldand its price, he may immediately sue for the rescis-sion of the sale.

Should such ground not exist, the provisions ofarticle 1191 shall be observed. (1503)

Right of vendor to rescind saleof immovable property.

This article refers only to a sale of immovable or real prop-erty where the vendor has good reasons to fear the loss of the prop-erty and its price. It contemplates a situation where there has beena delivery of the immovable property but the vendee has not yetpaid the price.

“Suppose the vendee has not yet paid the price, but he de-stroys the building sold, pulls out the plants on the land, cutsdown the forest, or places himself on the brink of insolvency.In other words, the subject matter of the sale is going to per-ish. To think of demanding payment from the vendee is some-thing useless, because the vendee has shown signs of irrespon-sibility. The only remedy that can guarantee the vendor againstsuch damage is the rescission of the contract.” (10 Manresa282-284.)

Article 1591 is applicable to both cash sales and to sales ininstallments as it does not distinguish between one and the other.(Ibid., 284-285.)

Pursuant to Article 1191 of the Civil Code, the vendor maysue for either fulfillment or rescission with damages in either caseupon the vendee’s failure to comply with his obligation to paythe agreed price. Rescission, however, is allowed only where thebreach is substantial and fundamental to the fulfillment of theobligation.

ART. 1592. In the sale of immovable property, eventhough it may have been stipulated that upon failureto pay the price at the time agreed upon the rescis-sion of the contract shall of right take place, the

Arts. 1591-1592 OBLIGATIONS OF THE VENDEE

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vendee may pay, even after the expiration of the pe-riod, as long as no demand for rescission of the con-tract has been made upon him either judicially or by anotarial act. After the demand, the court may not granthim a new term. (1504a)

Rule where automatic rescission of saleof immovable property stipulated.

As a general rule, the vendor may sue for rescission of thecontract should the vendee fail to pay the agreed price. (Art. 1191.)The sale of real property, however, is subject to the stipulationsagreed upon by the parties and to the provisions of Article 1592which speaks of non-payment of the purchase price as a resolutorycondition. Article 11912 is subordinated to the provisions of Arti-cle 1592 when applied to sales of immovable property.

Before a demand for rescission of the contract (for non-pay-ment of the price) has been made by the vendor, either judicially3

or by a notarial act, the vendee may still pay the price even afterthe expiration of the stipulated period for payment and notwith-standing a stipulation that failure to pay the price on the stipu-lated date ipso facto resolves the sale. (Adiarte vs. Court of Ap-peals, 92 Phil. 758 [1953]; Villareal vs. Tan King, 43 Phil. 251 [1922].)A judicial or notarial act is necessary before a valid rescission cantake place, whether or not automatic rescission has been stipu-lated. It is to be noted that the law uses the phrase “even though,’’emphasizing that when no stipulation is found on automatic re-scission, the judicial or notarial requirement still applies. (Iriñganvs. Court of Appeals, 155 SCAD 686, 366 SCRA 41 [2001].) A let-ter informing the buyer of the automatic rescission of a contractof sale of a real property of sale does not amount to a demand for

2See note 4 to Article 1458.3In the case of Luzon Brokerage Co., Inc. vs. Maritime Bldg. Co., Inc. (see facts, infra.), S

demanded from LBC, to whom B leased the properties sold, the payment of the monthlyrentals and the surrender of the same to S. As a consequence, LBC filed an action forinterpleader. S, in its answer, filed a cross-claim against B praying for the confirmationof its right to cancel the contract. The Supreme Court held that even if the contract wereconsidered an unconditional sale so that Article 1592 could be deemed applicable, S’sanswer to the complaint for interpleader in the lower court constituted a judicial de-mand for the rescission of the contract.

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rescission if it is not notarized. The offer to pay prior to the de-mand for rescission is sufficient to defeat the vendor’s right un-der Article 1592. (Ocampo vs. Court of Appeals, 52 SCAD 610, 233SCRA 551 [1994]; Laforteza vs. Machuca, 127 SCAD 798, 333 SCRA643 [2000].)

There is no existing provision in our laws authorizing theautomatic rescission of contracts of sale of real property for non-payment of the purchase price except as provided in Article 1592.4

A complaint by the vendor seeking the cancellation of the vendee’sadverse claim on the vendor’s original certificate of title and forthe refund of the payments made, cannot be considered a judi-cial demand under Article 1592 because it does not pray for therescission of the contract of sale. In other words, seeking dischargefrom contractual obligations and an offer for restitution is not thesame as abrogation of the contract. To rescind is “to declare a con-tract void in its inception and to put an end to it as though it neverwere.” (Ocampo vs. Court of Appeals, supra; see Arra Realty Corp.vs. Guarantee Development Corp. and Insurance Agency, 438SCRA 441 [2004].)

Note: In Articles 1191 and 1592, the rescission is a principalaction which seeks the resolution or cancellation of the contract,while in Article 1381, the action is a subsidiary one limited to casesof rescission for lesion as enumerated in said article. The prescrip-tive period applicable for rescission under Articles 1191 and 1592is found in Article 1144 which provides that the action upon awritten contract should be brought within 10 years from the timethe right of action accrues. (see Iriñgan vs. Court of Appeals, su-pra.)

Right of seller to rescind not absolute.

In a contract of sale, the remedy of the unpaid seller is eitherspecific performance or rescission with the right to claim dam-ages in either case. (Art. 1191.)

4“We concede the validity of the automatic forfeiture clause, which deems any pre-vious payments forfeited and the contract automatically rescinded upon the failure ofthe vendee to pay three successive monthly installments or any one year-end lump sumpayment. However, petitioners failed to prove the conditions that would warrant theimplementation of this clause.’’ (Valarao vs. Court of Appeals, 104 SCAD 114, 304 SCRA155 [1999].)


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A seller, however, cannot unilaterally and extrajudicially re-scind a contract of sale of immovable property where there is noexpress stipulation authorizing him to extrajudicially rescind(Laforteza vs. Machuca, supra.) except as provided in Article 1592.Judicial action for rescission of a contract is not necessary wherethe contract provides for automatic rescission in case of breach.(Gomez vs. Court of Appeals, 134 SCAD 206, 340 SCRA 720[2000].)

(1) Court may grant vendee a new term. — The right to rescindis not absolute and the court may extend the period for payment.(Art. 1191, par. 3.) Once a demand for rescission by suit or notarialact is made, however, under Article 1592, the court may not grantthe vendee a new term. Nevertheless, in the interest of justice andequity, the court may grant the vendee a new term where he hassubstantially performed in good faith. (J.M. Tuazon & Co., Inc.vs. Javier, 31 SCRA 829 [1970].)

(2) Vendor may waive his right. — The right of “automatic re-scission” (subject to Article 1592 when applicable) stipulated in acontract of sale is subject to waiver. In a case, the right was heldwaived by the vendor who granted many extensions to thevendee, in all of which, the vendor never called attention to theproviso on “automatic rescission.” (Pilipinas Bank vs. Intermedi-ate Appellate Court, 151 SCRA 546 [1987].) The unqualified ac-ceptance by the vendor of payments after the six-month periodexpired was held to constitute waiver of the period and hence, ofthe ground to rescind under Article 1592. (Ocampo vs. Court ofAppeals, supra.)

(3) Written notice of cancellation must be given. — While judi-cial action for the rescission of contract is not necessary where thecontract provides that it may be cancelled for violation of its termsand conditions, there must be at least a written notice sent to thedefaulter informing him of the rescission. The indispensability ofnotice of cancellation to the buyer of real estate is underscored inSection 3(b) of R.A. No. 6552 (see Appendix “B.”) which specifi-cally provides that the notice of cancellation or the demand forrescission of the contract must be by a notarial act. (Jison vs. Courtof Appeals, 164 SCRA 339 [1988]; Siska Development Corp. vs.Office of the President of the Phils., 50 SCAD 46, 231 SCRA 674[1994].)

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A notarial act presupposes signing before a notary public andtwo competent witnesses. A letter to the vendee rescinding a con-tract of sale which is not notarized is defective. More importantly,the notarized demand must be proven to have been received bythe vendee. (Ocampo vs. Court of Appeals, supra.) Similarly, aletter in the form of a “Formal Notice’’ ordering the buyer to va-cate the premises in question for the reason that the occupancy ofthe lot is presumed to be illegal as the lot is still registered in thename of the seller does not amount to a demand for rescissionwhere there is no reference to the sale much less a declaration thatthe sale is being rescinded or abrogated from the beginning. (Cityof Cebu vs. Heirs of C. Rubi, 106 SCAD 61, 306 SCRA 408 [1999].)Neither will a letter written by the vendor declaring his intentionto rescind to operate to validly rescind the sale. But an action forjudicial confirmation of rescission and damages has been held tocomply with the requirement of the law for judicial decree of re-scission. Even a crossclaim found in the answer can constitute ajudicial demand for rescission that satisfies the requirement of thelaw. (Iriñgan vs. Court of Appeals, 155 SCAD 686, 366 SCRA 41[2001]; Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc.,43 SCRA 93 [1972].)

(4) Breach must be substantial. — The general rule is that re-scission of a contract will not be permitted for a slight or causalbreach but only for such substantial and fundamental breach aswould defeat the very object of the parties. This is especially truewhere the slight breach by the vendee is outweighed by the badfaith of the vendor in reneging in his own prestation. The ques-tion of whether a breach of a contract is substantial depends, ofcourse, upon the attendant circumstances. (Ibid.) Where it wasstipulated in the deed of sale that payment could be made evenafter 10 years from the execution of the contract provided thevendee paid 12% interest, the failure of the vendee to pay the bal-ance of the purchase price within 10 years from the execution ofthe deed would not amount to a substantial breach. (Vda. deMistica vs. Naguiat, 418 SCRA 73 [2003].)

When Article 1592 not applicable.

(1) Sale on installment of real estate. — Article 1592 which re-quires rescission either by judicial action or notarial act contem-


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plates an absolute sale. It does not apply to sales on installmentof real property in which the parties have laid down the proce-dure to be followed in the event the vendee failed to fulfill hisobligation. (Albea vs. Inquimboy, 86 Phil. 477 [1950]; CaridadEstates, Inc. vs. Santero, 71 Phil. 114 [1940]; Torralba vs. De LosAngeles, 96 SCRA 69 [1980].)

(2) Contract to sell/conditional sale of real estate. — Neither isArticle 1592 applicable to a mere promise to sell (executory con-tract to sell) where the title remains with the vendor untilfulfillment of a positive condition, such as full payment of theprice (Roque vs. Lapuz, 96 SCRA 741 [1980]; Caridad Estates vs.Santero, supra.; Manila Racing Club vs. Manila Jockey Club, 69Phil. 57 [1939]; Manuel vs. Rodriguez, 109 Phil. 1 [1960]; Joseph& Sons Enterprises, Inc. vs. Court of Appeals, 143 SCRA 663 [1986];Alfonso vs. Court Appeals, 186 SCRA 400 [1990]; Adelfa Proper-ties, Inc. vs. Court of Appeals, 58 SCAD 462, 240 SCRA 565 [1995];Valarao vs. Court of Appeals, 104 SCAD 114, 304 SCRA 155 [1999];Gomez vs. Court of Appeals, 134 SCAD 206, 340 SCRA 720 [2000].)Such payment is a positive suspensive condition the failure ofwhich is not a breach, casual or serious, but simply an event thatprevents the obligation of the vendor to convey title from acquir-ing binding force. In an absolute sale, non-payment is a resolutorycondition. (Pangilinan vs. Court of Appeals, 87 SCAD 408, 279SCRA 590 [1997]; Odyssey Park, Inc. vs. Court of Appeals, 87SCAD 735, 280 SCRA 253 [1997].)

(3) Cases covered by R.A. No. 6552. — R.A. No. 6552 (see Ap-pendix “B.”) recognizes in conditional sales of all kinds of realestate the non-applicability of Article 1592 to such contracts to sellon installments and the right of the seller to cancel the contractupon non-payment, “which is simply an event that prevents theobligation of the vendor to convey title from acquiring bindingforce.” The Act in modifying the terms and application of Article1592 recognizes the vendor’s right to cancel unqualifiedly in caseof “industrial lots, commercial buildings, and sales to tenants” andrequires a grace period in other cases, particularly residential lots,with a refund of certain percentages of payments made on accountof the cancelled contract. (Luzon Brokerage Co., Inc. vs. MaritimeBldg. Co., Inc., 43 SCRA 93 [1972] and 86 SCRA 305 [1978]; Rillovs. Court of Appeals, 83 SCAD 905, 274 SCRA 461 [1997]; Olym-

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pia Housing, Inc. vs. Panasiatic Travel Corporation, 395 SCRA 298[2003].)

In other words, the vendee, in Nos. (1) and (2) above, may nolonger pay the price after the expiration of the time agreed uponalthough no demand has yet been made upon him by suit ornotarial act, except that in the case of sale on installment paymentsof residential properties, while the vendor’s right to cancel thecontract to sell upon breach by non-payment of the stipulatedinstallments is recognized by R.A. No. 6552, a grace period is re-quired, with the vendee entitled to refund of certain percentagesof payments in the event that the contract is cancelled. But therule upholding the validity of automatic rescission clauses con-tained in contracts to sell industrial and commercial real estateson installments upon failure to pay stipulated installments, andallowing the retention or forfeiture as rentals of the installmentspreviously paid, is not applicable to a contract to sell real estateon installments which is not essentially such a contract but is moreof a contract for the redemption of mortgaged property foreclosedby the mortgagee. (Phil. National Bank vs. Court of Appeals, 94SCRA 357 [1979].)

R.A. No. 6552 makes no distinction between “option” and“sale” which, under Section 2(b) of P.D. No. 957 (Appendix B.),virtually includes all transactions concerning land and housingacquisition including reservation agreements. (Realty ExchangeVenture Corp. vs. Sendino, 53 SCAD 57, 233 SCRA 665 [1994].)This law, which normally applies to all transactions or contracts,involving the sale or financing of real estate on installments pay-ments, including residential condominium apartments, excludesindustrial lots, commercial buildings, and sales to tenants underR.A. No. 3844, the Code of the Agrarian Reforms.5 (Odyssey Park,Inc. vs. Court of Appeals, supra.) It has been held that a decisionin an ejectment case can operate as notice of cancellation requiredby Section 3(b) of R.A. No. 6552. (Leaño vs. Court of Appeals, 158SCAD 34, 369 SCRA 36 [2001].)

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


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ILLUSTRATIVE CASE:

Vendor, retaining ownership of immovable property sold, under-took to convey it provided vendee, who defaulted, paid in full balanceof purchase price payable in monthly installments.

Facts: S, vendor, entered into a contract entitled “Deed ofConditional Sale” with B, vendee, involving three parcels ofland with the improvements thereon. The purchase price wasP1,000,000. The amount of P50,000 was paid upon the execu-tion of the deed and the balance of P950,000 was to be paid inmonthly installments of P10,000 a month with interest. It wasstipulated that in case of failure to pay any of the installments,the contract would be annulled at the vendor’s option, all pay-ments forfeited, and the property repossessed.

S advised B of the cancellation of the deed of conditionalsale and demanded the return of the property, B having failedto pay three installments. Upon suit, B invoked Article 1592.

Issue: Is Article 1592 applicable?

Held: No. S’s obligation to convey the property was ex-pressly made subject to a suspensive (precedent) condition ofthe punctual and full payment of the balance of the purchaseprice. What S sought was a judicial declaration that becausethe suspensive condition (full and punctual payment) had notbeen fulfilled, his obligation to sell to B never arose or neverbecame effective, and, therefore, S was entitled to repossess theproperty object of the contract, possession being a mere inci-dent to its right of ownership. In seeking the ouster of B forfailure to pay the price as agreed upon, S was not rescinding(or more properly, resolving) the contract, but precisely enforc-ing it according to its express terms.

In short, the contract in question was not the ordinary con-tract of sale envisaged in Article 1592 transferring ownershipsimultaneously with delivery but one in which the vendor re-tained ownership of the immovable property object of the sale,merely undertaking to convey it provided B strictly compliedwith the terms of the contract. (Luzon Brokerage Co., Inc. vs.Maritime Building Co., Inc., supra.)

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

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tion of the period fixed for the delivery of the thing,should not have appeared to receive it, or having ap-peared, he should not have tendered the price at thesame time unless a longer period has been stipulatedfor its payment. (1505)

Rule where automatic rescission of saleof movable property stipulated.

In the sale of real property, the vendor must make a demandfor rescission before he can have the right to rescind the contract.(Art. 1592.) In the case of personal property (which has not yetbeen delivered to the vendee), the vendor can rescind the contract,as a matter of right, if the vendee, without any valid cause, doesnot (1) accept delivery or (2) pay the price unless a credit periodfor its payment has been stipulated.

The mere failure of the vendee to comply with the terms ofthe contract does not rescind the same. It is necessary that thevendor should take some affirmative action indicating his inten-tion to rescind. (Guevarra vs. Pascual, 12 Phil. 311 [1908].) Theparties, however, may validly enter into an agreement that viola-tion of the terms of the contract would cause cancellation thereofeven without judicial intervention or permission. (see Universityof the Phil. vs. De los Angeles, 35 SCRA 102 [1970]; Consing vs.Jamandre, 64 SCRA 1 [1975].)

EXAMPLE:

S sold his piano to B for P30,000.00; said piano is to be de-livered on October 18. If on October 18, B does not accept de-livery or pay the price without lawful cause, then S may electto enforce compliance or to rescind the contract with the rightto damages in either case.

Reason for the rule with respectto movable property.

The reason for the difference is that personal properties arenot capable of maintaining a stable price in the market. Theirprices are so changeable that any delay in their disposal mightcause the vendor a great prejudice.


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This is not true in the case of real property which has more orless stable price in the market and the delay that might result fromthe requirement imposed on the vendor to demand rescissionbefore being entitled to rescind the contract will not in any wayprove detrimental to the interest of the vendor. (see 10 Manresa291.)

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365

Chapter 6

ACTIONS FOR BREACH OFCONTRACT OF SALE OF GOODS

ART. 1594. Actions for breach of the contract ofsale of goods shall be governed particularly by theprovisions of this Chapter, and as to matters not spe-cifically provided for herein, by other applicable pro-visions of this Title. (n)

Provisions governing breach of contractof sale of goods.

“Goods” include all chattels personal but not things in actionor money of legal tender in the Philippines. The term includesgrowing fruits or crops. (Art. 1636[1].)

Actions for breach of the contract of sale of goods are governedprimarily by the provisions of Chapter 6 (Arts. 1595-1599.) andsecondarily, by the other provisions of the Title on sales so far assaid provisions can apply. However, provisions concerning thesale of immovable property have no application to the sale ofgoods.

Actions available.

In general, the actions available for breach of the contract ofsale of goods are the following:

(1) action by the seller for payment of the price (Art. 1595.);

(2) action by the seller for damages for non-acceptance of thegoods (Art. 1596.);

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(3) action by the seller for rescission of the contract for breachthereof (Art. 1597.);

(4) action by the buyer for specific performance (Art. 1598.);and

(5) action by the buyer for rescission or damages for breachof warranty. (Art. 1599.)

ART. 1595. Where, under a contract of sale, theownership of the goods has passed to the buyer, andhe wrongfully neglects or refuses to pay for the goodsaccording to the terms of the contract of sale, the sellermay maintain an action against him for the price ofthe goods.

Where, under a contract of sale, the price is pay-able on a certain day, irrespective of delivery or oftransfer of title, and the buyer wrongfully neglects orrefuses to pay such price, the seller may maintain anaction for the price, although the ownership in thegoods has not passed. But it shall be a defense tosuch an action that the seller at any time before thejudgment in such action has manifested an inabilityto perform the contract of sale on his part or an inten-tion not to perform it.

Although the ownership in the goods has notpassed, if they cannot readily be resold for a reason-able price, and if the provisions of Article 1596, fourthparagraph, are not applicable, the seller may offer todeliver the goods to the buyer, and, if the buyer refusesto receive them, may notify the buyer that the goodsare thereafter held by the seller as bailee for the buyer.Thereafter the seller may treat the goods as the buy-er’s and may maintain an action for the price. (n)

Seller’s right of action for the price.

The above article provides the three cases when an action forthe price of the goods under a contract of sale can be maintainedby the seller:

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(1) when the ownership of the goods has passed to the buyerand he wrongfully neglects or refuses to pay for the price (par. 1.);

(2) when the price is payable on a certain day and the buyerwrongfully neglects or refuses to pay such price, irrespective ofdelivery or of transfer of the title (par. 2.); and

(3) when the goods cannot readily be resold for a reasonableprice and the buyer wrongfully refuses to accept them even be-fore the ownership in the goods has passed, if the provisions ofArticle 1596, 4th paragraph (infra.) are not applicable. (par. 3.)

EXAMPLE:

S sold to B a specific refrigerator for P8,000.00. S can main-tain an action for the price in any of the following cases:

(1) He has delivered the refrigerator to B and the latterwrongfully fails to pay;

(2) He has not yet delivered the refrigerator but the pe-riod fixed for the payment has already arrived while the pe-riod fixed for delivery is yet to come; and

(3) B has refused to accept delivery without just cause andS has notified B that he is holding the goods as bailee for B.

Under No. (1), where the unpaid goods are subsequentlysold or mortgaged to another who acted in good faith, the obli-gation to pay remains with the buyer mortgagor-seller. The fail-ure of the buyer to pay the purchase price does not ipso factorevert ownership of the goods to the (first) seller unless thesale is first liquidated. The (first) seller has no cause of actionagainst the purchaser or chattel mortgagee. (see PhilippineNational Bank vs. Court of Appeals, 367 SCRA 198 [2001].)

Where ownership in goodshas not passed.

Unless the contrary appears, the presumption is that the pay-ment of the price and the delivery of the goods were intended tobe concurrent acts and the obligation of each party to perform willbe dependent upon the simultaneous performance by the otherparty.

From the above, it can be deduced that the seller cannot main-tain an action for the price if the ownership in the goods has not

Art. 1595 ACTIONS FOR BREACH OF CONTRACTOF SALE OF GOODS

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passed to the buyer, (1) unless the price is payable on a certainday or (2) unless the goods cannot readily be resold for a certainprice and the provisions of Article 1596, 4th paragraph are notapplicable.

It must be noted that under Article 1588, the title to the goodspasses to the buyer from the moment they are placed at his dis-posal when his refusal to accept them is without just cause. Theseller may, therefore, bring an action for the price upon wrongfulrefusal of the buyer to accept.

Recovery of price payableon a certain day.

If different times are fixed for the payment of the price andthe delivery of the goods, the general rule is that the act which isto be performed first is absolutely due on that day, while the per-formance which is to take place on a later day is not due unless,as a condition precedent, the prior performance has been rendered.

(1) Buyer given credit for the price. — It is common for sellersto give credit for the price. But it is not common for buyers to givecredit for the goods. It may, however, happen that the buyer prom-ises to pay the price before acquiring the ownership or even thepossession of the goods. In such a case, the provisions of Article1595, paragraph 2 are applicable. (3 Williston, op. cit., pp. 218-219.)

(2) Defense to action for the price. — Said paragraph 2 excuses,however, the buyer from his obligation to pay the price when,before the time of payment, the seller has manifested an inabilityto perform the contract of sale or an intention not to perform it. Acontract of sale contemplates a double exchange. Accordingly,there is justice as well as good reason for excusing the buyer fromprior performance when he will not get subsequent performancefrom the seller. In this case, prospective failure to receive the thingpromised is as good as a defense as a failure which has actuallyoccurred.

ART. 1596. Where the buyer wrongfully neglectsor refuses to accept and pay for the goods, the sellermay maintain an action against him for damages fornon-acceptance.

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The measure of damages is the estimated loss di-rectly and naturally resulting in the ordinary courseof events, from the buyer’s breach of contract.

Where there is an available market for the goodsin question, the measure of damages is, in the ab-sence of special circumstances showing proximatedamage of a different amount, the difference betweenthe contract price and the market or current price atthe time or times when the goods ought to have beenaccepted, or, if no time was fixed for acceptance, thenat time of the refusal to accept.

If, while labor or expense of material amount isnecessary on the part of the seller to enable him tofulfill his obligations under the contract of sale, thebuyer repudiates the contract or notifies the seller toproceed no further therewith, the buyer shall be liableto the seller for labor performed or expenses madebefore receiving notice of the buyer’s repudiation orcountermand. The profit the seller would have madeif the contract or the sale had been fully performedshall be considered in awarding the damages. (n)

Seller’s right of action for damages.

(1) If the buyer without lawful cause neglects or refuses toaccept and pay for the goods he agreed to buy, the seller maymaintain an action against him for damages for non-acceptance.(par. 1.)

(2) In an executory contract, where the ownership in thegoods has not passed, and the seller cannot maintain an action torecover the price (see Art. 1595.), the seller’s remedy will be alsoan action for damages.

(3) If the goods are not yet identified at the time of the con-tract or subsequently, the seller’s right is necessarily confined toan action for damages.

Measure of damages for non-acceptance.

(1) Difference between contract price and market price. — Themeasure of damage is the estimated loss directly and naturally


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resulting from the buyer’s breach of contract. It is convenientlyexpressed by the formula — the difference between the contractprice, that is, the amount of the obligation which the buyer failedto fulfill, and the market or current price, that is, the value of thegoods which the seller has left upon his hands. (see Siuliong &Co. vs. Nanyo Shoji Kaisha, 42 Phil. 722 [1922]; Warner Barnes &Co. vs. Inza, 43 Phil. 505 [1922].) This follows the general rule thatdamages comprehend not only the actual loss suffered but alsounrealized profit. (Art. 2200.)

(a) As the market price varies with time and place, themarket price is fixed at the time when and the place where thegoods ought to have been accepted or, if no time was fixed, atthe time of refusal to accept.

(b) As the burden is upon the seller to show what dam-age, if any, he has suffered, it is incumbent upon him, in or-der to make out a case for recovery of more than nominaldamages, to show that the market value of the goods is lessthan the contract price.

(2) Full amount of damage. — If there is no available market inwhich the goods can be sold at the time, the seller is “entitled tothe full amount of damage which he has really sustained by abreach of the contract.” (3 Williston, op. cit., pp. 240-246; par. 2.)

(3) Proximate damages. — Article 1596 (par. 3.) allows the sellerunder “special circumstances” proximate damages of a greateramount than the difference between the contract price and mar-ket price when such damages “may be reasonably attributed tothe non-performance of the obligation.” (see Art. 2201, par. 2.)

EXAMPLE:

S agreed to sell and deliver to B on a certain date 100 bagsof sugar of a certain quality for P50,000.00. On the date desig-nated, B wrongfully refused to accept delivery.

If the market value of the sugar at the time is P40,000.00,the damage which S ought to receive is the amount ofP10,000.00, the profit he failed to realize. However, if the mar-ket value equals or exceeds the contract price of P50,000.00, S

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has suffered no damage and, though entitled to judgment, canrecover only nominal damages.1

If B acted in bad faith (this may be considered as an exam-ple of “special circumstances” mentioned in par. 3.), he is liablefor all the consequential damages incurred by S which clearlyoriginated from the breach of the contract. Thus, if the refusalof B to accept delivery so angered S that the latter suffered aheart attack for which he was hospitalized, hospitalization ex-penses may also be recovered from B as they may be reason-ably attributed to the non-performance of his obligation.

Measure of damages for repudiationor countermand.

In case the buyer repudiates the contract or notifies the sellerto proceed no further therewith, the measure of damages to whichthe seller is entitled would include:

(1) the labor performed and expenses incurred for materialsbefore receiving notice of the buyer’s repudiation; and

(2) the profit he would have realized if the sale had been fullyperformed. (Art. 1596, par. 4.)

ART. 1597. Where the goods have not been deliv-ered to the buyer, and the buyer has repudiated thecontract of sale, or has manifested his inability toperform his obligations thereunder, or has commit-ted a breach thereof, the seller may totally rescindthe contract of sale by giving notice of his election soto do to the buyer. (n)

Seller’s right of rescission before delivery.

The above article specifies the cases when the seller may re-scind a contract of sale of goods which have not yet been deliv-ered to the buyer. They are:

(1) when the buyer has repudiated the contract of sale;

1Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff,which has been violated or invaded by the defendant, may be vindicated or recognized,and not for the purpose of indemnifying the plaintiff for any loss suffered by him.


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(2) when the buyer has manifested his inability to performhis obligations thereunder; and

(3) when the buyer has committed a breach of the contract ofsale.

Article 1481 provides for a special cause for rescission of thecontract of sale of goods. Article 1534 (2nd par.) speaks of the re-scission of title.

In a case, the seller was not allowed to totally rescind a con-tract to sell two lots, it appearing that the installments paid bythe buyer were more than the value of one lot. The conveyance tothe buyer of one of the two lots was ordered. (Legarda Hermanosvs. Saldana, 55 SCRA 324 [1974].)

If the goods have been delivered, the seller may recover thevalue of what he has given. (Art. 1595.)

Giving of notice required.

The right granted to the seller follows the general rule in re-ciprocal obligations that a party to a contract injured by non-fulfillment, may rescind the contract and at the same time ask fordamages. (Art. 1191.)

It should be noted that the seller is required to give notice ofhis election to seek rescission. The way in which election must bemanifested may vary in different cases. Formal notice is certainlynot a requisite, and bringing an action promptly for restitution issufficient.

Seller’s right of rescission for breachof contract.

Article 1191 (Civil Code) establishes the principle that all re-ciprocal obligations are rescindable in the event that one of theparties bound should fail to perform that which is incumbentupon him. In the contract of sale, the obligation to pay the priceis correlative to the obligation to deliver the thing sold. Non-per-formance by one of the parties authorizes the other to exercise theright conferred upon him by the law, to elect to demand the per-formance of the obligation or its rescission, together with dam-

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ages in either event. Rescission abrogates the contract fromits inception and requires a mutual restitution of benefits received.

The right of the seller to rescind the sale for non-performanceon the part of the buyer is not absolute.

(1) The law subordinates it to the rights of third persons whoare legally in the possession of the object of the contract and towhom bad faith is not imputable. (Ocejo Perez & Co. vs. Interna-tional Bank, 37 Phil. 631 [1918]; see Art. 1385.)

(2) Moreover, the general rule is that rescission of a contractwill not be permitted for a slight or casual breach but only for suchsubstantial breach as would defeat the very object of the partiesin making the agreement. (Song Fo & Co. vs. Hawaiian-Phil. Co.,47 Phil. 821 [1925].) The question of whether a breach of a con-tract is substantial depends upon the attendant circumstances.(Corpus vs. Alikpala, 22 SCRA 104 [1968]; see Angel vs. Calasanz,135 SCRA 323 [1985].)

(3) Except as provided in Article 1597, and in the absence ofexpress stipulation authorizing the seller to extrajudicially rescinda contract of sale, the seller cannot unilaterally and extrajudiciallyrescind the contract. It has been held that where a vendor agreedto the resale of the property by the original vendee to anotherperson despite the failure of said vendee to comply with his obli-gation under the original sale, the vendor is deemed to have ef-fectively waived its right to rescind the sale. (Ayala Corporationvs. Rosa-Diana Realty and Development Corporation, 139 SCAD74, 346 SCRA 663 [2000].)

ART. 1598. Where the seller has broken a contractto deliver specific or ascertained goods, a court may,on the application of the buyer, direct that the con-tract shall be performed specifically, without givingthe seller the option of retaining the goods on pay-ment of damages. The judgment or decree may be un-conditional, or upon such terms and conditions as todamages, payment of the price and otherwise, as thecourt may deem just. (n)


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Buyer’s right to specific performance.

The article applies only where the goods to be delivered arespecific or ascertained. (see Art. 1636[1].)

In reciprocal obligations, it is the injured party who has a rightto choose between fulfillment (see Art. 1165, par. 1.) and rescis-sion, with the payment of damages in either case. (Art. 1191.)Consequently, the right of the injured party to demand specificperformance cannot be defeated by the guilty party’s choice torescind the contract.

This is also the rule in Article 1598 which grants to the buyer,as a matter of right, the remedy of specific performance in casethe seller should violate his obligation to make delivery. The sellercannot retain the goods on payment of damages because dam-ages are imposed by law to insure fulfillment of contract and notto substitute for it. In granting specific performance, the court mayimpose such terms and conditions as to damages, payment of theprice and otherwise, as it may deem just.

ART. 1599. Where there is a breach of warranty bythe seller, the buyer may, at his election:

(1) Accept or keep the goods and set up againstthe seller, the breach of warranty by way ofrecoupment in diminution or extinction of the price;

(2) Accept or keep the goods and maintain an ac-tion against the seller for damages for the breach ofwarranty;

(3) Refuse to accept the goods, and maintain anaction against the seller for damages for the breachof warranty;

(4) Rescind the contract of sale and refuse to re-ceive the goods or if the goods have already beenreceived, return them or offer to return them to theseller and recover the price or any part thereof whichhas been paid.

When the buyer has claimed and been granted aremedy in any one of these ways, no other remedy

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can thereafter be granted, without prejudice to theprovisions of the second paragraph of article 1191.

Where the goods have been delivered to the buyer,he cannot rescind the sale if he knew of the breach ofwarranty when he accepted the goods without pro-test, or if he fails to notify the seller within a reason-able time of the election to rescind, or if he fails toreturn or to offer to return the goods to the seller insubstantially as good condition as they were in at thetime the ownership was transferred to the buyer. Butif deterioration or injury of the goods is due to thebreach of warranty, such deterioration or injuryshall not prevent the buyer from returning or offeringto return the goods to the seller and rescinding thesale.

Where the buyer is entitled to rescind the sale andelects to do so, he shall cease to be liable for the priceupon returning or offering to return the goods. If theprice or any part thereof has already been paid, theseller shall be liable to repay so much thereof as hasbeen paid, concurrently with the return of the goods,or immediately after an offer to return the goods inexchange for repayment of the price.

Where the buyer is entitled to rescind the sale andelects to do so, if the seller refuses to accept an offerof the buyer to return the goods, the buyer shall there-after be deemed to hold the goods as bailee for theseller, but subject to a lien to secure the payment ofany portion of the price which has been paid, and withthe remedies for the enforcement of such lien allowedto an unpaid seller by Article 1526.

(5) In the case of breach of warranty of quality,such loss, in the absence of special circumstancesshowing proximate damage of a greater amount, isthe difference between the value of the goods at thetime of delivery to the buyer and the value they wouldhave had if they had answered to the warranty. (n)


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Remedies of buyer for breachof warranty by seller.

This article applies both to implied warranties and to expresswarranties, whether of quality or of title.

The remedies allowed to the buyer when the seller has beenguilty of a breach of promise or warranty are:

(1) accept the goods and set up the seller’s breach to reduceor extinguish the price;

(2) accept the goods and maintain an action for damages forthe breach of the warranty;

(3) refuse to accept the goods and maintain an action for dam-ages for the breach of the warranty; and

(4) rescind the contract of sale by returning or offering thereturn of the goods, and recover the price or any part thereofwhich has been paid. (Nos. 1-4.)

The remedies open to the buyer under the article may begrouped into three, to wit: (a) recoupment (No. 1.); (b) action (No.3.) or counterclaim for damages (No. 2.); and (c) rescission. (No.4.)

Nos. (1) and (2) should be read in connection with Article 1586.

The general measure of damage in case of breach of warrantyof quality is provided in No. (5) of Article 1599. It is similar to themeasure of damages under Article 1596, par. 2.

Remedies alternative.

The above remedies are alternative. Once a remedy has beengranted to the buyer, no other remedy can thereafter be exercisedor granted.

The only exception is when after the buyer has chosenfulfillment, it should become impossible, in which case he mayalso sue for rescission. (Art. 1191, par. 2.)

Recoupment in diminutionof the price.

The theory of recoupment is that the seller’s damages are cut

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down to an amount which will compensate him for the value ofwhat he has given.

In view of the breach of warranty by the seller, the buyer isnot bound to perform the contract on his part, but the buyer hasreceived something of value for which he ought to pay. By meansof recoupment, the buyer is allowed to avoid the contract andsubstitute in its stead a quasi-contractual obligation for the valueof what he has received. The word is nearly though not quite syn-onymous with discount, reduction or deduction.

EXAMPLE:

S sold to B 50 boxes of apples for P20,000.00. Upon exami-nation, it was discovered that apples equivalent to 15 boxeswere rotten.

In an action by S against B for the purchase price, B can setup the breach by S of his warranty by way of recoupment indiminution of the price of P20,000.00. In other words, from thepurchase price of P20,000.00 shall be deducted the amount ofP6,000.00, the value of the 15 boxes of apples. So B is liable onlyfor P14,000.00, the value of the apples received.

Action or counterclaim for damages.

The law provides that the buyer may “refuse to accept thegoods, and maintain an action against the seller for damages forthe breach of warranty.” (No. 3.) It is fundamental that the breachof an obligation gives rise to an action for damages. It is, there-fore, unnecessary to discuss so plain a point.

Acceptance with knowledge of the breach of warranty doespreclude rescission but it does not necessarily preclude a right torecoupment or damages. (3 Williston, op. cit., p. 362.)

Recoupment and counterclaim,distinguished.

The right of recoupment is to be distinguished from set-off orcounterclaim.

By means of counterclaim, both sides of the contract are en-forced in the same litigation. The defendant (buyer) does not seek


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to avoid his obligation under the contract but seeks to enforce theplaintiff’s (seller’s) obligation and to deduct it from his liabilityfor the price for breach of the warranty. (see No. 2.)

When rescission by the buyernot allowed.

The remedy of rescission is allowed on broad principles ofjustice. The basis of the remedy is that the buyer has not receivedwhat he has bargained for.

It cannot be availed of, however, in the following cases:

(1) if the buyer accepted the goods knowing of the breach ofwarranty without protest;

(2) if he fails to notify the seller within a reasonable time ofhis election to rescind; and

(3) if he fails to return or offer to return the goods in substan-tially as good condition as they were in at the time of the transferof ownership to him. But where the injury to the goods was causedby the very defect against which the seller warranted, the buyermay still rescind the sale. (par. 3.)

Rights and obligations of buyerin case of rescission.

They are as follows:

(1) In case of rescission, the buyer shall cease to be liable forthe price, his only obligation being to return the goods;

(2) If he has paid the price or any part thereof, he may recoverit from the seller (par. 4; see Embee Transportation Corp. vs.Camacho, 80 SCRA 477 [1977].);

(3) He has the right to hold the goods as bailee for the sellershould the latter refuse the return of the goods; and

(4) He has the right to have a lien on the goods for any por-tion of the price already paid which lien he may enforce as if hewere an unpaid seller. (par. 5.)

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Chapter 7

EXTINGUISHMENT OF SALE

ART. 1600. Sales are extinguished by the samecauses as all other obligations, by those stated in thepreceding articles of this Title, and by conventionalor legal redemption. (1506)

Causes for extinguishment of sale.

The modes or causes of extinguishing the contract of sale maybe classified into:

(1) Common or those causes which are also the means of ex-tinguishing all other contracts like payment, loss of the thing,condonation, etc. (see Art. 1231.);

(2) Special or those causes which are recognized by the lawon sales (such as those covered by Articles 1484, 1532, 1539, 1540,1542, 1556, 1560, 1567, and 1591.); and

(3) Extra-special or those causes which are given special dis-cussion by the Civil Code and these are conventional redemptionand legal redemption. (see 10 Manresa 300, 303.)

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379

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SECTION 1. — Conventional Redemption

ART. 1601. Conventional redemption shall takeplace when the vendor reserves the right to repur-chase the thing sold, with the obligation to complywith the provisions of article 1616 and other stipula-tions which may have been agreed upon. (1507)

Conventional redemption defined.

Conventional redemption is the right which the vendor reservesto himself, to reacquire the property sold provided he returns tothe vendee the price of the sale, the expenses of the contract, anyother legitimate payments made therefor and the necessary anduseful expenses made on the thing sold (Art. 1616.), and fulfillsother stipulations which may have been agreed upon.

Subject matter of conventional redemption.

Both real and personal property may be the subject matter ofpacto de retro sales or sales with right to repurchase although thereare certain articles (Arts. 1607, 1611, 1612, 1613, 1614, 1617, 1618.)which are applicable only to immovables.

Nature of conventional redemption.

(1) It is purely contractual because it is a right created, not bymandate of the law, but by virtue of an express contract. (Ordoñezvs. Villaroman, 78 Phil. 116 [1947].)

(2) It is an accidental stipulation and, therefore, its nullity can-not affect the sale itself since the latter might be entered into with-out said stipulation. (Alojado vs. Lim Siongco, 51 Phil. 339 [1927].)

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(3) It is a real right when registered, because it binds thirdpersons. (Art. 1608; see Mortera vs. Martinez, 14 Phil. 541 [1909].)

(4) It is potestative because it depends upon the will of thevendor. (see Art. 1182.)

(5) It is a resolutory condition because when exercised, the rightof ownership acquired by the vendee is extinguished. (see Art.1179; see Aquino vs. Deal, 63 Phil. 582 [1936]; Heirs of FranciscoParco vs. Haw Pia, 45 SCRA 164 [1972].) In a pacto de retro sale,the title or ownership of the property sold is immediately vestedin the vendee a retro, subject only to the resolutory condition ofrepurchase by the vendor a retro within the stipulated period.(Solid Homes, Inc. vs. Court of Appeals, 81 SCAD 546, 275 SCRA267 [1997].)

(6) It is not an obligation but a power or privilege that the ven-dor has reserved for himself. (Ocampo vs. Potenciano, [C.A.] 48O.G. 2230.)

(7) It is reserved at the moment of the perfection of the contract forif the right to repurchase is agreed upon afterwards, there is onlya promise to sell which produces different rights and effects andis governed by Article 1479. (Diamante vs. Court of Appeals, 206SCRA 52 [1992].)

(8) The person entitled to exercise the right of redemptionnecessarily is the owner of the property sold and not any third party.(see Quimson vs. Phil. National Bank, 36 SCRA 26 [1970].) Un-like a debt which a third person may satisfy even against the debt-or’s will (see Art. 1237.), the right of repurchase may be exercisedonly by the vendor in whom the right is recognized by contractor by any person in whom the right may have been transferred.(Gallar vs. Husain, 20 SCRA 186 [1967].)

(9) It gives rise to reciprocal obligation that of returning the priceof sale and other expenses, on the part of the vendor (Art. 1616.);and that of delivering the property and executing a deed of saletherefor, on the part of the vendee. The plea that the vendee madedelivery of the property to a third person whom he believed wasbetter entitled to possess it, cannot serve as an excuse for the fail-ure to comply with said obligation. (Pandaquilla vs. Gaza, 12 Phil.663 [1909].)

Art. 1601 EXTINGUISHMENT OF SALEConventional Redemption

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ILLUSTRATIVE CASE:

When period for exercise of right of repurchase expired, constitu-tional prohibition against aliens owning lands was already in force.

Facts: S, vendor a retro, sold to B, a Chinese, vendee a retro,a parcel of land. The sale was made in 1932, before the adop-tion of the old Constitution. No repurchase was made by S. Atthe expiration of the right of repurchase, the 1935 Constitution(Art. XIII, Sec. 5 thereof.) contains a prohibition against aliensowning lands save in cases of hereditary succession.

Issue: Does the prohibition apply to B, an alien who acquiredthe land by sale with pacto de retro before the 1935 Constitutionbecame effective?

Held: No. The nature of a sale with right of repurchase issuch that the ownership over the thing sold is transferred tothe vendee upon the execution of the contract assuming therequirements as to delivery to be present, subject only to theresolutory condition that the vendor exercises his right of re-purchase within the period agreed upon by the parties or pre-scribed by law. (Heirs of Francisco Parco vs. Haw Pia, 45 SCRA164 [1972].)

Option to buy and right of repurchasedistinguished.

An option to buy is different and distinct from the right ofrepurchase which must be reserved by the vendor by stipulationto that effect in the contract of sale. This is clear from Article 1601.

(1) The right of repurchase is not a right granted the vendorby the vendee in a subsequent instrument, but a right reserved bythe vendor in the same instrument of sale as one of the stipula-tions of the contract.

(2) Once the instrument of absolute sale is executed, the ven-dor no longer reserves the right to repurchase, and any right there-after granted the vendor by the vendee in a separate instrumentcannot be a right of repurchase, but some other right like the op-tion to buy.

(a) Accordingly, a deed of absolute sale and an option tobuy together, cannot be considered as evidencing a contractof sale with pacto de retro. Such option does not evidence a rightto repurchase, the extension of the period for the exercise of

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which (option) does not fall under No. 3 of Article 1602.(Villarica vs. Court of Appeals, 26 SCRA 189 [1968]; Vda. deZulueta vs. Octaviano, 121 SCRA 314 [1983]; Vda. de Cruzovs. Carriaga, Jr., 174 SCRA 330 [1989]; see Vasquez vs. Courtof Appeals, 199 SCRA 102 [1991]; Torres vs. Court of Appeals,216 SCRA 287 [1992].)

(b) Similarly, in an early case, it has been held that anagreement to repurchase becomes a promise to sell whenmade after an absolute sale because where the sale is madewithout such an agreement, the purchaser acquires the thingsold absolutely, and if he afterwards grants the seller the rightto repurchase, it is a new contract entered into by the pur-chaser, as absolute owner already of the object. (Ramos vs.Icasiano, 51 Phil. 343 [1927]; Vda. de Cruzo vs. Carriaga, Jr.,supra; Diamante vs. Court of Appeals, 206 SCRA 52 [1992].)

Right to redeem and right of repurchasedistinguished.

The right to redeem becomes functus officio on the date of itsexpiry, and its exercise after the period is not really one of redemp-tion but a repurchase.

Distinction must be made because redemption is by force oflaw; the purchaser at public auction is bound to accept redemp-tion. Repurchase, however, of foreclosed property, after redemp-tion period, imposes no such obligation. After expiry, the pur-chaser may or may not re-sell the property but no law will com-pel him to do so. And, he is not bound by the bid price; it is en-tirely within his discretion to set a higher price, for after all, theproperty already belongs to him as owner.’’ (Vda. De Urbano vs.GSIS, 157 SCAD 133, 367 SCRA 672 [2001], citing Natino vs. In-termediate Appellate Court, 397 SCRA 323 [2001].)

ART. 1602. The contract shall be presumed to bean equitable mortgage, in any of the following cases:

(1) When the price of a sale with right to repur-chase is unusually inadequate;

(2) When the vendor remains in possession as les-see or otherwise;


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(3) When upon or after the expiration of the rightto repurchase another instrument extending the pe-riod of redemption or granting a new period is ex-ecuted;

(4) When the purchaser retains for himself a partof the purchase price;

(5) When the vendor binds himself to pay the taxeson the thing sold;

(6) In any other case where it may be fairly inferredthat the real intention of the parties is that the trans-action shall secure the payment of a debt or the per-formance of any other obligation.

In any of the foregoing cases, any money, fruits orother benefits to be received by the vendee as rent orotherwise shall be considered as interest which shallbe subject to the usury laws. (n)

Equitable mortgage defined.

An equitable mortgage is one which lacks the proper formali-ties, form or words, or other requisites prescribed by law for amortgage, but shows the intention of the parties to make the prop-erty subject of the contract as security for a debt and containsnothing impossible or contrary to law. (41 C.J. 303; Cachola vs.Court of Appeals, 208 SCRA 496 [1992]; Ceballos vs. IntestateEstate of the Late E. Mercado, 430 SCRA 323 [2004].)

The “pacto de retro” problem.

Article 1602 is a new provision and is one of the suitable rem-edies (see Arts. 1603-1607.1) sponsored by the Code Commission

1Other remedies:Art. 1365. If two parties agree upon the mortgage or pledge of real or personal

property, but the instrument states that the property is sold absolutely or with a right ofrepurchase, reformation of the instrument is proper.

Art. 1450. If the price of a sale of property is loaned or paid by one person for thebenefit of another and the conveyance is made to the lender or payor to secure the pay-ment of the debt, a trust arises by operation of law in favor of the person to whom themoney is loaned or for whom it is paid. The latter may redeem the property and compela conveyance thereof to him.

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to provide safeguards and restrictions against the evils of saleswith a right of repurchase, commonly called pacto de retro sales.

The policy of the law is to discourage pacto de retro sales andthereby prevent the circumvention of the prohibition againstusury (see note, infra.) and pactum commissorium2 (Ching Sen Benvs. Court of Appeals, 112 SCAD 698, 314 SCRA 762 [1999].)

“One of the gravest problems that must be solved is thatraised by the contract of sale with right of repurchase or pactode retro. The evils arising from this contract have festered likea sore on the body politic.” (Report of the Code Commission,p. 61.)

“It is a matter of common knowledge that in practicallyall of the so-called contracts of sale with right of repurchase,the real intention of the parties is that the pretended purchaseprice is money loaned, and in order to secure the payment ofthe loan, a contract purporting to be a sale with pacto de retrois drawn up. It is, thus, that the provisions obtained in Arti-cles 1859 and 1958 [now Articles 2087 and 2088.] of the present[old] Civil Code which respectively prohibit the creditor fromappropriating the things given in pledge or mortgage andordering that said things be sold or alienated when the prin-cipal obligations become due are circumvented.

Furthermore, it is well-known that the practice in these so-called contracts of sale with pacto de retro is to draw up anothercontract purporting to be a lease of property to the supposedvendor, who pays in money or in crops a so-called rent. It is,however, no secret to anyone that this simulated rent is in truthand in fact interest on the money loaned. In many instances,the interest is usurious. Thus, the usury law is also circum-vented.” (Ibid., p. 63.)

Note: The Usury Law (Art. 2655, as amended.) is now “legallyinexistent” as the lender and borrower can agree on any interest

Art. 1454. If an absolute conveyance of property is made in order to secure theperformance of an obligation of the grantor toward the grantee, a trust by virtue of lawis established. If the fulfillment of the obligation is offered by the grantor when it be-comes due, he may demand the reconveyance of the property to him.

2Art. 2088. The creditor cannot appropriate the things given by way of pledge ormortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a)


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that may be charged on the loan under Central Bank Circular No.905 approved by the Monetary Board in Resolution No. 224 datedDecember 3, 1982. (see Verdejo vs. Court of Appeals, 157 SCRA743 [1988].)

“Pacto de retro” and mortgage,distinguished.

The following are the distinctions:

(1) In pacto de retro, ownership is transferred but the owner-ship is subject to the condition that the seller might recover theownership within a certain period of time,3 while in mortgage,ownership is not transferred but the property is merely subject toa charge or lien as security for the compliance of a principal obli-gation, usually a loan;

(2) If the seller does not repurchase the property upon the veryday named in the contract, he loses all interest thereon, while themortgagor does not lose his interest in the property if he fails topay the debt at its maturity; and

(3) In the case of a pacto de retro, there is no obligation restingupon the purchaser to foreclose. Neither does the vendor haveany right to redeem the property after the maturity of the debt.On the other hand, it is the duty of the mortgagee to foreclose themortgage if he wishes to secure a perfect title thereto, and afterthe maturity of the debt secured by the mortgage and before fore-closure, the mortgagor has a right to redeem. (Basilio vs.Encarnacion, 5 Phil. 360 [1905]; Borromeo vs. Vda. de Gonzales,[C.A.] 6200 O.G. 3775; see Heirs of Arches vs. De Diaz, 50 SCRA440 [1973].)

A vendor who decides to redeem or repurchase a propertysold with pacto de retro in a sense stands as the debtor and thevendee as the creditor of the repurchase price. (Catangcatang vs.Legayada, 84 SCRA 51 [1978]; Rivero vs. Rivero, 80 Phil. 802[1948].)

3The essence of a pacto de retro sale is that title to the property sold is immediatelyvested in the vendee a retro, subject to the resolutory condition of repurchase by thevendor a retro within the stipulated period. (De Guzman, Jr. vs. Court of Appeals, 156SCRA [1987].)

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ILLUSTRATIVE CASES:

1. It is stipulated that upon failure of owner to redeem land byreturning the loan, title thereto shall vest in the lender.

Facts: In the instrument wherein the words “mortgage withconditional sale” are used, it is stipulated (1) that S reserves theright to redeem the parcel of land in question after the periodof five (5) years from the date of the instrument by paying backand returning the loan of P5,000 to B and (2) that on his failureto exercise the said right, the title to the property shall pass to,and become vested, absolutely, in B.

There is no period after the five (5) years within which Smay redeem the property.

Issue: Is the second stipulation a mortgage or a sale withpacto de retro?

Held: If the stipulation be construed as giving B the right toown the property upon failure of S to pay the loan on the stipu-lated time — which is not provided — that would be pactumcommissorium4 which is unlawful and void. The clause is con-clusive proof that it is a mortgage and not a sale with pacto deretro because if it were the latter, title to the parcel of land wouldpass unto the vendee upon the execution of the sale and notlater as stipulated. (Guerrero vs. Ynigo and Court of Appeals, 96Phil. 37 [1954].)

———— ———— ————

2. Under the contract, if the first party failed to redeem theland “sold as by mortgage,” the other party may sell it to another.

Facts: S executed in favor of B a private document whichstates that he “has sold as by mortgage” a parcel of land andthat in case of non-fulfillment of certain conditions, B may ejectS, and further states that if S be unable to redeem the mort-gage, B may sell the land to another.

As S failed to redeem the land, B sold the land to C whotook possession. S now seeks the recovery of the land claimingthat the contract is a mortgage.

Issue: Is the contract a mortgage or a sale with pacto de retro?

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


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Held: It is a sale with pacto de retro. The right to repurchaseand the obligation to resell contained in a contract of pacto deretro are not the same as those in a mortgage agreement to se-cure a principal obligation, nor are they to be considered asinherent in or annexed to the mortgage. A mortgagee cannotappropriate or dispose of the mortgaged property, while a pur-chaser under pacto de retro, as soon as the right of dominion isconsolidated as prescribed by law (see Art. 1607.), may disposeof the same as his own property without restriction. (Tuazon vs.Gaduco, 23 Phil. 342 [1912].)

———— ———— ————

3. Vendor a retro failed to exercise his right of repurchase whilevendee a retro failed to pay balance of purchase price.

Facts: S sold his land to B for the sum of P1,400 with theright to repurchase it within five (5) years. The period expiredwithout S having availed himself of his right of repurchase. Bpaid only P1,200 of the purchase price and never paid the bal-ance of P200. On the other hand, although the land was sup-posed to have an area of 8.8 hectares, its actual area was onlymore than five (5) hectares or a deficiency of more than three(3) hectares.

B filed an action to recover the deficiency. S, in his counter-claim, asked for rescission of the sale.

Issue: What is the effect of the discrepancies, i.e., failure ofB to pay the full price and the failure of S to deliver the totalarea sold?

Held: The failure of B to pay the balance did not suspendthe running of the redemption period as there is nothing to in-dicate that the agreement of the parties is to suspend the pe-riod until the full payment of the purchase price. (Catangcatangvs. Legayada, 84 SCRA 51 [1978].)

Note: The Supreme Court affirmed the decision of the Courtof First Instance (now Regional Trial Court) dismissing bothB’s complaint seeking recovery of the deficiency, having foundthat the parcel of land sold was described by metes and bounds,having an actual area less than that stated in the tax declara-tion and S’s counterclaim.

R.C. Aquino, J., dissenting: In view of those discrepancies,the contract ceased to be a true pacto de retro sale and it became

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

Subsequent sale of propertyby vendor a retro.

The sole right of the vendor under a pacto de retro agreementis that of redemption. He has no other interest left in the propertywhich he can transfer. (Davis vs. Neyra, 24 Phil. 417 [1913].) But asale subsequently made by the vendor to an innocent purchaserfor value could defeat the vendee’s title and right to possession ifthe latter’s right is not properly registered or annotated.

When contract with right to repurchasepresumed an equitable mortgage.

For a presumption of an equitable mortgage to arise, there aretwo (2) requisites, namely: that the parties entered into a contractdenominated as a contract of sale with a right of repurchase orpurporting to be an absolute sale (Art. 1604.) and that their inten-tion was to secure an existing debt by way of mortgage. (Lustanvs. Court of Appeals, 78 SCAD 351, 266 SCRA 663 [1997]; Reyesvs. Court of Appeals, 339 SCRA 97 [2000]; San Pedro vs. Lee, 430SCRA 338 [2004].)

Article 16026 enumerates six distinct and separate circum-stances the presence of any (not a concurrence) of which is suffi-cient to give rise to the presumption that a contract, regardless ofits nomenclature, is an equitable mortgage in consonance with therule that the law favors the last transmission of property rights.

5Art. 2132. By the contract of antichresis the creditor acquires the right to receivethe fruits of an immovable of his debtor, with the obligation to apply them to the pay-ment of the interest, if owing, and thereafter to the principal of his credit.

6Art. 1378. When it is absolutely impossible to settle doubts by the rules estab-lished in the preceding articles, and the doubts refer to incidental circumstances of agratuitous contract, the least transmission of rights and interests shall prevail. If thecontract is onerous, the doubt shall be settled in favor of the greatest reciprocity of inter-ests.

If the doubts are cast upon the principal object of the contract in such a way that itcannot be known what may have been the intention or will of the parties, the contractshall be null and void. (1289)


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(Art. 1378.)7 (see Santos vs. Duata, 14 SCRA 1041 [1965]; Villaricavs. Court of Appeals, 26 SCRA 189 [1968]; Quinga vs. Court ofAppeals, 3 SCRA 66 [1961]; Claravall vs. Court of Appeals, 190SCRA 439 [1990]; Misena vs. Rongavilla, 303 SCRA 749 [1999];Aguirre vs. Court of Appeals, 119 SCAD 561, 323 SCRA 771 [2000];Hilado vs. Heirs of R. Medalla, 377 SCRA 257 [2002].) They areinconsistent with the vendee’s acquisition of the right of owner-ship under a true sale subject only to the vendor’s right to redeem,and belie the truthfulness of the sale a retro. In case of doubt, acontract purporting to be a sale with right of repurchase shall beconstrued as an equitable mortgage. (Art. 1603.)

These cases are the following:

(1) Price of the sale is unusually inadequate. (see Cabigao vs. Lim,50 Phil. 844 [1927]; Dapiton vs. Veloso, 93 Phil. 39 [1953]; Quingavs. Court of Appeals, supra; Labasan vs. Lacuesta, 86 SCRA 16[1978]; Serrano vs. Court of Appeals, 139 SCRA 179 [1985].) It iscommon knowledge borne out by experience that in nearly allcases, the zonal valuations of the Bureau of Internal Revenuehardly approximate the fair market values of real property.(Zamora vs. Court of Appeals, 72 SCAD 833, 260 SCRA 10 [1996].)But the mere disproportion of the price to the value of the prop-erty, in the absence of other circumstances incompatible with thecontract of purchase and sale, cannot alone justify the conclusionthat the transaction is a pure and simple loan. (Bruce vs. Court ofAppeals, 157 SCRA 330 [1988].) Inadequacy is not sufficient to setaside a sale unless it is grossly inadequate or purely shocking tothe conscience (Cachola vs. Court of Appeals, 208 SCRA 496[1992]; Adapo vs. Court of Appeals, 327 SCRA 180 [2000].); or issuch that the mind revolts at it and such that a reasonable manwould neither directly or indirectly be likely to consent to it (Vda.de Alvarez vs. Court of Appeals, 23 SCRA 309 [1968], citing A.Tolentino, Commentaries and Jurisprudence on the Civil Code ofthe Phils., Vol. V, [1992], pp. 156-158.);

7This provision was applied retroactively to cases arising prior to the effectivity ofthe new Civil Code since it is remedial in nature. (Magtira vs. Court of Appeals, 96SCRA 680 [1980]; Balatero vs. Intermediate Appellate Court, 154 SCRA 530 [1987]; Oleavs. Court of Appeals, 63 SCAD 579, 247 SCRA 274 [1995].)

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(2) Vendor remains in possession. (see Ibid.; Garcia vs. DeArijona, 97 Phil. 997 [1955]; Lanuza vs. De Leon, 20 SCRA 369[1967]; Tan vs. Valdehueza, 66 SCRA 61 [1975]; Quinga vs. Courtof Appeals, supra; Lao vs. Court of Appeals, 81 SCAD 845, 275SCRA 237 [1997].) Where the contract also provides that “It isagreed that the vendor shall have the right to possess [e.g., as les-see], use and build on the property during the period of redemp-tion,” there is here an acknowledgment by the vendee of the rightof the vendor to retain possession of the property, making thecontract one of loan guaranteed by mortgage, not a conditionalsale or an option to repurchase. (Bundalian vs. Court of Appeals,129 SCRA 645 [1984].) If the transaction is an absolute sale of prop-erty, particularly land, the vendee ordinarily would assume im-mediate possession after the execution of the deed of sale(Capulong vs. Court of Appeals, 130 SCRA 245 [1984].) Well-set-tled to the point of being elementary is the doctrine that wherethe vendor remains in physical possession of the land sold as les-see or otherwise, the contract should be treated as an equitablemortgage. The real intention of the parties is determinative of thetrue nature of the transaction. (Ramirez vs. Court of Appeals, 97SCAD 612, 294 SCRA 512 [1998].) The vendor’s continued pos-session of the property allegedly sold taken together with othercircumstances, may even cast a serious doubt on the due execu-tion and genuineness of a contested deed of sale. (Domingo vs.Court of Appeals, 156 SCAD 819, 367 SCRA 368 [2001].)

In a case, the vendor, under the agreement shall remain inpossession of the property for only one year. It was held that this“did not detract from the fact that the possession of the propertyan indicium of ownership, was retained by the private respond-ent as the alleged vendor. The period of time may be deemed asactually the time allotted for private respondent for fulfilling itspart of the agreement by paying its indebtedness x x x as may begleaned from paragraph (f) x x x of the agreement.’’ (Oronce vs.Court of Appeals, 100 SCAD 277, 298 SCRA 133 [1998].)

(3) Period of redemption is extended after expiration (see Umalivs. Fernandez, 28 Phil. 89 [1914]; Lizares, Jr. vs. Court of Appeals,44 SCAD 492, 226 SCRA 112 [1993]; Lacorte vs. Court of Appeals,91 SCAD 446, 286 SCRA 24 [1998].);


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(4) Purchaser retains part of the price (see Camus vs. Court ofAppeals, 41 SCAD 796, 222 SCRA 612 [1993].)

In the cited case of Oronce vs. Court of Appeals (supra.), para-graph (f) of the deed of sale with assumption of mortgage statesthat the “full title and possession’’ of the property “shall vest uponthe VENDEES upon the full compliance by them with all the termsand conditions herein set forth.’’ It “also evidences the fact thatthe agreed “purchase price’’ of fourteen million pesos(P14,000,000.00) was not handed over by petitioners to privaterespondent upon the execution of the agreement. OnlyP5,400,000.00 was given by petitioners to private respondent, asthe balance thereof was to be dependent upon the private respond-ent’s satisfaction of its mortgage obligation to China BankingCorporation. Notably, the MTC found that petitioners gave pri-vate respondent the amount of P8,500,000.00 that should be paidto the bank to cover the latter’s obligation, thereby leaving theamount of P100,000.00 (P5,400,000.00 + P8,500,000.00 =P13,900,000.00) of the purchase price still unpaid in the hands ofpetitioners, the alleged ‘vendees.’ Held: “Hence, two of the circum-stances enumerated in Article 1602 are manifest in the Deed ofSale with Assumption of Mortgage, namely: (a) the vendor wouldremain in possession of the property (No. 2), and (b) the vendeesretained a part of the purchase price (No. 4). On its face, there-fore, the document subject of controversy, is actually a contractof equitable mortgage.’’

(5) Vendor binds himself to pay taxes on the thing sold (see Aquinovs. Deala, 63 Phil. 583 [1936]; Dalandan vs. Julio, 10 SCRA 400[1964].) or the alleged vendee never declared in his name for taxa-tion purposes the land sold. (Labasan vs. Lacuesta, supra.) But thesole circumstance that the land sold continued to be registeredand all the tax declarations thereon were made in the name of thevendor cannot be invoked to support the finding that a deed ofsale with the right of repurchase is an equitable mortgage. At best,it may demonstrate neglect on the part of the vendee. (Bollozosvs. Yu Tieng Su, 155 SCRA 506 [1987].)

In a case, although the tax declarations for the property inquestion have been transferred to the vendee’s name and he hasbeen continuously paying the realty taxes thereon, the fact that

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he has made no move for 30 years to oust the vendor and his heirsfrom their possession of the property was taken as a circumstancewhich clearly falls within the ambit of Article 1602 as a badge ofan equitable mortgage. (Dapiton vs. Court of Appeals, 83 SCAD82, 272 SCRA 95 [1997].)

(6) The parties really intended an equitable mortgage instead of asale, i.e., that the transaction shall secure the payment of a debt orthe performance of any other obligations. (see Bautista vs. Ping,90 Phil. 409 [1952]; Macoy vs. Trinidad, 95 Phil. 192 [1954]; GloriaDiaz vs. Court of Appeals, 84 SCRA 483 [1978].) The intention ofthe parties is the decisive factor in evaluating whether or not theagreement is a simple loan accommodation secured by a mort-gage. This intention is shown not necessarily by the terminologyused but by all the surrounding circumstances. (Molina vs. Courtof Appeals, 398 SCRA 97 [2002].)

The terms of the document itself can aid in arriving at the truenature of the transaction. Thus, where the contract contains astipulation that upon payment by the vendor of the purchase pricewithin a certain period, the document shall become null and voidand have no legal force and effect, the purported sale should beconsidered a mortgage contract. In pacto de retro sale, the paymentof the repurchase price does not merely render the document nulland void but there is the obligation on the part of the vendee tosell back the property. (Olea vs. Court of Appeals, 63 SCAD 579,247 SCRA 274 [1995], citing A.M. Tolentino, Civil Code of thePhils., 19th ed., Vol. V, p. 159.) The same presumption applieswhen the vendee was given the right to appropriate the fruitsthereof in lieu of receiving interest on the loan. (Adrid vs. Morga,108 Phil. 927 [1960]; Olea vs. Court of Appeals, supra.)

In the above cases, the repurchase price paid by the apparentvendor is considered the principal of the loan and any money,fruits or other benefit received thereafter by the apparent vendee,are considered as interest on said loan and are subject to the UsuryLaw.8 The denomination of the contract as a deed of sale is notbinding as to its nature. The decisive factor in evaluating such an

8Rates of interest on loans or forebearances of money are no longer subject to anyceiling prescribed under the Usury Law. (see C.B. Resol. No. 224, Dec. 3, 1982.)


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agreement is the intention of the parties as shown, not necessar-ily by the terminology used in the contract, but by their conduct,words, actions and deeds prior to, during, and immediately afterexecuting the agreement. (see Art. 1371.) Even a conveyance ac-companied by the registration of the same and the issuance of anew certificate of title in favor of the transferee is no more securedfrom the operation of the equitable doctrine than the most infor-mal conveyance that could be devised. Equity looks through theform and considers the substance. (Oronce vs. Court of Appeals,100 SCAD 277, 298 SCRA 133 [1998]; see Tolentino and Mauni vs.Gonzales, 50 Phil. 158 [1927].)

Documentary and parol evidence9 is competent and admissi-ble to prove that the contract does not express the true intentionof the parties and may be introduced to show that the agreementis, in fact, merely a mortgage given merely as a security for therepayment of a loan, masquerading as a sale. (Vda. de Alvarezvs. Court of Appeals, 49 SCAD 663, 231 SCRA [1994]; Misena vs.Rongavilla, 303 SCRA 749 [1999]; Lapat vs. Rosario, 110 SCAD 896,312 SCRA 539 [1999]; Reyes vs. Court of Appeals, 339 SCRA 97[2000].)

Intention to execute mortgagemay be fairly inferred.

A contract should be construed as a mortgage or a loan in-stead of a pacto de retro sale when its terms are ambiguous (seeArt. 1603.) or when other circumstances rather than any of thespecific cases defined in Nos. (1) to (5) of Article 1602, may beindicative that the real intention of the parties is to enter into acontract of loan with mortgage. Thus:

(1) Vendor in urgent need of money. — Taking into account thesurrounding circumstances, a pacto de retro sale may be deemedan equitable mortgage where it appears that it was executed due

9Section 7, Rule 130 of the Rules of Court provides: “When the terms of an agree-ment have been reduced to writing, it is to be considered as containing all such terms,and, therefore, there can be, between the parties and their successors in interest, no evi-dence of the terms of the agreement other than the contents of the writing, except in thefollowing cases:

(a) Where a mistake or imperfection of the writing, or its failure to express thetrue intent and agreement of the parties, x x x.’’

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to the urgent necessity for money of the vendor, notwithstandingthat he was aware of the contents of the contract. Necessitous menare not, truly speaking, free men; but to answer a present emer-gency will submit to any terms that the crafty may impose uponthem. (Labasan vs. Lacuesta, supra; Claravall vs. Court of Appeals,190 SCRA 439 [1990]; see Camus vs. Court of Appeals, supra; Laovs. Court of Appeals, 81 SCAD 845, 275 SCRA 239 [1997];Matanguihan vs. Court of Appeals, 84 SCAD 463, 275 SCRA 380[1997]; Lorbes vs. Court of Appeals, 143 SCAD 490, 351 SCRA 716[2001].)

Among the circumstances considered in a case, namely, thevendee’s unequivocal recognition of the vendor as the owner andlessor of the property even after the alleged sale had been executedand his clear offer to sell back the property thereafter to the ven-dor who was then admittedly in grave financial crisis which thevendee took undue advantage of, were held more than enoughindicia of the true intention of the parties to treat the contract asan equitable mortgage. (Zamora vs. Court of Appeals, 72 SCAD833, 260 SCRA 10 [1996].)

(2) Automatic appropriation by vendee of property sold stipulated.— The stipulation in pacto de retro sale that the ownership overthe property sold would automatically pass to the vendee in caseno redemption was effected within the stipulated period, is con-trary to the nature of a true pacto de retro sale under which thevendee acquires ownership of the thing sold immediately uponthe execution of the sale, subject only the vendor’s right of re-demption. The said stipulation is pactum commissorium whichenables the mortgagee to acquire ownership of the mortgagedproperty without foreclosure. It is void. Its insertion in the con-tract is an avowal of the intention to mortgage, rather than to sellthe property. (Lanuza vs. de Leon, 20 SCRA 369 [1969].)

(3) Vendee given possession of certificate of title. — In a case, theSupreme Court, in holding that the conclusion of the trial courtthat the deeds of sale in question were mere contracts of loan or,properly speaking, a security arrangement, was not far-fetched,said: “This court takes cognizance of the common practice of in-dividual money lenders of taking physical possession of the cer-tificate of title or other documents evidencing ownership of real


396 SALES

estate by the debtor to ensure his faithful compliance with theobligation to pay the loan.” (Rodriguez vs. Toreno, 79 SCRA 351[1977].)

(4) Escalation of purchase price every month stipulated. — It hasalso been ruled that a stipulation in a contract sharply escalatingthe repurchase price every month enhances the presumption thatthe transaction is an equitable mortgage. Its purpose is to securethe return of the money invested with substantial profit or inter-est, a common characteristic of loans. (Bundalian vs. Court ofAppeals, 129 SCRA 645 [1984].)

(5) Vendor borrowed from vendee money used in buying propertysold. — The same presumption arises from a statement in a deedof sale with right to repurchase that the vendor borrowed fromthe vendee the money used in buying the property from the origi-nal owner. And the admission by the vendor that she “accepted”the transaction knowing it to be a contract of sale with right torepurchase is not a sufficient ground to arrive at such conclusionwhere the vendor was in urgent need of money. Vendors coveredby Article 1602 are usually in no position to bargain with thevendees and will sign onerous contracts to get the money theyneed. It is precisely this evil which the law guards against. It isnot the knowledge of the vendors that they are executing a con-tract of sale pacto de retro, which is the issue, but whether or notthe real contract was one of sale or a loan disguised as a pacto deretro sale. (Ibid.; Lao vs. Court of Appeals, 81 SCAD 845, 275 SCRA237 [1997].)

(6) Vendor of low intelligence and illiterate. — In subsequent case,an alleged sale of a land by a father who was of low intelligence,illiterate and could not even sign his name, having affixed histhumbmark in the document in question entitled: “Sanglaan ngisang Lupa na Patuluyang Ipaaari” was declared null and void, itappearing that the execution of the document was made withoutgiving notice to the son who was not even a witness to the docu-ment, that the old man would not understand the meaning of itscontents even if it were read to him, that the contract was so writ-ten that anyone could believe he was only giving his property byway of mortgage, not as a sale, and that the money which he hadbeen receiving from the alleged vendee a retro came from the sub-

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ject property so that, in effect, there was no consideration for thetransfer of the property — be it sale or mortgage. (Aguinaldo vs.Esteban, 135 SCRA 645 [1985].)

(7) Vendor continued to pay monthly interest; property not trans-ferred to vendee; etc. — In another case, the Supreme Court consid-ered the supposed deed of sale an equitable mortgage in view ofthe following circumstances: the vendor remained in possessionof the property; the property was not transferred to the supposedvendee for taxation purposes; the supposed vendor continued topay monthly interests; and the debt of the supposed vendor con-tinued to pile up notwithstanding the alleged sale, the loan ofP6,000 having earned an interest of more than P13,000. (Dimalantavs. Court of Appeals, 148 SCRA 534 [1987]; see Lazatin vs. Courtof Appeals, 211 SCRA 129 [1992].)

(8) Vendor continued to be indebted. — A test to determinewhether a conveyance is a sale or merely a security for the pay-ment of a loan is the continued existence of a debt or liability onthe part of the alleged mortgagor. If such a relationship exists, thetransaction is a mortgage; otherwise, it is a contract of sale.(Cuyugan vs. Santos, 34 Phil. 100 [1915]; Vda. de Alvarez vs. Courtof Appeals, 49 SCAD 663, 231 SCRA 309 [1994].)

(9) Vendor mortgaged property sold to a bank; paid taxes thereon;etc. — In a later case, the following circumstances existed to provethat the alleged contract of sale was an equitable mortgage: thevendor remained undisturbed in the possession of the parcel ofland sold, paid the taxes thereon, and mortgaged it to a bank; andthe price was unusually inadequate. The fact that the vendee sub-sequently executed an affidavit to consolidate his right of owner-ship over the subject property was held of no consequence. Hisalleged “constructive possession” did not ripen into ownershipbecause the contract was not a contract of sale. (Balatero vs. In-termediate Appellate Court, 154 SCRA 60 [1987].)

ILLUSTRATIVE CASES:

1. Circumstances indicate contract was an equitable mortgage.

Facts: S and B entered into a transaction which purportedto be a sale of a lot and building by S with the right to repur-chase.


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Issue: Whether the contract was really an equitable mort-gage.

Held: The following circumstances were held as indicatingthat the transaction was intended by the parties to secure thepayment of a debt (Art. 1602[6].):

(a) S did not intend in any way to sell his lot and building;

(b) S was greatly alarmed when B registered the deed andhad a new title issued in B’s name;

(c) The money that S borrowed from B was partly to fin-ish the construction of the building; and

(d) S made a strong remonstrance to B when the documentwas explained to him by his interpreter, but B assuaged himthat it made no difference as he could get back his propertywithin eight (8) years if he had the money. (Bautista vs. Ping, 90Phil. 409 [1951].)

———— ———— ————

2. Circumstances indicate contract was not an equitable mort-gage.

Facts: S sold to B a lot for P35,000.00 in 1951. It appearedthat B sold the lot in 1953 for P47,000.00. B allowed S to collectthe monthly rent on the land for five (5) months. Subsequent tothe date of absolute sale, B gave S an option to buy the prop-erty, and S paid the back taxes thereon up to the date of thesale.

Issue: Should the instrument of absolute sale be presumedan equitable mortgage?

Held: No, in view of the following:

(a) In selling the land to B, S made a profit of P15,000.00 inone year, without having invested his money in buying the land,as he just borrowed the part payment (P7,400.00) of the pricethereof (P20,000.00) which he made to its previous owner. Theprice of P35,000.00 is not inadequate;

(b) S did not remain in possession of the land sold as les-see or otherwise. On his request, in order to help him in theexpenses of his children in Manila, he was merely allowed by Bto collect the monthly rents, on the understanding that theamounts so collected would be charged against him. After five(5) months, B was the one who collected the monthly rents fromthe tenants;

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(c) An option is different from the right of repurchase;10

and

(d) S had the obligation to pay the back taxes because hesold the land free from all liens and encumbrances. The taxesdue after the sale were paid by B. (Villarica vs. Court of Appeals,26 SCRA 189 [1968].)

———— ———— ————

3. Circumstances show contract was a pacto de retro sale.

Facts: S entered into a contract with B. The contract stipu-lates a sale by S of an agricultural land with right of repur-chase. It does not contain any other condition to indicate that adifferent transaction was intended by the parties. No extrane-ous evidence was presented by S to show that a mortgage orantichresis was the real purpose of the instrument. Nor wasthere any proof offered by S that the purchase price was everrepaid by him.

B, the vendee, was placed in possession of the land imme-diately after the execution of the contract and this possession wascontinued by B’s heirs without any objection from S or his heirs.

Issue: Do these circumstances exemplify a contract of salewith pacto de retro?

Held: Yes. All the above facts justify the conclusion that thecontract was indeed a sale subject to right of repurchase andthat S failed to exercise such right. (Vda. de Luna vs. Valle, 48SCRA 36 [1972].)

———— ———— ————

4. Circumstances show contract was an equitable mortgage.

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

10See “Option to buy and right of repurchase distinguished,” under Article 1601.


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When the original period of redemption expired, the par-ties extended it by another period of three (3) months. The docu-ment was not recorded. After the execution of the instrument,S mortgaged the house in favor of C, which mortgage was reg-istered under Act No. 3344.

Issue: Is the contract a pacto de retro sale or an equitable mort-gage?

Held: The following circumstances indubitably show an eq-uitable mortgage:

(a) S, the supposed vendor, remained in possession of theproperty sold, and when the three-month period of redemp-tion expired the parties extended it;

(b) The price is grossly inadequate;

(c) S did not really transfer his ownership of the proper-ties in question to B. What was agreed was that ownership ofthe things supposedly sold would vest in B only if S failed topay P3,000.00. In fact, the emphasis is on S’s payment of theamount rather than on the redemption of the things suppos-edly sold. This stipulation is contrary to the nature of a truepacto de retro sale under which the vendee acquires ownershipof the thing sold immediately upon execution of the sale, sub-ject only to the vendor’s right of redemption. Indeed, what theparties established by this stipulation is an odious pactumcommissorium which enables the mortgagee to acquire owner-ship of the mortgaged properties without need of foreclosureproceedings. Such a stipulation is a nullity, being contrary tothe provisions of Article 2088 of the Civil Code. Its insertion inthe contract of the parties is an avowal of an intention to mort-gage rather than to sell; and

(d) S remained in possession even long after he had losthis right of redemption. B brought action for consolidation ofownership (see Art. 1607.) after more than one (1) year, andonly after C, who holds a registered mortgage, asked for theextra-foreclosure of his mortgage. Under Article 2155, the eq-uitable mortgage while valid between S and B as the immedi-ate parties thereto, cannot prevail over the registered mortgageof C. (Lanuza vs. De Leon, 20 SCRA 369 [1967].)

———— ———— ————

5. Other circumstances indicate contract was an equitable mort-gage.

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401

Facts: S obtained a series of loans from B, the aggregate ofwhich amounted to P16,250.00, secured by a continuing mort-gage on S’s land. S failed to liquidate the mortgage upon matu-rity. An absolute deed of sale was executed by S whereby titleto the property was transferred to B for P21,300.00, whichamount was P1,000.00 more than S’s mortgage indebtedness.

In another document executed on the same day, S was givenan option to purchase the property for the same price ofP21,300.00. S failed to exercise the option in due time, and herefforts to secure an extension of time proved futile. B subse-quently sold the land to his brother.

Issue: Should the “Pagbibilihang Tulayan ng Bakuran” betreated as an equitable mortgage?

Held: Yes, in view of the following:

(a) This case must be differentiated from the Villarica caseunder Article 1607 (supra.), where the ruling was based on aparticular set of facts. In the latter, the option to buy back theproperty was executed six (6) days after the execution of thedeed of sale and the option to buy was interpreted to be onlyan afterthought. Here, the intent of the parties to circumventthe provision discouraging pacto de retro sales is very apparent.The deed of absolute sale and the document giving the right torepurchase were, in fact, only one transaction of pacto de retrosale which must be construed as an equitable mortgage.

(b) Another factor is the sale of the property to B’s brother,thus interposing a supposed innocent third party between theparties to the contract. The records show that this sale and theissuance of a new transfer certificate of title on the same date asthe sale cannot be deemed to be bona fide.

(c) The records show that over a six-month period, S bor-rowed money on no less than 10 separate occasions from B,and when her total borrowings of P13,000.00 were added towhat S claimed were usurious interests amounting to P3,250.00,the cited total of P16,250.00 were made to appear as theP21,300.00 purchase price for the lot when actually no moneyoutside of the 10 earlier loan transactions were exchanged be-tween the parties.

(d) The added fact that S remained in actual possession ofthe land and enjoyed the fruits thereof confirms the real inten-tion of the parties to secure the payment of the loans with theland as security. B waited for the period of redemption to ex-


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pire before taking possession of the land. Had S really executedan absolute sale in favor of B, the land should have been deliv-ered to B and he would have assumed possession after the ex-ecution of the questioned deed of sale.

The deed of sale, together with the companion “right toredeem” contract, being only an equitable mortgage, B couldnot validly sell the land to his brother. (Capulong vs. Court ofAppeals, 130 SCRA 245 [1984].)

———— ———— ————

6. Vendee a retro, after execution of “deed of sale with pacto deretro,” gave several additional amounts and consented that they beaggregated to the price of redemption.

Facts: The following facts are undisputed: In the first docu-ment, Exh. “A” (deed of sale with pacto de retro), the considera-tion was for P3,600; then a second document of exactly the sametenor was executed hardly seven (7) months later, adding thesum of P200 that had been later on received as addition to theprice, making the redemption price P3,800; then four (4) yearslater, because an additional amount of P400 was again received,a new document was once more executed, raising the redemp-tion price to P4,200; and then a year later, because another sumof P300 had been received, still another document of the sametenor was once more executed, raising the redemption price toP4,500.

Issue: In the light of the above admitted facts, should thetransaction be deemed an equitable mortgage?

Held: Yes. If Exh. “A” was a true deed of sale with pacto deretro, the price was P3,600, nothing not even a centavo more,the only right of the vendor a retro would have been to redeemat that price. If the vendee a retro himself gave afterwards sev-eral additional amounts and himself consented that they beaggregated to the price of redemption, that was absolutely in-consistent with the designation of the agreement. The case fallsunder the 6th circumstance or badge of equitable mortgagelisted in Article 1602. (Gloria Diaz vs. Court of Appeals, 84 SCRA483 [1978].)

Price in pacto de retro salesusually lower.

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

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the former, the vendor expects to reacquire or redeem the prop-erty sold (Amigo and Amigo vs. Teves, 96 Phil. 255 [1954].), orelse he may sell his right to redeem and thus recover the loss heclaims suffered by reason of the inadequacy of the price. (seeBarrozo vs. Macaraeg, 83 Phil. 381 [1949]; Tolentino vs. Agcaoili,91 Phil. 917 [1952].)

The practice is to fix a relatively reduced price to afford thevendor a retro every facility to redeem the property. In an abso-lute sale where the vendor is permanently giving away his prop-erty, he tries to get as compensation its real value. Hence, the in-adequacy of repurchase price of itself cannot be considered aground for annulling the contract or justify the conclusion thatthe contract is one of equitable mortgage.11 (Claridad vs. Novella,105 Phil. 756 [1959]; Lacson vs. Granada, 1 SCRA 876 [1961];Ignacio vs. Court of Appeals, 62 SCAD 731, 246 SCRA 242 [1995].)

ART. 1603. In case of doubt, a contract purportingto be a sale with right to repurchase shall be construedas an equitable mortgage. (n)

ART. 1604. The provisions of Article 1602 shall alsoapply to a contract purporting to be an absolute sale.(n)

Presumption in case of doubt.

(1) Doubt resolved in favor of equitable mortgage. — Whether thesale is absolute or pacto de retro, it shall be presumed to be an eq-uitable mortgage even if only one of the circumstances mentionedin Article 1602 is present. This is so because pacto de retro sales,with the stringent and onerous effects that accompany them, arenot favored. (Olea vs. Court of Appeals, 63 SCAD 579, 247 SCRA274 [1995].) In case of doubt, a contract purporting to be a salewith right to repurchase shall still be regarded as an equitable

11In an extra-judicial foreclosure sale, when there is a right to redeem, inadequacyof the price is also of no moment for the reason that the mortgagor has always the chanceto redeem and reacquire the mortgaged property sold at the foreclosure sale. The prop-erty may be sold for less than the fair market value precisely because the lesser the pricethe easier for the owner to effect a redemption. (Valmonte vs. Court of Appeals, 103SCAD 509, 303 SCRA 287 [1999].)

Arts. 1603-1604 EXTINGUISHMENT OF SALEConventional Redemption

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mortgage. (see De la Paz vs. Garcia, 18 SCRA 779 [1966].) A con-tract of reconveyance is but a necessary consequence of the exer-cise of a party’s right to repurchase the property subject of a con-tract of sale with a right of repurchase or of an equitable mort-gage. (Lacorte vs. Court of Appeals, 91 SCAD 446, 286 SCRA 24[1998].)

The failure of the alleged vendee to take steps to consolidateownership of real property after the vendor failed to redeemwithin the period agreed upon, may be taken as a factor in con-struing a sale a retro an equitable mortgage. (Lacuesta vs. Labasan,86 SCRA 16 [1978].) Where the contract is deemed an equitablemortgage, ownership of the property cannot be consolidated untilafter foreclosure of the mortgage has been undertaken. (Republicvs. Intermediate Appellate Court, 43 SCAD 101, 224 SCRA 285[1993].)

(2) Presumption, an exception to general rule. — Article 1603 isan exception to the rule that doubts affecting an onerous contractshall be settled in favor of the greatest reciprocity of interests. (Art.1378, par. 1.) An equitable mortgage effects a lesser transmissionof rights and interests than a contract of sale, since the debtor doesnot surrender all rights to his property but simply confers uponthe creditor the right to collect what is owing from the value ofthe thing given as security. (see Lacuesta vs. Labasan, supra; Uyvs. Court of Appeals, 49 SCAD 176, 230 SCRA 664 [1994]; Reyesvs. Court of Appeals, 739 SCRA 97 [2002]; Cruz vs. Court of Ap-peals, 412 SCRA 614 [2003].)

(3) Parol evidence admissible. — Parol evidence is admissibleto show that a transaction purporting to be an absolute or a pactode retro sale is really one of loan with a security and, therefore, amortgage. (Serrano vs. Court of Appeals, 139 SCRA 179 [1985];see Art. 1604.) Thus, it has been held that a contract should beconstrued as a mortgage or a loan instead of a pacto de retro sale,when its terms are ambiguous or the circumstances surroundingits execution or performance are incompatible or inconsistent withthe theory that it is a sale. Accordingly, even when a documentappears on its face to be a sale with pacto de retro, the owner of theproperty may prove that the contract is really a loan with mort-gage by raising as an issue the fact that the document does not

Arts. 1603-1604

405

express the true intent and agreement of the parties; and uponproof of the truth of such allegation, the court will enforce theagreement in consonance with the true intent of the parties at thetime of the execution of the contract. This principle is applicableeven if the purported pacto de retro sale was registered in the nameof the transferee and a new certificate of title was issued in thename of the latter. (Olea vs. Court of Appeals, supra; Lustan vs.Court of Appeals, 78 SCAD 351, 266 SCRA 663 [1997].)

The admission of parol testimony to prove that a deed of saleabsolute in form, was in fact given and accepted to secure thepayment of a debt or the performance of any other obligation, doesnot violate the rule against the admission of evidence to vary orcontradict the terms of the contract. (Ignacio vs. Chua Hong, 52Phil. 940 [1929]; Aguinaldo vs. Esteban, 135 SCRA 645 [1985];Serrano vs. Court of Appeals, 139 SCRA 179 [1985]; Ramos vs.Court of Appeals, 180 SCRA 635 [1989]; Reyes vs. Court of Ap-peals, 339 SCRA 97 [2000].)

(4) Where contract appears to be a genuine sale. — If from all in-dications, the contract appears to be a genuine sale with right ofrepurchase (or an absolute sale) and none of the suspicious cir-cumstances mentioned in Article 1602 is present, the true agree-ment will be upheld. (see De Luna vs. Valle, 48 SCRA 361 [1972];Villarica vs. Court of Appeals, 26 SCRA 189 [1968]; De Bayquenvs. Baleoro, 143 SCRA 412 [1986]; Cachola vs. Court of Appeals,208 SCRA 496 [1992].)

The contract of sale with right of repurchase must be inter-preted according to its literal sense and held to be such a contract.

In a case (there was no trace of any circumstances showingthat the transaction was an equitable mortgage), the followingwere held evident manifestation of a genuine sale with right ofrepurchase: adequate price; immediate delivery of the land to thevendee who cultivated the same to rice and has since then beenimproving the property to the exclusion of the vendor; religiouspayment of all the land taxes by the vendee; neglect of the ven-dor to pay the taxes; and vendor’s inaction to redeem the prop-erty for a period of eight (8) years from the date of execution ofthe deed of sale. (Bagadiong vs. Vda. de Abundo, 165 SCRA 459[1988].)


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Effect where contract held as anequitable mortgage.

(1) Formal requirements of mortgage deemed complied with. —When a contract purporting to be sale with a right to repurchaseis held as an equitable mortgage, the same shall be given effect asif it has complied with the formal requirements of mortgage. (seeZubiri vs. Quijano, 74 Phil. 47 [1942].) The supposed vendee (inreality the creditor) has the right to recover the amount loaned.(Arches vs. Dias, 50 SCRA 440 [1973].)

(2) Contract subordinate to a subsequent registered mortgage. —The equitable mortgage, while valid as between the immediateparties thereto, cannot, however, prevail over a subsequent reg-istered mortgage. (see Art. 2125.)

(3) Title of property remains in supposed vendor. — The circum-stance that the original transaction is subsequently declared to bean equitable mortgage means that the title to the mortgaged prop-erty which had been transferred to the supposed vendee actuallyremained or is transferred back to the supposed vendor as owner-mortgagor conformably to the well-established doctrine that themortgagee does not become the owner of the mortgaged prop-erty because the ownership remains with the mortgagor. (Art.2088.)

(4) Remedy of creditor is to foreclose. — Accordingly, it is notproper for a court to declare the property as already owned bythe mortgagee upon failure of the mortgagor to pay his obliga-tion within the required period, as it would produce the sameeffect as a pactum commissorium, a forfeiture clause that has tradi-tionally been held as contrary to good morals and public policyand, therefore, void. The proper remedy to enforce a transactiondeclared to be a mortgage is not an action for consolidation ofownership (see Art. 1607.) but to foreclose the mortgage and sellthe property at public auction. (Montevirgen vs. Court of Appeals,112 SCRA 641 [1982]; see Ching Sen Ben vs. Court of Appeals, 112SCAD 698, 314 SCRA 762 [1999].)

(5) Conveyance of land not to affect mortgagor’s right of redemp-tion. — Neither is a person’s right as a mortgagor in equity af-fected by the fact that the subject property was already titled inthe name of the supposed vendee based on the mistaken notion

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407

that the property was sold a retro. The equitable doctrine thatdeems a conveyance intended as a security for a debt to be, ineffect, an equitable mortgage, operates regardless of the form ofthe agreement chosen by the contracting parties. Equity looksthrough the form and considers the substance. No conveyance ofland, even if accompanied by registration in the name of the trans-feree and the issuance of a new certificate, can be allowed whichwill enable a party to escape from the operation of this equitabledoctrine. (ibid.)

“Pacto de retro’’ sales not favored.

Sales with a right to repurchase, as defined by the Civil Code(Art. 1602.), are not favored, and the contract will be construed asa mere loan unless the court can see that, if enforced according toits terms, it is not an unconscionable one. (Aquino vs. Deala, 63Phil. 582 [1936].)

The presumption, however, that the contract is an equitablemortgage may be overcome by proof to the contrary (see Vda. deLuna vs. Valle, 48 SCRA 361 [1972].), and the fact that a documentis entitled as a mortgage (i.e., “Kasulatang Sanlaan”) is not control-ling where the body of said document shows that is a deed withright to repurchase as revealed by the words (i.e., “aking inilipat,ipinagbili nang biling mabibiling muli”) used by the parties. (Magtiravs. Court of Appeals, 96 SCRA 680 [1980].)

ART. 1605. In the cases referred to in articles 1602and 1604, the apparent vendor may ask for the refor-mation of the instrument. (n)

When vendor may ask for reformation.

Article 1604 seeks to prevent a circumvention of Article 1602by making the contract of loan appear as an absolute sale.

Reformation is that remedy granted by law by means of whicha written instrument is made or construed so as to express or con-form to the real intention of the parties when such intention isnot expressed in the instrument. (see Art. 1359.) If the parties re-ally intended a mortgage but the instrument states that the prop-erty is sold absolutely or with a right of repurchase, the same may


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be reformed (Art. 1365.) so that the contract should appear to bea mortgage and not an absolute sale or a pacto de retro sale.

In reformation, there has been a meeting of the minds betweenthe parties, but the written instrument purporting to embody theiragreement does not express their true intention by reason, forinstance, of mistake or fraud. (Art. 1359.) Where there has beenno meeting of the minds, the remedy is annulment. (Art. 1390.)

EXAMPLES:

(1) As security for a loan, S mortgaged his house to B. Bothparties intended to enter into a mortgage contract but the in-strument as written states that the house is sold by S to B witha right to repurchase. In this case, the remedy of reformation isproper.

(2) If, in the same example, S was borrowing money fromB, with mortgage of his house as security, and B was buyingthe house of S with right of S to repurchase, the remedy is an-nulment. Either way, reformation cannot make the instrumentexpress the real intention of the parties.

ART. 1606. The right referred to in article 1601, inthe absence of an express agreement, shall last fouryears from the date of the contract.

Should there be an agreement, the period cannotexceed ten years.

However, the vendor may still exercise the right torepurchase within thirty days from the time final judg-ment was rendered in a civil action on the basis thatthe contract was a true sale with right to repurchase.(1508a)

Period for exercise of right of redemption.

Article 1606 refers to conventional redemption. It does notapply where the contract is not one of sale with right of repur-chase. (Baluran vs. Navarro, 79 SCRA 309 [1977].)

For conventional redemption to take place, the vendor shouldreserve, in no uncertain terms, the right to repurchase the thing

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sold. (see Art. 1601.) Thus, the right to redeem must be expresslystipulated in the contract of sale in order that it may have legalexistence. Accordingly, where the contract provides: “In case ofsale” by the buyer of the property (sold) to the seller, the SupremeCourt held that the stipulation does not grant the right of repur-chase. The quoted phrase should be construed to mean “shouldthe buyer wish to sell” which is the plain and simple import ofthe words, and not “the buyer should sell.” (Leal vs. Intermedi-ate Appellate Court, 155 SCRA 394 [1987].)

(1) No agreement granting right. — If there is no agreement ina contract of sale (see Umale vs. Fernandez, 28 Phil. 89 [1914].)granting the vendor the right to redeem, there is no right of re-demption since the sale should be considered an absolute sale.

(2) Agreement merely grants right. — If the parties agreed onlyon the right to redeem on the part of the vendor but there is a totalabsence of express stipulation as to the time within which therepurchase should be made, then the period of redemption shallbe four (4) years from the date of the contract. (par. 1.)

(3) Definite period of redemption agreed upon. — If the partiesagreed on a definite period of redemption, then the right to re-deem must be exercised within the period fixed provided it doesnot exceed 10 years. (par. 2.) It has been held that the non-pay-ment by the vendee a retro of the balance of the purchase pricedoes not suspend the running of the period of redemption agreedupon (5 years) in the absence of a stipulation to that effect. A saleis consummated upon the execution of the document and thedelivery of the subject matter thereof to the vendee. Failure to paypart of the price does not in any way affect the cause or consid-eration of the contract. (Catangcatang vs. Legayada, 84 SCRA 51[1978].)

(4) Period agreed upon exceeds ten years. — Where the agreedperiod exceeds 10 years, the vendor a retro has 10 years from theexecution of the contract to exercise his right of redemption.(Anchuelo vs. Intermediate Appellate Court, 147 SCRA 434[1987].)

(5) Period of redemption not specified. — If the parties agreed thatthe vendor shall have a right to redeem and they intend a periodwhich, however, is not specified, then the redemption period is


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10 years. In order to be applicable, paragraph 2 of Article 1606requires the existence of an agreement, not a definite and clearagreement on the period. The mere fact that the agreement isobtained by inference does not argue in favor of its non-existence.(Tumaneng vs. Abad, 92 Phil. 18 [1952].)

(6) Final judgment that contract is pacto de retro. — “From thetime final judgment was rendered in a civil action on the basisthat the contract was a true sale with right to repurchase,” thevendor a retro has 30 days within which to exercise the right torepurchase. (par. 3; see Gonzales vs. De Leon, 4 SCRA 332 [1962];Gerardino vs. The Hon. Judge, 80 SCRA 646 [1977]; Gloria Diazvs. Court of Appeals, 84 SCRA 483 [1978].)

(a) As set forth in this provision, there must be an expressfinding that the transaction is one of pacto de retro. (Tapas vs.Court of Appeals, 69 SCRA 369 [1976].)

The application of the third paragraph of Article 1606 ispredicated upon the bona fides of the vendor a retro. It must ap-pear that there was belief on his part, founded on facts attend-ant upon the execution of the contract, honestly and sincerelyentertained, that it was in reality a mortgage, one not intendedto affect the title to the property sold, but merely to give it assecurity for a loan or other obligation (Felicen, Sr. vs. Orias,156 SCRA 586 [1987].), and because of such belief, he had notredeemed the property within the proper period. (Leonardovs. Court of Appeals, 220 SCRA 254 [1993].) In short, the judg-ment was rendered in a civil action where the issue waswhether the contract entered into by the parties was a pactode retro sale or an equitable mortgage.

(b) The thirty-day period is peremptory because the policyof the law is not to leave the purchaser’s title in uncertaintybeyond the said period. It is not a prescriptive period but ismore a requisite or condition precedent to the exercise of theright of legal redemption. (Pangilinan vs. Ramos, 181 SCRA359 [1990]; Caro vs. Court of Appeals, 113 SCRA 10 [1982].)

(c) The grant of the right of repurchase in accordance withthe third paragraph of Article 1606 is not found in the old CivilCode. The legislative intent behind this article, along with Ar-

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ticles 1602-1605 and 1607, is “to accord the vendor a retro themaximum safeguards for the protection of his legal rights un-der the true agreement of the parties. Experience has demon-strated too often that many sales with right of repurchase havebeen devised only to circumvent or ignore our usury laws andfor this reason, the law looks upon them with disfavor.’’ (Aganvs. Heirs of Sps. A. Nueva and D. Nueva, 418 SCRA 421[2003].)

EXAMPLES:

(1) A and B entered into a contract whereby A shall reapthe fruits of the riceland of B while B shall have a right to builda house on the residential lot of A. The agreement providesthat neither party shall encumber nor alienate their respectiveproperties without the consent of the other and that in the eventthat any of the children of A shall decide to build his house onthe lot, B shall be obliged to return the same.

Is the right to recover the lot subject to the prescriptive pe-riod of four (4) years provided in Article 1606 (par. 1.)? No.Article 1606 is not applicable. The agreement is not one of salewith right of repurchase but is one of or akin to usufruct (seeArt. 562.), where the parties transferred the use or material pos-session of each other’s property. (Baluran vs. Navarro, supra.)

(2) S sold to B a parcel of land. There was no express stipu-lation reserving to S the right to repurchase. In this case, theland is not subject to redemption as the sale is an absolute andunconditional sale.

(3) If there was an express agreement granting S the rightto redeem within three (3) years from the date of the contract, Smust exercise the right within said period; but if no period forredemption was stipulated, the law supplies it by providingthat it shall be four (4) years from the date of the contract. Smay grant a renewal or extension of the period provided it doesnot exceed the balance of 10 years.

(4) Suppose it was agreed that S could redeem the landonly within eight (8) years, then S may redeem the land onlywithin that period. If the agreement was that A could redeemwithin 12 years, the right to repurchase cannot be exercised af-ter 10 years, the stipulation with respect to the excess (2 years)


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over the term of 10 years being null and void. (Montiero vs.Salgado, 27 Phil. 631 [1914].)

A stipulation not to repurchase within 10 years followingthe execution of the sale is contrary to law. This fact, however,does not in itself convert the contract into a mere evidence ofindebtedness and much less of mortgage, for it would at mostbe considered as one where the repurchase is to be made withinthe period not exceeding 10 years from the date of the sale.(Tayao vs. Dulay, 13 SCRA 758 [1965].)

(5) If the right of redemption shall not be exercised “withinthree (3) years from the date of sale,” and nothing is said as tohow long the right to redeem shall continue, its duration is seven(7) years from the date of the contract. (Rosales vs. Reyes andOrdovesa, 25 Phil. 495 [1913].) Where the condition as to theexercise of the right of repurchase is that it shall not be made“until after three (3) years from this date,” the duration of theright, once effective is four (4) years or the balance of the 10years limit allowed by law. (Lucido vs. Calupitan, 27 Phil. 148[1914].)

Suppose the stipulation was that S may repurchase theproperty “at any time he has the money,” the right of repur-chase may be exercised within the period of 10 years from thedate of the execution of the contract a time having been ex-pressly stipulated, which is “any time” which, however, is in-definite or unlimited. (Soriano vs. Abalos, 92 Phil. 18 [1952].)

Similarly, where the instrument says that S “may repur-chase the property in the month of March of any year,” S maymake the repurchase within 10 years, there being a periodagreed upon for the exercise of the right which, however, is notspecified. (Bandang vs. Austria, 21 Phil. 479 [1912].) It has beenheld, however, that the stipulation that S could repurchase theland “when he has established a certain business” does notstipulate a period for the repurchase, but the suspension of theright of repurchase until the establishment of the business and,therefore, the repurchase should be made within 4, not 10, yearsfrom the date of the contract. (Medel vs. Francisco, 51 Phil. 367[1927]; see example No. 3.)

(6) Suppose the nature of the contract is the subject of con-troversy in a civil action between S and B. B claims that the con-tract is a sale with a right to repurchase. (Art. 1601.) On the otherhand, S contends that the contract is an equitable mortgage. (Art.

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1602.) Subsequently, the court renders judgment holding thatthe contract is really one with the right of repurchase.

Under the 3rd paragraph, S has 30 days from the date offinal judgment to redeem the property. If the case is appealed,the 30-day period shall begin to run from the day the judgmentof the higher court becomes final. (see Gavina Perez vs. Zulueta,106 Phil. 264 [1959].)

When Article 1606, par. 3, not applicable.

(1) Contract found to be an absolute sale. — Article 1606, para-graph 3 is not applicable where the contract is found to be anabsolute deed of sale, pure and simple. There could not even be aperiod of redemption. It refers to cases involving a transactionwhere the seller contests or denies that the true agreement is oneof sale with right to repurchase and claims that the real intentionwas a loan with equitable mortgage, but the court decides other-wise. (Tapas vs. Court of Appeals, 69 SCRA 349 [1976].)

(2) Sale known and admitted by vendor as pacto de retro. — Nei-ther is said provision applicable where the sale is admittedly onewith pacto de retro. If the rule were otherwise, it would be withinthe power of every vendor a retro to set at naught a pacto de retroor resurrect an expired right of repurchase, by simply institutingan action to reform the contract — known to him to be in truth, asale with pacto de retro — into an equitable mortgage. (Felicen, Sr.vs. Orias, 156 SCRA 586 [1987].) The issue or controversy betweenthe parties must concern or involve the juridical nature or char-acter of the contract in question and the court makes an expressfinding that the contract is one of pacto de retro. (see Tapia vs. Courtof Appeals, supra.)

ILLUSTRATIVE CASE:

Lower court held Article 1606, par. 3 as applicable to a vendor aretro who failed to redeem under a deed of sale which, as expresslystipulated by the parties, is admittedly one with right of repurchase.

Facts: S executed in favor of B a deed of sale of a parcel ofland with right to repurchase within one (1) year from the dateof the sale. B afterwards sold the property to C who, in turn,sold the same to D. Since the first sale S, who had not redeemedthe land from B within the stipulated period, never relinquished


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the possession thereof. D brought suit to recover possessionfrom S.

The court held that the deed of sale between S and B shouldbe given the effect of a mere pacto de retro sale and S should bepermitted to exercise the right of repurchase in accordance withthe third paragraph of Article 1606.

Issue: Is the third paragraph of Article 1606 applicable?

Held: No, because the sale is expressly one with right ofrepurchase. As the stipulated period has expired without S hav-ing redeemed the land in question, B had irrevocably acquiredownership over the property in accordance with Article 1509of the old Civil Code which was in force at the time of the trans-action in dispute. (Adorable vs. Inacala, 103 Phil. 481 [1958].)

Note: Under Article 1607 of the new Civil Code, the con-solidation of ownership in the vendee shall not be recordedwithout a judicial order.

(3) Party abandoned position that transaction an equitable mort-gage after judicial declaration of transaction as a pacto de retro sale. —In Abilla vs. Goboseng, Jr. (172 SCAD 437, 374 SCRA 51 [2002].), ithas been respondents’ consistent claim that the transaction sub-ject hereof was an equitable mortgage and not a pacto de retro saleor a sale with option to buy. Even after the Court of Appeals de-clared the transaction to be a pacto de retro sale, respondents main-tained their view that the transaction was an equitable mortgage.Seeing the chance to turn the decision in their favor, however,respondents abandoned their theory that the transaction was anequitable mortgage and adopted the finding of the Court of Ap-peals that it was in fact a pacto de retro sale. Respondents now in-sist that they are entitled to exercise the right to repurchase pur-suant to the third paragraph of Article 1606. Under the facts ofthe case, the respondents were not allowed to exercise the rightof repurchase.

In the parallel case of Vda. de Macoy vs. Court of Appeals (206SCRA 244 [1992].), the petitioners raised the defense that the con-tract was not a sale with right to repurchase but an equitablemortgage. They further argued as an alternative defense that evenassuming the transaction to be a pacto de retro sale, they can nev-ertheless repurchase the property by virtue of Article 1606, third

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paragraph of the Civil Code. It was held that the said provisionwas inapplicable, thus: “The application of the third paragraphof Article 1606 is predicated upon the bona fides of the vendor aretro. It must appear that there was a belief on his part, foundedon facts attendant upon the execution of the sale with pacto de retro,honestly and sincerely entertained, that the agreement was inreality a mortgage, one not intended to affect the title to the prop-erty ostensibly sold, but merely to give it as security for a loan orother obligation. In that event, if the matter of the real nature ofthe contract is submitted for judicial resolution, the applicationof the rule is meet and proper; that the vendor a retro be allowedto repurchase the property sold within 30 days from rendition offinal judgment declaring the contract to be a true sale with rightto repurchase. x x x’’

In Abilla, the Court of Appeals correctly noted that if respond-ents really believed that the transaction was indeed an equitablemortgage, as a sign of good faith, they should have, at the veryleast, consigned with the trial court the amount of P896,000.00,representing their alleged loan, on or before the expiration of theright to repurchase x x x.’’

Date from which period reckoned.

(1) Date of contract. — Under paragraphs 1 and 2 of Article1606, the date from which the period must be counted is the dateof the contract. The date, however, of the contract must not betaken in a very material sense. The date of the contract referredto must be that from which the contract produces its effects, as forexample, if the contracting parties agreed on a suspensive condi-tion to determine the effectiveness of the contract, the periodwithin which the right to repurchase must be exercised must notbe counted from the date of the contract itself but from the timeof the fulfillment of the suspensive condition.

(2) Date of finality of judgment. — Under paragraph 3 of Arti-cle 1606, it has been held that the period to redeem is reckonedfrom the time the judgment becomes final; and a judgment be-comes final after the period to appeal had lapsed without onehaving been perfected. The date of finality of a decision is entirelydistinct from the date of its entry and the delay in the latter doesnot affect the effectivity of the former, as such is counted from the


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expiration of the period of appeal. (Muñez vs. Court of Appeals,152 SCRA 197 [1987].)

Effect of stipulation extending periodof repurchase.

(1) After expiration of period of redemption. — It is legally im-possible to speak of extension because that which is extinguishedcannot be extended and because the ownership in the vendee isalready consolidated, and becomes absolute.

(2) Before the expiration of the period of redemption. — The origi-nal term may be extended provided that the extension, includingthe original term, shall not extend beyond 10 years; otherwise, theextension is void as to the excess.

Reason for limiting period of redemption.

The question of the period within which the repurchase maybe made is unanimously considered as a question of public inter-est. It is not a good thing that the title to property should be leftfor a long period of time subject to indefinite conditions of thisnature. For this reason, the intention of the law is restrictive andlimitative. (10 Manresa 302.)

“A long term for redemption renders the tenure of prop-erty uncertain and redounds to its detriment, for neither doesthe precarious holder cultivate the ground with the same in-terest as the owner, nor does he properly attend to the preser-vation of the building, and owing to the fact that his enjoymentof the property is temporary, he endeavors above all to derivethe greatest benefit therefrom, economizing to that end eventhe most essential expenses.” (23 Scaevola 667.)

Validity of penal clause providing automatictermination of redemption period.

In a contract of sale with pacto de retro, the parties may legiti-mately fix any period they please, not in excess of ten (10) years,for the redemption of the property sold by the vendor. The deter-mination of the right of redemption may be made to depend uponthe delinquency of the vendor. (Dimatulac vs. Coronel, 40 Phil.686 [1919].)

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ILLUSTRATIVE CASE:

Penal clause provides that in case of failure of vendor a retro,who will remain in possession as lessee, to pay the agreed rentals, thelease shall automatically be terminated and ownership of vendee shallbecome absolute.

Facts: S sold to B a parcel of land. It is stipulated in the deedof sale that S can repurchase the property within a period of 18months from the date of the sale and that S will remain in pos-session of the land as lessee for the same period of 18 months.The lease covenant contained in the deed of sale with pacto deretro provides also, among others, that in case of failure of thevendor-lessee (S) to pay the rentals agreed upon, the lease shallautomatically terminate and the right of ownership of thevendee (B) shall become absolute.

Issue: Is the penal clause valid?

Held: Yes. The lease that S executed on the property may beconsidered as a means of delivery or tradition by constitutumpossessorium. (see Art. 1500.) While the lease covenant may beonerous or may work hardship on S because of its clause pro-viding for the automatic termination of the period of redemp-tion, however, the same is not contrary to law, morals, or pub-lic order which may serve as basis for its nullification. Ratherthan being obnoxious or oppressive, it is a clause common in asale with pacto de retro and as such it received the sanction ofour courts. (see Amigo vs. Teves, 96 Phil. 252 [1954].)

The consequences of such provision are not worse than suchas follow from many other forms of agreement to which con-tracting parties may lawfully attach their signatures. Never-theless, the court should not hesitate to relieve the vendor fromits effects whenever this can be done consistently with estab-lished principles of law. (Dimatulac vs. Coronel, supra.)

ART. 1607. In case of real property, the consolida-tion of ownership in the vendee by virtue of the fail-ure of the vendor to comply with the provisions ofArticle 1616 shall not be recorded in the Registry ofProperty without a judicial order, after the vendor hasbeen duly heard. (n)


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Judicial order for recording of consolidationof ownership.

(1) Necessity. — If real property is involved and the vendorfailed to redeem within the period agreed upon, the vendee’s ti-tle becomes irrevocable but the consolidation of ownership in thevendee shall not be recorded in the Registry of Property withouta judicial order and until after the vendor has been duly heard.The reason is that the transaction may not be a genuine pacto deretro but only an equitable mortgage.

(2) Purpose. — The requirement provides additional safe-guards to debtors. The purpose is not only to have all doubts overthe true nature of the transaction speedily ascertained and decided,but also to prevent the interposition of buyers in good faith whilesuch determination is being made. (Teodoro vs. Arcenas, 110 Phil.222 [1960]; Cruz vs. Leis, 122 SCAD 693, 327 SCRA 570 [2000].)

(3) Former method. — Under the former method of consolida-tion by a mere extra-judicial affidavit of the buyer a retro, the lat-ter could easily cut off any claims of the seller by disposing of theproperty after such consolidation to strangers in good faith andwithout notice. The chances of the seller a retro to recover his prop-erty would thus be nullified, even if the transaction were reallyproved to be a mortgage and not a sale. (Ibid.)

(4) Acquisition of ownership by vendee a retro. — It is plain fromArticle 1607 that the acquisition of ownership by a vendee a retrois automatic (Oviedo vs. Garcia, 40 SCRA 17 [1971].), i.e., once thereis failure to redeem within the stipulated period, ownership ofthe property sold becomes vested or consolidated by operationof law on the vendee. Any other interpretation would be violativeof the sanctity of the contract between the parties. (Rosario vs.Rosario, 110 Phil. 394 [1960].) The needed judicial hearing con-templated by Article 1607 refers not to the consolidation itself, butmerely for the purpose of registering the consolidation (DeBayquen vs. Baleoro, 156 SCRA 412 [1986].) or the consolidatedtitle. (De Guzman, Jr. vs. Court of Appeals, 156 SCRA 701 [1987].)

(5) Effect of failure to comply with the requirement. — The onlyeffect of the failure of the vendee a retro to comply with Article 1607

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is that the absolute ownership of the vendee a retro cannot be re-corded in the Registry of Property. It does not impair his title orownership for the method prescribed under Article 1607 as men-tioned above is merely for the purpose of registering the consoli-dated title. The nature of a sale with the right of repurchase is suchthat the ownership over the thing sold is transferred to the vendeeupon execution of the contract, subject only to the resolutory con-dition that the vendor exercises his right of repurchase within theperiod agreed upon. (Heirs of Francisco Parco vs. Haw Pia, 45SCRA 164 [1972]; see Flores vs. So, 162 SCRA 117 [1988]; Cruz vs.Leis, supra.)

Action to consolidate ownership.

(1) Ordinary civil actions. — The consolidation shall be effectedthrough an ordinary civil action cognizable by the Regional TrialCourt wherein the vendor a retro is made a party defendant. Thepetition to consolidate ownership under Article 1607 does notpartake of the nature of a motion, it not being merely an incidentto an action or proceeding.

Article 1607 contemplates a contentious proceeding whereinthe vendor a retro must be named respondent in the caption andtitle of the petition for consolidation of ownership and duly sum-moned and heard. The failure on the part of the court to causethe service of summons as prescribed (in Rule 14, Rules of Court)is sufficient cause for attacking the validity of the judgment andsubsequent orders on jurisdictional grounds. (Yturralde vs. Courtof Appeals, 43 SCRA 313 [1972]; Ongoco vs. Judge, CFI of Bataan,15 SCRA 30 [1965]; Crisologo vs. Centeno, 26 SCRA 68 [1968];Ramos vs. Court of Appeals, 180 SCRA 635 [1989].)

(2) Registration proceedings. — Where the land has been soldunder pacto de retro, the vendor a retro may file an application forthe original registration of the land. However, should the periodfor redemption expire during the pendency of the registrationproceedings and ownership to the property consolidated in thevendee a retro, the latter shall be substituted for the applicant andmay continue the proceedings. (Sec. 14, par. 2, Pres. Decree No.1529 [Property Registration Decree].)


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ART. 1608. The vendor may bring his actionagainst every possessor whose right is derived fromthe vendee, even if in the second contract no mentionshould have been made of the right to repurchase,without prejudice to the provisions of the MortgageLaw and the Land Registration Law with respect tothird persons. (1510)

Nature of right to redeem.

(1) A right, not an obligation. — The right to redeem is what itis: a right, not an obligation; therefore, consignation (Art. 1256.)is not required to preserve the right to redeem. Thus, the allega-tion that the offer to redeem was not sincere because there wasno consignation of the purchase price is devoid of merit. But toactually redeem, there must, of course, be payment or consigna-tion. (Immaculate vs. Navarro, 160 SCRA 211 [1988].)

(2) A real right. — By virtue of the provision of this article, itcan be concluded that the right to repurchase is of a real charac-ter and should not be considered personal. Exception is, however,made to the provisions of the Mortgage Law and the Land Regis-tration Law with respect to third persons. (10 Manresa 314.) Thismeans that the vendor a retro cannot exercise his right of redemp-tion against a subsequent transferee for value and in good faith ifhis right is not properly registered or annotated. (see Art. 1544;see Lucido vs. Calupitan, 27 Phil. 148 [1914]; Alarcon vs. Esteva,16 SCRA 123 [1966].)

Note: The Spanish Mortgage Law has been discontinued byPresidential Decree No. 892. The discontinuance is reiterated byPresidential Decree No. 1529, the latter being the new PropertyRegistration Decree which superseded Act No. 196, as amended,the Land Registration Law.

EXAMPLE:

S sold his land (not registered) to B with a right to repur-chase within 2 years to B. If before 2 years B sold the same landto C, a purchaser for value and in good faith. S may still repur-chase the property from C even if in the sale between B and Cno mention was made of the right of S.

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If the land, however, is registered under the Torrens Sys-tem (Pres. Decree No. 1529.) and the right of S was not anno-tated on B’s certificate of title, S cannot exercise his right to re-deem against C who registered the land free from all liens andencumbrances not noted on the certificate of title.

ART. 1609. The vendee is subrogated to the ven-dor’s rights and actions. (1511)

Rights acquired by vendee a retro.

(1) Vendee subrogated to vendor’s rights. — Subrogation trans-fers to the person subrogated the credit with all the rights theretoappertaining. (Art. 1303.) The above article is logical because apacto de retro sale transfers ownership to the vendee althoughsubject to the condition of repurchase. As owner, the vendee, forexample, may transfer or alienate his right to a third person,mortgage the property, enjoy the fruits thereof, recover the prop-erty against every possessor, and perform all other acts of own-ership subject only to the right of redemption of the vendor. Ofcourse, the vendor cannot transfer ownership if he is not the realowner.

(2) Right to eject vendor. — Prior possession by the vendee aretro of the property is not a condition precedent in an unlawfuldetainer action against the vendor a retro who, after having failedto redeem, and title in the vendee a retro had been consolidated,refused to vacate the property. (Pharma Industries, Inc. vs.Pajarillaga, 100 SCRA 339 [1980].)

ART. 1610. The creditors of the vendor cannotmake use of the right of redemption against thevendee, until after they have exhausted the propertyof the vendor. (1512)

Right of vendor’s creditors to redeem.

This article is a practical application of Article 1177 permit-ting creditors to exercise the rights and actions of their debtor afterexhausting his properties to satisfy their claims. (see Manresa 331.)The right to redeem being property, it is answerable for the debts


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of the vendor provided the vendor’s properties are first exhausted.The exhaustion must be established to the satisfaction of thevendee.12

Article 1610 refers to all kinds of creditors, whether ordinaryor preferred, except those in whose favor exists a mortgage orantichresis upon the very property sold recorded prior to the sale.They need not exhaust. All these latter creditors have to do is toforeclose their rights, ignoring the rights of the vendee. (see 10Manresa 325-326.)

ART. 1611. In a sale with a right to repurchase, thevendee of a part of an undivided immovable who ac-quires the whole thereof in the case of article 498, maycompel the vendor to redeem the whole property, ifthe latter wishes to make use of the right of redemp-tion. (1513)

Redemption in sale of part of undividedimmovable.

The purpose of the above article (and Arts. 1612-1615.) is todiscourage co-ownership which is recognized as undesirable,since it does not encourage the improvement of the property co-owned.

(1) A co-owner may demand the partition of the thing ownedin common insofar as his share is concerned. (Art. 494.)

(a) If the thing is essentially indivisible, it may be allottedto the co-owner who shall indemnify the others.

12Art. 2059. This excussion shall not take place:(1) If the guarantor has expressly renounced it;(2) If he has bound himself solidarily with the debtor;(3) In case of insolvency of the debtor;(4) When he has absconded, or cannot be sued within the Philippines unless he

has left a manager or representative;(5) If it may be presumed that an execution on the property of the principal debtor

would not result in the satisfaction of the obligation.Art. 2060. In order that the guarantor may make use of the benefit of excussion, he

must set it up against the creditor upon the latter’s demand for payment from him, andpoint out to the creditor available property of the debtor within Philippine territory,sufficient to cover the amount of the debt.

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423

(b) If the co-owners cannot agree that the thing be allot-ted to one of them, it shall be sold and its proceeds distributed.(Art. 498.)

(2) In either case, the vendee who acquires the whole of anundivided immovable a part of which is subject to a right to re-purchase, has a right to demand that the vendor a retro, who likesto exercise his right of redemption, redeem the whole property.

EXAMPLE:

A, B, and C are co-owners of an undivided parcel of land.A sold his undivided portion to D with the right to repurchase.As a result of a partition, D, who is now one of the co-owners,acquired the whole land after paying the portions belonging toB and C.

If A would like to repurchase the portion sold by him, Dmay compel him to redeem the entire parcel of land so that theproperty will not revert again to a state of co-ownership.

ART. 1612. If several persons, jointly and in thesame contract, should sell an undivided immovablewith a right of repurchase, none of them may exer-cise this right for more than his respective share.

The same rule shall apply if the person who soldan immovable alone has left several heirs, in whichcase each of the latter may only redeem the part whichhe may have acquired. (1514)

ART. 1613. In the case of the preceding article, thevendee may demand of all the vendors or co-heirsthat they come to an agreement upon the repurchaseof the whole thing sold; and should they fail to do so,the vendee cannot be compelled to consent to a par-tial redemption. (1515)

Redemption in joint sale by co-owners/co-heirs of undivided immovable.

(1) The co-owners of an undivided immovable sold by themjointly or collectively and in the same contract with the right to


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repurchase, can exercise such right only as regards their respec-tive shares. (Art. 1612, par. 1.)

(2) Similarly, the co-heirs of the vendor of an undivided im-movable can exercise the right of redemption only for the respec-tive portions they have inherited. (Ibid., par. 2.)

(3) The vendee a retro can refuse partial redemption; he mayrequire all the vendors or all the heirs to redeem the entire prop-erty or to agree to its redemption by any one of them. (Art. 1613.)This right is given to the vendee in line with the object of the law(see Art. 1620.) to put an end to co-ownerships whenever possi-ble.

(4) Under Article 1620 (infra.), the right of a co-owner whochooses not to redeem accrues to the benefit of the others. Theextent of the share of the redeeming co-owner is not taken intoaccount except as provided in the second paragraph thereof.

EXAMPLE:

A, B, and C are co-owners of a parcel of land. If they shouldsell the property to D with the right to repurchase in the con-tract, each one of them may exercise that right only as regardshis own share or for one-third portion of the property.

The same rule applies if X were the sole owner of the landand he sold it with right to repurchase to D and he should dieand leave A, B, and C as heirs. Each one of them can only ex-ercise the right of redemption for the one-third portion he hasinherited.

But D can demand that they come to an agreement uponthe repurchase of the whole property by all of them or any oneof them. If they do not do so, D cannot be compelled to assentto a partial redemption. (see Art. 1611.)

Effect of redemption by co-ownerof entire property.

Under Article 1612, a co-owner cannot redeem more than hisshare in the co-ownership. The redemption by a co-owner of theproperty in its entirety, shouldering the expenses therefor, does

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not make him the owner of all of it. In other words, it does notput to end the existing state of co-ownership.

Article 1613 does not provide for a mode of terminating a co-ownership nor does the fact that the redeeming co-owner hassucceeded in securing title over a parcel of land in his name ter-minate the existing co-ownership. Registration of property is nota means of acquiring ownership. It operates as a mere notice ofexisting title, that is, if there is one. (Adill vs. Court of Appeals,157 SCRA 455 [1988]; see Paulmian vs. Court of Appeals, 215 SCRA866 [1992].)

ILLUSTRATIVE CASE:

The entire property sold by the deceased was redeemed by one ofthe heirs.

Facts: Two (2) days before her death, M (mother) sold aparcel of unregistered land with a right of repurchase withinseven (7) years. D (daughter) and her husband, H, redeemedthe property within the redemption period. The tax declara-tion on the land in favor of M was cancelled and another onewas issued in the name of H; and since then, the real estatetaxes had been paid by D and H.

The other children of M invoked the right to the disputedproperty as co-owners thereof by right of intestate succession.

Issue: Under the deed of repurchase, was the ownership ofthe land in dispute vested in D and H or in all of the heirs of M?

Held: In all of the heirs. The repurchase could not have beenmade by D and H by themselves alone because the right be-longed in common to the heirs of M. This was true even if itwere assumed that the vendee a retro had intended to sell backthe land to D and H only as the repurchase was subject to thelimitations under Article 1612 and the stipulations in the origi-nal contract, to wit, that the repurchase was to be made by thevendor (M) or her successors. D was not the only successor,and H was not even an heir of M.

A sale during the period of redemption to any other per-son other than the heirs of the deceased mother, as co-ownersof the subject land, could not have been made by the vendee aretro. Any of the co-owners could have successfully invalidatedsuch a transaction. (De Guzman vs. Court of Appeals, 148 SCRA75 [1987].)


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ART. 1614. Each one of the co-owners of an undi-vided immovable who may have sold his share sepa-rately, may independently exercise the right ofrepurchase as regards his own share, and the vendeecannot compel him to redeem the whole property.(1516)

Redemption in separate sales by co-ownersof undivided immovable.

Although it is the policy of the law to avoid indivision, itwould be unjust, if the sale was made separately and independ-ently, to require the co-owners to come to an agreement with re-gard to the repurchase of the thing sold, and certainly, it wouldbe worse to deprive them of their right in case they fail to agree.

The very purpose of the article is to prevent such injustice. (10Manresa 332.)

EXAMPLE:

In the preceding example, if A, B, and C sold their respec-tive shares to D with the right of repurchase in separate instru-ments and at different dates, each one of them may exercise hisright independently of the others and D cannot compel him toredeem the whole property.

ART. 1615. If the vendee should leave several heirs,the action for redemption cannot be brought againsteach of them except for his own share, whether thething be undivided, or it has been partitioned amongthem.

But if the inheritance has been divided, and thething sold has been awarded to one of the heirs, theaction for redemption may be instituted against himfor the whole. (1517)

Redemption against heirs of vendee.

The vendor a retro can exercise the right to redeem against theheirs of the vendee a retro with respect only to their respective

Arts. 1614-1615

427

shares, whether the thing be undivided or it has been partitionedamong them.

However, if by partition the entire property has been adjudi-cated to one of the heirs, the vendor can exercise the right to re-deem against said heir for the whole.

EXAMPLE:

A sold his parcel of land to B with a right to repurchase.Then B died leaving C, D, and E, his children, as heirs.

In this case, the right of redemption by A is against each ofthe heirs only for his respective share or for one-third of theproperty.

If the property has been awarded to C by partition, thenthe action for redemption may be instituted against him for theentire property.

ART. 1616. The vendor cannot avail himself of theright of repurchase without returning to the vendeethe price of the sale, and in addition:

(1) The expenses of the contract, and any otherlegitimate payments made by reason of the sale;

(2) The necessary and useful expenses made onthe thing sold. (1518)

Obligation of vendor a retroin case of redemption.

Article 1616 defines the obligations of the vendor who desiresto exercise his right of repurchase. (see Gargallo vs. Duero, 1 SCRA134 [1961].) He must return to the vendee a retro:

(1) The price. — The law speaks of “price of the sale” and notthe value of the thing. It is lawful, however, for the parties to agreethat the price to be returned will be more or less than the originalsum paid by the vendee (10 Manresa 338-339.);

(2) Expenses of contract and other legitimate expenses. — If theexpenses for the execution and registration of the sale were paidby the vendee, the same shall be reimbursed by the vendor. (see


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Art. 1497.) But they need not be paid at the very time of the exer-cise of the right since they are unknown amounts. They may bepaid later. The same is true of necessary and useful expenses (De-cision of Supreme Court of Spain, Dec. 31, 1897; 10 Manresa 338.);and

(3) Necessary and useful expenses. — The first are expenses in-curred for the preservation of the thing or those which seek toprevent the waste, deterioration or loss of the thing, while thesecond are which increase the value of the thing or create improve-ments thereon, such as a house.

(a) The necessary expenses which must be repaid to thevendee are not those which are ordinary and simple expensesof preservation because these expenses are incident to the en-joyment of the thing and should be borne by the vendee. (10Manresa 339-342.)

(b) Useful expenses are refunded to the vendee a retro be-cause he is considered a possessor in good faith. (Art. 546, par.2.)

(c) The vendor a retro is given no option to require thevendee a retro to remove the useful improvements on the landsubject of the sale a retro, unlike that granted the owner of aland under Articles 546 and 54713 of the Civil Code.

(d) The vendor a retro must pay for the useful improve-ments introduced by the vendee a retro; otherwise, the lattermay retain possession of the land until reimbursement ismade. (Gargollo vs. Duero, 1 SCRA 1311 [1961].) It has beenheld, however, that considering the purpose of the law onhomesteads (Public Land Act, C.A. No. 141, as amended.),which is to conserve ownership in the hands of the home-

13Art. 546. Necessary expenses shall be refunded to every possessor; but only thepossessor in good faith may retain the thing until he has been reimbursed therefor.

Useful expenses shall be refunded only to the possessor in good faith with thesame right of retention, the person who has defeated him in the possession having theoption of refunding the amount of the expenses or of paying the increase in value whichthe thing may have acquired by reason thereof.

Art. 547. If the useful improvements can be removed without damage to the princi-pal thing, the possessor in good faith may remove them, unless the person who recoversthe possession exercises the option under paragraph 2 of the preceding article.

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429

steader and his family, Article 1616 should be construed inconjunction with Articles 546 and 547. To allow a vendee a retroof a homestead the right of retention until payment of usefulexpenses is made by the redemptioner would be to rendernugatory the right of repurchase granted by law to a home-steader because all a vendor a retro can do to prevent repur-chase is to build something on the homestead beyond the ca-pacity to pay of the homesteader who seeks to repurchase.(Calagan vs. CFI of Davao, 95 SCRA 498 [1980].)

(e) The payment of land tax has been as neither necessarynor useful. It is a charge against the property. The object of theland tax is to contribute to the expenses of the government inthe protection of the vendee’s right as owner and it is but justthat he should bear said charges. (Cabigao vs. Valencia, 53 Phil.646 [1929].) Taxes on the property may be considered neces-sary expenses in the sense that if they are not paid, the prop-erty may be sold for tax delinquency or forfeited to the gov-ernment.

ILLUSTRATIVE CASE:

Property subject to right of repurchase was embargoed by thegovernment and vendor a retro redeemed the property from the gov-ernment and not from vendee a retro who subsequently sold the prop-erty.

Facts: S sold in December, 1897 to B a property with right torepurchase within six (6) months. S was not able to effect therepurchase in May, 1898 by reason of the fact that B was absentfrom his place of residence on account of the war. About thattime the revolution broke out and the property was seized bythe revolutionary government from B.

The property was redeemed by S from said government inNovember, 1898. Subsequently, B sold the property to C. Sbrought action against C to recover the property.

Issue: Was the sale made by the revolutionary governmentto S valid, with the result that B had no right to transfer to C theproperty in question?

Held: No. What S did was to attempt to reacquire the own-ership of the property transferred to B from a third person towhom the property had not been transferred by B in any man-


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ner whatsoever. Therefore, the payment made by S to the revo-lutionary government which should have been made to B inorder to redeem the property, could not have extinguished theobligation incurred by him in favor of the latter. (Panganibanvs. Cuevas, 7 Phil. 477 [1907].)

Offer to redeem and tender of paymentgenerally required.

(1) Offer to redeem must be bona fide. — The mere declarationof the vendor of his intention to exercise the right of repurchaseis not sufficient to preserve the right of redemption. The law re-quires that the offer must be a bona fide one and accompanied byan actual and simultaneous tender of payment or consignationof the full amount agreed upon for repurchase. (see Torrijos vs.Crisologo, 6 SCRA 1984 [1962]; Catangcatang vs. Legayada, 84SCRA 51 [1978].) Thus, the mere sending of letters by the vendorexpressing his desire to repurchase without an accompanyingtender of the redemption price falls short of the requirement ofthe law. (Uy Lee vs. Court of Appeals, 68 SCRA 196 [1975]; seeState Investment House, Inc. vs. Court of Appeals, 215 SCRA 734[1992].)

(2) When tender of payment not necessary. — Neither is it neces-sary to tender payment of the repurchase price if the vendee hasalready flatly refused to reconvey. (Gonzaga vs. Go, 69 Phil. 778[1940]; Catalan vs. Rivera, [C.A.] 45 O.G. 4538; Torrijos vs.Crisologo, supra; Lafont vs. Pascasio, 5 Phil. 391 [1905]; Fructo vs.Fuentes, 15 Phil. 362 [1910].) This rule is premised on the groundthat under such circumstance the vendee will also refuse the ten-der of payment. (Uy Lee vs. Court of Appeals, 68 SCRA 196 [1975].)Where the vendor a retro had consigned or deposited in court theredemption price when the action was filed, prior tender couldbe excused. (see De la Cruz vs. Marcelino, 84 Phil. 709 [1949]; Toriovs. Del Rosario, 93 Phil. 800 [1953]; Torrijos vs. Crisologo, supra.)

If the tender is made after the period of repurchase has ex-pired, its acceptance would amount only to a promise to sell onthe part of the vendee because the right of repurchase havingexpired, there was no more right that could have been preserved.(Tan Queto vs. Vda. de Maquiling, 2 C.A. Rep. 150.)

Art. 1616

431

Consignation of price generallynot required.

It is not a legal requisite for the vendor to make a consigna-tion or judicial deposit of the price if the offer or tender is refused.(Canuto vs. Mariano, 37 Phil. 849 [1918]; see Rumbaoa vs. Arzaga,84 Phil. 812 [1949].) He is not a debtor. He has a right, not an ob-ligation, to repurchase. (Villegas vs. Capistrano, 9 Phil. 416 [1907].)It is enough that a sincere and genuine tender of payment is madeand refused, although consignation may serve to provide addi-tional security for the vendor and to indicate the veracity of hisdesire to exercise the right of repurchase. (Legaspi vs. Court ofAppeals, 142 SCRA 82 [1986].)

(1) Where right of repurchase judicially declared. — Where theright of the vendor a retro to repurchase had been judicially de-clared to exist, the effect of the judgment is to definitely fix therelation of the vendor a retro and the vendee a retro, as that ofdebtor and creditor, respectively, in the amount and within theperiod fixed in the judgment. Should the vendee (creditor) refuseto accept the amount of the redemption price offered, the vendor(debtor) must deposit it in court. (Torrijos vs. Crisologo, supra.)

(2) In case of absence of the vendee a retro. — In such case, theright of redemption may still be exercised as a vendor who de-cides to redeem a property sold with pacto de retro, in a sense,stands as the debtor and the vendee as the creditor of the pur-chase price. The vendor can and should exercise his right of re-demption against the vendee by filing a suit against him andmaking a consignation with the court of the amount due for re-demption (Catangcatang vs. Legayada, supra; Rivero vs. Rivero,80 Phil. 802 [1948].), not that deposit or consignation is legallyessential to preserve his reserved right of redemption but becausehe should be regarded as having done that which should havebeen done to terminate the right of the vendee over the propertywhere the redemption price is already due and payable. (Rumbaoavs. Arzaga, supra; see Legaspi vs. Court of Appeals, supra.)

ART. 1617. If at the time of the execution of thesale there should be on the land, visible or growingfruits, there shall be no reimbursement for or prorating


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14Art. 442. Natural fruits are the spontaneous products of the soil, and the youngand other products of animals.

Industrial fruits are those produced by lands of any kind through cultivation orlabor.

Civil fruits are the rents of buildings, the price of leases of lands and other propertyand the amount of perpetual or life annuities or other similar income.

Art. 544. A possessor in good faith is entitled to the fruits received before the pos-session is legally interrupted.

Natural and industrial fruits are considered received from the time they are gath-ered or severed.

Civil fruits are deemed to accrue daily and belong to the possessor in good faith inthat proportion.

of those existing at the time of redemption, if no in-demnity was paid by the purchaser when the sale wasexecuted.

Should there have been no fruits at the time of thesale, and some exist at the time of redemption, theyshall be prorated between the redemptioner and thevendee, giving the latter the part corresponding to thetime he possessed the land in the last year, countedfrom the anniversary of the date of the sale. (1519a)

Right of parties as to fruits of land.

This article applies only when the parties have not providedfor any sharing arrangement with respect to the fruits existing atthe time of redemption. (Almeda vs. Daluro, 79 SCRA 327 [1977].)It refers only to natural and industrial fruits. Civil fruits aredeemed to accrue daily and belong to the vendee in that propor-tion.14

(1) If there were fruits at the time of the sale and the vendeepaid for them, he must be reimbursed at the time of redemptionas the payment forms part of the purchase price.

(2) If no indemnity was paid by the vendee for the fruits, thereshall be no reimbursement for those existing at the time of redemp-tion. (par. 1.)

(3) If the property had no fruits at the time of the sale andsome exist at the time of redemption, they shall be apportionedproportionately between the redemptioner and the vendee, giv-ing the latter a share in proportion to the time he possessed the

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433

property during the last year counted from the anniversary of thedate of the sale (par. 2.) to compensate the vendee for his expense.(see Lustado vs. Pinol, [unrep.] 102 Phil. 1164 [1958].)

The same rule, it is believed, is also applicable if there werefruits at the time of the sale and the vendee paid for them.

EXAMPLE:

S sold to B with the right of repurchase for P500,000.00 aparcel of land on June 5, 2001 with a three-year redemptionperiod. At the time of the sale, there were existing crops on theland for which B paid an additional amount of P50,000.00.

(1) If S should exercise his right of redemption, he mustreturn to B the amount of P550,000.00 as the price of the sale.

(2) If B did not pay for the crops, he is not entitled to reim-bursement for crops existing at the time of the redemption.

(3) If there were no crops at the time of the sale and someexist at the time of redemption on June 5, 2004, B is entitled tothe crops during the last year, that is, from June 5, 2003 to June5, 2004.

(4) If there were crops at the time of the sale and B paid forthem, B is entitled to reimbursement, or to the fruits for the lastyear, because having paid for them, the effect is the same as ifthere were no crops on the land when it was sold.

ART. 1618. The vendor who recovers the thing soldshall receive it free from all charges or mortgagesconstituted by the vendee, but he shall respect theleases which the latter may have executed in goodfaith, and in accordance with the customs of the placewhere the land is situated. (1520)

Right of vendor a retro to recover thingsold free from charges.

The vendee a retro may alienate, encumber, or perform otheracts of ownership over the thing sold. But his ownership beingrevocable upon redemption, all acts done by him are also revoca-ble. Thus, he may borrow money and mortgage the property butwhen the vendor a retro redeems, the vendee a retro is obliged to


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15Art. 1676. The purchaser of a piece of land which is under a lease that is not re-corded in the Registry of Property may terminate the lease, save when there is a stipula-tion to the contrary in the contract of sale, or when the purchaser knows of the existenceof the lease.

redeem the mortgage. The vendor has the right to receive theproperty in the same condition in which it was at the time of thesale.

The law, however, establishes an exception with respect toleases which the vendee may have entered into in good faith ac-cording to the custom of the place where the land is located.15 Theexception is dictated by public convenience in the interest of ag-riculture.

— oOo —

Art. 1618

435

SECTION 2. — Legal Redemption

ART. 1619. Legal redemption is the right to be sub-rogated, upon the same terms and conditions stipu-lated in the contract, in the place of one who acquiresa thing by purchase or dation in payment, or by anyother transaction whereby ownership is transmittedby onerous title. (1521a)

Legal redemption defined.

Article 1619 gives the definition of legal redemption. As theword “thing” is employed without qualification, the right appliesto both movable and immovable property. (U.S. vs. Caballero, 23Phil. 65 [1912].)

Transfer of ownership by onerous title.

Subrogation transfers to the person subrogated the rightspertaining to another. (Art. 1303.) Note that legal redemption maytake place not only in purchase or dation in payment but in anyother transfer of ownership by onerous title. It has been held,however, that it cannot take place in barter and in the transmis-sion of property by hereditary title. (Decision of the SupremeCourt of Spain, July 9, 1903 and June 7, 1915; 10 Manresa 319.)

Evidently, the right is not available where there is only a mort-gage or lease.

Dation in payment defined.

Dation in payment or dacion en pago is the transmission of theownership of a thing by the debtor to the creditor as the acceptedequivalent of the performance of an obligation. (8 Manresa 314;see Art. 1245.) In this special mode of payment, the debtor offers

435

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another thing to the creditor who accepts it as equivalent of pay-ment of an outstanding debt.

Nature of dation in payment.

(1) Sale of thing. — The undertaking partakes in one sense ofthe nature of sale,1 that is, the creditor is really buying the thingor property of the debtor, payment for which is to be chargedagainst the debtor’s debt. As such, the essential elements of acontract of sale, namely, consent, object certain, and cause or con-sideration must be present. It is, therefore, governed by the lawof sales.2

(2) Novation of an obligation. — In its modern concept, whatactually takes place in dacion en pago is an objective novation ofthe obligation where the thing offered as an accepted equivalentof the performance of an obligation is considered as the object ofthe contract of sale, while the debt is considered as the purchaseprice. (Filinvest Credit Corporation vs. Phil. Acetylene Co., Inc.,111 SCRA 421 [1982].)

Basis and nature of right of legal redemption.

(1) The nature of conventional and legal rights of redemptionis identical, except for the source of the right. While conventionalredemption arises from the voluntary agreement of the parties,legal redemption proceeds from law. (see Alarcon vs. Esteva, 16SCRA 123 [1966].)

The concept of legal redemption may be converted into oneof conventional redemption. Thus, where there was voluntaryagreement of the parties, consisting of extensions of the redemp-tion period granted at the request of the vendors followed bycommitment by them to pay the redemption price at a fixed date,it was held that the concept of legal redemption is converted bythe parties into one of conventional redemption such that it gen-erated binding contracts when approved by the vendee. In suchcase, the period of redemption is that agreed upon by the parties.

1See distinctions between dation in payment and sale under Article 1486.2Art. 1245. Dation in payment, whereby property is alienated to the creditor in

satisfaction of a debt in money, shall be governed by the law of sales.

Art. 1619

437

(Lazo vs. Republic Surety & Insurance Co., Inc., 31 SCRA 329[1970].)

(2) The right of legal redemption is not predicated on proprietaryright but on a bare statutory privilege to be exercised only by theperson named in the statute. In other words, the statute does notmake actual ownership at the time of sale or redemption a condi-tion precedent, the right following the person and not the prop-erty. (Magno vs. Viola and Sotto, 61 Phil. 80 [1934].) Under thelaw (Rules of Court, Rule 39, Sec. 30.), the property sold subjectto redemption may be redeemed by the judgment debtor or hissuccessor-in-interest in the whole or any part of the property. Inan extra-judicial foreclosure sale, the mortgagor, his successors-in-interest, judgment creditor or any person having a lien on theproperty subsequent to the mortgage, may redeem the same. (ActNo. 3155, Sec. 6.)

(3) Legal redemption is in the nature of a mere privilege cre-ated partly for reason of public policy and partly for the benefitand convenience of the redemptioner to afford him a way out ofwhat might be a disagreeable or inconvenient association intowhich he has been thrust. It is intended to minimize co-owner-ship. (Basa vs. Aguilar, 117 SCRA 128 [1982]; Tan vs. Court ofAppeals, 172 SCRA 660 [1989].) It works only one way in favor ofthe redemptioner. Not having parted with anything, he can com-pel the purchaser to sell, but cannot be compelled by him to buy.(Villasor vs. Medel, [C.A.] No. 8677, Sept. 29, 1948.)

Instances of legal redemption.

(1) Under the Civil Code, the instances of legal redemptionare found in Articles 1620, 1621, 1622, 1634 (infra.), and 1088.

Article 1088 provides:

“Should any of the heirs sell his hereditary rights to astranger before the partition, any or all of the co-heirs may besubrogated to the rights of the purchaser by reimbursing himfor the price of the sale, provided they do so within the periodof one month from the time they were notified in writing ofthe sale of the vendor.”

Article 1088 refers to sale of hereditary rights, and not to spe-cific properties, for the payment of the debts of the decedent’s

Art. 1619 EXTINGUISHMENT OF SALELegal Redemption

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estate. In the administration and liquidation of the estate of adeceased person, sales ordered by the probate court for paymentof debts are final and not subject to legal redemption. Unlike inordinary execution sales, there is no legal provision allowing re-demption in the sale of property for the payment of debts of adeceased person. (Plan vs. Intermediate Appellate Court, 135SCRA 270 [1985].)

(2) Under special laws, the following are instances of legalredemption:

(a) Redemption by owner of real property sold for delin-quent taxes. The period is within one year from the date of sale(R.A. No. 7160 [Local Government Code], Sec. 261.);

(b) Repurchase by homesteader of homestead sold underthe Public Land Act. The period is five years (Com. Act No.141 [Public Land Law], Sec. 119; see Tupas vs. Damasco, 132SCRA 593 [1984].);

(c) Redemption by judgment debtor or redemptioner ofreal property sold on execution. The period is twelve months(Rules of Court, Rule 39, Sec. 30.);

(d) Redemption by mortgagor after mortgaged propertyhas been judicially foreclosed and sold. The period is ninetydays but before confirmation of sale by the court. (Ibid., Rule68, Sec. 3.) In all cases of extra-judicial foreclosure sale, themortgagor may redeem the property within one year from thedate of registration of the sale (see Act No. 3135, Sec. 6); and

(e) Redemption by an agricultural lessee of landholdingsold by the landowner. The period is 180 days from notice inwriting which shall be served by the vendee on all lesseesaffected and the Department of Agrarian Reform upon theregistration of the sale. (R.A. No. 3844, as amended [Code ofAgrarian Reform], Sec. 12.) This right has priority over anyother right of redemption, like the right of redemption of a co-owner under Article 1620.

ILLUSTRATIVE CASE:

Redemption of property sold under execution was effected bymeans of a check for the amount due.

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439

Facts: Pursuant to a judgment to pay damages, the sherifflevied upon two parcels of land registered in the name of S,one of which had already been purchased by B but had not yetbeen registered in the latter’s name. The two lots were sold atpublic auction to P (petitioners).

Before the expiration of the period of redemption, B issuedto the sheriff a check as the redemption price for the two lots.The sheriff acknowledged receipt of the check on the same dateand issued the following day a certificate of redemption, in favorof B and S.

Issue: The central issue is whether or not redemption hadbeen validly effected by B and S in view of Article 12493 of theCivil Code which, according to B and S, private respondents,was applicable in case of redemption under Section 30, Rule 39of the Rules of Court.

Held: “It is contended by the private respondents that Arti-cle 1249 is inapplicable as it ‘deals with a mode of extinction ofdebts’ (Golez vs. Camara, 101 Phil. 363 [1957].) while the ‘rightto redeem is not an obligation, nor is it intended to discharge apre-existing debt.’ (Paez vs. Magno, 83 Phil. 403 [1949].)

They rely on Javellana vs. Mirasol (40 Phil. 761 [1920].) wherethe Supreme Court held that ‘a redemption of property soldunder execution is not rendered invalid by reason of the factthat the payment to the sheriff for the purpose of redemption iseffected by means of a check for the amount due.’

The petitioners, on the other hand, invoke Belisario vs.Natividad (60 Phil. 156 [1934].), where it was held that “even ifthe check had been good, the defendant was not legally boundto accept it because such a check does not satisfy the require-ments of a legal tender.” They also cite Villanueva vs. Santos (67Phil. 648 [1939].), Legarda vs. Miailhe (88 Phil. 637 [1951].), NewPacific Timber and Supply Co., Inc. vs. Seneris (101 SCRA 686

3Art. 1249. The payment of debts in money shall be made in the currency stipu-lated, and if it is not possible to deliver such currency, then in the currency which islegal tender in the Philippines.

The delivery of promissory notes payable to order, or bills of exchange or othermercantile documents shall produce the effect of payment only when they have beencashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held inabeyance. (1170)


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[1980].), and Philippine Air Lines vs. Court of Appeals (181 SCRA557 [1990].), all of which, they claim, have overruled Javellana.

“It would appear from a study of the jurisprudence invokedby the parties that the case applicable to the present contro-versy is Javellana vs. Mirasol.

The cases cited by the petitioners do not involve redemp-tion by check. The check tendered in Belisario was in the exer-cise of an option to repurchase; in Villanueva, in connectionwith a pacto de retro; in Legarda and New Pacific, as payment ofa mortgage indebtedness; and in the PAL case, in satisfaction ofa judgment.

Tolentino vs. Court of Appeals (106 SCRA 513 [1981].), besidesciting Javellana, stresses the liberality of the courts in redemp-tion cases. On the issue of the applicability of Article 1249 ofthe Civil Code and the validity of the tender of payment througha crossed check, this Court held:

‘x x x the aforequoted Article should not be applied inthe instant case x x x

To start with, the Tolentinos are not indebted to BPI,their mortgage indebtedness having been extinguished withthe foreclosure and sale of the mortgaged properties. Aftersaid foreclosure and sale, what remains is the right vestedby law in favor of the Tolentinos to redeem the propertieswithin the prescribed period. This right of redemption isan absolute privilege, the exercise of which is entirely de-pendent upon the will and discretion of the redemptioners.There is, thus, no legal obligation to exercise the right ofredemption. Said right, can in no sense, be considered anobligation, for the Tolentinos are under no compulsion toexercise the same. Should they choose not to exercise it,nobody can compel them to do so nor will such choice giverise to a cause of action in favor of the purchaser at theauction sale. In fact, the relationship between said purchaserand the redemptioners is not even that of creditor anddebtor.

On the other hand, if the redemptioners choose to ex-ercise their right of redemption, it is the policy of the law toaid, rather than to defeat, the right of redemption. It standsto reason, therefore, that redemptions should be lookedupon with favor and where no injury is to follow, a liberal

Art. 1619

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construction will be given to our redemption laws as wellas to the exercise of the right of redemption. In the instantcase, the ends of justice would be better served by afford-ing the Tolentinos the opportunity to redeem the proper-ties in question other than the homestead land, in line withthe policy aforesaid. x x x

x x x

x x x And the redemption is not rendered invalid bythe fact that the said officer accepted a check for the amountnecessary to make the redemption instead of requiring pay-ment in money. It goes without saying that if he had seenfit to do so, the officer could have required payment to bemade in lawful money, and he undoubtedly, in accepting acheck, placed himself in a position where he could be li-able to the purchaser at the public auction if any damagehad been suffered by the latter as a result of the medium inwhich payment was made. But this cannot affect the valid-ity of the payment. The check as a medium of payment incommercial transactions is too firmly established by usageto permit of any doubt upon this point at the present day.No importance may thus be attached to the circumstancethat a stop-payment order was issued against the check theday following the deposit, for the same will not militateagainst the right of the Tolentinos to redeem, in the samemanner that a withdrawal of the redemption money beingdeposited cannot be deemed to have forfeited the right toredeem, such redemption being optional and not compul-sory. Withal, it is not clearly shown that said stop-paymentorder was made in bad faith. x x x’

In the United States, it has also been held and recognizedthat a payment by check or draft or bank bills or currency whichis not legal tender is effective if the officer accepts such pay-ment. (93 C.J.S. Executions 258.) If in good faith theredemptioner pays, and the officer receives before the expira-tion of the time of redemption an ordinary banker’s check, thepayment is regarded as sufficient. (Ibid.)

We are not, by this decision, sanctioning the use of a checkfor the payment of obligations over the objection of the credi-tor. What we are saying is that a check may be used for theexercise of the right of redemption, the same being a right andnot an obligation. The tender of a check is sufficient to compel


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redemption but is not in itself a payment that relieves theredemptioner from his liability to pay the redemption price. Inother words, while we hold that the private respondents prop-erly exercised their right of redemption, they remain liable, ofcourse, for the payment of the redemption price.’’ (Fortunadovs. Court of Appeals, 196 SCRA 269 [1991].)

ART. 1620. A co-owner of a thing may exercise theright of redemption in case the shares of all the otherco-owners or of any of them, are sold to a third per-son. If the price of the alienation is grossly excessive,the redemptioner shall pay only a reasonable one.

Should two or more co-owners desire to exercisethe right of redemption, they may only do so in pro-portion to the share they may respectively have in thething owned in common. (1522a)

Right of legal redemption of co-owner.

The right of legal redemption among co-owners presupposedof course, the existence of a co-ownership. The following are therequisites for the right to exist:

(1) There must be co-ownership of a thing;

(2) There must be alienation of all or of any of the shares ofthe other co-owners;

(3) The sale must be to a third person or stranger (Art. 1620.),i.e., a non-co-owner; and

(4) The sale must be before partition.

The right of a co-owner to legal redemption is based on hisstatus as such independently of the size of his share. (Butte vs. M.Uy & Sons, Inc., 4 SCRA 527 [1961].) It can no longer be invokedwhere there had been an actual partition of the property so thatco-ownership no longer exists. (Salantandol vs. Reyes, 162 SCRA568 [1988].) Redemption by a co-owner within the period pre-scribed by law (see Art. 1623.) inures to the benefit of all the otherco-owners. (Mariano vs. Court of Appeals, 41 SCAD 927, 222SCRA 736 [1993].)

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EXAMPLES:

(1) A, B, and C are co-owners of an undivided propertyvalued at P500,000.00. A sells his interest to D for P200,000.00.

B or C may exercise the right of redemption by reimburs-ing D the price of the sale. If both B and C redeem the interestsold by A, each of them shall pay P100,000.00 to D, which is theproportion of their respective shares in the co-ownership. If theprice of P200,000.00 is grossly excessive, the same may be equi-tably reduced by the court.

(2) The property inherited by A, B, and C, heirs, were mort-gaged by X, decedent, during his lifetime, to D. The redemp-tion of the whole property by C with his own personal fundsdoes not vest in him sole ownership over said property butwill inure to the benefit of all co-owners. In other words, it willnot put an end to the lasting state of co-ownership. Redemp-tion is not a mode of terminating a co-ownership. (Mardenovs. Court of Appeals, supra.)

ILLUSTRATIVE CASE:

The sale was made by the father, a co-owner, to the wife of one ofhis children, the other co-owners.

Facts: Spouses H and W owned a small lot. After W diedintestate, H sold one-half of the lot to T, wife of S, H’s son. Trefused to allow redemption by X, etc., other children of H andW. The lower court disallowed redemption because it consid-ered T, the vendee, a co-heir, being married to S, and held theconveyance valid since it was in favor of the conjugal partner-ship of T and S in the absence of any statement that the prop-erty was paraphernal in character.

Issue: Should X, etc. be allowed to exercise their right toredeem the property sold to T?

Held: Yes. A co-ownership exists. Within the meaning of Ar-ticle 1620, the term “third person” or “stranger” refers to allpersons who are not heirs in succession, and by heirs are meantonly those who are called either by will or the law to succeedthe deceased and who actually succeeds. In short, a third per-son is any one who is not a co-owner. (Villanueva vs. Florendo,139 SCRA 329 [1985]; see dissenting opinion.)


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By whom and against whom rightmay be exercised.

(1) A co-owner has the legal right to sell, assign, or mortgagehis ideal share in the property held in common. (see Art. 493.) Bythe very nature of the right of legal redemption, a co-owner’s rightto redeem is invoked only after the shares of the other co-ownersare sold to a third party or stranger.

(2) Co-owners have no right of legal redemption against eachother to whom the law grants the same privilege, but only againsta third person. (Estrada vs. Reyes, 33 Phil. 31 [1915]; Reyes vs.Concepcion, 190 SCRA 171 [1990].) A third person, within the mean-ing of Article 1620, is anyone who is not a co-owner. Article 1620is intended to minimize co-ownership. (Basa vs. Aguilar, 117 SCRA128 [1982].)

(3) Should any of the heirs sell his hereditary right to astranger before partition, any or all of the co-heirs may be subro-gated to the rights of the purchaser by reimbursing him for thepurchase price, provided it be done within the period of one (1)month to be counted from the time they were notified in writingof the sale by the vendor. (Art. 1088.) Once the portion correspond-ing to each heir is fixed, the co-heirs turn into co-owners and theirright of legal redemption should be governed by Articles 1620 and1623. (Saturnino vs. Paulino, 97 Phil. 51 [1955].)

(4) The right of legal redemption is not granted solely andexclusively to the original co-owners but applies to those whosubsequently acquire their respective shares while the commu-nity subsists. (see Felices vs. Colegado, 35 SCRA 173 [1970].) Thereis nothing in Article 1620 which, expressly or by inference, limitsthe right of redemption to the original co-owners. Moreover, thisinterpretation is in accordance with the spirit of the law. (Violaand Roura vs. Tecson, 43 Phil. 808 [1922].)

When right cannot be invoked.

Article 1620 applies only if the co-ownership still exists. (seeMendoza vs. Court of Appeals, 199 SCRA 778 [1992]; Abalos vs.Court of Appeals, 42 SCAD 569, 223 SCRA [1993].) It presupposesthe existence of a co-ownership at the time the conveyance is madeby a co-owner and when it is demanded by the other co-owner

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or co-owners. (Uy vs. Court of Appeals, 63 SCAD 243, 246 SCRA703 [1995].)

(1) Thing owned in common partitioned. — The right given to aco-heir or co-owner by Article 1620 in case any of the other co-heirs or co-owners sells his share to a third person cannot be in-voked where the sale was made after the properties owned incommon had been partitioned, judicially or extra-judicially.(Umengan vs. Butacan, 7 SCRA 311 [1963].) If a plan of partitionhas been agreed upon though not approved at the time of the sale,its approval by the court relates back to the date of the plan, andproperty sold after such date is not subject to legal redemption.(De Jesus vs. Daza, 77 Phil. 152 [1946].)

(2) Shares of all co-owners sold. — The provision covers the casewhere some or one of the co-owners sell(s) their/his share(s) inthe property owned in common but not the case where all the co-owners have sold their shares. (Tan Queto vs. Candongo, 106SCRA 199 [1981].)

(3) Thing owned in common had been offered for sale by all co-own-ers. — Neither can the right be invoked where the petitioners,together with the other co-owners, had previously offered for salethe entire property and after the respondent agreed to purchasethe same and advanced a considerable amount of money, saidpetitioners wanted to renege on their agreement to sell and in-stead, offered to redeem from the respondent portion of the prop-erty sold by the other co-owners to the respondent. (Dominguezvs. Lee, 155 SCRA 703 [1987].)

Price of redemption.

(1) Reasonable price. — The law requires the redemptioner topay only a reasonable price if the price of the alienation is grosslyexcessive. This is to prevent collusion between the buyer and theselling co-owner. The right of the redemptioner to pay a reason-able price under Article 1620 does not excuse him from the dutyto make proper tender of the price that can be honestly deemedreasonable under the circumstances, without prejudice to finalarbitration by the courts, nor does it authorize said redemptionerto demand that the vendee accept payment by installments.(Torrijos vs. Crisologo, 6 SCRA 186 [1962].) There is no legal re-


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demption in case of a mere least. (De La Cruz vs. Marcelino, 84Phils. 709 [1949]; Fernandez vs. Terun, 391 SCRA 653 [2002].)

(2) Price stated in the deed of sale. — The practice of understat-ing the consideration of transactions for the purpose of evadingtaxes and fees due the government is violative of public policyand injurious to public interest and must be condemned and theparties guilty thereof must be made to suffer the consequences oftheir ill-advised agreements to defraud the State. In a case whereonly P30,000 was the price stated in the deed of sale of the inter-est of a co-owner in a piece of land “to minimize the payment ofthe registration fees, stamps and sales tax,” the court ruled thatthe co-owner exercising the right of legal redemption should payonly P30,000, although much more had been paid by the buyer.(Doromal vs. Court of Appeals, 66 SCRA 575 [1975].)

(3) Amount actually paid by the buyer. — On the other hand, ifby false representations the buyer obtains from the redemptioneran amount (e.g., P100,000) greater than the price which he actu-ally paid (e.g., P80,000), the co-owner who made the repurchasecan recover from the buyer the difference (P20,000) in an appro-priate action. (see Lim Tuico vs. Cu Unjieng, 21 Phil. 493 [1912].)

Purpose of the grant of rightto co-owners.

The purpose of the law in establishing the right of legal re-demption between co-owners is to reduce the number of partici-pants until the community is done away with, as being a hin-drance to the development and better administration of the prop-erty. This reason exists while the community subsists and theparticipants continue to be so whether they be the original co-owners or their successors. (Viola and Roura vs. Tecson, 43 Phil.808 [1922]; see Estrada vs. Reyes, 33 Phil. 31 [1915]; Caram vs.Court of Appeals, 101 Phil. 315 [1957].)

ART. 1621. The owners of adjoining lands shallalso have the right of redemption when a piece of ru-ral land, the area of which does not exceed one hec-tare, is alienated, unless the grantee does not ownany rural land.

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447

This right is not applicable to adjacent lands whichare separated by brooks, drains, ravines, roads andother apparent servitudes for the benefit of other es-tates.

If two or more adjoining owners desire to exercisethe right of redemption at the same time, the owner ofthe adjoining land of smaller area shall be preferred;and should both lands have the same area, the onewho first requested the redemption. (1523a)

Right of legal redemption of adjacentowners of rural lands.

The following are the requisites for the exercise of the rightunder this article:

(1) Both the land of the one exercising the right of redemp-tion and the land sought to be redeemed must be rural;

(2) The lands must be adjacent;

(3) There must be an alienation;

(4) The piece of rural land alienated must not exceed one (1)hectare;

(5) The grantee or vendee must already own any other ruralland; and

(6) The rural land sold must not be separated by brooks,drains, ravines, roads and other apparent servitudes from theadjoining lands.

The lands mentioned in paragraph 2 of Article 1621 are notreally adjacent.

When the land exceeds one (1) hectare, the adjacent ownersare not given the right of legal redemption because this maylead to the creation of big landed estates. (10 Manresa 372.) Theright cannot be exercised against a vendee if he is also an adja-cent owner. The last paragraph of Article 1621 refers to a situa-tion where the vendee of a piece of rural land is not an adjoiningowner.


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ILLUSTRATIVE CASES:

1. Party who has the burden of proving existence of barrier be-tween land sought to be redeemed and land of one who wants to re-deem.

Facts: It is not disputed that the land sought to be redeemedadjoins that of X, who seeks to repurchase the property in theexercise of his legal right of redemption in accordance with firstparagraph of Article 1621, that it is rural and has an area of notmore than one (1) hectare, and that its purchaser already ownsor is a co-owner of another rural land.

Issue: Is it incumbent upon X to prove that his land and theone he seeks to redeem are not separated by any of the barriersmentioned in the second paragraph of Article 1621?

Held: No. Having proved that his land and that which heseeks to redeem are contiguous, X should not be called upon toprove the contrary by showing that the two estates are sepa-rated by a brook, drain, ravine, etc. The one called upon to provethe existence of a barrier between two estates is he who wantsto defeat the right of redemption on the ground that the twoestates are not contiguous to each other. (Maturan vs. Gullas, 94Phil. 701 [1954].)

———— ———— ————

2. Right of redemption by adjacent owner against vendee whois also an adjacent owner.

Facts: S sold to B, an adjacent owner, a parcel of rural land.B bought the land for the purpose of having an egress from hisland to a road. C, another adjacent owner, seeks to redeem theland sold to B.

Issue: Has C the right to exercise the right of redemptiongranted to an adjacent owner?

Held: No. The right of redemption of adjacent owners can-not be exercised by any of them among themselves, but onlyby them against a stranger, who acquires from any one of themby purchase or gift, in payment, or by any other title for value,a rural estate of the area fixed by law. (Del Pilar vs. Catindig, 35Phil. 263 [1916].)

Note: The last paragraph of Article 1523 of the old CivilCode, except for a slight change in wordings, is the same asthat of Article 1621 of the new Civil Code. The Supreme Court

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449

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

Meaning of rural lands.

The word “rural” has been defined as relating to or constitut-ing tenement in land adopted and used for agricultural or pasto-ral purposes. It is one which, regardless of site, is principally usedfor the purpose of obtaining products from the soil as opposed tourban lands, which are principally for the purpose of residence.(Fabia vs. Intermediate Appellate Court, 133 SCRA 364 [1984],citing 3 Castan 124.)

Use of property a determining factor.

The above definition is correct insofar as the word is ordinar-ily and commonly used or understood. However, in giving anadjoining owner the right to redeem “a piece of rural land,” theword “rural,” as used in Article 1621, must be construed in con-sonance with the meaning intended by the framers of the law. Thereason for the law in question is to foster the development of ag-ricultural areas by adjacent owners who may desire the increasefor the improvement of their own land. (infra.)

In view of the legislative objective, the “use” of property foragricultural purposes is essential in order that the same may becharacterized as rural land for purposes of legal redemption un-der Article 1621. The use and destination of the land and the cus-toms of each town will be the data that ought to be taken intoaccount in order to decide firmly the cases where the qualifica-tion appears doubtful. (Ibid., citing 10 Manresa 372.)

Preference as between two or moreadjacent owners of rural lands.

In case two or more adjacent owners desire to exercise the rightof redemption, the law gives preference to the owner of the ad-joining land of smaller area but if both lands have the same area,to the one who first requested the redemption.

Under Article 1620, the co-owners exercise their right of re-demption pro rata.


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Purpose of the grant of right to ownersof adjoining rural lands.

(1) To benefit adjacent owners and public weal as well. — Theobject of the lawmaker in allowing the redemption by adjacentowners is to prevent an adjoining real estate belonging to anotherowner or owners, the area of which does not exceed one hectare,from passing into the hands of a person other than someoneamong the adjacent owners whereby the property of the latterwould be divided without benefit to the public weal and perhapsto the prejudice of the adjacent owners themselves who are inter-ested in preserving the integrity of their respective properties andmaking use of the alienated property for the improvement anddevelopment of their own lands. (Del Pilar vs. Catindig, 35 Phil.263 [1916].)

(2) To avoid difficulties in cultivation. — “An estate of not morethan a hectare in area does not, as a general rule, produce enoughto keep one family; its cultivation cannot be accomplished eco-nomically, as the agricultural implements used have to be broughtin across lands belonging to other owners, and the same may besaid with regard to the gathering and transportation of the pro-duce. All these difficulties disappear if on the sale of the estate, itis purchased by one of the adjacent owners whereby the publicinterest is favored, because the production increases, the privateinterests of the redemptioner are respected, and no ostensibleharm is occasioned either on the vendor or the purchaser.” (Ibid.,quoting 10 Manresa 358.)

(3) To protect agriculture. — The intention of the law in givingthe right of redemption is to protect agriculture, by the union ofsmall agricultural lands and those adjoining thereto under onesingle owner for their better exploitation. If the land adjacent tothat which is sought to be redeemed is not agricultural, then theredemption is in vain — it does not answer the purpose behindthe law. (Cortes vs. Flores, 47 Phil. 992 [1925]; Fabia vs. Interme-diate Appellate Court, 133 SCRA 364 [1984].) Both the land of theone exercising the right and the adjacent property sought to beredeemed should be rural or destined for agricultural exploita-tion; otherwise, there is no right of redemption.

Art. 1621

451

In short, the purpose is to encourage the maximum develop-ment and utilization of agricultural lands. (Ortega vs. Orcine, 38SCRA 276 [1971].)

ART. 1622. Whenever a piece of urban land whichis so small and so situated that a major portion thereofcannot be used for any practical purpose within a rea-sonable time, having been bought merely for specu-lation, is about to be re-sold, the owner of any adjoin-ing land has a right of pre-emption at a reasonableprice.

If the re-sale has been perfected, the owner of theadjoining land shall have a right of redemption, alsoat a reasonable price.

When two or more owners of adjoining lands wishto exercise the right of pre-emption or redemption,the owner whose intended use of the land in questionappears best justified shall be preferred. (n)

Rights of pre-emption and legal redemptionof adjacent owners of urban lands.

(1) Meaning. — Article 1622 recognizes two rights; namely:

(a) Pre-emption, which has been defined as the act or rightof purchasing before others. (72 C.J.S. 478.) It is exercised be-fore the sale or resale against the would-be vendor; and

(b) Redemption, which is exercised after the sale has beenperfected against the vendee. The recognition of the right ofredemption will result in the rescission of the sale.

(2) Requisites. — The conditions or requisites for the exerciseof the right of pre-emption or redemption, as the case may be, arethe following:

(a) The one exercising the right must be an adjacentowner;

(b) The piece of land sold must be so small and so situatedthat a major portion thereof cannot be used for any practicalpurpose within a reasonable time; and


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(c) Such urban land was bought by its owner merely forspeculation.

The above requisites must be alleged by the adjoining ownerin his complaint and proved by him. (Del Rosario vs. Bansil, 149SCRA 662 [1989].)

(3) Price. — The price to be paid is a reasonable price. In a case,an adjoining owner was held not entitled to redeem a lot (612 sq.meters) which was much bigger area-wise, than the lot (140 sq.meters) owned by him. (Tañedo vs. Bernad, 165 SCRA 86 [1988].)

(4) Preference as between two or more adjacent owners. — In casetwo or more adjoining owners desire to exercise the right of legalredemption, the law prefers him whose intended use of the landappears best justified. (last par.) The determinative factor is theintended use that appears best justified, and not whether the landwas acquired for speculative purposes.

ILLUSTRATIVE CASES:

1. The land in question is intended to be used by an educa-tional institution whose existing site is not enough for its needs.

Facts: The City of Manila and Arellano University enteredinto the contract of exchange whereby 5 parcels of land belong-ing to the city were ceded to the university for 3 parcels be-longing to the latter.

X brought suit, claiming the right of redemption and forpre-emption over one of the 5 city parcels with an area of 221.50square meters, adjoining X’s property and lots of the univer-sity.

Issue: Does X have the right of legal redemption under Ar-ticle 1622?

Held: No. The existence of the two conditions (Nos. 2 and3) mentioned in Article 1622 must be alleged and proved. X notonly failed to allege them but could not have proved them be-cause, in the first place, the parcel of land in question consistsof 221.50 square meters, an area bigger than the average size oflots in Manila as found by the trial court, and in the secondplace, the City of Manila did not acquire the lot by purchase.

Furthermore, it was alleged by the university that, as aneducational institution whose existing site was not enough for

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453

its needs, it could devote the said parcel to serve public inter-est, which intended use entitled the university to preferenceunder the last paragraph of Article 1622. (De Santos vs. City ofManila, 45 SCRA 40 [1972]; see De la Cruz vs. Cruz, 32 SCRA307 [1970]; Soriente vs. Court of Appeals, 8 SCRA 750 [1963];Ortega vs. Orcine, 38 SCRA 276 [1971].)

———— ———— ————

2. Part of adjoining owner’s house occupies without his faultadjoining lot sold to another adjoining owner.

Facts: Having discovered that part of her ancestral housewas erected on an adjoining lot of 59 square meters, X wantedto exercise her right of pre-emption but the lot owner asked forthe exorbitant sum of P9,000. Later, the 59 square meter lot wassold to another adjoining owner for only P1,500.

Issue: Who has a better right to the lot, X or the other ad-joining owner?

Held: X, because her intended use of the land appears bestjustified. Her house was occupying the lot through no fault onher part. (Legaspi vs. Court of Appeals, 69 SCRA 360 [1976].)

Note: In the above cases, the right of legal redemption wassought to be exercised by an adjoining owner against the vendeewho is also an adjoining owner. (see ruling in Del Pilar case,supra, as to rural lands.)

Meaning of urban land.

The term “urban,” as used in Article 1622, does not necessar-ily refer to the nature of the land itself sought to be redeemed norto the purpose to which it is somehow devoted, but to the char-acter of the community or vicinity in which it is found. In thissense, even if the land is somehow dedicated to agriculture, it isstill urban in contemplation of Article 1622, if it is located withinthe center of population or the more or less populated portion ofa city or town. (Ortega vs. Orcine, 38 SCRA 276 [1971].)

Urban and rural lands distinguished.

As it is not easy to fix with exactitude as to furnish a sure normfor all cases the line that separates the rural from the urban, thelaw has avoided any definition on this point.


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(1) As to location. — “Rural” means of, or pertaining to, thecountry as distinguished from a city or town. The word “urban”is defined as of, or belonging to, a city or town. And “rural prop-erty” is to be determined from the character of the locality, thestreets, lots, buildings, improvements, and the market value ofthe property as also of the neighboring and surrounding proper-ties. (Enriquez vs. Devanadera, [C.A.] 32 O.G. 1486; see Ortegavs. Orcine, supra.)

(2) As to purpose. — Urban lands are distinguished from ru-ral lands by their purpose or being for dwelling, industry or com-merce, and not for agricultural, fishing or timber exploitation.

A land is urban if it is principally used for residential purposes.The character of the locality, the streets, the neighboring and sur-rounding properties give a clear picture of a residential area. Truly,a residential home lot is not converted into agricultural land bythe simple reservation of a plot for the cultivation of garden cropsor the planting of bananas and some fruit trees. Nor can an or-chard or agricultural land be considered residential simply be-cause a portion thereof has been criss-crossed with asphalt andcement roads with buildings here and there.

The rule of reason based on the specific facts of each case mustbe applied. (Fabia vs. Intermediate Appellate Court, 133 SCRA 364[1984].)

Meaning of “to speculate.’’

According to Webster’s International Dictionary (2nd edition,p. 2417.), “to speculate” means: “To enter into a business transac-tion or venture from which the profits or return are conjecturalbecause the undertaking is outside the ordinary course of business,to purchase or sell with the expectation of profiting by anticipated,but conjectural fluctuations in price. Often in a somewhat depre-ciative sense, to engage in a hazardous business transaction for thechance of an unusually large profit; as to speculate in coffee, insugar, or in bank stock.” (cited in Ortega vs. Orcine, supra.)

ILLUSTRATIVE CASE:

In less than eight (8) months from date of its purchase, vendeedeveloped land into a subdivision for resale.

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455

Facts: S sold to B a 4,452-square-meter parcel of land (inIriga, Camarines Sur). C, adjoining owner of a parcel of landused as a school site, brought suit for the purpose of enforcinghis right of legal redemption. The land in question has beenfilled with earth, developed and subdivided into small lots forresidential purposes by B in less than eight (8) months from thedate when he bought it.

Issue: Is C entitled to the right of redemption under Article1622?

Held: No. An owner of an urban land may not redeem anadjoining urban property where he does not allege in his com-plaint much less prove at the trial that the latter is so small andso situated that a major portion thereof cannot be used for anypractical purpose within a reasonable time, having been boughtmerely for speculation. Considering the area of the land in ques-tion which is far from being “so small and so situated that amajor portion thereof cannot be used for any practical purpose”for, quite the contrary, it has been made a subdivision, and alsothat it cannot be said that B bought the same “merely for specu-lation” since in less than eight (8) months from the date whenhe bought it he had developed the same into a subdivision forresale, which shows that he must have had that definite purposein mind in buying the same, C cannot invoke Article 1622. Suchpurpose cannot be held as speculative. (Ortega vs. Orcine, supra.)

Purpose of the grant of right to ownersof adjoining urban lands.

Whereas, the objective of the right of redemption of adjoin-ing rural land is to encourage the maximum development andutilization of agricultural lands, the evident purpose of Article1622 is to discourage speculation in real estate and the consequentaggravation of the housing problems in centers of population.(Ibid.)

ART. 1623. The right of legal pre-emption or re-demption shall not be exercised except within thirtydays from the notice in writing by the prospectivevendor, or by the vendor, as the case may be. Thedeed of sale shall not be recorded in the Registry ofProperty, unless accompanied by an affidavit of the


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vendor that he has given written notice thereof to allpossible redemptioners.

The right of redemption of co-owners excludes thatof adjoining owners. (1524a)

Exercise of right of pre-emption or redemption.

Article 1623 stresses the need for notice in writing in the three(3) species of legal redemption mentioned in Articles 1620, 1621,and 1622.

While the co-owner’s right of legal redemption is a substan-tial right, it is exceptional in nature, limited in its duration andsubject to strict compliance with legal requirements. One of theseis that the redemptioner should tender payment of the redemp-tion money within 30 days from written notice of the sale by theco-owner. (Caro vs. Court of Appeals, 113 SCRA 10 [1982].)

One who purchases an undivided interest in a property ischarged with notice that this acquisition is subject to redemptionby any other co-owner within the statutory 30-day period. (Buttevs. M. Uy & Sons, Inc., 4 SCRA 527 [1962].) The right of redemp-tion of co-owners (Art. 1620.) is preferred over that of adjoiningowners. (Arts. 1621, 1622.) In other words, the law attaches moreimportance to the necessity to put an end to tenancy in commonthan to the purpose of encouraging the development of agricul-ture.

Under Article 484 of the Civil Code, there is co-ownershipwhenever the ownership of an undivided thing or right belongsto different persons. There is no longer co-ownership when thedifferent portions owned by different people are already con-cretely determined and separately identifiable, even if not yettechnically described. This situation makes inapplicable the pro-vision on the right of redemption of a co-owner under Article 1623.(Si vs. Court of Appeals, 342 SCRA 653 [2002].)

Period for exercise of right.

(1) Absolute and non-extendible — The period provided in theabove article is absolute. It is peremptory and non-extendible.(Cabrera vs. Villanueva, 160 SCRA 672 [1988].) In fact, there is

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much stronger reason against relaxing the period in favor of a legalredemptioner than in favor of a vendor with pacto de retro. In thelatter transaction, there is a contractual relation founded on valu-able consideration, a contract by which the party from whom therepurchase is sought has been benefited. The right of a legal re-demption is a pure creature of the law, regulated by law, andworks only one way in favor of the redemptioner. Even if theperson entitled to redeem is a minor, the running of the period isnot interrupted. (Villasor vs. Medel, 81 Phil. 546 [1948].)

(2) A condition precedent. — The thirty-day period4 is not aprescriptive period but is more a requisite or condition precedentto the exercise of the right of legal redemption. (Caro vs. Court ofAppeals, supra.) It is a period set by law to restrict the right of thepayor exercising the right of legal redemption. It is not one ofprescription. (Hermoso vs. Court of Appeals, 300 SCRA 516[1999].) In other words, if no offer is made within the prescribedperiod, no action will be allowed to enforce the right of redemp-tion. (Cabrera vs. Villanueva, supra.)

(3) Reason for rule. — The fundamental policy of the law is todiscourage the keeping for a long time of property in a state of

4Under the Code of Agrarian Reform (R.A. No. 3844, as amended, Sec. 11.), theright of pre-emption of an agricultural lessee may be exercised within 180 days fromnotice in writing which shall be served by the landowner (vendor) on all lessees affectedand the Department of Agrarian Reform. The lessee who agrees with the terms andconditions of the sale must give notice in writing to the lessor his intention to exercisehis right within the balance of 180 days. The period for the exercise of the right of legalredemption is also 180 days from notice in writing. (Sec. 12 thereof, supra.) The Code ofAgrarian Reform gives agricultural lessees a substantially longer period than that pro-vided by the Civil Code in view of the fact that because of their economic status, theymay not be able to avail of the right without securing funds from other sources, and thelonger period is given precisely to enable them to obtain legal and financial supportfrom the Department of Agrarian Reform and the Land Bank and other sources as pro-vided by the Code itself. (Lusung vs. Vda. de Santos, 118 SCRA 669 [1982].) There is nolegal provision suspending or interrupting the period for exercising the lessee’s right ofpre-emption or redemption. The right is not a matter of intent, but of making the properpayment or tender of the price within the specified period. How the lessee will raise themoney for the purpose is immaterial. Timeliness of the payment or tender is what mat-ters. (De la Merced vs. De Guzman, 160 SCRA 87 [1988].)

Note: Presidential Decree No. 27 (Tenants Emancipation Decree.) impliedly repealedthe provisions of the Code of Agrarian Reform on pre-emption and redemption insofaras rice and corn lands above seven (7) hectares are concerned. The excess areas are cov-ered by Operation Land Transfer the objective of which is to distribute land transfercertificates to the tenant farmers pursuant to the Decree.


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uncertainty, beyond the thirty-day period, a situation which ob-viously is unjust to the purchaser and prejudicial to public inter-est. (Ibid.; Manaois vs. Zamora, [C.A.] 48 O.G. 5362; Daza vs.Tomacruz, 58 Phil. 414 [1933]; Lim Tuico vs. Cu Unjieng, 21 Phil.493 [1912].) Nevertheless, in the interpretation of Articles 1620,1621, and 1622, it is always tilted in favor of the re-demptionerand against the vendee. The purpose is to reduce the number ofparticipants until the community is terminated being a hindranceto the development and better administration of the property. Itis a one-way street. It is always in favor of the redemptioner sincehe can compel the vendee to sell to him but he cannot be com-pelled by the vendee to buy the alienated property. (Hermoso vs.Court of Appeals, 300 SCRA 516 [1999].)

Notice by vendor or prospective vendor.

The period of thirty (30) days is counted from the notice inwriting given by the prospective vendor or by the vendor, as thecase may be, and not by the vendee.

(1) Reasons for rule. — The reasons for requiring the vendorto give the notice are easy to see. The seller of an undivided inter-est is in the best position to know who are his co-owners thatunder the law must be notified of the sale. Also, the notice by theseller removes all doubts as to the fact of the sale, its perfection,and its validity, the notice being a reaffirmation thereof; so thatthe party notified need not entertain doubt that the seller may stillcontest the alienation. This assurance would not exist if the no-tice should be given by the buyer. (Butte vs. M. Uy & Sons, Inc.,supra; Salantadol vs. Reyes, 162 SCRA 568 [1988].)

(2) Notice must be in writing. — The written notice requiredunder Article 1088 (supra.) and Article 1623 is indispensable. Anyother kind of notice such as verbal or by registration, or the mereknowledge of the sale, acquired in some other manner by the le-gal redemptioner, does not satisfy the statute. The written noticewas obviously exacted by the law to remove all uncertainty as tothe sale, its terms and its validity and to quiet any doubts that thealienation is not definitive. (Conejero vs. Court of Appeals, 16SCRA 407 [1978]; Mariano vs. Court of Appeals, 41 SCAD 927, 222

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SCRA 736 [1993]; see, however, Alonzo vs. Intermediate Appel-late Court, 150 SCRA 259 [1987], infra.)

(3) Form of written notice. — Jurisprudence affirms the needfor notice but its form has been the subject of varying interpreta-tions. Article 1623 does not prescribe any particular form of no-tice so long as the reasons for a written notice are present or oth-erwise satisfied. So long, therefore, as the redemptioner is in-formed in writing of the sale and the particulars thereof, the 30days for redemption start running. (Ibid.)

(a) Accordingly, the mere furnishing of the deed of sale isequivalent to giving of written notice, in a more authentic man-ner than any other writing could have done. (Ibid., Badillo vs.Ferrer, 152 SCRA 407 [1987]; see Castillo vs. Samonte, 106 Phil.1023 [1960]; Garcia vs. Calaliman, 172 SCRA 201 [1989].) Butthe mere statement in a deed of sale to the effect that the ven-dor has complied with the provisions of Article 1623 does notcomply with the required written notice where the holder ofthe right of pre-emption or redemption is not a party to thedeed of sale. (Primary Structures Corp. vs. Valencia, 409 SCRA371 [2003].)

(b) The court must not adopt a stand of having to sacri-fice substance to technicality. More so where the vendor statedunder oath in the deed of sale that notice of the sale had beengiven to prospective redemptioners in accordance with Arti-cle 1623. “A sworn statement or clause in a deed of sale to theeffect that a written notice of sale was given to possibleredemptioners or co-owners might be used to determinewhether an offer to redeem was made on or out of time, orwhether there was substantial compliance with the require-ment of Article 1623.” (Etcuban vs. Court of Appeals, 148SCRA 507 [1987].)

(c) Similarly, although Article 1623 has provided “a par-ticular method of giving notice and that notice must bedeemed exclusive” (Butte vs. M. Uy & Sons, Inc., supra.), anexception to the rule may be adopted, in view of the peculiar circum-stances of the case, to prevent manifest injustice. The only purposeof the written notice is to ensure that all the co-owners shallbe actually notified of the sale and to remove all doubt as to


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the perfection of the sale. Thus, in a case where the co-ownerwas actually present and even acted as an active intermedi-ary in the consummation of the sale of the property, it was heldthat he was and must be considered to have had actual noticeof the sale. A written notice to him as required by Article 1623was no longer necessary since he was actually aware of thesale. (Distrito vs. Court of Appeals, 197 SCRA 606 [1991].)Where the buyer took possession of the property sold imme-diately after the execution of the deed of sale in his favor andcontinued to possess the same and the fact of such possessionhad not been questioned by any of the co-owners, the require-ment in Article 1623 had been rendered inutile thereby as thelatter should be deemed to have knowledge of the sale. (Pilapilvs. Court of Appeals, 66 SCAD 178, 250 SCRA 566 [1995].)

(d) In a case, it appears that the executor of the deceasedwho had petitioned the court for authority to sell the propertyin question was granted such authority with the conformityof all the heirs. It was held that the heirs’ conformity was “ac-tually a waiver of their right of pre-emption; and, in the least,it was notice of the intention of the heirs to sell their shares,sufficient to supplement the written notice required by Arti-cle 1623 of the Civil Code.” (Seechung-Federis vs. Sunga, 134SCRA 16 [1985].)

(e) In a civil case for collection of a share in the rentals byan alleged buyer of a co-owned property, the receipt of a sum-mons by a co-owner has been held to constitute actual knowl-edge of the sale. On that basis, the co-owner may exercise theright of redemption within 30 days from finality of the deci-sion. (Francisco vs. Boiser, 127 SCAD 198, 332 SCRA 792[2000].) Similarly, a co-owner was deemed to have been givennotice of sale to the respondents by the execution and signingof the deed of extra-judicial partition and exchange of shares.(Fernandez vs. Tarun, 391 SCRA 653 [2002].)

(f) The written notice of sale is mandatory. Notwithstand-ing actual knowledge of a co-owner, the latter is still entitledto a written notice from the selling co-owner in order to re-move all uncertainties about the sale, its terms and conditions,as well as its efficacy and status. (see Cabrera vs. Villanueva,

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160 SCRA 672 [1988]; Cornejero vs. Court of Appeals, supra.)Even in Alonzo vs. Intermediate Appellate Court (infra.), the Su-preme Court made it clear that it was not reversing the pre-vailing jurisprudence but merely adopting an exception to thegeneral rule in view of the peculiar circumstances of the case.In Alonzo, the right to legal redemption was invoked severalyears, not just days or months after the consummation of thecontract of sale. The complaint for legal redemption itself wasfiled more than 30 years after the sale was concluded. (Verdadvs. Court of Appeals, 70 SCAD 482, 256 SCRA 593 [1996]; seePrimary Structures Corp. vs. Valencia, 409 SCRA 371 [2003].)

In Si vs. Court of Appeals (135 SCAD 754, 342 SCRA 653 [2000].),the Supreme Court, made a contrary ruling, to wit: “Co-ownerswith actual notice of the sale are not entitled to written notice. Awritten notice is a formal requisite to make certain that the co-owners have actual notice of the sale to enable them to exercisetheir right of redemption within the limited period of thirty days.But where the co-owners had actual notice of the sale at the timethereof and/or afterwards, a written notice of a fact alreadyknown to them, would be superfluous. The statute does not de-mand what is unnecessary.’’

(4) Contents of written notice of sale. — The notice in writingwhich Article 1623 requires to be made is a notice not only of aperfected sale but of the actual execution and delivery of the deedof sale. This is implied from the second sentence of Article 1623.A sale may not be presented to the register of deeds for registra-tion unless it be in the form of a duly executed public instrument.Moreover, the law prefers that all the terms and conditions of thesale should be definite and in writing. (see Doromal vs. Court ofAppeals, 66 SCRA 575 [1975].) Note that Article 1623 merely pro-vides that a deed of sale shall not be recorded in the Registry ofProperty unless accompanied by an affidavit that a written no-tice has been given to all possible redemptioners. It does not statethat by reason of such lack of notice the sale shall become void.(Fernandez vs. Tarun, 391 SCRA 653 [2002].)

(5) Notice by any other insufficient. — The notice required byArticle 1623 must be given by the vendor (or prospective vendor)and by nobody else. This is clear from Article 1623 unlike Article


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1524 of the former Civil Code which did not specify who mustgive the notice.

ILLUSTRATIVE CASE:

Notice of sale of co-owner’s share in a property was sent by thevendee and not by the co-owner-vendor.

Facts: A, B, C, D, and E are co-owners of four (4) parcels ofland. E without the knowledge of the other co-owners, sold onAugust 8, 1986 her 1/5 share for P10,000.00 to respondent X.On August 5, 1992, petitioner D received summons, with a copyof the complaint filed by X demanding her share in the rentalsbeing collected by D from the tenants of the property. D theninformed X that she was exercising her right of redemption asco-owner of the subject property.

Issue: Whether the letter of May 30, 1992 sent by X to D onthe same date notifying her of the sale on August 8, 1986 of F’s1/5 share of the property to X, containing a copy of the deed ofsale, can be considered sufficient compliance with the noticerequirement of Article 1623 for the purpose of legal redemp-tion, and, therefore, the 30-day period of redemption shouldbe counted from said date and from August 5, 1992.

Held: (1) Notice must be given by the vendor. — The notice sentby the vendee (X) to a co-owner (D) cannot substitute for thatrequired to be given by the vendor (E) or prospective vendor.

“In Etcuban vs. Court of Appeals (48 SCRA 507 [1987].), no-tice to the co-owners of the sale of the share of one of them wasgiven by the vendees through their counterclaim in the actionfor legal redemption. Despite the apparent meaning of Art. 1623,it was held in that case that it was ‘of no moment’ that the no-tice of sale was given not by the vendor but by the vendees. ‘Solong as the [co-owner] is informed in writing of the sale andthe particulars thereof, the 30 days for redemption start run-ning, and the redemptioner has no cause to complain,’ so itwas held. The contrary doctrine of Butte vs. Manuel Uy and Sons,Inc. was thus overruled sub silencio.

However, in the later case of Salatandol vs. Retes, decided ayear after the Etcuban case, the Court expressly affirmed theruling in Butte that the notice required by Art. 1623 must begiven by the vendor. In Salatandol, the notice given to theredemptioner by the Register of Deeds of the province wherethe subject land was situated was held to be insufficient.’’

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(2) Return to ruling in Butte vs. Manuel Uy & Sons, Inc., proper.— “There was thus a return to the doctrine laid down in Butte.That ruling is sound. In the first place, reversion to the rulingin Butte is proper. Art. 1623 of the Civil Code is clear in requir-ing that the written notification should come from the vendoror prospective vendor, not from any other person. There is,therefore, no room for construction. Indeed, the principal dif-ference between Art. 1524 of the former Civil Code and Art.1623 of the present one is that the former did not specify whomust give the notice, whereas the present one expressly saysthe notice must be given by the vendor. Effect must be given tothis change in statutory language.

In the second place, it makes sense to require that the no-tice required in Art. 1623 be given by the vendor and by nobodyelse. As explained by this Court through Justice J.B.L. Reyes inButte, the vendor of an undivided interest is in the best positionto know who are his co-owners who under the law must benotified of the sale. It is likewise the notification from the seller,not from anyone else, which can remove all doubts as to the factof the sale, its perfection, and its validity, for in a contract of sale,the seller is in the best position to confirm whether consent tothe essential obligation of selling the property and transferringownership thereof to the vendee has been given.’’

(3) Notice, however, by vendor no longer necessary. — “Now,it is clear that by not immediately notifying the co-owner, avendor can delay or even effectively prevent the meaningfulexercise of the right of redemption. In the present case, for in-stance, the sale took place in 1986, but it was kept secret until1992 when vendee (herein respondent) needed to notify peti-tioner about the sale to demand 1/5 rentals from the propertysold. Compared to serious prejudice to petitioner’s right of le-gal redemption, the only adverse effect to vendor Adela Blasand respondent-vendee is that the sale could not be registered.It is non-binding, only insofar as third persons are concerned.It is, therefore, unjust when the subject sale has already beenestablished before both lower courts and now, before this Court,to further delay petitioner’s exercise of her right of legal re-demption by requiring that notice be given by the vendor be-fore petitioner can exercise her right. For this reason, we rulethat the receipt by petitioner of summons in Civil Case No. 15510on August 5, 1992 constitutes actual knowledge on the basis ofwhich petitioner may now exercise her right of redemptionwithin 30 days from finality of this decision.’’


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(4) Need for written notification may be dispensed with. — “Ourruling is not without precedent. In Alonzo vs. Intermediate Ap-pellate Court (150 SCRA 259 [1987].), we dispensed with the needfor written notification considering that the redemptioners livedon the same lot on which the purchaser lived and were thusdeemed to have actual knowledge of the sales. We stated thatthe 30-day period of redemption started, not from the date ofthe sales in 1963 and 1964, but sometime between those yearsand 1976, when the first complaint for redemption was actu-ally filed. For 13 years, however, none of the co-heirs moved toredeem the property. We thus ruled that the right of redemp-tion had already been extinguished because the period for itsexercise had already expired.’’

(5) Receipt by D of summons amounted to actual knowledge. —“In the present case, as previously discussed, receipt by peti-tioner of summons in Civil Case No. 15510 on August 5, 1992amounted to actual knowledge of the sale from which the 30-day period of redemption commenced to run. Petitioner haduntil September 4, 1992 within which to exercise her right oflegal redemption, but on August 12, 1992 she deposited theP10,000.00 redemption price. As petitioner’s exercise of saidright was timely, the same should be given effect.’’ (Franciscovs. Boiser, 127 SCAD 198, 332 SCRA 792 [2000].)

How right exercised.

(1) Consignation in court. — In exercising the right to redeem,the redemptioner may go to the court directly, and practicallymake the offer to repurchase through it. The reason for this is thatthe redemptioner might not know the vendee’s whereabouts orthe latter might even conceal himself to prevent redemption. (seeDe la Cruz vs. Marcelino, 84 Phil. 709 [1949]; Torio vs. Del Rosario,93 Phil. 800 [1953].)

Consignation is not required to preserve the right of redemp-tion as a mere tender of payment is enough if made on time. It isnot necessary because the tender of payment is not made to dis-charge an obligation but to enforce or exercise a right. (Morenovs. Court of Appeals, supra.)

There is actually no prescribed form for an offer to redeem tobe properly effected. Hence, it can either be through a formal ten-der with consignation, or by filing a complaint in court coupled

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with consignation of the redemption price within the prescribedperiod. Either of the two modes is a condition precedent to a validexercise of the right of legal redemption. (Lee Chuy Realty Corp.vs. Court of Appeals, 66 SCAD 203, 250 SCRA 596 [1995].)

(2) Tender of price. — That the legal redemptioner is only re-quired to pay a reasonable price is no obstacle to the requirementof tender. The statutory period fixed for the exercise of the rightof legal redemption would be rendered meaningless and of easyevasion, unless the redemptioner is required to make an actualtender in good faith of what he believes to be the reasonable priceof the land sought to be redeemed.

Unless tender or consignation is made requisite to the validexercise of the right to redeem everytime redemption is attempted,a case must be filed in court to ascertain the reasonable price. Onthe other hand, a prior tender by the redemptioner of the pricehe considers reasonable affords an opportunity to avoid litigation,for the landowner may well decide to accept a really reasonableoffer, considering that he would thereby save the attorney’s feesand the expenses of protracted litigation. (see Basbas vs. Entena,28 SCRA 665 [1969].)

ILLUSTRATIVE CASES:

1. Co-heirs with actual notice of sales invoked right of redemp-tion 14 years after the sales.

Facts: A, B, C, D, and E, brothers and sisters, inherited inequal pro indiviso shares a parcel of land. On March 15, 1963, Asold his undivided share to E and F by way of absolute sale.One year later, on April 22, 1964, B sold her own share to thesame vendees who afterwards occupied an area correspond-ing to the portions sold to them, enclosing the same with a fence.In 1975, with the consent of E and F, their son H and his wifebuilt a semi-concrete house on a part of the enclosed area.

On May 22, 1977, C filed her complaint invoking her rightof redemption. C lived on the same lot, which consisted of only604 square meters, including the portions sold to E and F andknew that the area occupied by the petitioners had been pur-chased by them from the other co-heirs, A and B.

Issue: In the absence of a written notice, did the actualknowledge of the sales satisfy the requirements of Article 1623?


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Held: Yes. Strictly applied and interpreted, Articles 1088 (su-pra.) and 1623 can lead to only one conclusion, to wit: that inview of such deficiency, the 30-day period for redemption hadnot begun to run, much less expired in 1977.

It is a cardinal rule that in seeking the meaning of the law,the concern of the judge should be to discover in its provisionsthe intent of the lawmaker. Unquestionably, the law shouldnever be interpreted in such a way as to cause injustice as thisis never within the legislative intent. To be sure, there are somelaws that, while generally valid, may seem arbitrary when ap-plied in a particular case because of its peculiar circumstances.In such a situation, the court is not bound to apply them just thesame, in slavish obedience to their language. What it must doinstead is find a balance, a balance between the word and thewill, that justice may be done even as the law is obeyed. Whilea court may not read into the law a purpose that is not there, itnevertheless has the right to read out of it the reason for its en-actment. As courts both of law and justice, courts apply the lawwith justice.

In requiring written notice, the law seeks to insure that theredemptioner is properly notified of the sale and to indicatethe date of such notice as the starting time of the 30-day periodof redemption. Considering the shortness of the period, it isreally necessary, as a general rule, to pinpoint the precise dateit is supposed to begin, to obviate any problem of alleged de-lays, sometimes consisting of only a day or two. The instantcase presents no such problem because the right of redemptionwas invoked not days but years after the sales were made in1963 and 1964, 13 years after the first sale and 14 years after thesecond. The co-heirs were undeniably informed of the sales al-though no notice in writing was given them. The 30-day pe-riod began and ended during the 14 years between the sales inquestion and the filing of the complaint for redemption in 1977,without the co-heirs exercising their right of redemption.

By requiring written proof of such notice, the court wouldbe closing its eyes to the obvious truth in favor of their palpa-bly false claim in ignorance, thus exalting the letter of the lawover its purpose. They were actually informed, although not inwriting, of the sales made in 1963 and 1964, and such noticewas sufficient. The De Cornejo and Butte doctrines are not aban-doned. An exception is simply adopted in view of the peculiarcircumstances of the case. (Alonzo vs. Intermediate Appellate Court,150 SCRA 259 [1987].)

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———— ———— ————

2. Petitioners orally offered to redeem within the period fixedby law but their lawyer, coursed through a lawyer, offering to redeemwas made several months after notice of the sale.

Facts: The land in question is owned in common by CHwho owns 2/3 and the heirs of EH. There has been no subse-quent distribution among the co-heirs of their specific shares.Neither was there a deed of partition among the co-owners.Two of the heirs (who are brothers) executed a deed of salecovering their undivided shares in favor of BP, describing them-selves as ‘co-owners’ who “have agreed to sell, transfer andconvey x x x all our shares, rights and interests over the above-described parcel of land.’’ The petitioners (co-heirs, their motherand sister) who are their mother and sister had notice of thesale in January, 1984 and considering that their letter, offeringto redeem the property was made only in September 1984, theCourt of Appeals was of the view that the action to enforceredemption had prescribed. As found, however, by the trialcourt, the petitioners immediately started negotiations with B.P.to redeem the alienated shares. At this time, BP had not yetcompleted payment for the shares.

Issue: Could the petitioners still exercise the right of redemp-tion?

Held: Yes. (1) Period of legal redemption not a prescriptive pe-riod. — “It was error for the respondent court to rule that theright of the petitioners to redeem the alienated share had longprescribed. This finding fails to take into account that the pe-riod of legal redemption is not a prescriptive period. It is a con-dition precedent to the exercise of the right of redemption. It isa period set by law to restrict the right of the person exercisingthe right of legal redemption. It is not one of prescription.’’

(2) Sale was deliberately hidden from petitioners. — “The writ-ten notice required by Article 1623 of the Civil Code was en-acted to remove all doubts and uncertainty that the alienationmay not be definite. The co-owners must know with certaintythe circumstances of the sale by his co-owners and the termsand the validity of the alienation. Only after said knowledge isthe co-owner required to exercise the right of redemption givento him by law.

While the law requires that the notice must be in writing, itdoes not state any particular form thereof, so long as the rea-


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sons for a written notice are present. The records of the caseshow that the sale of the brothers’ share was deliberately hid-den from the petitioners. For sometime after the sale, the peti-tioners were ignorant about its execution. When they some-how heard rumors about it, they had to take one step after an-other to find out if the information was true. x x x Far fromgiving the notice required by law or giving information on thehistory and details of the sale, Agustinito and Danilo gave thepetitioners the run-around until the brothers were practicallyforced to admit it and the petitioners immediately went to seeBen Palaganas. In their dialogue with Ben Palaganas, petition-ers offered to redeem the property, but this time, unlike thefirst, the offer was rejected.’’

(3) Petitioners orally offered to redeem within the period fixedby law. — “When the petitioners offered to redeem within theperiod fixed by law, they complied with the condition prec-edent to the exercise of their right. The filing of an action toenforce the redemption is not the determining point in time. InConejero vs. Court of Appeals (16 SCRA 775 [1966].), this Courtruled that a consignation of the tendered price is not necessaryas long as a valid tender is present. However, the offer to re-deem is indispensable. Considering the indignation and thewrath of the petitioners directed at the two brothers for theiracts of alienating an undivided portion of the property, despitethe earlier redemption of the sale sold in 1979, there can be noquestion about the willingness and capability of the petition-ers to buy back the shares sold in 1980.’’

(4) Interpretation in applying Article 1623. — “In applyingArticle 1623 of the Civil Code on the exercise of legal redemp-tion to certain facts, the interpretation must be in favor of jus-tice and equity. This Court explained –– ‘x x x. We test a law byits result. A law should not be interpreted so as not to cause aninjustice x x x. There are laws which are generally valid butmay seem arbitrary when applied in a particular case becauseof its peculiar circumstances. We are not bound to apply themin slavish obedience to their language.’

Whether it is the vendees who will prevail as in the Alonzodoctrine, or the redemptioners as in this case, the righting ofjustice is the key to the resolution of the issues.

The standards and conditions of legal redemption providedunder Article 1623 of the Civil Code have not been met in this

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petition. Furthermore, there is the fact that justice and equity,as the law provides, are also on the side of the petitioners. Aswe said, the righting of an injustice is the key to the resolutionof this case and thus would be the end result of our decision.’’

(5) Petitioners made investigation to confirm their hearsayknowledge about the transaction. — “From the records, one getsthe impression that the two brothers, Agustinito and Danilo,were irresponsible and self-centered, failing to consider thewishes of their mother. x x x Again, we reiterate the salient factthat Clarita Carin, their mother, and Victoria Hermoso, theirsister, were kept in the dark about the sale. Considering thefactual background of this case, the honorable and expectedstep for the Palaganas was to inform the petitioners about theaction taken by Agustinito and Danilo. Instead, as the recordreveals the parties to the sale concealed the transaction frompetitioners for four (4) years. It was only after hearing rumorsabout the sale when petitioners started to investigate and searchfor evidence to confirm their hearsay knowledge about thetransaction. Even then, the two brothers and the Palaganasesgave them a hard time.’’

(6) BP clan were in bad faith. — “The Palaganas clan knewall along the strong feelings of the petitioners against the al-ienation of share in the still undivided property. This was theirsecond attempt to buy the property. As a matter of fact, theyknew that in 1979 when the land was first sold, the petitionersimmediately took steps to cancel the sale upon discoverythereof. In 1980, the private respondents and Ben Palaganasstill did exactly what the petitioners vigorously opposed anddid not want to happen. They also hid the sale from the peti-tioners until confronted with facts that they could no longerhide or deny. x x x There can be no doubt that the Palaganasclan were in bad faith at the time they bought the disputedproperty from the Hermoso brothers. We cannot thus close oureyes to the injustice which would befall the petitioners consid-ering that this is not the first time that they have expressed theirdesire to redeem the property sold by the Hermoso brothers.Under the circumstances, it is just and equitable to rule in favorof the exercise of legal redemption.’’ (Hermoso vs. Court of Ap-peals, 300 SCRA 516 [1999].)

— oOo —


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Chapter 8

ASSIGNMENT OF CREDITS AND OTHERINCORPOREAL RIGHTS

ART. 1624. An assignment of credits and other in-corporeal rights shall be perfected in accordance withthe provisions of article 1475. (n)

Assignment of credit defined.

Assignment of credit is a contract by which the owner (assignor/creditor) of a credit and other incorporeal rights transfers, eitheronerously or gratuitously, to another (assignee) his rights andactions against a third person (debtor).

It is the process of transferring the right of the assignor to theassignee who would then be allowed to proceed against thedebtor1 for the enforcement or satisfaction of the credit to the sameextent as the assignor could.

Where the assignment is on account of pure liberality on thepart of the assignor, the rules on donation would be pertinent;where valuable consideration is involved, the assignment partakesof the nature of a contract of sale or purchase. (Nyco Sales Corpo-ration vs. BA Finance Corporation, 200 SCRA 637 [1991]; ProjectBuilders, Inc. vs. Court of Appeals, 149 SCAD 322, 358 SCRA 626[2001].)

Nature of assignment of credit.

(1) Assignment of credit and other incorporeal rights is a con-sensual, bilateral, onerous, and commutative or aleatory contract.

1Assignment of receivables is a commonplace commercial transaction today. It isan activity or operation that permits the assignee to monetize or realize the value ofreceivables before the maturity thereof. (Atok Finance Corporation vs. Court of Ap-peals, 41 SCAD 450, 222 SCRA 232 [1993].)

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(2) The assignment involves no transfer of ownership butmerely effects the transfer of rights which the assignor has at thetime to the assignee. (Casabuena vs. Court of Appeals, 91 SCAD933, 286 SCRA 594 [1998].) As a consequence of the assignment,the third party (assignee) steps into the shoes of the original credi-tor (assignor) as a subrogee of the latter. (see South City Homes,Inc. vs. BA Finance Corporation, 159 SCAD 880, 371 SCRA 603[2001].)

(3) It may be done gratuitously (i.e., by donation) or onerously.If done onerously (i.e., exchange, dacion en pago), whatever maybe the legal cause, it is really a sale. Thus, the subject matter is thecredit or right assigned; the consideration is the price paid for thecredit or right; and the consent is the agreement of the parties tothe assignment of the credit or right at the agreed price. Hence,Article 1475 is made applicable.

(a) There is, however, one important difference and, thatis, after the transfer, a definite third person is obliged; whereasin sale, the subject obliged is the whole world which mustrespect the title to the buyer. (10 Manresa 376.)

(b) In assignments, a consideration is not always a requi-site, unlike in sales. Thus, an assignee may maintain an actionbased on his title and is immaterial whether or not he paid anyconsideration therefor. Furthermore, in an assignment, title istransferred but possession need not be delivered. (PhilippineNational Bank vs. Court of Appeals, 82 SCAD 472, 272 SCRA291 [1997].)

(c) As a general rule, all principles governing sales alsoapply to this transaction. As in sale, the assignee cannot ac-quire a greater right than that pertaining to the assignor.Hence, the act of assignment cannot operate to erase liens orrestrictions burdening the right assigned. (Gonzales vs. LandBank of the Philippines, 183 SCRA 520 [1990].)

Perfection of contract for assignmentof credit.

The contract for the assignment or transfer of credit and otherincorporeal rights is perfected from the moment the parties agree

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upon the credit or right assigned and upon the price even if nei-ther has been delivered. (see Art. 1475.)

However, the assignee will acquire ownership only upon de-livery. (see Arts. 1498, par. 2 and 1501.)

Assignment distinguished from otherterms.

(1) Renunciation is the abandonment of a right without a trans-fer to another. (see Art. 1270.)

(2) Agency involves representation, not transmission whereinthe agent acts for the principal.

(3) Substitution is the change of a new debtor for the previ-ous debtor with the credit remaining in the same creditor. (see 10Manresa 377.)

(4) Subrogation is the change in the person of the creditor withthe credit being extinguished. (see 8 Manresa 400.)

ART. 1625. An assignment of a credit, right or ac-tion shall produce no effect as against third persons,unless it appears in a public instrument, or the instru-ment is recorded in the Registry of Property in casethe assignment involves real property. (1526)

Binding effect of assignment.

(1) As between the parties, the assignment is valid althoughit appears only in a private document so long as the law does notrequire a specific form for its validity. (see Art. 1356.)

(2) To affect third persons, the assignment must appear in apublic instrument, and in case it involves real property, it is in-dispensable that it be recorded in the Registry of Property. (seeLopez vs. Alvarez, 9 Phil. 28 [1908].)

(3) The assignee merely steps into the shoes of the assignor,the former acquiring the credit subject to defenses (e.g., fraud,prescription, etc.) available to the debtor against the assignor. Theassignee is deemed subrogated to the rights as well as to the ob-ligations of the seller. He cannot acquire greater rights than those

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pertaining to the assignor. (Koa vs. Court of Appeals, 219 SCRA541 [1993].) Hence, the act of assignment cannot operate to effaceliens or restrictions burdening the right assigned. (Casabuena vs.Court of Appeals, 91 SCAD 933, 286 SCRA 594 [1998].)

ART. 1626. The debtor who, before having knowl-edge of the assignment, pays his creditor shall bereleased from the obligation. (1527)

Consent of debtor to assignmentnot required.

In an assignment of credit, the consent of the debtor is notessential in order that it may produce legal effects. Hence, the dutyto pay does not depend on the consent of the debtor; otherwise,all creditors would be prevented from assigning their credits be-cause of the possibility of the debtors’ refusal to give consent.(Sison vs. Yap Tico, 37 Phil. 587 [1918]; Rodriguez vs. Court ofAppeals, 207 SCRA 553 [1992].)

The law speaks not of consent but of notice to the debtor. Thepurpose of the notice by the assignee is to inform the debtor thatfrom the date of the assignment he should make payment to theassignee and not to the original creditor. (Ibid.)

Effect of payment by debtor afterassignment of credit.

(1) Before notice. — The notice is thus for the protection of theassignee because before the said notice, payment to the originalcreditor is valid. (Elizalde & Co., Inc. vs. Biñan Transportation Co.,[C.A.] 56 O.G. 5886.) “No man is bound to remain a debtor; hemay pay to him with whom he contracted to pay; and if he paybefore notice that his debt has been assigned, the law holds himexonerated, for the reason that it is the duty of the person whohas acquired a will by transfer to demand payment of the debt togive debtor notice.” (Sison vs. Yaptico, supra.) In such case, theassignee has a right of action against the assignor, the originalcreditor. In the absence of notice, the burden of proving that thedebtor had knowledge of the assignment is on the interested partywhich is the assignee. (see 10 Manresa 377.)


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It has been held that since the law does not require the regis-tration of an assignment of a chattel mortgage, its registration doesnot ipso facto operate as constructive notice to the mortgagor. (Sisonvs. Yap Tico, supra.)

(2) After notice, or before notice but debtor had knowledge of as-signment. — Payment by the debtor to the original creditor afterthe former had received notice of the assignment, whether or nothe consented, is not valid as against the assignee. Even withoutnotice, the debtor will not also be released from his obligationshould he pay the creditor after having had knowledge of theassignment of the obligation. He thereby acts in bad faith. He canbe made to pay again by the assignee.

ART. 1627. The assignment of a credit includes allthe accessory rights, such as a guaranty, mortgage,pledge or preference. (1528)

Extent of assignment of credit.

The assignment of credit includes not only the credit itself butalso all rights accessory thereto. (see Art. 1537.) This follows thefamiliar rule that the accessory follows the principal. But the par-ties may stipulate that the accessory rights shall not be includedin the assignment.

EXAMPLE:

D owes C P1,000.00, with G as guarantor. C assigns his creditto T with notice given to D.

In case D fails to pay T, the latter may enforce the guarantyof G unless the credit was transferred with express stipulationthat G shall be released from his obligation.

ART. 1628. The vendor in good faith shall be re-sponsible for the existence and legality of the creditat the time of the sale, unless it should have beensold as doubtful; but not for the solvency of the debtor,unless it has been so expressly stipulated or unlessthe insolvency was prior to the sale and of commonknowledge.

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475

Even in these cases he shall only be liable for theprice received and for the expenses specified in No. 1of Article 1616.

The vendor in bad faith shall always be answer-able for the payment of all expenses, and for dam-ages. (1529)

Warranties of the assignor of credit.

In dation in payment or dacion en pago, as a special mode ofpayment, the debtor offers another thing to the creditor who ac-cepts it as equivalent of payment of an outstanding debt. (see Art.1245.) the undertaking really partakes of the nature of sale. Assuch, the vendor in good faith shall be responsible for the exist-ence and legality of the credit. An assignment credit which is inthe nature of sale of personal property produces the effects of adation in payment which may extinguish the obligation. How-ever, as in any other contract of sale, the vendor or assignor isbound by certain warranties. More specifically, they are providedin Article 1628 (par. 1.). (Lo vs. KJS Eco-Formwork System, Phil.,Inc., 413 SCRA 182 [2003].)

(1) When a creditor assigns his credit, he warrants only the(a) existence and (b) legality of the credit at the perfection of thecontract. He is not even liable for the warranty if the credit hadbeen sold as doubtful.

(2) There is no warranty as to the solvency of the debtor un-less it is expressly stipulated or unless the insolvency was alreadyexisting and of public knowledge at the time of the assignment.

If there be any breach of the above warranties, the assignor-vendor shall be held answerable therefor.

Liabilities of the assignor of credit.

(1) For violation of the above warranties, the liability of thevendor (assignor) in good faith is limited only to the price receivedand to the expenses of the contract, and any other legitimate pay-ments by reason of the assignment. (Art. 1616, par. 1.)

(2) The assignor in bad faith is liable not only for the paymentof the price and all expenses, but also for damages. An assignor inbad faith is one who has knowledge of any of the circumstances


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mentioned above (i.e., non-existence or illegality of the credit,insolvency of the debtor, etc.) while an assignor in good faith is onewho is ignorant of them.

EXAMPLE:

D owes C P20,000.00, which represents the purchase priceof a car bought by D. C assigns the credit to T.

C is liable to T if at the time of the assignment the credithas already prescribed, or has been paid, or is annullable andits nullity is subsequently declared because C warrants the ex-istence and legality of the credit.

But C is not liable if D cannot fulfill his obligation due to in-solvency because insolvency has nothing to do with the exist-ence and legality of the credit unless it has been so expresslystipulated, or the insolvency of D was existing prior to the as-signment and of common or public knowledge although it wasnot known to C (for C is conclusively presumed to have knownof the same), or known to C although it was not of commonknowledge.

If C lacks sufficient data to determine whether the credit isstill enforceable or not, as for instance, whether the period ofprescription was interrupted and there is a full disclosure ofsuch fact when the credit was assigned, he cannot be held re-sponsible even for the existence and legality of the credit.

ART. 1629. In case the assignor in good faithshould have made himself responsible for the sol-vency of the debtor, and the contracting parties shouldnot have agreed upon the duration of the liability, itshall last for one year only, from the time of the as-signment if the period had already expired.

If the credit should be payable within a term orperiod which has not yet expired, the liability shallcease one year after the maturity. (1530a)

Duration of assignor’s liability wheredebtor’s solvency guaranteed.

This provision does not apply if the assignor acted in bad faith.(see Art. 1628.)

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477

In case the assignor has expressly warranted the solvency ofthe debtor,2 the duration of the assignor’s liability shall be as fol-lows:

(1) If there is a stipulation, then for the term or period fixed;

(2) If there is no stipulation:

(a) for one year from the assignment of the credit whenthe period for payment of the credit has expired; or

(b) for one year after its maturity, when such period forpayment has not yet expired.

EXAMPLE:

D owes C P50,000.00 payable on July 1, 2004. C assigns hiscredits to T with C making himself responsible for the solvencyof D.

(1) If the agreement is that the duration of C’s liability shalllast for two years from July 1, 2004, then his guaranty shall lastas agreed upon.

(2) If there is no stipulation, and the assignment was madeon August 1, 2004, the liability is limited to one year from theassignment.

(3) However, if the assignment was made on June 1, 2004,the responsibility shall cease exactly one year after July 1, 2004or one year after the maturity of the debt.

Reasons for the rule.

There are two reasons for the rule contained in Article 1629.

First, to prevent fraud which may be committed by feigningthe solvency of the debtor at the time of the assignment when infact he is insolvent; and

2The liability of the assignor under Article 1629 is ex lege; it rests on the breach ofthe warranty of solvency. Where the liability is ex contractu, the limiting period set out inArticle 1629 is not applicable. Thus, in a case, although the assignor warrants the sol-vency of the debtors under the deed of assignment, it also binds itself to become solidarilyliable with the other respondents in case of non-payment by the debtors. “The effect ofnon-payment by the original trade debtors was a breach of warranty of solvency by [theassignor], resulting in turn in assumption of solidary liability by [it] under the receiva-bles assigned. In other words, the assignor becomes a solidary debtor under the termsof the receivables covered and transferred by virtue of the Deed of Assignment.’’ (AtokFinance Corporation vs. Court of Appeals, 41 SCAD 450, 222 SCRA 232 [1993].)


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Second, to oblige the assignee to exert efforts in the recoveryof the credit and thereby avoid that by his oversight, the assignormay suffer. (10 Manresa 400-401.)

ART. 1630. One who sells an inheritance withoutenumerating the things of which it is composed, shallonly be answerable for his character as an heir. (1531)

Sale of successional or hereditaryrights.

This article refers to the sale of successional right or the rightto an inheritance before partition.

(1) Subject of sale is hereditary right, not objects which make upinheritance. — An inheritance may be sold either with specifica-tion of the properties to be alienated or without enumerating thethings comprising it, that is to say, the hereditary rights only. (Arts.1630, 1632.) What the law prohibits is the sale of a future inherit-ance, upon which no contract can be made other than those mak-ing a division inter vivos of an estate in accordance with Article1347 of the Civil Code. (Abella vs. Cinco, [C.A.] 37, O.G. 924.)Hereditary rights in an estate under judicial settlement can bevalidly sold without need for approval by the probate court. (Heirsof P. Escanlar vs. Court of Appeals, 88 SCAD 532, 281 SCRA 176[1997].)

(2) Warranties of seller. — The seller of an inheritance warrantsonly the fact of his heirship but he does not warrant the objectswhich make up his inheritance. The sale is, therefore, a sort of analeatory contract because the assignee bears the risk that the es-tate may not be sufficient to pay the obligations of the deceased.(10 Manresa 404; see Art. 2010.)

EXAMPLE:

H and I are the heirs of the estate left by D, deceased. Be-fore partition and without specifying his definite share in theinheritance, H sold his share to B for P100,000.00.

In this case, H only warrants the fact that he is an heir to D.He is not liable to B should his share after partition be less thanP100,000.00.

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479

(3) Limitation. — There is no law which prohibits an heirfrom selling his interests in an inheritance before partition (seeArt. 1088.) except that any such sale must be deemed subject tothe result of the administration proceedings and any pendinglitigation. (Beltran vs. Soriano, 32 Phil. 66 [1916].) Pursuant toArticle 774 (Civil Code), “the rights to the succession are trans-mitted from the moment of the death of the decedent.” In otherwords, the person concerned is an heir and may exercise hisrights as such, from the very moment of the death of thedecedent. (Saturnino vs. Paulino, 97 Phil. 50 [1955].)

(4) Distinguished from a waiver of hereditary rights. — Thereis a marked difference between a sale of hereditary rights and awaiver of hereditary rights. The first presumes the existence ofa contract of deed of sale between the parties. The second is,technically speaking, a mode of extinction of ownership wherethere is an abdication or intentional relinquishment of a knownright with knowledge of its existence and intention to relin-quish it, in favor of other persons who are co-heirs in the suc-cession. (Acap vs. Court of Appeals, 66 SCAD 359, 251 SCRA30 [1995].)

ART. 1631. One who sells for a lump sum the wholeof a certain rights, rents, or products, shall complyby answering for the legitimacy of the whole in gen-eral; but he shall not be obliged to warrant each ofthe various parts of which it may be composed, ex-cept in the case of eviction from the whole or the partof greater value. (1532a)

Sale of whole of certain rights, rents,or products.

In the sale of the whole of certain rights, rents, or productsfor a lump sum, the subject matter is the totality of such rights,rents, or products. As a consequence, the vendor warrants onlythe legitimacy of the whole and not the various parts of which itmay be composed. The vendor is not liable for eviction of each ofthe various parts unless the eviction involves the whole or the partof greater value.


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EXAMPLE:

P is a partner in a partnership. He sells all his interests to Bfor the lump sum of P150,000.00. Upon the dissolution of thepartnership, B received the share of P in its assets consisting ofP50,000.00, some office equipment and a car. Subsequently, thecar was recovered by C, a creditor of the partnership.

P is not liable to B because P does not warrant each of thevarious parts of his interest in the partnership but only the le-gitimacy of his rights as partner taken as a whole. But if thevalue of the car exceeds P75,000.00, P will be liable because B isevicted from “the part of greater value.”

ART. 1632. Should the vendor have profited bysome of the fruits or received anything from the in-heritance sold, he shall pay the vendee thereof, if thecontrary has not been stipulated. (1533)

Liability of vendor of inheritancefor fruits received.

Unless otherwise stipulated, the fruits of an inheritance areincluded in the sale thereof. (see Art. 1537.) If the vendor merelyreceived the fruits, he must deliver them to the vendee; if theyhave been consumed, he must reimburse the vendee; if they havebeen sold, he must deliver the price of the sale. (see 10 Manresa406.)

The liability of the vendor for anything received from the in-heritance sold is subject to any agreement to the contrary.

ART. 1633. The vendee shall, on his part, reimbursethe vendor for all that the latter may have paid for thedebts of and charges on the estate and satisfy thecredits he may have against the same, unless there isan agreement to the contrary. (1534)

Liability of vendee for debts ofand charges on estate.

Since under Article 1632 the vendor is obliged to pay thevendee the fruits or anything received from the inheritance, it is

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481

also just that the vendee be required to reimburse the vendor forwhatever the latter has paid for the debts of and charges on theestate.

The liability of the vendee for the debts and charges is like-wise subject to any contrary agreement.

ART. 1634. When a credit or other incorporeal rightin litigation is sold, the debtor shall have a right toextinguish it by reimbursing the assignee for the pricethe latter paid therefor, the judicial costs, incurred byhim, and the interest on the price from the day onwhich the same was paid.

A credit or other incorporeal right shall be consid-ered in litigation from the time the complaint concern-ing the same is answered.

The debtor may exercise his right within thirty daysfrom the date the assignee demands payment fromhim. (1535)

Legal redemption in sale of credit or otherincorporeal right in litigation.

This article is an instance of legal redemption.

The following are the requisites before the right of legal re-demption can be exercised:

(1) There must be a sale or assignment of a credit. The con-cept of sale must be understood in its restricted sense. The rightcannot be exercised if the transaction is exchange or donation (see10 Manresa 416.);

(2) There must be a pending litigation at the time of the as-signment. The complaint by the assignor must have been filed andanswered by the creditor before the sale of the credit. Article 1634applies only to a claim in litigation the meaning of which is not aclaim open to litigation, but one which is actually litigated; thatis to say, disputed or contested, which happens only after an an-swer interposed in a suit (Robinson vs. Garry, 8 Phil. 275 [1907].);

(3) The debtor must pay the assignee:


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(a) the price paid by him;

(b) the judicial costs incurred by him; and

(c) the interest on the price from the date of payment; and

(4) The right must be exercised by the debtor within thirty (30)days from the date the assignee demands (judicially or extra-ju-dicially) payment from him. A debtor who has paid the fullamount of a litigated credit to one who has purchased such liti-gated credit cannot counterclaim the difference between theamount paid by such debtor and the amount paid by the pur-chaser of such litigated credit unless such debtor shall make useof his right to do so within the prescribed period.

ILLUSTRATIVE CASES:

1. Mortgagee assigned its rights as such and as highest bidderin foreclosure sale of mortgaged land while there was a pending casebetween unpaid seller of the land and mortgagor (buyer).

Facts: S sold several lots to B, who, after securing registra-tion of said lots in her name, mortgaged them to C (bank). Bfailed to complete payment of the purchase price. The sale wasrescinded by the court without prejudice to the right of C, whichwas adjudged a mortgagee in good faith. C foreclosed the mort-gage. At the public auction, C was the highest bidder. Subse-quently, C assigned its rights as mortgagee and as the highestbidder to D (NIDC).

S filed a motion to cancel the encumbrance of D from thecertificates of title concerned which was granted by the lowercourt on the ground that C “should have submitted the deed ofassignment for approval of the court knowing that the subjectmatter of said deed is in custodia legis and so that the consent ofS could be taken.”

Issue: Upon the facts, has a valid assignment been made byC to D of its rights over the lots in question?

Held: Yes. There is nothing in our statutes or jurisprudencewhich prohibits a creditor without the consent of the debtorfrom making an assignment of his credit and the rights acces-sory thereto; and, certainly, an assignment of credit and its ac-cessory rights does not at all obliterate the obligation of thedebtor to pay, but merely puts the assignee in the place of hisassignor. Indeed, Article 1634 definitely recognizes the likeli-

Art. 1634

483

hood that credits and other incorporeal rights in litigation maybe assigned pendente lite and, in such event, provides that thedebtor may extinguish his obligation by making appropriatereimbursement to the assignee.

In other words, an assignment of credit pendente lite doesnot extinguish the credit or accessory rights assigned, but sim-ply changes the bag into which the debtor must empty themoney in payment. (National Investment & Development Corp.vs. De Los Angeles, 40 SCRA 487 [1971].)

———— ———— ————

2. Plaintiff in a case, who had previously assigned in favor ofhis creditor his litigated credit in said case by a deed of assignmentwhich was duly submitted to the court, entered into a compromiseagreement thereafter releasing the defendant therein from his claimwithout notice to his assignee.

Facts: T brought an action against M for the collection of asum of money. While the case was pending resolution, T as-signed in favor of L by way of securing or guaranteeing T’sobligation to L his litigated credit against M duly submitted tothe court with notice to the parties. The lower court ruled infavor of T. Subsequently, pending resolution of the appeal of Mto the Court of Appeals, M entered into a compromise agree-ment with T wherein T acknowledged that all his claims againstM had been settled.

After the Court of Appeals rendered a decision affirming intoto the decision of the lower court, M filed a motion for recon-sideration praying that said decision be set aside, principally an-chored upon the ground that a compromise agreement was en-tered into between him and T which, in effect, released M fromliability. The validity of the guarantee or the pledge in favor ofL has not been questioned and it appears that the deed of as-signment fulfills the requisites of a valid pledge or mortgage.

Issue: Is the compromise agreement valid?

Held: No. Although T (assignor) may validly alienate thelitigated credit under Article 1634, said provision should notbe taken to mean as a grant of an absolute right on the part of Tto indiscriminately dispose of the thing or the right given assecurity. It should be read in consonance with Article 2097.3

3Art. 2097. With the consent of the pledgee, the thing pledged may be alienated bythe pledgor or owner, subject to the pledge. The ownership of the thing pledged is trans-


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Although the pledgee or assignee (L) did not ipso facto be-come the creditor of M, the pledge being valid, the incorporealright assigned by T in favor of L can only be alienated by Twith due notice to and consent of L or his duly authorized rep-resentative. To allow the assignor to dispose or alienate the se-curity without notice to and consent of the assignee will rendernugatory the very purpose of a pledge or an assignment ofcredit.

Moreover, under Article 1634, the debtor (M) has a corre-sponding obligation to reimburse the assignee (L) for the pricethe latter paid or for the value given in consideration for thedeed of assignment. Failing in this, the alienation of the liti-gated credit made by T in favor of M by way of a compromiseagreement does not bind L.

Furthermore, having knowledge of the assignment, M wasestopped from entering into a compromise agreement withoutnotice to and consent of L. More so, in the light of the fact thatno reimbursement has even made in favor of L as required un-der Article 1634. M acted in bad faith and in connivance with Tso as to defraud L in entering into the compromise agreement.(Estate of G. Litton vs. Mendoza, 163 SCRA 246 [1988].)

Purpose of grant of right to debtor.

The above provision gives an advantage to the debtor becausehe will pay less than the value of the credit assigned if he exer-cises his right to redeem the same.

The object of the law in allowing the redemption by the debtoris to avoid the purchase by the third person of credits in litiga-tions merely for speculation.

ART. 1635. From the provisions of the precedingarticle shall be excepted the assignments or salesmade:

(1) To a co-heir or co-owner of the right assigned;

(2) To a creditor in payment of his credit;

mitted to the vendee or transferee as soon as the pledgee consents to the alienation, butthe latter shall continue in possession. (n)

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485

(3) To the possessor of a tenement or piece of landwhich is subject to the right in litigation assigned.(1536)

Exceptions to debtor’s right to legalredemption.

Article 1635 enumerates three instances of assignments orsales as exceptions to the provisions of Article 1634. (see Art.1491[5].)

It must be emphasized that under both Articles 1634 and 1635,the debtor cannot redeem if the credit or other incorporeal rightis not in litigation when the same is sold.

(1) Sale to a co-heir or co-owner. — This exception is based onthe desire to do away with co-ownership or pro-indivision.Moreover, if the right of redemption is granted to the debtor, itwould not terminate litigation which is the purpose of this arti-cle because the co-owner or co-heir may still sue the debtor forthe share that corresponds to the former in the credit. (10 Manresa419.)

EXAMPLE:

D is indebted to B and C in the amount of P10,000.00. Forfailure to pay his debt, B sues D.

If B transfers his credit to C during the pendency of thelitigation, D cannot redeem.

(2) Sale to a creditor. — There is a lawful basis for the assign-ment as the assignee cannot be considered as a vendee of a rightin litigation and as a speculator. It really refers to a dation in pay-ment. (see Art. 1245; 10 Manresa 419.)

EXAMPLE:

A owes B the sum of P10,000.00 and B owes C P8,000.00.

If B assigns his credit against A to C then the subject oflitigation (between A and B), A has also no right of legal re-demption.


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(3) Sale to the possessor of property in question. — The reason forthis exception is that the assignee is moved by a desire to preservethe property and not to speculate at the expense of the debtor.

The example usually given is that where a vendee (assignee)of a property subject to a mortgage acquires the mortgage creditof the assignor (mortgage-creditor) against the vendor (mortgage-debtor). It may also refer to a purchaser of property under attach-ment who subsequently acquires the credit giving rise to the at-tachment. (Ibid., 419-420.)

EXAMPLE:

A owes B P10,000.00 which is secured by a mortgage on aland owned by A.

If A sells the land to C and B assigns his credit in litigationagainst A to C, A is not entitled to redeem.

— oOo —

Art. 1635

487

Chapter 9

GENERAL PROVISIONS

ART. 1636. In the preceding articles in this Titlegoverning the sale goods, unless the context or sub-ject matter otherwise requires:

(1) “Document of title to goods” includes any billof lading, dock warrant, “quedan,” or warehouse re-ceipt or order for the delivery of goods, or any otherdocument used in the ordinary course of business inthe sale of transfer of goods, as proof of the posses-sion or control of the goods, or authorizing or pur-porting to authorize the possessor of the documentto transfer or receive either by indorsement or by de-livery, goods represented by such document.

“Goods” includes all chattels personal but notthings in action or money of legal tender in the Philip-pines. The term includes growing fruits or crops.

“Order” relating to documents of title means anorder by indorsement on the documents.

“Quality of goods” includes their state or condi-tion.

“Specific goods” means goods identified andagreed upon at the time a contract of sale is made.

An antecedent or pre-existing claim, whether formoney or not, constitutes “value” where goods ordocuments of title are taken either in satisfactionthereof or as security therefor.

487

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(2) A person is insolvent within the meaning of thisTitle who either has ceased to pay his debts in theordinary course of business or cannot pay his debtsas they become due, whether insolvency proceedingshave been commenced or not.

(3) Goods are in a “deliverable state” within themeaning of this Title when they are in such a statethat the buyer would, under the contract, be bound totake delivery of them. (n)


This article defines or explains the various terms used in thepreceding articles governing the sale of goods. They hardly re-quire comment. The definitions in this article do not apply if thecontext or subject matter of any particular portion of the law oth-erwise requires.

(1) Goods do not include things or choses in action or negoti-able instruments.

(a) A chose in action is any claim or right which may bepleaded in a suit at law, such as a claim of reparation for a tortor quasi-delict, or a right acquired under a contract.

(b) Stock certificates have been held to be goods within themeaning of the U.S. Uniform Sales Act. (Babb & Martin, op. cit.,p. 86.)

(c) Real property is not the proper subject of a transactioninvolving a sale of goods within the definition of the term.However, growing crops or fruits which are agreed to be sev-ered under the contract of sale are treated as goods and not asinterest in realty.

(d) The U.S. Uniform Commercial Code excludes moneyfrom the term “goods” but only where money is the mediumof payment. Said another way, money in which the price is tobe paid for the goods involved, is not to be considered part ofthe goods which are the subject matter of the transaction. SaidCode (Sec. 2-105 thereof.) specifically provides that money,when treated as a commodity, is a good and the contract

Art. 1636

489

formed out of the transaction is one for the sale of goods. (1Williston, 4th ed., p. 152.)

(e) Any transaction between the parties, even if in theform of an unconditional contract to sell or even if in the formof present sale, is excluded from a sale of goods if the par-ties to the transaction intended that the transaction operateonly as a security transaction; but the provision on sales willgovern the general sales aspects of such transaction. (Ibid.,p. 176.)

(2) Ascertained goods means goods that are identified andagreed upon as forming the subject matter of the bargain.

(a) They are specific if they are identified and agreed uponat the time the contract of sale is made.

(b) If identification takes place afterwards, the goods arespecified but not specific.

(c) Existing goods (owned or possessed by the seller) mayor may not be specific.

(d) Future goods (to be manufactured or acquired by theseller after the making of the contract to sell) cannot be spe-cific. (Ibid., pp. 101-102.)

EXAMPLES:

(1) S sells to B one used X truck, Motor No. 12345. S and Bare on the truck when the bargain is made. The goods are exist-ing, ascertained, and specific.

(2) B, a retail grocer, orders 6 dozen cans of X brand toma-toes from S, a wholesale concern. S has the canned goods instock, and accepts the order but does not immediately set aside6 dozen cans. The goods are existing and unascertained. When6 dozen cans have been set aside and earmarked for B, the goodshave become ascertained or specified — not specific. (Ibid.)

ART. 1637. The provisions of this Title are subjectto the rules laid down by the Mortgage Law and theLand Registration Law with regard to immovable prop-erty. (1537a)

Art. 1637 GENERAL PROVISIONS

490 SALES

Sale of immovable subjectto registration law.

Under the Spanish Mortgage Law and the Land RegistrationLaw, the registration of documents or titles pertaining to immov-able property is the operative act that binds the property andserves as constructive notice to the public. This means that theright of third persons are not adversely affected by the sale ofimmovable property until after its registration.

The Spanish Mortgage Law has been discontinued by Presi-dential Decree No. 892. This discontinuance was reiterated inPresidential Decree No. 1529, the Property Registration Decree,which superseded Act No. 496, as amended, the Land Registra-tion Law.

(1) Under the decree, “no deed, mortgage, lease or other vol-untary instrument, except a will purporting to convey or affectregistered land shall take effect as a conveyance or bind the land,but shall operate only as a contract between the parties and asevidence of authority to the Register of Deeds to make registra-tion. The act of registration shall be the operative act to convey oraffect the land insofar as third persons are concerned.” (Sec. 51thereof.)

(2) Every conveyance, if registered, shall be constructive no-tice to all persons from the time of such registration. (Sec. 52thereof.)

(3) “The registration shall be made in the office of the Regis-ter of Deeds for the province or city where the land lies.” (Sec. 51thereof.)

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Art. 1637

491

BARTER OR EXCHANGE(Title VII, Arts. 1638-1641)

ART. 1638. By the contract of barter or exchangeone of the parties binds himself to give one thing inconsideration of the other’s promise to give anotherthing. (1538a)

Barter defined.

The contract of barter is defined by Article 1638. It is similarto sale with the only difference that instead of paying a price inmoney, another thing is given in lieu thereof. (see Art. 1468.) Acontract whereby one person transfers the ownership of non-fun-gible things to another with the obligation on the part of the lat-ter to give things of the same kind, quantity, and quality is con-sidered a barter. (Art. 1954.)

The use of the term “barter” in describing a contract is notcontrolling. (Baluran vs. Navarro, 79 SCRA 309 [1977].)

Perfection and consummationof the contract.

(1) The contract of barter is perfected from the moment thereis a meeting of minds upon the things promised by each party inconsideration of the other. (see Art. 1475.)

(2) It is consummated from the time of mutual delivery bythe contracting parties of things they promised. (Tagaytay Dev.Co. vs. Osorio, 69 Phil. 180 [1939]; Biagtan vs. Viuda de Oller, 62Phil. 933 [1936].)

491

492 SALES

ILLUSTRATIVE CASES:

1. A party to a barter issued a promissory note for the value ofthe things he promised to give.

Facts: The agreement between A and B was for A to deliversugar to B, who was to give A 50 bottles of whisky for everypicul of sugar. Because at the time B had no whisky, he signed apromissory note for the value of the whisky.

Issue: Did the contract become one of sale?

Held: The contract was still barter. The consideration forthe sugar was not cash but the whisky, and the note was ex-ecuted in consideration for the liquor. The Price Control Law(then in force) contemplated sales payable in cash. Being inderogation of a natural right, it must be construed strictly, bar-ring collusions to evade its provisions. It appeared that the trans-action was bona fide and fair, B being a manufacturer of anddealer in whisky on a large scale, and as such he needed largequantities of sugar to carry on his business. (Herrerias vs.Javellana, 84 Phil. 609 [1949].)

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2. In the contract entitled “barter,” the parties shall enjoy thematerial possession, and neither shall alienate the property received,one party even obliging himself to return the property should any ofthe children of the other need it.

Facts: Spouses A and B executed a written document enti-tled “Barter” whereby they agreed to “barter” and exchangetheir residential lot with the riceland of spouses C and D. Un-der the agreement, the parties shall enjoy the material posses-sion of their respective properties. A and B shall reap the fruitsof the riceland, while C and D shall have the right to build theirhouse on the lot, subject to the condition that should any of thechildren of A and B decide to reside in the municipality wherethe lot is located and build his house on the lot, C and D shallbe obliged to return the lot to such children, and that neitherparty shall encumber, alienate or dispose of their respectiveproperties without the consent of the other. E, a son of A and B,filed a complaint against C and D to recover the lot claimingthat he needed the property for the construction of his housethereon.

Issue: Did the contract of “barter” transfer the ownershipof the lot to C and D?

Art. 1638

493

Held: No. Contracts are not what the parties may see fit tocall them but what they really are as determined by the princi-ples of law. Thus, in the instant case, the use of the term “bar-ter” in describing the agreement is not controlling. The stipula-tions in the document are clear enough to indicate that there wasno intention at all on the part of the signatories thereto to con-vey the ownership of their respective properties. The agreementis not barter but one of or akin to usufruct (see Art. 562.) in thatall that was conveyed or transferred from one to the other is onlythe use or material possession or enjoyment of each other’s realproperty. (Baluran vs. Navarro, 79 SCRA 309 [1977].)

ART. 1639. If one of the contracting parties, hav-ing received the thing promised him in barter, shouldprove that it did not belong to the person who gave it,he cannot be compelled to deliver that which he of-fered in exchange, but he shall be entitled to dam-ages. (1539a)

Effect where giver not lawful ownerof thing delivered.

Under this provision, the aggrieved party cannot be compelledto deliver the thing he has promised (see Biagtan vs. Viuda deOller, 62 Phil. 933 [1936].) Moreover, he is entitled to claim dam-ages. The rule is analogous to Articles 1590 and 1591.

ART. 1640. One who loses by eviction the thingreceived in barter may recover that which he gave inexchange with a right to damages, or he may onlydemand an indemnity for damages. However, he canonly make use of the right to recover the thing whichhe has delivered while the same remains in the pos-session of the other party, and without prejudice tothe rights acquired in good faith in the meantime by athird person. (1540a)

Effect of eviction.

Each contracting party warrants to the other that he has rightto transfer ownership of the thing exchanged. (see Arts. 1547,1548.)

Arts. 1639-1640 BARTER OF EXCHANGE

494 SALES

In case of eviction, the injured party is given the option eitherto recover the property he has given in exchange with damagesor only claim an indemnity for damages. The right to recover is,however, subject to the rights of innocent third persons. (see Art.1385.)

ART. 1641. As to all matters not specifically pro-vided for in this Title, barter shall be governed by theprovisions of the preceding Title relating to sales.(1541a)

Applicability of provisions on sales.

Barter is a mutual sale. Each party really is both a vendor anda vendee. For this reason, the provisions on sales are also appli-cable to barter.

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Art. 1641

495

THE BULK SALES LAW(Act No. 3952, as amended.)

Section 1. This Act shall be known as “The BulkSales Law.”

Purpose of the law.

The Bulk Sales Law is designed to prevent the defrauding ofcreditors by the secret sale or disposal or mortgage in bulk of allor substantially all of a merchant’s stock of goods. (37 C.J.S. 1320.)

Scheme of the law.

The general scheme of the law is to declare such bulk salesfraudulent and void as to creditors of the vendor, or presump-tively so, unless specified formalities are observed, such as thedemanding and the giving of a list of creditors, the giving of ac-tual or constructive notice to such creditors, by record or other-wise, and the making of an inventory. (Ibid.)

The effect of the law is to create a new type or kind of fraudu-lent conveyance. (Ibid., 1324.)

Constitutionality of the law.

The Bulk Sales Law is constitutional. (Liwanag vs. Neng-hraj,40 O.G. 1441.) It does not deprive persons of their property with-out due process of law nor do they deny to such persons the equalprotection of the law.

While the Legislature may not constitutionally declare voidthat which in its nature is, and under all circumstances, entirelyhonest and harmless, yet it may, under its police powers, placesuch reasonable restrictions on the right of an owner in relation

495

496 SALES

to his property as it finds necessary to protect the interests of thepublic, or prevent frauds among individuals. (MC Daniels vs.Connely Shoe Co., 71 Pac. 37.)

Construction of the law.

The statute should be read as a whole for purposes of con-struction. As the law is of a penal character and in derogation ofthe right to alienate property without restriction, it is to be strictlyconstrued against the State and liberally in favor of the accused,and is not to be extended by construction to situations not clearlyintended thereby.

However, it should be construed and applied with a view tocure the evil at which it is aimed, which is the defrauding of credi-tors by secret bulk sales. (37 C.J.S. 1322; People vs. Wong Szu Tung,[C.A.] No. 9770-R, March 26, 1954.)

Sec. 2. Any sale, transfer, mortgage or assignmentof a stock of goods, wares, merchandise, provisions,or materials otherwise than in the ordinary course oftrade and the regular prosecution of the business ofthe vendor, mortgagor, transferor, or assignor, or anysale, transfer, mortgage or assignment of all, or sub-stantially all, of the business or trade thereto con-ducted by the vendor, mortgagor, transferor, orassignor, or of all, or substantially all, of the fixturesand equipment used in and about the business of thevendor, mortgagor, transferor, or assignor, shall bedeemed to be a sale and transfer in bulk, in contem-plation of this Act: Provided, however, That if suchvendor, mortgagor, transferor, or assignor, producesand delivers a written waiver of the provisions of thisAct from his creditors as shown by certified state-ments, then, and in that case, the provisions of thissection shall not apply.

When sale or transfer in bulk.

A sale and transfer in bulk under the Bulk Sales Law is any sale,transfer, mortgage, or assignment —

Sec. 2

497

(1) of a stock of goods, wares, merchandise, provisions, ormaterials otherwise than in the ordinary course of trade and theregular prosecution of the business; or

(2) of all or substantially all, of the business or trade; or

(3) of all or substantially all, of the fixtures and equipmentused in the business of the vendor, mortgagor transferor, orassignor. (Sec. 2.)

When sale or transfer in bulk not coveredby the Bulk Sales Law.

The Bulk Sales Law does not apply to the following:

(1) If the sale or transfer is in the ordinary course of trade andthe regular prosecution of the business of the vendor;

(2) If it is made by one who produces and delivers a writtenwaiver of the provisions of the Bulk Sales Act from his creditors(Ibid.);

(3) If it is made by an executor, administrator, receiver, as-signee in insolvency, or public officer, acting under judicial proc-ess (Sec. 8.); and

(4) If it refers to properties exempt from attachment or execu-tion. (Rules of Court, Rule 39, Sec. 12.)

Meaning of stock.

The common use of the term stock when applied to goods in amercantile house refers to that which are kept for sale. (Albrechtvs. Cudikee, 79 Pac. 628.)

Meaning of merchandise.

Merchandise must be construed to mean such things as areusually bought and sold in trade by merchants. (People’s SavingsBank vs. Ban Allsburg, 131 N.W. 101.) It means something that issold everyday, and is constantly going out of the store and beingreplaced by other goods. (Boise Credit Men’s Assoc. vs. Ellis, 133Pac. 6.)

It has been held that the sale of an entire foundry shop whichdoes not sell merchandise, but whose main business is to manu-

Sec. 2 THE BULK SALES LAW

498 SALES

facture ironworks, or processes or casts metals, together with thegoodwill and credits, equipment, tools and machineries thereof,is not covered by the law because the contents are not the “stock,goods, wares, merchandise, provisions, or materials” in bulk con-templated in Section 3 of the law. (People vs. Wong Szu Tung,[C.A.] L-9776-R, March 26, 1954.) Neither are land and buildings“goods, wares and merchandise” within the statute. (McMillanvs. Nelson, 181 N.W. 618.)

Meaning of fixtures.

The term fixtures refers to such articles of merchandise usu-ally possessed and annexed to the premises occupied by mer-chants to enable them better to store, handle, and display theirwares and which are commonly known as trade fixtures, althoughremovable without material injury to the premises at or beforethe end of tenancy. (Brown vs. Quigley, 130 N.W. 690.)

The law has reference to trade fixtures connected with thebusiness and not to the building in which the business is carriedon. (Robbins vs. Fuller, 229 S.W. 8.)

Sec. 3. It shall be the duty of every person whoshall sell, mortgage, transfer, or assign any stock ofgoods, wares, merchandise, provisions or materials,in bulk, for cash or on credit, before receiving fromthe vendee, mortgagee, or his or its agents or repre-sentatives any part of the purchase price thereof, orany promissory note, memorandum, or other evidencetherefor, to deliver to such vendee, mortgagee, oragent, or if the vendee, mortgagee, or agent be a cor-poration, then to the president, vice-president, treas-urer, secretary or manager of said corporation, or, ifsuch vendee or mortgagee be a partnership firm, thento a member thereof, a written statement sworn tosubstantially as hereinafter provided, of the namesand addresses of all creditors to whom said vendoror mortgagor may be indebted, together with theamount of indebtedness due or owing, or to becomedue or owing by said vendor or mortgagor to each of

Sec. 3

499

said creditors, which statement shall be verified byan oath to the following effect:

REPUBLIC OF THE PHILIPPINES

PROVINCE/CITY OF . . . . .

Before me, the undersigned authority, personally appeared . . . .. . . . (vendor, mortgagor, agent or representative, as the case maybe), bearing Res. Cert. No. . . . . . . . . issued at . . . . . . . on the . . . .. . day of . . . . . . . who, by me being first duly sworn, upon his oath,deposes and states that the foregoing statement contains the namesof all of the creditors of . . . . . . (vendor, or mortgagor) together withtheir address, and that the amount set opposite each of said respec-tive names, is the amount now due and owing, and which shall be-come due and owing by . . . . . . . (vendor, or mortgagor) to suchcreditors, and that there are no creditors holding claims due or whichshall become due, for or on account of goods, wares, merchandise,provisions or materials purchased upon credit or on account of moneyborrowed to carry on the business of which said goods, wares, mer-chandise, provisions or materials are a part, other than as set forthin said statement.

. . . . . . . . . . . .

Subscribed and sworn to before me this . . . . . . . . . day of. . . . . . . . 19 . . . . . . . at . . . . . . .

Sec. 4. Whenever any person shall sell, mortgage,transfer, or assign any stock of goods, wares, mer-chandise, provisions, or materials, in bulks, for cashor on credit, and shall receive any part of the purchaseprice, or any promissory note, or evidence of indebt-edness for said purchase price or advance upon mort-gage without having first delivered to the vendee ormortgagee or to his or its agent or representative, thesworn statement provided for in Section three hereof,and without applying the purchase or mortgage moneyof the said property to the pro rata payment of thebona fide claim or claims of the creditors of the ven-dor or mortgagor, as shown upon such sworn state-

Sec. 4 THE BULK SALES LAW

500 SALES

ment, he shall be deemed to have violated this Act,and any such sale, transfer or mortgage shall befraudulent and void.

Sec. 5. It shall be the duty of every vendor,transferor, mortgagor, or assignor, at least ten daysbefore the sale, transfer, or execution of a mortgageupon any stock of goods, wares, merchandise, provi-sions or materials, in bulk, to make a full detailed in-ventory thereof and to preserve the same showing thequantity and, so far as is possible with the exercise ofreasonable diligence, the cost price to the vendor,transferor, mortgagor, or assignor of each article tobe included in the sale, transfer or mortgage, andnotify every creditor whose name and address is setforth in the verified statement of the vendor, transferor,mortgagor, or assignor at least ten days before trans-ferring possession thereof, personally by or registeredmail, of the price, terms and conditions of the sale,transfer, mortgage, or assignment.

Protection accorded to creditorsby the law.

The law protects or benefits the creditors as follows:

(1) It requires the vendor, etc. to deliver to the vendee, etc. asworn written statement of the names and addresses of all credi-tors to whom said vendor, etc. may be indebted together with theamount of indebtedness due or to become due (Sec. 3.); and

(2) It requires the vendor, etc. at least ten (10) days before thesale, etc., to make a full detailed inventory showing the quantityand the cost price of the goods and to notify every creditor of theprice, terms, and conditions of the sale, etc. (Sec. 5.)

Creditors contemplated by law.

The statute contemplates not only creditors whose claims aredue but includes all persons who were creditors of the seller atthe time of the sale, although their claims had not been reducedto judgment, or were not due. But creditors whose claims came

Secs. 3-5

501

into existence subsequent to the sale are not entitled to the ben-efits of the statute. (37 C.J.S. 1532, 1535.)

Waiver and estoppel of creditors.

Creditors may waive the right to the benefit of the statute orestop themselves to claim that the sale was invalid because therequirements of statute were not complied with. (31 C.J.S. 1328.)Thus, a creditor who consents to and participates in a bulk sale inthe expectation that the proceeds thereof are to be applied to hiscredits (Polo Sav. Bank vs. Caneron, 168 N.W. 769.), or who af-firms the sale thus making it his own (Warren vs. Parlin, 206 S.W.586.), or who, after he has been notified of the sale, states that hewill look to the seller for payment and remains silent for two (2)years (Rice vs. West, 157, Pac. 1105.), cannot be heard to say thatthe sale was void.

The benefit of the statute is for those who take the steps pre-scribed thereby in order to protect their claims. But there is noestoppel unless the conduct was relied on by the other party tohis prejudice, in accordance with the rule as to estoppel gener-ally. (37 C.J.S. 1329; see Arts. 1431, 1432.)

Effects of false statements in the scheduleof creditors.

(1) Without knowledge of buyer. — If the statement is fair uponits face and the buyer has no knowledge of its incorrectness (aswhen the seller misrepresents the amount of his indebtedness),and nothing to put him on inquiry about it, he will be protectedin its purchase. (International Silver Co. vs. Hull, 79 S.E. 609.) Insuch case, the remedy of the creditor is not against the goods butto prosecute the seller criminally. (Seltzer vs. Peddi, 24 Pa. Dist.456.) It would be unreasonable to make the purchaser responsi-ble for any incorrectness in the list. (Glantz vs. Gardinc, 40 R.I. 367.)

(2) With knowledge or imputed knowledge of buyer. — If thevendee has knowledge of the false statement or the statement isdefective on its face (as when it fails to give the addresses of thecreditors), the vendee accepts it at his peril. (Fitzhugh vs. Munnel,179 Pac. 679.) The sale is valid only as between the vendor andthe vendee but void as against the creditors.

Secs. 3-5 THE BULK SALES LAW

502 SALES

(3) With names of certain creditors without notice omitted. — Ifthe list omits to name certain creditors who are not notified, thesale is void as to such creditors, whether that omission was fraudu-lent or not. (Williams vs. J.W. Crowdus Drug Co., 167 S.W. 187.) Ithas been held that a sale made of all the effects in the vendor’sstore without the buyer being furnished a sworn list of creditorsas required by Section 3 is null and void irrespective of the goodor bad faith of the buyer. (Chin Asing vs. Gongco & Co., [C.A.] 40O.G. 142.)

(4) With respect to an innocent purchaser for value from the origi-nal purchaser. — But the creditor of the vendor who fails to com-ply with the requirements of the statutes does not have the rightto pursue the property in whosoever hands it may fall. An inno-cent purchaser for value from the original purchaser is protected.However, if the circumstances are such as to bind the subsequentpurchaser with constructive notice that the sale to the vendor wasfraudulent, the property will be liable in his hands to creditors ofthe original vendor. (37 C.J.S. 1356.)

Effect of violation of law on transfer.

(1) As between the parties. — The bulk sales law does not inany way affect the validity of the transfer as between the inter-mediate parties thereto. A sale not in compliance with the bulksales statutes is valid against all persons other than creditors. (seeIbid.)

(2) As against creditors. — A purchaser in violation of the lawacquires no right in the property purchased as against the credi-tors of the seller. His status is that of a trustee, or receiver for thebenefit of all the creditors of the seller. As such, he is responsiblefor the disposition of the property. (Ibid., pp. 1349-1350.)

Remedies available to creditors.

Mere non-compliance with the statute does not render thepurchaser personally liable to creditors. Hence, an ordinary ac-tion against him by creditors to obtain a money judgment will notlie, unless the purchaser has sold or otherwise disposed of, or dealtwith, the property, so as to become personally liable to creditorsfor the value of it.

Secs. 3-5

503

The proper remedy is one against the goods to subject themto the payment of a debt, such as execution, attachment,garnishment, or by a proceeding in equity. (37 C.J.S. 1356.)

Sec. 6. Any vendor, transferor, mortgagor, orassignor of any stock of goods, wares, merchandise,provisions or materials, in bulk, or any person actingfor, or on behalf of any such vendor, transferor, mort-gagor, or assignor, who shall knowingly or willfullymake, or deliver or cause to be made or delivered, astatement, as provided in Section three hereof, whichshall not include the names of all such creditors, withthe correct amount due and to become due to each ofthem, or shall contain any false or untrue statement,shall be deemed to have violated the provisions ofthis Act.

Sec. 7. It shall be unlawful for any person, firm orcorporation, as owner of any stock of goods, wares,merchandise, provisions, or materials, in bulk, totransfer title to the same without consideration or fora nominal consideration only.

Acts punished by law.

They are:

(1) Knowingly or willfully making or delivering a statementas required by the Act (Sec. 3.) which does not include the namesof all the creditors of the vendor, etc. with the correct amount dueand to become due or which contains any false or untrue state-ment (Sec. 6.); and

(2) Transferring title to any stock of goods, wares, merchan-dise, provisions or materials sold in bulk without considerationor for a nominal consideration only. (Sec. 7.)

Sec. 8. Nothing in this Act contained shall applyto executors, administrators, receivers, assignees ininsolvency, or public officers, acting under judicialprocess.

Secs. 6-8 THE BULK SALES LAW

504 SALES

Sec. 9. The sworn statement containing the namesand addresses of all creditors of the vendor or mort-gagor provided for in Section three of this Act, shallbe registered in the Bureau of Commerce.1 For theregistration of each such sworn statement a fee offive pesos shall be charged to the vendor or mortga-gor of the stock of goods, wares, merchandise, provi-sions or materials in bulk. (As amended by R.A. No.111.)

Sec. 10. The provisions of this Act shall be admin-istered by the Director of the Bureau of Commerce,who is hereby empowered, with the approval of theDepartment Head,2 to prescribe and adopt from timeto time such rules and regulations, as may be deemednecessary for the proper and efficient enforcement ofthe provisions of this Act.

Sec. 11. Any person violating any provisions ofthis Act shall, upon conviction thereof, be punishedby imprisonment for not less than six months, no morethan five years or fine in a sum not exceeding fivethousand pesos, or by both such imprisonment andfine, in the discretion of the court.

Sec. 12. This Act shall take effect upon its approval.

APPROVED: December 1, 1932.

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1Now, Bureau of Trade Regulation and Consumer Protection (BTRCP), under theDepartment of Trade and Industry.

2Secretary of Trade and Industry.

Secs. 9-12

560 LEASE

560

Part II

LEASE(Title VIII, Arts. 1642-1699, 1713-1731)

Chapter 1

GENERAL PROVISIONS

ART. 1642. The contract of lease may be of things,or of work and service. (1542)

Concept and nature of contract of lease.

(1) The contract of lease is an agreement whereby one person(lessor) binds himself to grant temporarily the enjoyment or useof a thing or to render some work or service to another (lessee)who undertakes to pay rent, compensation or price therefor.

(2) Lease is only a personal right. It is a real right only by ex-ception as in the case of lease of real estate recorded in the Regis-try of Property which makes it binding upon third persons, like apurchaser. In the absence of registration, the purchaser may ter-minate the lease, save when there is a stipulation in the contractof sale, or when the purchaser knows of the existence of the lease.(Art. 1676.), actual knowledge being equivalent to registration.(Art. 1648.)

(3) A lease contract is not essentially personal in character inthe sense that the rights and obligations therein are transmissibleto the heirs. The death of a party does not excuse non-performanceof a contract, which involves a property right, and the rights and

561

obligations thereunder pass to the successors or representativesof the deceased. (Sui Man Hui Chan vs. Court of Appeals, 424SCRA 127 [2004].)

Kinds of lease according to subject matter.

Lease contract may be.

(1) Lease of things, whether real or personal, involving an ob-ligation on the part of the lessor to deliver the thing which is theobject thereof and the correlative right of the lessee to the peace-ful and adequate enjoyment thereof for a price certain (Art. 1654.);or

(2) Lease of work which refers to a contract for a piece of work,involving an obligation on the part of the contractor (lessor) toexecute a piece of work for the employer (lessee) in considera-tion of a certain price or compensation) (Art.1 1713.); or

(3) Lease of service involving an obligation on the part of thehousekeeper (Art. 1689.), laborer or employee (Art. 1700.), or com-mon carrier (Art. 1732.) to do or perform a service for the head ofa family, or master, employer, or passenger or shipper of goods,respectively, in consideration of compensation.

Under the Civil Code, this kind of lease covers householdservice (Arts. 1689-1699.), contract of labor2 (Arts. 1700-1712.),contract for a piece of work (Arts. 1713-1731.), and common car-riers.3 (Arts. 1732-1766.)

Characteristics and elements of the contract.

(1) The contract of lease is consensual, bilateral, onerous, com-mutative, nominate, and principal.4

In lease as in sale, there is an exchange of equivalent values.The use by the lessee of the thing, work, or service is consideredthe equivalent to the rent, compensation, or price paid to the les-sor.

1Unless otherwise indicated, refers to article in the Civil Code.2This topic is more appropriately taken up in Labor Law.3This topic is studied in the course on transportation.4See comments under Article 1458, Part I.


562 LEASE Art. 1643

(2) As in ordinary contracts, a contract of lease has three (3)elements, namely: (a) consent of the contracting parties; (b) ob-ject certain which is the subject matter of the contract; and (c) causeof the obligation which is established. (Art. 1318.)

ART. 1643. In the lease of things, one of the partiesbinds himself to give to another the enjoyment or useof a thing for a price certain, and for a period whichmay be definite or indefinite. However, no lease formore than ninety-nine years shall be valid. (1543a)

Lease of things.

In legal parlance and in ordinary usage, the term “landlord’’means lessor or owner and the word “tenant’’ means lessee.(Gutierrez vs. Santos, 107 Phil. 419 [1960].)

(1) Essence of lease. — The essence or essential purpose of thelease of things is the transmission of the temporary enjoyment oruse by the lessee of a thing for a certain period in considerationof the undertaking to pay rent therefor. Hence, the object of thelease must be within the commerce of man (Art. 1374.); otherwise,it is void. Thus, a lease of property belonging to the public do-main such as a road or a public plaza is void ab initio. (Yngson vs.Secretary of Agriculture and National Resources, 123 SCRA 441[1983]; Municipality of Cavite vs. Rojas, 30 Phil. 602 [1915].)

The lease of a building naturally includes the lease of the loton which it stands, and the rentals of the buildings include thoseof the land. (Duellowe vs. Gotoco, 7 SCRA 841 [1963]; Phil. Con-solidated Freight Lines, Inc. vs. Ajon, 103 Phil. 318 [1958]; City ofManila vs. Chin Kam, 101 Phil. 1252 [1957].)

(2) Subject-matter of lease. — Article 1643 applies to lease ofthings, whether movable or immovable. The Civil Code makesno special-provisions for the lease of movables. Nevertheless, theprovisions of the Code on leases of lands are also applicable toleases of personal property except those provisions which by theirnature and intent, can only be applied where the object of the leaseis immovable.

563

In a lease of chattels, the lessor loses complete control overthe chattel leased although the lessee would be responsible to thelessor should he make bad use thereof. (National Labor Union vs.Dinglasan, 98 Phil. 649 [1956].)

(3) Ownership of thing. — The lessor need not be the owner ofthe thing leased as long as he can transmit its enjoyment or use tothe lessee since ownership is not being transferred. For example,the usufructuary may personally enjoy the thing in usufruct orhe may lease it to another but the lease contract shall terminateupon the expiration of the usufruct saving only leases of rurallands (infra.), which shall be considered as subsisting during theagricultural year. (Art. 572.) But an easement cannot be leased in-dependently of the estate to which it actively or passively belongsas it is inseparable therefrom (Art. 617.), being an accessory thingwhose very existence depends upon the principal thing (immov-able).

Even the lessee himself may lease the property to another; insuch case, a sublease results. (Art. 1650.)

(4) Consideration of lease. — The cause of a contract of lease ofthings must be a price certain generally called “rent’’ or “rental’’in money or its equivalent, such as products, fruits, or other use-ful things, or some other prestation or labor which the lessee bindshimself to undertake. The important thing is that what is givenby the lessee has value.

(a) The phrase “price certain’’ means that the price of thelease or rent has been determined by the parties or is at leastcapable of determination under the contract. A price certainexists when the same can be ascertained according to the us-ages or customs of the place. (Arroyo vs. Azur, 76 Phil. 493[1946].)

(b) The amount must not be nominal or so insignificantas to indicate an intention to enter into a contract of commo-datum which is essentially gratuitous. (Art. 1933.)

(c) Since lease is essentially a consensual contract, in theabsence of a law fixing a ceiling on rentals, the lessor has theright to fix the amount of the rent, and upon the expiration ofthe contract, to demand an increase thereof. The lessee may


564 LEASE Art. 1643

agree with the rent or not consent to the lease. (see Vda. deRoxas vs. Court of Appeals, 63 SCRA 302 [1975]; RamonMagsaysay Award Foundation vs. Court of Appeals, 134SCRA 134 [1985].)

(d) Of course, during the period fixed in the contractwhere there is a stipulated rent, the lessor cannot increase therental without the consent of the lessee. Neither can a courtfix a different rental, even where there is an increase in realtytaxes. (Ledesma vs. Javellana, 121 SCRA 794 [1983].)

(5) Period of lease. — The period may be definite or indefinite.In any case, the period is temporary, not perpetual.

(a) When the period is definite or fixed, the longest is 99years. According to the Code Commission, Article 1643 “lim-its a lease to 99 years because it is an unsound economic policyto allow ownership and enjoyment to be separated for a verylong time. A similar limitation applies in Philippine law tosales with a right of redemption, fideicommerssary substitu-tions, and other cases.’’ (Report, p. 142.)

In fact, the period of 99 years is even too long. Under theold Civil Code (Art. 1543 thereof.), there was no maximumperiod; it only provides that the lease must be for “definiteperiod.’’

(b) In case the period fixed is more than 99 years, the leaseshould be considered as having expired after the end of saidterm. Where there is an implied new lease (see Art. 1670.), thelease will be for an indefinite time.

(d) If a term is fixed but it is indefinite, but from the circum-stances it can be inferred that a period was intended, the courtmay fix the duration thereof. (Art. 1196.) A contract establishedto be a lease can only be for a determinate period for a lease,by its very nature, must be temporary.

(d) If no term is fixed, Article 1682 applies for leases of ru-ral lands, and Article 1687, for leases of urban lands.

(e) A verbal contract of lease “for as long as the lessees aredoing business and as long as they can pay just rents’’ has beenheld to be a lease from month to month under Article 1687

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and not one of indefinite duration, terminable without neces-sity of a special notice upon the expiration of any month.(Evangelista vs. Alvarez, [CA] 45 O.G. 1792; see Rivera vs.Trinidad, 48 Phil. 396 [1925].)

(f) A lease of things during the lifetime of one of the partiesis for in indefinite period. A lease for such time as the lessoror the lessee may please, is one for life, ending upon the deathof either party. (see Eleizegui vs. Lawn Tennis Club, 2 Phil.309 [1903].)

(g) The continuance and fulfillment of a lease of a house can-not be made to depend solely upon the uncontrolled choiceof the lessee on whether or not the lessee would pay rentals,thus depriving the lessor of any say on the matter. If the les-see elected to pay rentals, the lessor would never be able toterminate the lease. On the other hand, if the lessor shoulddesire to continue the lease, the lessee could thwart his pur-pose by the simple expedient of stopping the payment ofrentals. Such an arrangement is contrary to Article 1308 whichprohibits the validity or compliance with a contract to be leftto the will of one of the parties. (Singson Encarnacion vs.Baldomar, 77 Phil. 470 [1946].)

ILLUSTRATIVE CASES:

1. The lease contract expressly gives the lessor the sole optionto renew the lease.

Facts: Private respondents, spouses FT and LT (Tangcuecos),leased their lot to petitioner ALLIED (bank) for a monthly rentalof P1,000.00 for the first three (3) years, adjustable by 25% everythree (3) years thereafter. The lease contract specifically statesin its Provision No. 1 that “the term of this lease shall be four-teen (14) years commencing from April 1, 1978 and may be re-newed for a like term at the option of the lessee.”

Pursuant to their lease agreement, ALLIED introduced animprovement on the property consisting of a concrete buildingwith a floor area of 340-square meters which it used as a branchoffice. As stipulated, the ownership of the building would betransferred to the lessors upon the expiration of the originalterm of the lease.


566 LEASE Art. 1643

A year before the expiration of the contract of lease, therespondents notified petitioner ALLIED that they were nolonger interested in renewing the lease. ALLIED replied that itwas exercising its option to renew their lease under the sameterms with additional proposals.

When the lease contract expired in 1992 private respond-ents demanded that ALLIED vacate the premises. But the lat-ter asserted its sole option to renew the lease and enclosed inits reply letter a cashier’s check in the amount of P68,400.00representing the advance rental payments for six (6) monthstaking into account the escalation clause. Private respondents,however, returned the check to ALLIED, prompting the latterto consign the amount in court.

Issues: There are two main issues in the petition for review,namely:

(a) whether a stipulation in a contract of lease to the effectthat the contract “may be renewed for a like term at the optionof the lessee” is void for being potestative or violative of theprinciple of mutuality of contracts under Article 1308 of theCivil Code and, corollarily, what is the meaning of the clause“may be renewed for a like term at the option of the lessee’’;and

(b) whether a lessee has the legal personality to assail thevalidity of a deed of donation executed by the lessor over theleased premises.

Held: (1) Principle of mutuality of contracts. — “Article 1308of the Civil Code expresses what is known in law as the princi-ple of mutuality of contracts. It provides that ‘the contract mustbind both the contracting parties; its validity or compliancecannot be left to the will of one of them.’ This binding effect ofa contract on both parties is based on the principle that the ob-ligations arising from contracts have the force of law betweenthe contracting parties, and there must be mutuality betweenthem based essentially on their equality under which it is re-pugnant to have one party bound by the contract while leav-ing the other free therefrom.

The ultimate purpose is to render void a contract contain-ing a condition which makes its fulfillment dependent solelyupon the uncontrolled will of one of the contracting parties.’’

(2) Sole option of lessee to renew, an integral part of the agree-ment. — “An express agreement which gives the lessee the sole

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option to renew the lease is frequent and subject to statutoryrestrictions, valid and binding on the parties. This option, whichis provided in the same lease agreement, is fundamentally partof the consideration in the contract and is no different from anyother provision of the lease carrying an undertaking on the partof the lessor to act conditioned on the performance by the les-see. It is a purely executory contract and at most confers a rightto obtain a renewal if there is compliance with the conditionson which the right is made to depend.

The right of renewal constitutes a part of the lessee’s inter-est in the land and forms a substantial and integral part of theagreement.’’

(3) Mutuality obtains in the contract. — “The fact that suchoption is binding only on the lessor and can be exercised onlyby the lessee does not render it void for lack of mutuality. Afterall, the lessor is free to give or not to give the option to thelessee. And while the lessee has a right to elect whether to con-tinue with the lease or not, once he exercises his option to con-tinue and the lessor accepts, both parties are thereafter boundby the new lease agreement. Their rights and obligations be-come mutually fixed, and the lessee is entitled to retain posses-sion of the property for the duration of the new lease, and thelessor may hold him liable for the rent therefor. The lessee can-not thereafter escape liability even if he should subsequentlydecide to abandon the premises.

Mutuality obtains in such a contract and equality exists be-tween the lessor and the lessee since they remain with the samefaculties in respect to fulfillment.’’

(4) Lessor bound by the option he has conceded to lessee. — “Thecase of Lao Lim vs. Court of Appeals (191 SCRA 156 [1990].) reliedupon by the trial court is not applicable here. In that case, thestipulation in the disputed compromise agreement was to theeffect that the lessee would be allowed to stay in the premises‘as long as he needs it and can pay the rents.’ In the presentcase, the questioned provision states that the lease ‘may be re-newed for a like term at the option of the lessee.’ The lessor isbound by the option he has conceded to the lessee. The lesseelikewise becomes bound only when he exercises his option andthe lessor cannot thereafter be excused from performing his partof the agreement.


568 LEASE Art. 1643

Likewise, reliance by the trial court on the 1967 case of Garciav. Rita Legarda, Inc. (21 SCRA 555 [1976].), is misplaced. In thatcase, what was involved was a contract to sell involving resi-dential lots, which gave the vendor the right to declare the con-tract cancelled and of no effect upon the failure of the vendeeto fulfill any of the conditions therein set forth. In the instantcase, we are dealing with a contract of lease which gives thelessee the right to renew the same.’’

(5) Meaning of clause “may be renewed for a like term at theoption of the lessee.’’ — “With respect to the meaning of the clause‘may be renewed for a like term at the option of the lessee,’ wesustain petitioner’s contention that its exercise of the optionresulted in the automatic extension of the contract of lease un-der the same terms and conditions. The subject contract simplyprovides that ‘the term of this lease shall be fourteen (14) yearsand may be renewed for a like term at the option of the lessee.’As we see it, the only term on which there has been a clearagreement is the period of the new contract, i.e., fourteen (14)years, which is evident from the clause ‘may be renewed for alike term at the option of the lessee,’ the phrase ‘for a like term’referring to the period. It is silent as to what the specific termsand conditions of the renewed lease shall be. Shall it be thesame terms and conditions as in the original contract, or shallit be under the terms and conditions as may be mutually agreedupon by the parties after the expiration of the existing lease?’’

(6) Where contract failed to specify terms and conditions to beembodied in renewed contract. — “In Ledesma vs. Javellana (121SCRA 794 [1983].), this Court was confronted with a similarproblem. In that case, the lessee was given the sole option torenew the lease, but the contract failed to specify the terms andconditions that would govern the new contract. When the leaseexpired, the lessee demanded an extension under the sameterms and conditions. The lessor expressed conformity to therenewal of the contract but refused to accede to the claim of thelessee that the renewal should be under the same terms andconditions as the original contract. In sustaining the lessee, thisCourt made the following pronouncement:

‘x x x in the case of Hicks vs. Manila Hotel Company, asimilar issue was resolved by this Court. It was held that‘such a clause relates to the very contract in which it isplaced, and does not permit the defendant upon the renewalof the contract in which the clause is found, to insist upon

569

different terms than those embraced in the contract to berenewed’; and that ‘a stipulation to renew always relatesto the contract in which it is found and the rights grantedthereunder, unless it expressly provides for variations inthe terms of the contract to be renewed.

The same principle is upheld in American Law regard-ing the renewal of lease contracts. In 50 Am. Jur. 2d, Sec.1159, at p. 45, we find the following citations: ‘The rule iswell-established that a general covenant to renew or ex-tend a lease which makes no provision as to the terms of arenewal or extension implies a renewal or extension uponthe same terms as provided in the original lease.’

In the lease contract under consideration, there is noprovision to indicate that the renewal will be subject to newterms and conditions that the parties may yet agree upon.It is to renewal provisions of lease contracts of the kindpresently considered that the principles stated abovesquarely apply. We do not agree with the contention of theappellants that if it was intended by the parties to renewthe contract under the same terms and conditions stipu-lated in the contract of lease, such should have expresslyso stated in the contract itself. The same argument couldeasily be interposed by the appellee who could likewisecontend that if the intention was to renew the contract oflease under such new terms and conditions that the partiesmay agree upon, the contract should have so specified.Between the two assertions, there is more logic in the lat-ter.

The settled rule is that in case of uncertainty as to themeaning of a provision granting extension to a contract oflease, the tenant is the one favored and not the landlord.‘As a general rule, in construing provisions relating to re-newals or extensions, where there is any uncertainty, thetenant is favored, and not the landlord, because the latter,having the power of stipulating in his own favor, has ne-glected to do so; and also upon the principle that everyman’s grant is to be taken most strongly against himself.’(50 Am Jur. 2d, Sec. 1162, p. 48; see also 51 C.J.S. 599.)’’

(7) Terms and conditions no longer subject to mutual agreement.— “Besides, if we were to adopt the contrary theory that theterms and conditions to be embodied in the renewed contract


570 LEASE Art. 1643

were still subject to mutual agreement by and between the par-ties, then the option — which is an integral part of the consid-eration for the contract — would be rendered worthless. Forthen, the lessor could easily defeat the lessee’s right of renewalby simply imposing unreasonable and onerous conditions toprevent the parties from reaching an agreement, as in the caseat bar.

As in a statute no word, clause, sentence, provision or partof a contract shall be considered surplusage or superfluous,meaningless, void, insignificant or nugatory, if that can be rea-sonably avoided. To this end, a construction which will renderevery word operative is to be preferred over that which wouldmake some words idle and nugatory.’’ (Allied Banking Corpora-tion vs. Court of Appeals, 284 SCRA 357 [1998].)

——— ———— ———-

2. The lease contract stipulates an indefinite period, the leaseto continue for as long as the lessee is paying the rent.

Facts: Petitioner JRC leased its apartment building to therespondents. The terms of the contract, among others, are thefollowing:

“Period of lease. — The lease period shall be effectiveas of February 1, 1985 and shall continue for an indefiniteperiod provided the lessee is up-to-date in the payment ofhis monthly rentals. The LESSEE may, at his option, termi-nate this contract any time by giving sixty (60) days priorwritten notice of termination to the LESSOR.

‘However, violation of any of the terms and conditionsof this contract shall be a sufficient ground for terminationthereof by the LESSOR.

‘xxx xxx xxx

‘RENT INCREASE — For the duration of this contract,the LESSEE agrees to an automatic 20% yearly increase inthe monthly rentals.’

Since the effectivity of the lease agreement on February1985, the lessees religiously paid their respective monthlyrentals together with the 20% yearly increase in the monthlyrentals as stipulated in the contract. On January 2, 1990, JRCsent a written notice to the lessees informing them of theformer’s intention to increase the monthly rentals on the occu-

571

pied premises to P3,500.00 monthly effective February 1, 1990.The respondents manifested their opposition alleging that thesame is in contravention of the terms of the contract of lease asagreed upon. Due to the opposition and the failure of the les-sees to pay the increased monthly rentals in the amount ofP3,500.00, JRC demanded that the lessees vacate the premisesand pay the amount of P7,000.00 corresponding to the monthsof February and March, 1990.

The respondents exerted effort to pay the rentals due forthe months of February and March 1990 at the monthly ratestipulated in the contract but was refused by the lessor so thaton May 2, 1990, they instituted before the Metropolitan TrialCourt a case for consignation.

Issues: The petitioners raise the following questions:

(a) When the parties to a contract of lease stipulated for anindefinite period and shall continue for as long as the lessee ispaying the rent, is the said contract interminable even by thelessor?

(b) When there is a disagreement on the rentals to be paid,should it be resolved in a consignation case or in an ejectmentcase?

Held: (1) Article 1687 not applicable. — “We agree with theruling of the Court of Appeal. Article 1687 finds no applicationin the case at bar.

The lease contract between petitioner and respondents iswith a period subject to a resolutory condition. The wording ofthe agreement is unequivocal: ‘The lease period xxx shall continuefor an indefinite period provided the lessee is up-to-date in the pay-ment of his monthly rentals.’ The condition imposed in order thatthe contract shall remain effective is that the lessee is up-to-date in his monthly payments. It is undisputed that the lesseesGutierrez and Co Tong religiously paid their rent at the increas-ing rate of 20% annually.

The agreement between the lessor and the lessees are there-fore still subsisting, with the original terms and conditionsagreed upon, when the petitioners unilaterally increased therental payment to more than 20% or P3,500.00 a month.’’

(2) Factual backgrounds in cases cited by petitioner not the sameas in case at bar. — “Petitioner cites Puahay Lao vs. Suarez (22SCRA 215 [1968].) where it said that ‘the Court in the earlier


572 LEASE Art. 1643

case of Singson vs. Baldomar (77 Phil. 470 [1946].), rejected thetheory that a lease could continue for an indefinite term so longas the lessee paid the rent, because then its continuance andfulfillment would depend solely on the free and uncontrolledchoice of the tenant between continuing to pay rentals or not,thereby depriving the lessors of all say in the matter as it wouldbe contrary to the spirit of Article 1256 of the Old Civil Code,now Article 1308 of the New Civil Code of the Philippines whichprovides that validity or compliance of contracts can not be leftto the will of one of the parties.’

A review of the Puahay and Singson cases shows that thefactual backgrounds therein are not the same as in the case atbar. In those cases, the lessees were actually in arrears with theirrental payments. The Court, in the Puahay case, ruled that thelessor had the right to terminate the lease under par. 3, Art.1673 of the Civil Code, declaring that the lessor may judiciallyeject the lessee for violation of any of the conditions agreed uponin the contract. In the case of Singson, the lease contract wasexpressly on a month-to-month basis.’’

(3) Stipulation not contrary to Article 1308 of the Civil Code.— “The contention of the petitioner that a provision in a con-tract that the lease period shall subsist for ‘an indefinite periodprovided the lessee is up-to-date in the payment of his monthly rentals’is contrary to Art. 1308 of the Civil Code is not plausible. Asexpounded by the Court in the case of Philippine Banking Cor-poration vs. Lui She (21 SCRA 52 [1967].):

‘We have had occasion to delineate the scope and applica-tion of article 1308 in the early case of Taylor vs. Uy Tieng Piao(43 Phil. 873 [1922].) We said in that case:

‘Article 1256 [now Art. 1308] of the Civil Code in ouropinion creates no impediment of the insertion in a con-tract for personal service of a resolutory condition permit-ting the cancellation of the contract by one of the parties.Such a stipulation, as can be readily seen, does not makeeither the validity or the fulfillment of the contract depend-ent upon the will of the party to whom is conceded theprivilege of cancellation; for where the contracting partieshave agreed that such option shall exist, the exercise of theoption is as much in the fulfillment of the contract as anyother act which may have been the subject of agreement.xxx’

573

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

x x x x x x

As correctly ruled by the MTC in its decision, the grant ofbenefit of the period in favor of the lessee was given in exchangefor no less than an automatic 20% yearly increase in monthlyrentals. This additional condition was not present in the Puahayand Singson cases.

Moreover, the express provision in the lease agreement ofthe parties that violation of any of the terms and conditions ofthe contract shall be sufficient ground for termination thereofby the lessor, removes the contract from the application of Arti-cle 1308.’’

(4) Lessor in estoppel. — “Lastly, after having the lessees be-lieve that their lease contract is one with an indefinite periodsubject only to prompt payment of the monthly rentals by thelessees, we agree with private respondents that the lessor isestopped from claiming otherwise.

In the case of Opulencia vs. Court of Appeals (293 SCRA 385[1998].), this Court held that petitioner is estopped from back-ing out of her representations in the contract with respondent,that is, she may not renege on her own acts and representa-tions, to the prejudice of the respondents who relied on them.We have held in a long line of cases that neither the law nor thecourts will extricate a party from an unwise or undesirable con-tract he or she entered into with all the required formalitiesand willfull awareness of its consequences.’’

(5) Petitioner’s allegation of respondents’ non-payment is false.— “Anent the second issue, we likewise hold that the conten-tion of petitioner is without merit. The Court of Appeals foundthat the petitioner’s allegation of respondents’ non-payment isfalse. This is a finding of fact which we respect and uphold,absent any showing of arbitrariness or grave abuse on the partof the court. Furthermore, the statement of petitioner that thecorrect amount of rents cannot be considered in a consignationcase but only in the ejectment case is misleading because no-where in the decision of the appellate court did it state other-wise. This second issue is clearly just a futile attempt to over-throw the appellate court’s ruling.’’


574 LEASE Art. 1643

(6) Rationale for consignation. — “Nevertheless, suffice it tobe stated that under Article 1258 of the Civil Code which pro-vides:

‘Art. 1258. Consignation shall be made by depositingthe things due at the disposal of judicial authority, beforewhom to tender of payment shall be proved, in a propercase, and the announcement of the consignation in othercases. The consignation having been made, the interestedparties shall also be notified thereof.’

the rationale for consignation is to avoid the performance of anobligation becoming more onerous to the debtor by reason ofcauses not imputable to him. Whether or not petitioner has acause of action to eject private respondents from the leasedpremises due to refusal of the lessees to pay the increasedmonthly rentals had been duly determined in the ejectment caseby the Municipal Trial Court which was correctly upheld bythe Court of Appeals. (Jespajo Realty Corporation vs. Court ofAppeals, 175 SCAD 499, 390 SCRA 27 [2002].)

Estoppel against lessee.

A lessee is stopped from asserting title to the thing leased asagainst the lessor (Art. 1436.), or to deny the lessor’s title, or toassert a better title not only in himself, but also in some third per-son, including the State while he remains in possession of theleased property and until he surrenders possession to the lessor.(VSC Commercial Enterprises, Inc. vs. Court of Appeals, 394 SCRA74 [2002].) This estoppel applies even though the lessor had notitle at the time the relation of lessor and lessee was created. Itmay be asserted not only by the original lessor, but also by thosewho succeed to his title. (Geminiano vs. Court of Appeals, 72SCAD 518, 259 SCRA 344 [1996].) Indeed, the relation of lessorand lessee does not depend on the former’s title but on theagreement between the parties as long as the lessee remains inundisturbed possession, it is immaterial whether the lessor has avalid title — or any title at all — at the time the relationship wasentered into. However, due to the peculiar circumstances availingin a case, the rule may be relaxed to avoid unjust enrichment infavor of the lessor at the expense of the lessee such as in a casewhere the lessee would, in effect, be paying in rental twice for theuse of the same property for the same period of time — to the real

575

owner if he were to still pay the lessor. (Tamio vs. Ticson, 443 SCRA44 [2004].)

Under the Rules of Court, conclusive presumptions include:“(b) The tenant is not permitted to deny the title of his landlordat the time of the commencement of the relation of landlord andtenant between them.” (Sec. 3-b, Rule 131, Rules of Court.) A judg-ment rendered in ejectment cases, however, shall not bar an ac-tion between the same parties respecting title to land and shallnot be conclusive as to the facts found therein in a case betweenthe same parties upon a different cause of action involving pos-session of the same property. In ejectment cases, the issue is thephysical or material possession and any pronouncement made bythe trial court on the question of ownership is provisional in na-ture. (Heirs of R.S. Florencio vs. Heir of T. S. De Leon, 425 SCRA447 [2004]; Amagan vs. Marayag, 326 SCRA 581 [2000]; Olan vs.Court of Appeals, 314 SCRA 273 [1999].)

Lease distinguished from sale.

(1) In lease of things, only the enjoyment or use is transferred,while in sale, ownership is transferred (Art. 1460.);

(2) In the first the transfer is temporary, while in the second,it is permanent, unless subject to a resolutory condition (Art.1465.);

(3) In the first, the lessor need not be the owner, while in thesecond, the seller must be the owner or at least authorized by theowner to transfer ownership, of the thing sold at the time it isdelivered (Art. 1459.); and

(4) In the first, the price of the subject matter, is usually notmentioned, being immaterial, while in the second, the price of thething is usually fixed in the contract. (Art. 1473.)

In case of doubt, the intention of the parties is an importantfactor in determining the contract entered into. Thus, the fact thatthe price of the thing (machine) was fixed in the contract, makessaid contract a sale and not a lease, because in contracts of lease,as distinguished from those sale, it is plain redundancy to fix ormake any mention of the price of the thing which is the subject


576 LEASE Art. 1643

matter thereof. (H.E. Heacock Co. vs. Buntal Mfg. Co., 66 Phil. 245[1937].)

Conditional sales of goods.

A lease of personalty with option to buy is an installment saleand not a lease. Sellers desirous of making conditional sales oftheir goods, but who do not wish openly to make a bargain in thatform, for one reason or another, have frequently resorted to thedevice of making contracts in the form of leases either with op-tion to the buyer to purchase for a small consideration at the endof term, provided the so-called rent has been duly paid, or withstipulation that if the rent throughout the term is paid, title shallthereupon vest in the lessee.

It is obvious that such transactions are leases only in name.The so-called rent must necessarily be regarded as payment ofthe price in installments since the due payment of the agreedamount results, by the terms of the bargain, in the transfer of titleto the lessee. (Vda. De Jose vs. Veloso Barrueco, 67 Phil. 191 [1939];see Manila Gas Corporation vs. Calupitan, 66 Phil. 747 [1937];Filinvest Credit Corporation vs. Court of Appeals, 178 SCRA 188[1989].)

Lease distinguished from commodatum.

By the contract of loan, one of the parties delivers to another,either something not consumable so that the latter may use thesame for a certain time and return it, in which case the contract iscalled a commodatum; or money or other consumable thing, uponthe condition that the same amount of the same kind and qualityshall be paid, in which case the contract is simply called a loan ormutuum. (Art. 1933.)

(1) The first is an onerous contract, although the rent may sub-sequently be condoned or remitted, while the second is essentiallygratuitous (Art. 1933.);

(2) The first is not essentially personal in character and, there-fore, the right may be transmitted to the heirs, while the secondis purely personal in character, and consequently, the death ofeither the bailor or the bailee extinguishes the contract (Art. 1939.);and

577

(3) The first is a consensual contract, while the second is a realcontract as it is perfected only upon delivery of the object thereof.(Art. 1934.)

Both contracts consist in the transmission of the enjoyment oruse of a thing to another. (Art. 1933.)

Lease distinguished from mutuum.

(1) In the first, the owner of the property does not lose hisownership, while in the second, the lender or creditor loses owner-ship of the thing loaned which becomes the property of the bor-rower or debtor (Art. 1953.);

(2) In the first, the relationship is one of lessor and lessee,while in the second, it is that of creditor or obligee and debtor orobligor (Ibid.);

(3) In the first, the subject matter may be real and/or personalproperty, while in the second, it is only money or any other fun-gible thing (Ibid.);

(4) The first is governed by the statute of frauds where thething leased is real property for more than one year (Art. 1403[e].),while the second is not governed by the statute of frauds (Art.1403); and

(5) The first is not governed by the Usury Law, while the sec-ond is governed by said law.5 (Arts. 1175, 1961.)

Simple loan may be gratuitous or with a stipulation. (Art.1933.)

Lease distinguished from usufruct.

Usufruct gives a right to enjoy the property of another withthe obligation of preserving its form and substance, unless the titleconstituting it or the law otherwise provides. (Art. 562.)

(1) The first is a real right only in the case of the lease of realproperty where the lease is registered, while the second is alwaysa real right (see Art. 567, 3rd par.);

5Central Bank Circular No. 905 (Dec. 10, 1982) suspended the effectivity of the UsuryLaw. It removed the ceiling on interest rates.


578 LEASE Art. 1643

(2) In the first, the lessor may or may not be the owner, whilein the second, the creator of the right must be the owner or oneduly authorized by him (see Art. 563.);

(3) In the first, the lessor has the active obligation to main-tain the lessee in the enjoyment or use of the properly, while inthe second, the owner has the passive duty to allow the usufruc-tuary to enjoy or use the same (see Art. 562.);

(4) In the first, the lessee generally pays no taxes, while in thesecond, the usufructuary pays the annual charges and taxes onthe fruits (Art. 596.);

(5) In the first, the lessee generally has no obligation to payfor repairs, while in the second, the usufructuary is obliged tomake the ordinary repairs needed by the thing given in usufruct(Art. 592.);

(6) In the first, the lessee cannot constitute a usufruct on theproperty, while in the second, the usufructuary may lease the thingin usufruct to another (Art. 581.);

(7) The first, as a rule, may be created only by contract, whilethe second may be created by law, contract, last will and testa-ment, or prescription (Art. 563.); and

(8) The first generally covers particular uses limited by thecontract, while the second, as a rule, covers all possible uses ofthe property. (Arts. 562, 564, 566.)

Lease distinguished from deposit.

A deposit is constituted from the moment a person receives athing belonging to another, with the obligation of safely keepingit and of returning the same. If the safekeeping of the thing deliv-ered is not the principal purpose of the contract, there is no de-posit but some other contract. (Art. 1962.)

(1) In the first, the enjoyment or use of the thing leased is theessential purpose, while in the second, the safekeeping of the thingdelivered is the principal purpose (Ibid.);

(2) In the first, the lessor can not demand the thing leasedbefore the expiration of the contract, while in the second, the

579

depositor can demand the return of the subject matter at will (Art.1972.);

(3) In the first, both movable and immovable property maybe the object, while in the second, if it is extrajudicial, only mov-able (corporeal) things may be the object (Art. 1966.);

(4) The first is onerous, while the second may be gratuitous(Art. 1965.); and

(5) The first is consensual, while the second is a real contractperfected only upon delivery of the object thereof. (Art. 1963.)

Lease of chattels distinguished from employment.

(1) In the first, the relationship is that of lessor and lessee,while in the second, it is one of employer and employee (Arts.1689, 1713.);

(2) In the first, the lessor loses control or management overthe chattel leased, while in the second, the employer retains con-trol or management over his chattel;

(3) In the first, the lessor has no control or supervision overthe lessee, while in the second, the employer exercises control andsupervision over his employee; and

(4) In the first, the lessee pays rent to the lessor for the enjoy-ment or use of the chattel, while in the second, the employer payswage or salary for the services of the employee.

Service as driver under the boundarysystem.

Under the boundary system, the relation between the driver andthe jeepney owner is that of employer and employee, not lessorand lessee.

Thus, in a case, where the respondent is the owner and op-erator of TPU jeepneys, while the petitioners are drivers who hadan oral contract with the respondent for the use of his jeepneys inconsideration of P7.50 for 10 hours’ use, the drivers receiving nosalaries or wages, their days’ earnings being the excess over theP7.50 that they paid for the use of the jeepneys, and the respond-ent’s supervision over the drivers consisted only in inspection of


580 LEASE Art. 1644

the jeepneys when they passed his gasoline station for water, andchecking the route prescribed by the Public Service Commission(now Land Transportation Franchising and Regulatory Board), theSupreme Court held:

“The only features that would make the relationship oflessor and lessee between the respondent, owner of the jeeps,and the drivers, members of the petitioner union, are the factthat he does not pay them any fixed wage but their compen-sation is the excess of the total amount of fares earned or col-lected by them over and above the amount of P7.50 whichthey agreed to pay to the respondent, and the fact that thegasoline burned by the jeeps is for the account of the drivers.These two features are not, however, sufficient to withdrawthe relationship between them from that of employer-em-ployee, because the estimate earnings for fares must be overand above the amount they agreed to pay to the respondentfor a ten-hour shift or ten-hour a day operation of the jeeps.Not having any interest in the business because they did notinvest anything in the acquisition of the jeeps and did not par-ticipate in the management thereof, their service as drivers ofthe jeeps being their only contribution to the business, the re-lationship of lessor and lessee cannot be sustained.’’ (NationalLabor Union vs. Dinglasan, 98 Phil. 64 [1955].)

ART. 1644. In the lease of work or service, one ofthe parties binds himself to execute a piece of workor to render to the other some service for a price cer-tain, but the relation of principal and agent does notexist between them. (1544a)

Lease of work or service.

In a lease of work, the object is the execution of a piece workfor an employer by an independent contractor (Art. 1713.), whilein a lease of service, it is the performance of some service or anemployer by a househelper (Art. 1689.) or laborer (Art. 1700.) orfor a passenger or owner of goods by a common carrier. (Art.1732.)

581

In both kinds of lease, the employer or passenger or owner ofgoods binds himself to pay some renumeration or compensationin favor of the independent contractor, employee, or commoncarrier and the relation of principal and agent does not exist be-tween the parties.

Lease of work or service distinguishedfrom agency.

By the contract of agency a person binds himself to render someservice or to do something in representation or on behalf of an-other, with the consent or authority of the latter. (Art. 1868.)

(1) In the first, the basis is employment, while in the second,it is representation (Ibid.);

(2) In the first, the lessor performs a material act for the ben-efit of his employer without representation of the latter (Art.1644.), while in the second, the agent executes a juridical act forand in behalf of his principal (Art. 1868.);

(3) In the first, the work or service must be for a price or com-pensation, while in the second, it is presumed for a compensa-tion (Art. 1875.);

(4) In the first, the will of both parties is necessary for the ex-tinguishment of the relationship (Art. 1159.), while in the second,the will of one is sufficient (Arts. 1919[1, 2], 1920, 1928.);

(5) In the first, only two persons are involved: the lessor andthe lessee, while in the second, three persons: the principal, theagent, and the third person with whom the agent has contracted;

(6) In the lease of work, the risk of loss before delivery is borneby the independent contractor, especially in the lease of work fora fixed price (Arts. 1717, 1718.), while in the second, the risk isborne by the principal since the agent acts merely as his repre-sentative;

(7) In the lease of work, the independent contractor is person-ally liable for his contracts with third persons, while the agent isnot, unless he expressly binds himself or exceeds the limits of hisauthority (Art. 1897.); and


582 LEASE Art. 1644

(8) In the lease of service, the lessor (like a servant or laborer)ordinarily performs only ministerial duties, while in the second,the agent exercises discretionary powers. (Arts. 1876, 1877, 1881,1882, 1884, 1887, 1888.)

ILLUSTRATIVE CASE:

Respondent corporation claims that the management contract itentered into with petitioner corporation is a contract of agency suchthat it has the right to revoke and terminate the said contract, as it didterminate the same.

Facts: Nielson was hired by Lepanto to manage and oper-ate the mining properties of the latter.

“Under the contract, Nielson had agreed, for a period offive years, with the right to renew for a like period, to explore,develop and operate the mining claims of Lepanto, and to mine,or mine and mill, such pay ore as may be found therein and tomarket the metallic products recovered therefrom which mayprove to be marketable, as well as to render for Lepanto otherservices specified in the contract.

Nielson was to take complete charge, subject at all times tothe general control of the Board of Directors of Lepanto, of theexploration and development of the mining claims, of the hir-ing of a sufficient and competent staff and of sufficient and ca-pable laborers, of the prospecting and development of the mine,of the erection and operation of the mill, and of the beneficiationand marketing of the minerals found on the mining properties;and in carrying out said obligation, Nielson should proceeddiligently and in accordance with the best mining practice. Inconnection with its work, Nielson was to submit reports, maps,plans and recommendations with respect to the operation anddevelopment of the mining properties, make recommendationsand plans on the erection or enlargement of any existing mill,dispatch mining engineers and technicians to the mining prop-erties as from time to time may reasonably be required to in-vestigate and make recommendations without cost or expenseto Lepanto. Nielson was also to ‘act as purchasing agent of sup-plies, equipment and other necessary purchases by Lepanto,provided, however, that no purchase shall be made withoutthe prior approval of Lepanto; and provided further, that nocommission shall be claimed or retained by Nielson on such

583

purchase’; and ‘to submit all requisition for supplies, all con-tracts and arrangement with engineers, and staff and all mat-ters requiring the expenditures of money, present or future, forprior approval by Lepanto; and also to make contracts subjectto the prior approval of Lepanto for the sale and marketing ofthe minerals mined from said properties, when said productsare in a suitable condition for marketing.’’

Lepanto contends that the management contract in ques-tion as one of agency because: (1) Nielson was to manage andoperate the mining properties and mill on behalf, and for theaccount of Lepanto; and (2) Nielson was authorized to repre-sent Lepanto in entering, on Lepanto’s behalf, into contractsfor the hiring of laborers, purchase of supplies, and the saleand marketing of the ores mined. All these Lepanto claims showthat Nielson was, by the terms of the contract, destined to ex-ecute juridical acts not on its own behalf but on behalf ofLepanto under the control of the Board of Directors of Lepanto“at all times.’’ Hence, claims that the contract is one of agency:Lepanto then maintains that an agency is revocable at the willof the principal regardless of any term or period stipulated inthe contract, and it was in pursuance of that right that Lepantoterminated the contract in 1945 when it took over and assumedexclusive management of the work previously entrusted toNielson under the contract. Lepanto finally maintains thatNielson as an agent is not entitled to damages since the lawgives to the principal the right to terminate the agency at will.

Issue: Is the management contract, a contract of agency or acontract of lease?

(1) Distinctions between agency and lease of services. — “Inboth agency and lease of services one of the parties binds him-self to render some service to the other party. Agency, however,is distinguished from lease of work or services in that the basisof agency is representation, while in the lease of work or serv-ices the basis is employment. The lessor of services does notrepresent his employer, while the agent represents his princi-pal. x x x.

There is another obvious distinction between agency andlease of services. Agency is a preparatory contract, as agency‘does not stop with the agency because the purpose is to enterinto other contracts.’ The most characteristic feature of anagency relationship is the agent’s power to bring about busi-


584 LEASE Art. 1644

ness relations between his principal and third persons. ‘Theagent is destined to execute juridical acts (creation, modifica-tion or extinction of relations with third parties). Lease of serv-ices contemplate only material (non-juridical) acts.’’’

(2) Principal and paramount undertaking of Nielson. — “Inthe light of the interpretations we have mentioned in the fore-going paragraphs, let us now determine the nature of the man-agement contract in question. x x x.

It thus appears that the principal and paramount under-taking of Nielson under the management contract was the op-eration and development of the mine and the operation of themill. All the other undertakings mentioned in the contract arenecessary or incidental to the principal undertaking — theseother undertakings being dependent upon the work on the de-velopment of the mine and the operation of the mill. In the per-formance of this principal undertaking Nielson was not in anyway executing juridical acts for Lepanto, destined to create,modify or extinguish business relations between Lepanto andthird persons. In other words, in performing its principal un-dertaking Nielson was not acting as an agent of Lepanto, in thesense that the term agent is interpreted under the law of agency,but as one who was performing material acts for an employer,for a compensation.

It is true that the management contract provides thatNielson would also act as purchasing agent of supplies andenter into contracts regarding the sale of mineral, but the con-tract also provides that Nielson could not make any purchase,or sell the minerals, without the prior approval of Lepanto. It isclear, therefore, that even in these cases Nielson could not ex-ecute juridical acts which would bind Lepanto without firstsecuring the approval of Lepanto. Nielson, then, was to act onlyas an intermediary, not as an agent.’’

(3) Contract not terminable at will. — “Lepanto contends thatthe management contract in question being one of agency ithad the right to terminate the contract at will pursuant to theprovision of Article 1733 of the old Civil Code. We find, how-ever, a proviso in the management contract which militatesagainst this stand of Lepanto. Paragraph XI of the contract pro-vides:

‘Both parties to this agreement fully recognize that theterms of this Agreement are made possible only because of

585

the faith or confidence that the Officials of each companyhave in the other; therefore, in order to assure that suchconfidence and faith shall abide and continue, Nielsonagrees that Lepanto may cancel this Agreement at any timeupon ninety (90) days written notice, in the event thatNielson for any reason whatsoever, except acts of God,strike and other causes beyond its control, shall cease toprosecute the operation and development of the proper-ties herein described in good faith and in accordance withapproved mining practice.’

It is thus seen, from the above-quoted provision of para-graph XI of the management contract, that Lepanto could notterminate the agreement at will. Lepanto could terminate orcancel the agreement by giving notice of termination ninety daysin advance only in the event that Nielson should prosecute inbad faith and not in accordance with approved mining prac-tice the operation and development of the mining properties ofLepanto. Lepanto could not terminate the agreement if Nielsonshould cease to prosecute the operation and development ofthe mining properties by reason of acts of God, strike and othercauses beyond the control of Nielson.’’

(4) Cause for revocation of contract. — “There is noshowing that Nielson had ceased to prosecute the operationand development of the mines in good faith and inaccordance with approved mining practice which wouldwarrant the termination of the contract upon ninety dayswritten notice. In fact there was no such written notice oftermination. It is an admitted fact that Nielson ceased tooperate and develop the mines because of the war — a causebeyond the control of Nielson.

Indeed, if the management contract in question was in-tended to create a relationship of principal and agent betweenLepanto and Nielson, paragraph XI of the contract should nothave been inserted because as provided in Article 1733 [nowArt. 1920], agency is essentially revocable at the will of the prin-cipal — that means with or without cause. But precisely saidparagraph XI was inserted in the management contract to pro-vide for the cause of revocation. The provision of paragraph XImust be given effect.’’ (Nielson & Company, Inc. vs. Lepanto Con-solidated Mining Company, 26 SCRA 540 [1968].)


586 LEASE Art. 1644

Lease of work or service distinguishedfrom partnership.

By the contract of partnership two or more persons bind them-selves to contribute money, property, or industry to a commonfund, with the intention of dividing the profits among themselves.(Art. 1767.)

(1) In the first, there is no principle of representation, whilein the second, every partner is an agent of the partnership for thepurpose of its business (Art. 1818.);

(2) In the first, the lessor performs a material act for the ben-efit of the employer, while in the second, the partners enter intocommercial or business transactions for the realization of profits(Art. 1767.);

(3) In the first, only two persons are involved, while in thesecond, a juridical personality (partnership) separate and distinctfrom that of each of the partner is formed (Art. 1768.);

(4) In the first, the work or service is dependent upon the endsor purposes of the lessee, while in the second, the partners per-form acts conducive to their own business purposes (Art. 1767.);

(5) In the first, the work or service must be for a price or com-pensation, in the second, the partners share in the profits or losses(Art. 1797.);

(6) In the first, the will of both parties is necessary for the ex-tinguishment of the relationship (Art. 1159.), while in the second,the will of any partner is sufficient (Art. 1830[1, a], [2].);

(7) In the lease of work, the independent contractor is person-ally liable for his contracts with third persons, while a partner isgenerally not (Arts. 1816, 1818.); and

(8) In the lease of service, the lessor (like a servant) ordinar-ily performs only ministerial duties while in the second, everypartner as an agent of the partnership, exercises discretionarypowers. (Ibid.)

Compensation in lease of work or service.

(1) Where there is an agreement. — The lessee must be com-pelled to pay the agreed price unless it is found to be iniquitous

587

or unreasonable in which case the courts may fix a reasonable andjust remuneration. Where the compensation is renounced orwaived after the service has been rendered, there is still a lease ofservice although it has become gratuitous. (Arroyo vs. Hospitalde San Pedro, 81 Phil. 333 [1948].)

(2) Where the agreement may be implied. — On principle one whoperforms work or service in favor of another who impliedly con-sents thereto and who benefits thereby, is entitled to compensa-tion by virtue of an innominate contract (Art. 1307.) of facio ut des(I give that you may do) or of the case of services tacitly contractedin which case the courts will fix the reasonable worth of the serv-ices rendered. (Arroyo vs. Azur, 76 Phil. 493 [1946].) No one shouldbe enriched by the work of another unless the services are ex-pressly stated to be gratuitous. (Reguera vs. Tanodra, 81 Phil. 404[1948]; Arroyo vs. Hospital de San Pablo, supra.)

(a) The tacit agreement of both parties with respect to theservices of interpreter rendered by the plaintiff to the defend-ant and reciprocal benefits accruing to each, are the best evi-dence that there was an implied contract sufficient to be bind-ing. Article 1644 is applicable. (Perez vs. Pomar, 2 Phil. 682[1903].)

(b) When a vessel has been disabled by the breaking ofits shaft at sea and hoists signals for aid, and another vesselgoes to its relief and takes it in tow, such service is one of sal-vage and not merely towage, and must be remunerated. (G.Urrutia & Co. vs. Pasig Steamer and Lighter Co., 22 Phil. 33[1912].)

(3) Where no rate or amount is fixed in the contract. — Althoughno exact amount may have been expressly determined by the par-ties as the consideration for the contract of hiring, the contract isnevertheless valid if the amount can be ascertained in the light ofthe customs and usages of the place, or by findings of fact on thebasis of evidence submitted in case of disagreement. (Perez vs.Pomar, supra.; Herrera vs. Cruz, 7 Phil. 275 [1906]; Reguera vs.Tanodra, supra.) A price certain exists when the same can be ascer-tained according to the customs and usages of the place. (Arroyovs. Azur, supra.)


588 LEASE Art. 1644

(a) When no rate has been fixed in a contract of hire ofservices, such as those rendered by a physician to a sick per-son, the court, in case of disagreement, shall determine a rea-sonable and equitable compensation according to usages andcustoms of the place and the evidence in the case, with orwithout the testimony of experts. (Imperial vs. Alejandre, 14Phil. 203 [1909].)

(b) With respect to the value of the services rendered ondifferent occasions, the most important of which was the first,as it does not appear that any salary was fixed upon by theparties at the time the services were accepted, it devolves uponthe court to determine, upon the evidence presented, the valueof such services, taking into consideration the few occasionson which they were rendered. The fact that no fixed or deter-mined consideration for the rendition of the services wasagreed upon does not necessarily involve a violation of theprovisions of Article 1644, because at the time of the agree-ment this consideration was capable of being made certain.(Perez vs. Pomar, supra.)

(c) In a case, where it was stipulated that the plaintiffwould be liberally compensated by “providing for the main-tenance of herself, her husband, and their child during all thetime that the services of the plaintiff were required’’ as wetnurse and governess of defendant’s infant daughter, the factthat the exact amount to be paid for the hired services is notprecisely fixed is no bar to an action to recover provided thatthe contract by its terms, furnishes a basis or measure of as-certaining the amount agreed upon.

In this case, the contracting parties fixed the maintenance ofthe plaintiff and her family as the price for the services requiredfor her. Said maintenance is the specific and determinate thingthat in its turn fixes the price, inasmuch as its cost determines theprice according to the agreement of the parties to the contract.There might be a question as to the actual cost of the plaintiff’smaintenance, but this is a matter of fact which in such a case wouldhave to be proven. Be it as it may, whatever might be the cost ofsaid subsistence, it would constitute the price for the services ren-

589

dered by the plaintiff. (Majarabas vs. Leonardo, 11 Phil. 272[1908].)

ART. 1645. Consumable goods cannot be the sub-ject matter of a contract of lease, except when theyare merely to be exhibited or when they are acces-sory to an industrial establishment. (1545a)

Lease of consumable goods.

Under the old Civil Code (Art. 1545 thereof.), “fungible6 thingswhich are consumed by use cannot be the subject matter of lease.’’The rule is the same under Article 1645 with the qualification nowthat consumable goods may be the object of lease when they aremerely to be exhibited or when they are accessory to an industrialestablishment.

The essence of a lease of things is the enjoyment or use of theproperty (Art. 1643.) with the obligation on the part of the lesseeto return the same upon the expiration of the lease. (Art. 1665.)Ownership is not transfered to the lessee. Hence, things whichby their nature cannot be used without being consumed, cannotbe the subject matter of lease.

— oOo —

6See comments under Article 1464, Part I.


590 LEASE

Chapter 2

LEASE OF RURAL AND URBAN LANDS

SECTION 1. — General Provisions

ART. 1646. The persons disqualified to buy referredto in Articles 1490 and 1491, are also disqualified tobecome lessees of the things mentioned therein. (n)

Rural lands distinguished from urban lands.

The law has avoided, without doubt deliberately, any defini-tion on this point as it is not easy to fix, with such exactitude as tofurnish a sure guide for all cases, the line that separates the ruralfrom the urban.

The focal or determining factor is generally the location of theproperty. The word “rural’’ has been defined as relating to, orassociated with, or typical of, the country, the word being derivedfrom the Latin word “ruralis’’ meaning country. It pertains to acountry as distinguished from a city or town. However, it is thelegal definition of the word with which we are concerned. Thus,a construction of the word “rural’’ that is an consonance with thelegislative purpose must be followed.

Having in view the legislative objective, the word “rural’’ hasbeen defined as relating to or constituting tenement in landadopted and used for agricultural or pastoral purposes. It is onewhich, regardless of site, is principally used for the purpose ofobtaining products from the soil as opposed to urban lands, whichare principally for the purpose of residence. (Fabia vs. Interme-diate Appellate Court, 133 SCRA 364 [1984], citing 3 Castan 124.)

590

591

Persons disqualified to become lessees.

Article 1646 provides that persons disqualified to buy in ac-cordance with Articles 1490 and 1491 are likewise disqualified tolease the thing therein mentioned.

Article 1490 refers to the relative incapacity of husband andwife to sell property to each other, while Article 1491, to the inca-pacity of the persons enumerated therein who, by the special re-lations they have with the property under their charge or pecu-liar control, are prohibited from purchasing said property.1 Theprohibition is adopted in Article 1646 because of the similaritybetween the contract of lease and that of sale.

Lease of real property by aliens.

Foreigners are prohibited by the Constitution, except only incases of hereditary succession, to acquire lands in the Philippines.(Secs. 7, 2, par. 1, Art. XII, Constitution.) Nevertheless, they canlease real or immovable property in the Philippines.

It is true that there is a similarity between the one and the otherbut it is only apparent, superficial. The lessee has apparently thesame rights as the owner; but between the one and the other, thereexists an important, substantial difference as regards ownership.The lessor does not have the possession of the thing but he pre-serves the title, the ownership. The lessee enjoys the use of theimmovable, nothing, more; he does not exercise any proprietaryright. The foreigner who buys a land becomes the owner, exer-cises ownership over the same; but a lessee does not obtain morethan the possession or use of the land; there is no danger that alessee be converted into an owner of the land; the ownership ispreserved in the lessor. (Smith, Bell & Co., Ltd. vs. Register ofDeeds, 96 Phil. 53 [1953].) Since the residence of aliens in thePhilipines is temporary, they may be granted temporary rightssuch as a lease contract which is not forbidden by the Constitu-tion. (Krivenko vs. Register of Deeds, 79 Phil. 461 [1947].)

The parties, however, will not be permitted to resort to anothertransaction for the purpose of disguising the transfer in violation

1See comments under said articles in Part I.

Art. 1646 LEASE OF RURAL AND URBAN LANDSGeneral Provisions

592 LEASE Art. 1647

of the Constitution. Accordingly, it has been held that a contractwhereby an alien is given not only a lease but also an option tobuy a parcel of land by virtue of which the Filipino owner cannotsell or otherwise dispose of her property, this to last for 50 years,is a virtual transfer of ownership and circumvents the constitu-tional ban against alien landholding. (Philippine Banking Corpo-ration vs. Lui She, 21 SCRA 52 [1967]; which qualifies the rulinglaid down in Rellosa vs. Gaw Chee Hun, 93 Phil. 827 [1953], andsubsequent similar cases.) Incidentally, under Presidential DecreeNo. 471, the maximum period allowable for the duration of leasesof private lands to aliens or alien-owned entities not qualified toacquire private lands under the Constitution is 25 years, renew-able for another period of 25 years upon mutual agreement of bothlessor and lessee.

ART. 1647. If a lease is to be recorded in the Reg-istry of Property, the following persons cannot con-stitute the same without proper authority: the husbandwith respect to the wife’s paraphernal real estate, thefather or guardian as to the property of the minor orward, and the manager without special power. (1548a)

Proper authority required if leased to be recordedin Registry of Property.

If a lease is to be recorded in the Registry of Property, the per-sons mentioned in Article 1647 cannot constitute the same with-out proper authority (i.e., power of attorney) to constitute thesame. Under the old Civil Code (Art. 1548 thereof.), said personscould not lease for a term of more than six (6) years without aspecial power of attorney for the purpose because such a leasewas considered an act of strict ownership and not a mere act ofadministration.

Article 1647 does not specify the term of the lease. Every leaseof real estate may be recorded, and if recorded, creates a real rightbinding upon third persons. (Arts. 1648, 1676.) The registrationof the lease is, therefore, an act of strict ownership; hence, a spe-cial power of attorney is necessary. But if the lease is not to be

593

recorded, the lease entered into by said persons is valid even with-out a special power.

Under Article 1878(8), a special power of attorney is neces-sary “to lease any real property to another person for more thanone year.’’ This requirement is imposed whether or not the leasewill be recorded. In the absence of a special power, a lease for thanone (1) year executed by the persons mentioned in Article 1647 isvalid only for one (1) year but void as to the excess.

The word “administrator’’ in the old Civil Code is changedto “manager’’ in Article 1647. Said word has been held to applyto an administrator of conjugal property (Rodriguez vs. Borromeo,43 Phil. 479 [1925].), property owned in common (Melencio vs.Dy Tiao Lay, 55 Phil. 91 [1930].), property of a decedent (Jocsonvs. Nava, 69 Phil. 1 [1939]; Ferraris vs. Rodas, 65 Phil. 732 [1938].),and patrimonial or private property of the State. (Tipton vs.Andueza, 5 Phil. 477 [1905].)

ART. 1648. Every lease of real estate may be re-corded in the Registry of Property. Unless a lease isrecorded, it shall not be binding upon third persons.(1549a)

Effect of registration of leaseof real estate.

(1) As against third persons. — A lease contract is valid andbinding between the parties, their privies, and their heirs (Art.1311.), unless it be an oral lease for a longer period than one (1)year in which case it cannot be enforced by action for non-com-pliance with the statute of frauds. (Art. 1403[2, e].) To affect or bindthird persons, a lease of real property should be registered in theRegistry of Property. Unless so recorded, an innocent purchaserfor value is not bound to respect the existing lease and he mayterminate the same. (Art. 1676.) A contract of lease of land mustbe in a public instrument so that it may be recorded.

According to the Code Commission, Article 1648 “is intendedto protect the lessee, who cannot be ousted by the buyer if the lease


594 LEASE Art. 1648

is recorded. The right of the buyer to terminate the lease shouldbe curbed as much as possible because it is unjust to the lessee,and practically sanctions a violation of the contract of lease by thelessor.’’ (Report, p. 142.)

The lessor may be compelled by the court to deliver to thelessee the certificate of title over the property leased so that thelease may be annotated therein. (Domestic Savings and Loan Assn.vs. Villafenia-Caguioa, 115 SCRA 803 [1982].)

(2) As between the parties. — Lease is a mere personal right. Itsinscription in the Registry of Property to bind third persons doesnot in any way alter or modify the rights and obligations of theparties under the contract which has a life of its own independ-ent of the registration. Thus, where the instrument registered isinvalid or legally defective, registration will not render it validor cure its defect. Lease partakes of the nature of a real right whenit is recorded on the title of the lessor (regardless of duration) onlyin the sense that it is binding even as against third persons with-out actual notice of the transaction.

Leases of personal property.

Article 1648 applies only to lease of real estate; hence, leasesof personal or movable property cannot be registered.

Under Article 1625 (Part I.), an assignment of a credit, right,or action shall affect third persons if the assignment appear in apublic instrument. By analogy with said rule, leases of personalproperty shall be binding on third persons if they appear in apublic instrument.

Effect of actual notice of unregistered leaseby purchaser.

As a rule, where the contract of lease entered into by the les-see with the former owner was not recorded, said contract can-not bind a purchaser of the property.

(1) Where a purchaser of land at the time of the purchase hasfull knowledge of the fact that the land has been leased to a thirdperson and is informed of the terms of such lease, he is bound to

595

respect said lease, although it is not entered upon the certificateof title. The lease, in effect, became a part of the contract of sale.(Gustillo vs. Maravilla, 48 Phil. 442 [1925].)

(2) Where the plaintiff (lessee) was in open possession of theland at the time the condemnation proceedings were institutedand that long before the railroad company bought the land fromthe Archbishop of Manila, the plaintiff presented his claim in thecondemnation proceedings asking that he be allowed to intervenetherein, but that his motion for intervention was resisted by therailroad company and, therefore, denied by the court, the railroadcompany cannot be regarded as a third party within the meaningof Article 1648 of the Civil Code and Article 34 of the MortgageLaw. (Sayo vs. Manila Railroad Co., 43 Phil. 551 [1922].)

(3) Where at the time of the execution of the contract of leasethe plaintiff knew that the defendant was in possession of the land,but was told by the landlords that defendant’s lease would ex-pire before the beginning of term of the plaintiff’s lease, by virtueof its registration, the plaintiff’s lease held priority over the de-fendant’s unregistered lease and the plaintiff’s knowledge of thefact that the defendant was in possession of the land was not suf-ficient to charge him with notice of the duration of the term ofthe defendant’s lease, but that he had a right to rely on the certifi-cate of title and was not bound to make further inquiries.(Quimson vs. Suarez, 45 Phil. 901 [1924].) Here, the plaintiff be-lieved in good faith the representation of the landlords, which wasnot true. His information was that the lease had expired. He wasconsidered an innocent third person.

ART. 1649. The lessee cannot assign the lease with-out the consent of the lessor, unless there is a stipu-lation to the contrary. (n)

Assignment of lease by lessee.

In an assignment of lease, the personality of the lessee(assignor/debtor) disappears. The lessee makes an absolute trans-fer of his lease, involving not only his rights but also obligationsas such lessee and thus, dissociates himself from the original con-


596 LEASE Art. 1650

tract of lease. There arises the new juridical relation between thelessor and the assignee who is converted into a new lessee. Thereis, in effect, a novation by substituting the person of the debtor(Art. 1291[2].) and novation cannot take place without the con-sent of the creditor. (Art. 1293.) Hence, the lessee cannot assignthe lease without the consent of the lessor (creditor), unless thereis a stipulation granting him that right. (Manlapat vs. Salazar, 98Phil. 356 [1956]; Sy Juco vs. Montemayor, 52 Phil. 73 [1928]; Vda.De Hijos de Barretto vs. Sevilla, Inc., 62 Phil. 593 [1935]; Tamiovs. Ticson, 443 SCRA 4 [2004].)

The objective of the prohibition is to protect the lessor or ownerof the leased properly. (Dakudao vs. Consolacion, 122 SCRA 877[1983].) An assignment of lease without the consent of the lessoris a ground for rescission of the lease. (Caco vs. Court of Appeals,80 SCRA 699 [1977].)

What is contemplated by Article 1649 is a transfer wherebythe original lessee is released from his obligations under the con-tract. In other words, there must be transfer of the contract itself,not merely of the rights of the lessee. Where the assignee of thelessee did not assume the liabilities and obligations of the lesseeunder an express stipulation that the assignment “does not carrywith it any of the liabilities and obligations’’ of the lessee-assignor,the assignee cannot be held liable for the rentals unpaid by thelessee-assignor. Here, the lessor’s consent is not required and hehas no right of action against the assignee. (Rohde Shotwell vs.Manila Motor Co., Inc., 100 Phil. 655 [1956].)

ART. 1650. When in the contract of lease of thingsthere is no express prohibition, the lessee may sub-let the thing leased, in whole or in part, without preju-dice to his responsibility for the performance of thecontract toward the lessor. (1550)

Sublease by lessee of thing leased.

(1) Unlike in assignment of a lease, a lessee may sublease theproperty in the absence of express prohibition. (Filoil RefineryCorp. vs. Mendoza, 150 SCRA 632 [1987].) A violation of the prohi-

597

bition entitles the lessor to rescission of the contract and indem-nification for damages or only the latter allowing the contract toremain in force. (see Art. 1659.) That the sublessee is financiallysolvent is not a defense. If the prohibition is merely implied, asublease is still allowed. The contract of lease must expressly stipu-late the prohibition on subletting.

(2) In sublease, the lessee remains a party to the contract. Thepersonality of the lessee does not disappear. There are two leasesand two distinct juridical relations: between the lessor and thelessee, and between the sublessor (lessee) and the sublessee, al-though intimately related to each other. The sublessee generallydoes not have any direct action against the lessor to require com-pliance with his or lessee’s obligations, or vice versa. The subles-sor is the one directly liable to the sublessee whose damages areincluded in whatever damages the former may recover from thelessor. (A. Maluenda & Co. vs. Enriquez, 46 Phil. 916 [1924]; Ortizvs. Balgos, 54 Phil. 171 [1929]; Manlapat vs. Salazar, 98 Phil. 356[1955]; Marumperio Cia Naviera vs. Court of Appeals, 156 SCRA368 [1987].)

(3) The sublease of a leased property cannot affect the efficacyof the contract of lease which subsists with all its legal consequencesnotwithstanding said sublease. (Celis vs. De Vera, [C.A.] 39 O.G. 652.)By express provision of Article 1650, the lessee is still responsiblefor the performance of his obligations toward the lessor.

(4) A judgment of eviction against the lessee affects the sub-lessee even if the latter is not sued in the ejectment case. This is sobecause the sublessee can invoke no right superior to that of thesublessor from which his own right is derived, and the momentthe sublessor is duly ousted from the premises, the sublessee hasno leg to stand on. His possession is entirely dependent on thelessee. His right, if any, is to demand reparation for damages fromhis sublessor, should the latter be at fault. (Ng Sui Tian vs. Amparo,80 Phil. 921 [1948]; Go King vs. Geronimo, 81 Phil. 445 [1948]; Sipinvs. Court of First Instance, 74 Phil. 649 [1944]; De La Cruz vs.Roxas, 75 Phil. 457 [1946]; Brodett vs. De La Rosa, 77 Phil. 752[1947]; Gozon vs. De La Rosa, 77 Phil. 919 [1947].)


598 LEASE Art. 1650

ILLUSTRATIVE CASE:

The lessee, without the written consent of the lessors, acceptedboarders in their apartment, the latter alleging that the lessee vio-lated the prohibition against subleasing any portion of the premiseswithout their written consent.

Facts: Respondents, spouses N and R Gopiao, leased to thepetitioner V. Malasarte an apartment on a month to month ba-sis for a monthly rental of P300. The lease agreement prohib-ited the subleasing or assignment of a portion of the leasedpremises. The respondents, through their attorney-in-fact, madean annual inspections of their apartment. They discovered thattwo (2) rooms on the second floor and a portion of the livingand dining rooms had been converted into bed spaces for board-ers. There were eight (8) bed spacers and boarders. One of theboarders moved out of the apartment and petitioner’s daugh-ter moved in on the same day.

Alleging that the petitioner had violated the lease contract,the Gopiaos demanded that he vacate the premises. When hedid not comply, they filed a complaint for ejectment in thebarangay court. Eventually, the case reached the courts.

Petitioner alleged that the boarders were his nephew, nieces,grandchildren or other relatives, who are students at the FarEastern University, and that the respondents filed the ejectmentsuit because they had demanded an increase in his rent fromP300 to P600 per month which he refused to pay.

Issue: Did the petitioner violate the lease agreement by tak-ing in of boarders?

Held: No. (1) Accepting boarders not equivalent to subleasing.— “The taking in of boarders by the petitioner in the leasedpremises, without the consent of the lessors, did not violate thelease agreement, for a prohibition against subleasing may notembrace the taking in of boarders. Accepting boarders is notequivalent to subleasing the premises. The lessee, by acceptingboarders and assigning rooms or bed spaces for them in theleased premises, does not relinquish or surrender his lease tothem. He did not cease to become the actual occupant and pos-sessor of the demised premises. He did not surrender the pos-session and control of the leased premises or a part thereof.

‘The word ‘sublet’ has a clear and distinct meaning, that is,it means to make a sublease, accompanied by a surrender of

599

the possession and control of the premises, or at least a partthereof.2 (51 C.J.S. 108.)’’

(2) Boarders merely provided with meals and lodging for a price.— By accepting boarders in the apartment, the petitioner didnot sublease portions of the apartment to the boarders, but onlyagreed to provide them with meals and/or lodging for a price.

To this effect are the following rulings:

‘Letting a room for personal occupation to a lodger doesnot constitute a subletting’ (51C C.J.S., citing Pembrook vs.Goldman, App., 176 So. 888).

‘Since a roomer or lodger is not a tenant in the strictlegal sense, it has generally been held that the taking in ofroomers or lodgers by a lessee does not constitute a viola-tion of a covenant or provision against subletting. How-ever, where the lease of one of the two houses of a doublebrick dwelling contained a provision that there should beno subletting of the leased premises, it was held that therewas a technical violation of the lease where the lesseesrented one of the rooms of such house to a person who wasnot related to the lessees in any way, and who, in additionto having a room and private bath, had breakfast with thelessees, and who was certified by such lessees as a tenantto the Price Administration.’ (49 Am. Jur. 2d Section 490,pp. 476.)

‘A sublease is a grant by a tenant of an interest in thedemised premises less than his own, retaining to himself areversion, and a subtenant is a person who rents all or aportion of leased premises from the lessee for a term lessthan the original one, leaving a reversionary interest in thefirst lessee.’ (49 Am. Jur. 2d Sec. 480, p. 469.)

‘A lessee’s common-law right to sublet may be ex-pressly restricted by a covenant or stipulation against sub-letting, but since such restriction are in restraint of aliena-tion, they are not looked upon with favor by the courts;they are construed with the utmost jealousy, and very easymodes have always been countenanced for defeating them.’(49 Am. Jur. 2d Sec. 485, pp. 472-473.)

Art. 1650 LEASE OF RURAL AND URBAN LANDS

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

600 LEASE Arts. 1651-1652

‘Permitting lodgers or boarders to occupy rooms in ademised building is not a subletting.’ (White v. Maynard,111 Mass 250, 15 Am. Rep. 28; 32 Am. Jur., pp. 331-332.)’’

(3) Lease contract has not been violated. — “Since neither thelaw (BP Blg. 25, as amended.) nor his contract with the prop-erty owner prohibits the petitioner from accepting roomers, bedspacers, or boarders in the leased apartment, the lease has notbeen violated. The lessors have no cause of action for the judi-cial ejectment of petitioner-lessee.’’ (Malasarte vs. Court of Ap-peals, 178 SCRA 310 [1989].)

ART. 1651. Without prejudice to his obligation to-ward the sublessor, the sublessee is bound to the les-sor for all acts which refer to the use and preserva-tion of the thing leased in the manner stipulated be-tween the lessor and the lessee. (1551)

Direct liability of sublessor to lessor.

The sublessee is not a party to the contract between the lessorand the lessee; hence, under the general rule in contracts (Art.1311.), the sublessee can only be held liable directly to the subles-sor. Article 1651 provides an exception to the rule. The lessor maybring an action directly against the sublessee if he does not useand preserve the thing leased in accordance with the agreementbetween the lessor and the lessee or with the nature of the prop-erty. (see Art. 1657[2].) It is not necessary that the sublessor bejoined as a defendant. (Ortiz vs. Balgos, 54 Phil. 171 [1929].)

The duty of the sublessee insofar as the use and preservationof the thing leased is concerned is without prejudice to his obli-gation towards the sublessor.

ART. 1652. The sublessee is subsidiarily liable tothe lessor for any rent due from the lessee. However,the sublessee shall not be responsible beyond theamount of rent due from him, in accordance with theterms of the sublease, at the time of the extra-judicialdemand by the lessor.

601

Payments of rent in advance by the sublessee shallbe deemed not to have been made, so far as thelessor’s claim is concerned, unless said paymentswere effected in virtue of the custom of the place.(1552a)

Subsidiary liability of sublessee to lessor.

(1) Remedy to collect rents from the sublessee. — Although thesublessee has assumed no direct obligation to answer for the rentsdue from the lessee to the lessor, the law grants the lessor the rightto demand payment from the sublessee the rents which the sub-lessor failed to pay the lessor. The evident purpose of the remedyis to prevent a situation where the lessee collects rents from thesublessee but does not pay his rents to the lessor.

Article 1652 does not annul the contractual relations betweenthe lessee and sublessee but simply helps the owner of the prop-erty to collect the rentals on the same. The demand to pay rentsmade by the lessor on the sublessee does not exempt the latterfrom his obligation to pay the sublessor the rents which said sub-lessee failed to pay the lessor. (Vera vs. Fisher, [C.A.] 51 O.G. 3476.)

(2) Amount of rent recoverable. — The liability of the sublesseeis limited to the amount of rent due from him to the sublessorunder the terms of the sublease at the time of the extrajudicialdemand by the lessor. Future rents cannot be recovered. Note thatthe liability of the sublessee is subsidiary, i.e., he is liable to thelessor only for rents the lessee failed to pay the lessor.

(3) Liability for rents paid in advance. — Articles 1651 and 1652impose upon the sublessee certain obligations which imply thegrant of a direct action in favor of the lessor against the former.Under the second paragraph of Article 1652, payments of rent inadvance by the sublessee shall be deemed not to have been made,so far as the lessor’s claim is concerned, unless said payments wereeffected in virtue of the custom of the place. The sublessee con-tinues to be subsidiarily liable to the lessor for any rent unpaidby the lessee. The rule is a precaution to avoid collusion betweenthe lessee and lessee. With the insolvency of the sublessee and thesupposed advance payment by the sublessee, the rights of the


602 LEASE Art. 1653

lessor might be rendered nugatory. (Celis vs. De Vera, [C.A.] 39O.G. 652.)

ART. 1653. The provisions governing warranty,contained in the Title on Sales, shall be applicable tothe contract of lease.

In the cases where the return of the price isrequired, reduction shall be made in proportion to thetime during which the lessee enjoyed the thing. (1553)

Warranty of the lessor.

Article 1653 applies to leases the warranties in sales. (see Com-ments under Arts. 1547, 1548, 1561, 1566, Part I.)

In a lease contract, the lessor likewise warrants that he has aright to lease the thing, that the lessee shall enjoy the legal andpeaceful possession of the thing, and that the thing is fit for theuse for which it is intended and free from any hidden fault ordefect. (see Art. 1654.)

In case of eviction of the lessee, and the return of the rents paidis required, a reduction shall be made taking into account theperiod during, which the lessee enjoyed the thing. The lessee hasalso the right to ask for the proportionate reduction of the rentsagreed upon where the area or number of the object of the leaseis less than that stated in the contract. (see Art. 1542, Part I.)

Lessor’s warranty distinct from his liabilityfor damages.

In connection with a lease, warranty is the obligation to re-pair or correct any fault or defect existing when the lessee tookover the property leased, but when the law declares that the les-sor must warrant the thing leased; it is not to be understood thathe must also indemnify the lessee. Liability for the warranty isnot equivalent to liability in damages, as the latter is an obliga-tion distinct from the former.

The lessor’s obligation to warrant the thing leased, whetheror not he knew of the existence therein of defects that rendered it

603

unsuitable for the use for which the lessee intended it, is distinctfrom his liability for damages, which only attaches when he knewabout such defects and failed to reveal them to the lessee or con-cealed them, in which case fraud and bad faith may be presumedon his part. (Yap Kim Chuan vs. Tiaoqui, 31 Phil. 433 [1915].)

In a lease of a cold storage plant for foodstuffs, the lessor isunderstood as having warranted that the leased premises wouldbe free from rats. In this warranty, fraud or bad faith on the partof the lessor is not a necessary element. A lessor of a cold storageplant may be held liable for the deterioration of the foodstuffsstored therein by the lessee because some foodstuffs were gnawedby rodents. (United States Lines Company vs. San Miguel Brew-ery, Inc., 10 SCRA 805 [1964].)

— oOo —


604 LEASE

SECTION 2. — Rights and Obligationsof the Lessor and the Lessee

ART. 1654. The lessor is obliged:

(1) To deliver the thing which is the object of thecontract in such a conditions as to render it fit for theuse intended;

(2) To make on the same during the lease all thenecessary repairs in order to keep it suitable for theuse to which it has been devoted, unless there is astipulation to the contrary;

(3) To maintain the lessee in the peaceful and ad-equate enjoyment of the lease for the entire durationof the contract. (1554a)

Obligations of the lessor.

Article 1654 enumerates the three (3) principal obligations ofthe lessor. Another obligation of the lessor is that he cannot alterthe form of the thing leased. (Art. 1661.)

(1) Delivery of the property. — The thing leased must be deliv-ered in order that the lessee may enjoy or use the same. Delivery,may, of course, be actual or constructive. (see Art. 1496, Part I.)

(a) At the time of delivery, the thing must be in a condi-tion fit for the use intended. The contract, however, may val-idly provide that the thing, when delivered, shall be in thesame condition in which it might be at the time of the perfec-tion of the contract. The parties may stipulate regarding thefitness of the thing and the particular use to which it will bedevoted by the lessee.

604

605

(b) When a lessee rents a building which turns out, how-ever, to be occupied by another person, and the former can-not obtain possession, his (the lessee’s) cause of action isagainst the lessor for breach of contract in that the latter vio-lated the obligation of delivering to him the peaceful posses-sion of the leased premises. The lessee has no cause of actionagainst the possessor because he has no relation, contractualor ex delicto, with the latter. (Republic vs. De Los Angeles, 41SCRA 422 [1971].) A lessee who fails to take possession of theleased premises on account of the presence of third personsunwilling to vacate the premises because of some previousact or transaction of the lessor, should institute the actionagainst the lessor based upon the latter’s failure to complyhis obligation to deliver the same. (Rivera vs. Halili, 9 SCRA59 [1963].)

(2) Making of necessary repairs. — Article 1654 speaks of neces-sary repairs to keep the thing leased suitable for the use to whichit has been devoted unless there is a stipulation to the contrary.In default of a special stipulation, the custom of the place shall beobserved as to the kind of repairs. (Art. 1686.) If the lessor fails inthe performance of this duty, the lessee may suspend the paymentof rent (Art. 1658.) or avail himself of the other remedies providedin the law. The lessor is not liable for repairs for damages or dete-rioration caused by the lessee himself.

(a) The lessee may agree to do the repairs and relieve thelessor of the duty, as where the lessee is to pay only a verymoderate if not nominal, rent. (Gonzales vs. Mateo, 74 Phil.573 [1944].)

(b) The word “repairs’’ implies the putting back of some-thing in the condition in which it was originally, while an “im-provement’’ is the adding of something new thereto; hence,the filling of a vacant lot is not a repair (Albano vs. Villanueva,7 Phil. 277 [1906].) nor the construction of a house. (Valenciavs. Ayala de Roxas, 13 Phil. 45 [1909].)

(c) The word “repairs,’’ in its ordinary acceptation, mustbe understood to apply to the restoration of things after in-jury or partial destruction, without complete loss of identityin the thing repaired.

Art. 1654 LEASE OF RURAL AND URBAN LANDSRights and Obligations of the Lessor and the Lessee

606 LEASE Art. 1654

The obligation to make repairs is very different from re-construction in case of total loss. Thus, the lessor’s obligationto make repairs does not extend to the obligation to recon-struct a camarin which has been totally destroyed by fire. Re-pairs mean the restoration of the camarin which had deterio-rated from use or has been partially destroyed without totalloss of identity. (Lizares vs. Alunan, 40 Phil. 981 [1920].)

(d) When the lessor agrees to keep a building under leasein a proper condition but fails to do so, and the lessee vacatesthe building before the expiration of the lease, the lessor can-not recover damages nor rent for the unexpired term. (Donatovs. Lack, 20 Phil. 503 [1911].)

(e) There are no authorities to the effect that it is incum-bent upon the owner to constantly inspect the premises andthat if he fails to do so or through error of judgment fails tomake repairs before the damage is material, the lessee has acause of action. As the lessee is in possession and if repairsare necessary, which it is the duty of the owner to make, thelessee should call upon the owner to make the necessary re-pairs. If the owner then fails to perform his duty, action wouldlie. (Gregorio Araneta, Inc. vs. Lyric Film Exchange, Inc., 58Phil. 735 [1933].)

(f) Where the lessee’s goods got wet as a result of torren-tial rain even though the roof of the building occupied by thelessee was in good condition and there was no proof that thelessor knew that it had cracks or defects, the lessor cannot beheld liable for damages in the absence of express agreementto that effect. (Yap Kim Chuan vs. Tiaoqui, 31 Phil. 433 [1915].)Note that while the lessor is not liable for damages due to afortuitous event or force majeure, he must make the repairs afterhe has been advised by the lessee of the necessity thereofwithin the shortest time possible.

(3) Keeping lessee in peaceful and adequate enjoyment. — The les-sor’s obligation to maintain the lessee arises when acts termed“legal trespass’’ disturb, dispute, or place difficulties in the les-see’s peaceful and adequate enjoyment of the leased premises thatin some manner or other cast doubt upon the right of the lessorto execute the lease. The lessor must answer for such legal tres-

607

pass. (Liwayway Publications, Inc. vs. Permanent Concrete Work-ers Union, 108 SCRA 161 [1981].)

(a) The lessor who fails in the performance of his obliga-tions shall be subject to indemnity for the losses and dam-ages caused thereby. The true measure of damages for thebreach of such a contract is what the plaintiff has lost by thebreach. (De La Cruz vs. Seminary of Manila, 18 Phil. 330[1911].)

(b) The warranty of the lessor is that the lessee shall notbe disturbed in his legal, not physical possession. (Bobol vs.Torres, 84 SCRA 302 [1978]; Goldstein vs. Roces, 34 Phil. 562[1916]; see Chua Tee Dee vs. Court of Appeals, 429 SCRA 418[2004].) Hence, the lessor is not liable for physical trespass,but is liable when his non-payment of the real estate tax re-sults in the eviction of the lessee. (Heirs of Ormaechea vs. CuChee Gan & Co., [C.A.] 36 O.G. 3527.) The lessor, however, isnot responsible for his lessee’s eviction through condemna-tion proceedings for the reason that expropriation is involun-tary. (Sayo vs. Manila Railroad Co., 43 Phil. 551 [1922].)

(c) It has been held that the act of the Japanese ArmedForces in evicting the lessee from the leased premises consti-tuted not merely an act of trespass (pertubacion de mero hecho)but a trespass under a color of title (perturbacion de derecho)chargeable to the lessor. The lessee’s obligation to pay rentalsceased during such deprivation. (Vda. De Villareal vs. Ma-nila Motor Co., 104 Phil. 926 [1958].)

(d) In a case where the agreement of the parties is for thelease of an entire area and “the term of the lease shall be con-sidered as extended for a period equal to that during whichthe lessee was not in possession of the leased premises’’, thefailure of the lessee to use a portion of the leased premiseswas held equivalent to a dispossession from the entire area inquestion, for there was incomplete performance by the lessorof its principal prestation, thereby calling for the applicationof the contractual provision on extension of term. (NinoyAquino International Airport Authority vs. Court of Appeals,398 SCRA 703 [2003].)


608 LEASE Art. 1655

(e) The obligation of the lessor to maintain the lessee inthe peaceful and adequate enjoyment of the lease persists onlyfor the duration of the contract. (Tagbilaran Integrated SellersAssoc. vs. Court of Appeals, 444 SCRA 193 [2004].)

ART. 1655. If the thing leased is totally destroyedby a fortuitous event, the lease is extinguished. If thedestruction is partial, the lessee may choose betweena proportional reduction of the rent and a rescissionof the lease. (n)

Effect of destruction of thing leasedby fortuitous event.

(1) Destruction total. — In this case, the lease is extinguished,because of the absence of the object of the contract. The lessee ofa room in a building which is subsequently destroyed cannotconsider himself a lessee of the land on which said building wasconstructed and from which he is sought to be ousted, just be-cause he was a lessee of one of the rooms of said buildings. Hislease came to an end when the building was destroyed, so that,to make him lessee of the land thereafter, a new contract of leasewould have to be made. (Roces vs. Rickards, [C.A.] 45 O.G. [Supp.]97.) Where the buildings and the land, which formed part of thecausa or consideration of the lease contract, constituted an indi-visible unit, the destruction of the buildings extinguished theobligation or terminated the lease contract. (Rohde Shotwell vs.Manila Motors Co., Inc., 100 Phil. 655 [1957].)

(2) Destruction partial. — In this case, the lessee is given theoption to choose between a proportionate reduction of the rentand rescission of the lease. Once the choice of the lessee has beencommunicated to the lessor, the former cannot change it. (see Art.1201.) If reduction of rent is chosen, the same shall be retroactiveto the date the partial destruction occurred. In case of rescission,the general rule is that it will not be granted for slight or trivialcauses. The partial destruction, under the circumstances, shouldbe important or substantial as to defeat the purpose of the lesseein entering into the contract of lease.

609

ART. 1656. The lessor of a business or industrialestablishment may continue engaging in the samebusiness or industry to which the lessee devotes thething leased, unless there is a stipulation to the con-trary. (n)

Right of lessor to continue same businessor industry engaged in by lessee.

This provision permits the lessor of a business or industrialestablishment to continue engaging in the same business or in-dustry to which the lessee has devoted the thing leased. A leaseis no warranty by the lessor to the lessee that the latter’s businesswould be successful. Even if the lessee should suffer losses, hewould still be bound to fulfill the terms of the lease. (City of Nagavs. Court of Appeals, 96 Phil. 153 [1954].)

Neither does a lease create a right in favor of the lessee to befree from competition offered by the lessor or other persons. It issubmitted that the lessor may engage or continue to engage inthe same business of the lessee, unless there is a stipulation to thecontrary.

ART. 1657. The lessee is obliged:

(1) To pay the price of the lease according to theterms stipulated;

(2) To use the thing leased as a diligent father of afamily, devoting it to the use stipulated; and in theabsence of stipulation, to that which may be inferredfrom the nature of the thing leased, according to thecustom of the place;

(3) To pay the expenses for the deed of lease.(1555)

Obligations of the lessee.

Article 1657 enumerates the three (3) principal obligations ofthe lessee. Another obligation of the lessee is to notify the lessorof every usurpation or untoward act by any third person and ofthe necessity of urgent repairs. (Art. 1663.)

Arts. 1656-1657 LEASE OF RURAL AND URBAN LANDSRights and Obligations of the Lessor and the Lessee

610 LEASE Art. 1657

(1) Payment of agreed price of lease. — The obligation of the les-see to pay the rent agreed upon arises only when the thing leasedhas been delivered to the lessee for the purposes stipulated in thecontract. Thus, where the agreement to lease a vessel was neverconsummated for the reason that the defendant did not acceptdelivery of the same because it was not what it was representedto him, the lessee was not liable for rent. (Sugar Estates vs. Iribar,5 Phil. 316 [1905].)

(a) Only the lessor has the right to fix the rents. The courtcannot determine the rent and compel the lessor to conformthereto and allow the lessee to enjoy the premises on the ba-sis of the rents fixed by it. (Lim Si vs. Lim, 109 Phil. 251 [1960].)It is error for the court to fix a monthly rental at an amountwhich is lower than what the lessee is willing to pay for theleased premises. (Imperial Insurance, Inc. vs. Simon, 14 SCRA855 [1965].)

(b) The lessor has not only the right to terminate the leaseupon the expiration of the term but also to increase the rentin case of renewal. The lessee has to option to accept the newrate or vacate the premises; otherwise, he will be considereda possessor in bad faith of the property. (Bulahan vs. Tuason,109 Phil. 251 [1960]; see De Leon Vda. de Roxas vs. Court ofAppeals, 63 SCRA 302 [1975].)

(c) Where the lessee was in continuous possession of theleased building and lot during the pendency of the case, op-erating its business therein and making profits thereby,whereas the lessor was not only deprived of the possessionof his property but also of the rental therefor, said lessee mustbe required to compensate the lessor for such occupancy un-til it vacates the premises. (Camus vs. Price, Inc., 5 SCRA 581[1962]; Price, Inc. vs. Rilloraza, 17 Phil. 957 [1955].) The lesseeis obliged to pay rentals during the pendency of the actionfor rescission of the lease. (M & M Management Aids, Inc. vs.Court of Appeals, 130 SCRA 225 [1985].)

(d) Where on few occasions the lessee paid late the rentalsdue, but the delay was only for a few days, such breaches arenot so substantial and fundamental to warrant the rescission

611

of the lease. (Filoil Refinery Corp. vs. Mendoza, 150 SCRA 632[1987].)

(e) The fact that the vendor-lessee has a right to repur-chase the lots sold by him under a pacto de retro sale and leasedto him by the vendee, is no excuse for failure to pay rentals.The sale and the lease are independent of each other. (Beechvs. Jimenez, 12 Phil. 212 [1908].)

(f) The disagreement between a lessor and a lessee as tothe amount of rent to be paid cannot be decided in an actionof consignation (see Art. 1256.) but in that of forcible entryand unlawful detainer that the lessor institutes when the les-see refuses to pay the rents that the lessor has fixed for theproperty. (Lim vs. Lim, supra.)

(g) The place for the payment of rental is governed by thesame rules regarding payment of obligations in general.1

(2) Proper use of the thing leased. — The lessee must exercisethe diligence of a good father of a family. He must devote the thingto the use stipulated, and if none was stipulated, to that whichmay be inferred from the nature of the thing leased according tothe custom of the place. The use of the thing for an illegal pur-pose entitles the lessor to terminate the contract.

“When a thing by its nature is susceptible of various uses,the lessee may use it for any of the purposes for which it maybe suitable. The lessee need limit himself to the use to whichthe thing was devoted at the time of the lease. Thus, a lot mayat the time of the contract may have been used as a deposi-tary for lumber; the lessee may use it as a motor compoundor even for purposes of constructions suitable to the place.But when the lease is of a commercial establishment dedicatedto a particular business, such as a bakery or grocery, the les-

1Art. 1251. Payment shall be made in the place designated in the obligation.There being no express stipulation and if the undertaking is to deliver a determi-

nate thing, the payment shall be made wherever the thing might be at the moment theobligation was constituted.

In any other case the place of payment shall be the domicile of the debtor.If the debtor changes his domicile in bad faith or after he has incurred in delay, the

additional expenses shall be borne by him.These provisions are without prejudice to venue under the Rules of Court. (1171a)


612 LEASE Art. 1658

see cannot change the purpose of such establishment.’’ (A.M.Tolentino, Commentaries and Jurisprudence on the Civil Codeof the Phils., 1992 Ed., Vol. V, p. 229.)

(3) Payment of expenses for deed of lease. — In sale, the expensesfor the execution and registration of the deed of sale shall be borneby the vendor, unless there is a stipulation to the contrary. (Art.1487.) In lease, the law imposes the obligation to pay expensesfor the deed of lease on the lessee. By agreement, the obligationmay be assumed by the lessor.

ART. 1658. The lessee may suspend the paymentof the rent in case the lessor fails to make the neces-sary repairs or to maintain the lessee in peaceful andadequate enjoyment of the property leased. (n)

Suspension of the payment of rent.

The provision mentions two (2) grounds which give the les-see the right to suspend the payment of rent.

A similar rule in sales permit the vendee to suspend the pay-ment of the price should he be disturbed in the possession orownership of the thing bought, by a vindicatory action or fore-closure of mortgage. (Art. 1590.) In the case of sale, however, therule is justified for the vendee may lose the price he paid and thething bought. In lease, there is no risk that the lessee will lose bothhis rental payment and his possession of the thing leased exceptwhere the rentals have been paid in advance.

(1) In the case of repairs, the lessee may suspend paymentfrom the time demand is made upon the lessor and the latter failsto perform his obligation.

(2) In the case of eviction, the lessee is released from the obli-gation to pay rents from the time he is unlawfully dispossessed.(Heirs of Ormachea vs. Cu Chee Gan & Co. [C.A.] 36 O.G. 3527.)However, where the disturbance in the lessee’s possession iscaused by mere intruder who acted without any color of title orright, the disturbance is a mere act of trespass for which the les-sor is not liable. The lessee has a direct against the trespasser.(Madamba vs. Araneta, 106 Phil. 103 [1958].)

613

If the cause for suspending payment has ceased to exist, thelessee has no liability to pay the rents, for the intervening periodunless the lessor can prove that the suspension was not legallyjustifiable.

ART. 1659. If the lessor or the lessee should notcomply with the obligations set forth in Articles 1654and 1657, the aggrieved party may ask for the rescis-sion of the contract and indemnification for damages,or only the latter, allowing the contract to remain inforce. (1556)

Alternative remedies of aggrieved party.

A lease contract imposes reciprocal obligations. Upon failureof either the lessor or the lessee to comply with any of his obliga-tions, the aggrieved or innocent party may elect to demand therescission of the contract or its fulfillment with damages in eithercase.2

(1) Article 1659 follows the general rule in obligations con-tained in Article 11913 with the difference that while the courtsare granted by said article the discretion to grant an obligor addi-tional time for performance (par. 3 thereof.), under Article 1659,there is no such discretion granted to courts. (Mina vs. Rodriguez,[CA] 40 O.G. [Supp. 5] 65.)

(2) A violation of the lease contract entitles the aggrievedparty to demand indemnity for damages.

(a) An action which has for its object the recovery of dam-ages is quite different from an action for ejectment which has

2Art. 1192. In case both parties have committed a breach of the obligation, the li-ability of the first infractor shall be equitably tempered by the courts. If it cannot bedetermined which of the parties first violated the contract, the same shall be deemedextinguished, and each shall bear his own damages. (n)

3Art. 1191. The power to rescind obligations is implied in reciprocal ones, in caseone of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of theobligation, with the payment of damages in either case. He may also seek rescission,even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizingthe fixing of a period.


614 LEASE Art. 1659

for its object the recovery of the possession of the leased prop-erty. (Yunti vs. Dy-Yco, Phil. 353 [1906].)

(b) As to the amount of damages recoverable by the les-sor, it is the difference between the rental actually obtainedand that stipulated in the contract of lease. (Maluenda & Co.vs. Enriquez, 46 Phil. 916 [1924].) The indemnity for damagesdoes not include rents for the future where the termination ofthe lease abrogated liability for future rents. (Rios vs. Jacinto,Palma y Hermanos, 49 Phil. 1 [1926].)

(c) Where the lessee fails to pay on time the stipulatedrents, the lessor has the right to rescind the contract, recoverthe unpaid rents, and eject the lessee. (Hernaez vs.Montelibano, 34 Phil. 954 [1916]; Avila vs. Veloso, 69 Phil. 357[1939].)

Rescission of lease contract.

(1) In addition to the general remedy of rescission grantedunder Article 1191 of the Civil Code, Article 1659 grants the rem-edy of rescission for breach of any of the lessor’s or lessee’s statu-tory obligation. Ordinarily, an obligee’s remedies upon breach ofan obligation are judicial in nature. This is implicit in the thirdparagraph of Article 1191, and in Article 1659. In certain excep-tional cases, the law recognizes the availability of extrajudicialremedies, which exist in addition to the judicial remedies givenin the above provisions. (Chua vs. Victorio, 428 SCRA 447 [2005];see Art. 1673.)

(a) Upon nonpayment of rent by the lessee, the lessor mayelect to treat the contract as rescinded and thereby determinethe right of the lessee to continue in possession; and his rightto recover possession may be enforced in an action for un-lawful detainer. It is not necessary, in such situation, that anindependent action for the rescission of the lease should firstbe instituted for the purpose of putting an end to the right ofthe tenant to remain in possession under the lease (Pamintuanvs. Tiglao, 53 Phil. 7 [1929].), unlike resolution of reciprocalobligations under Article 1191. (Dio vs. Concepcion, 296 SCRA579 [1998].)

615

(b) The lessor may rescind the lease for the lessee’s fail-ure to pay the rentals. If the lessor does not accept the rentals,the lessee’s remedy is tender of payment and consignation.Rescission under Article 1659 is different from the automaticrescission if the lessee failed to make the required deposit ofrentals. In making the deposit, the lessee prevents the auto-matic cancellation of the lease but does not preclude the les-sor from suing for rescission of the lease for the lessee’s fail-ure to pay the stipulated rentals. (Pamintuan vs. Court ofAppeals, 42 SCRA 344 [1971].)

(c) A judgment rescinding a lease should order the lesseeto vacate and return the premises to the lessor. The court hasno discretion under Article 1659 to grant the lessee a longerperiod for performance. The lessee should pay the accruedrent. (Luna vs. Carandang, 26 SCRA 306 [1968].)

(d) A lessee cannot take advantage of his own wrong torescind the lease. He cannot refuse to pay rent and then de-clare the lease rescinded. A stipulation allowing the lessor torescind the lease for nonpayment of rentals does not meanthat the lessee may refuse to pay the rentals and thereby pro-duce the abrogation of the lease. (Hernaez vs. Montelibano,34 Phil. 954 [1916].) Rescission is a remedy granted only tothe injured party and cannot be availed of by the wrongdoer.If a person could rescind an obligation by the simple act ofrefusing to fulfill it, then contracts would be a worthless thingand if one may take advantage of his own wrong then thereis no inducement to do right. (Fernandez Hermanos vs. Pitt,34 Phil. 549 [1916].)

(e) Where the lessor takes possession of the leased landfor nonpayment of rentals and the lessee voluntarily surren-ders it, the lessor has no right to recover the rent accruing sub-sequently. (Rios vs. Jacinto, Paloma y Hermanos, 49 Phil. 7[1926].)

(f) A lessor may seek rescission of a lease contract andejectment of the lessee simultaneously in a single action forunlawful detainer. (Dayao vs. Shell Company, 97 SCRA 407[1980].)


616 LEASE Art. 1659

(2) An action to annul a lease and the grounds therefor pro-vided by law, and an action for rescission thereof and the groundsupon which the same may be based, should not be confused. Fail-ure on the part of the lessor or lessee to comply with their con-tract gives rise to an action to rescind the same and not one toannul it. The allegation of non-performance of lessee’s obligationto pay the rental agreed upon made in lessor’s complaint is obvi-ously not a ground to annul the lease but to rescind it. (Vda. DeSanti vs. Alcid, [C.A.] 44 O.G. 130.)

(3) In an action for rescission of a contract of lease and indem-nity for losses and damages, the withdrawal made by the lessorof the amounts deposited with the Clerk of Court by the lesseefor rentals due, does not constitute a waiver of the right of actionfor ejectment in which the complaint of said lessor is based andwith more reason when such withdrawal was made with the au-thority of the court. (Veloso vs. Avila, [C.A.] 38 O.G. 3217.)

(4) Rescission will not be permitted for a slight or casualbreach of the contract, but only for such breaches as are so sub-stantial and fundamental as to defeat the object of the parties inmaking the agreement. (Song & Co. vs. Hawaiian-Philippine Co.,47 Phil. 821 [1925]; Ang vs. Court of Appeals, 70 SCRA 286 [1989].)The question of whether a breach is substantial depends upon theattendant circumstances. (Delta Motor Corp. vs. Genuino, 170SCRA 29 [1989].)

(a) Where the defendant leased a jukebox for a stipulatedperiod for 75% of the gross receipts per week, and once in awhile coins would be stuck but such sticking-up of the coinswas a normal occurrence, the defendant was held not justi-fied in trying to return the jukebox and considering the con-tract automatically rescinded, for in order that an action ofrescission to prosper, the breach must be substantial, not likethe stick-up in this case, which happened only occasionally.(Philippine Amusement Enterprises, Inc. vs. Natividad, 21SCRA 284 [1967].)

(b) Where time is not of the essence of the contract, a slightdelay on the part of the lessor or lessee in the performance ofhis obligation is not a sufficient ground for the rescission of

617

the contract. Thus, it has been held that delay on four (4) oc-casions in the payment of rentals for a few days did not con-stitute substantial breaches in a contract of lease because thelaw is not concerned with trifles. De minimis non curat lex.(Filoil Refinery Corp. vs. Mendoza, 150 SCRA 632 [1987].)

(c) In another case, the lessee sent a letter on January 15,1986 to the lessor manifesting his intent to exercise the optionto purchase the leased property subject of the option withinthe lease period ending January 30, 1986 but requesting for asix-month extension of the lease contract for the alleged pur-pose of raising funds intended to purchase the property. Therequest was denied by the lessor on February 14, 1986. By aletter dated February 18, 1986, the lessee notified the lessor ofhis desire to exercise the option formally. It was held that thedelay of 18 days was neither “substantial’’ nor “fundamen-tal’’ and did not amount to breach that would defeat the in-tention of the parties when they executed the lease contractwith option to purchase. (Carciller vs. Court of Appeals, 103SCAD 258, 302 SCRA 718 [1999].)

ART. 1660. If a dwelling place or any other buildingintended for human habitation is in such a conditionthat its use brings imminent and serious danger tolife or health, the lessee may terminate the lease atonce by notifying the lessor, even if at the time thecontract was perfected the former knew of the dan-gerous condition or waived the right to rescind thelease on account of this condition. (n)

Dwelling place or building dangerousto life or health.

Under Article 1660, the lessee may terminate the lease at onceby notice to the lessor in case the dwelling place or any otherbuilding is unfit for human habitation and is dangerous to life orhealth. The right is given to the lessee even if at the time the con-tract was perfected, the lessee knew of the dangerous conditionor waived the right to rescind the lease on account of said condi-tion.


618 LEASE Art. 1661

This right of the lessee is a precaution for public safety whichis above any stipulation. (Report of the Code Commission, p. 142.)It cannot be waived. (Art. 6.)

ART. 1661. The lessor cannot alter the form of thething leased in such a way as to impair the use towhich the thing is devoted under the terms of thelease. (1557a)

Alteration of form of lease.

(1) By the lessor. — The lessor can alter the form of the leaseprovided there is no impairment in the use to which the thing isdevoted under the terms of the lease.

To constitute an alteration within the purview of the law, themodification must be in such a manner that it would destroy thesubstance of the thing leased or change its conditions in such away to render the thing leased unserviceable for the use intended.Under the facts presented in a case, it was held that the conver-sion of the main gate into a concrete culvert did not at all alter theform of the thing leased in such a way as to impair the use of thething leased and render it unserviceable. (Banate vs. Cuñada, 6C.A. Rep. 306.)

(2) By the lessee. — The lessee may alter the form of the leaseso long as the value of the property is not impaired by the altera-tion.

The lessee of a building under an 18-year lease had the rightto make such changes as the business established therein required,provided that neither the value nor the solidity of the buildingwas impaired. Said lessee undertook to remove a thick masonrywall and substitute therefor a reinforced concrete wall, whichwould add materially to the floor space, which he needed in hisbusiness, and at the same time strengthen the building and addmaterially to the value of the building. The lessors claimed thelease should be rescinded because the form and substance of theleased premises had been changed. Held: Not such alteration ofthe form and substance under the circumstances of the leasedpremises as to entitle the lessor to rescission of the lease. (Enriquezvs. Watson & Co., 22 Phil. 623 [1912].)

619

If the object leased were a house, the lessee might effect suchimprovements for use, recreation or comfort as would not changeits form or substance as he deemed fit; he could build a bower orluxurious pavilion more expensive than the house itself, to which,at the expiration of the lease, the owner of the house would haveno right whatever, unless the lessee could not remove the samewithout injury to the house to which it was attached as an im-provement, excepting, of course, the right to cause the same to bedemolished so that the house might be returned to him in the samecondition that the lessee received it as provided in Article 1665.(In re Building and Loan Association and Peñaloza, 13 Phil. 575[1909].)

ART. 1662. If during the lease it should becomenecessary to make some urgent repairs upon the thingleased, which cannot be deferred until the termina-tion of the lease, the lessee is obliged to tolerate thework, although it may be very annoying to him, andalthough during the same, he may be deprived of apart of the premises.

If the repairs last more than forty days the rentshall be reduced in proportion to the time — includ-ing the first forty days — and the part of the propertyof which the lessee has been deprived.

When the work is of such a nature that the portionwhich the lessee and his family need for their dwell-ing becomes uninhabitable, he may rescind the con-tract if the main purpose of the lease is to provide adwelling place for the lessee. (1558a)

Rule in case of urgent repairs.

(1) Need to make the repairs. — The lessor has the obligation tomake necessary repairs (Art. 1654[2].) and the lessee is obliged tonotify the lessor of the urgency of such repair. (Art. 1663, par. 2.)If the repairs are not urgent, the lessee can refuse to be disturbedin the enjoyment of the thing leased. But if the repairs are so ur-gent that they cannot be deferred until the termination of the lease,the lessee has no choice but to bear the burden of whatever in-


620 LEASE Art. 1663

convenience they may cause. The burden is on the lessor to provethe urgency of the repair.

Note that Article 1662 speaks of repairs. Modifications orimprovements which the lessor may want to make on the prop-erty during the period of the lease cannot be done against theobjection of the lessee.

(2) Length of time for the repairs. — If the repairs should lastfor more than 40 days, the lessee is entitled to a proportionatereduction of the rent, taking into account the time (including thefirst 40 days) and the part of the property of which the lessee hasbeen deprived. If the repairs did not last 40 days, the lessee can-not ask for reduction in the absence of a provision in the contractgiving him such right.

(3) Rescission of the lease. — Regardless of the length of timetaken up for repairs, rescission may be availed of by the lessee ifthe main purpose of the lease is to provide a dwelling place forthe lessee and work done has made the same uninhabitable.

ART. 1663. The lessee is obliged to bring to theknowledge of the proprietor, within the shortestpossible time, every usurpation or untoward actwhich any third person may have committed ormay be openly preparing to carry out upon the thingleased.

He is also obliged to advise the owner, with thesame urgency, of the need of all repairs included inNo. 2 of Article 1654.

In both cases the lessee shall be liable for the dam-ages which, through his negligence, may be sufferedby the proprietor.

If the lessor fails to make urgent repairs, the les-see, in order to avoid an imminent danger, may orderthe repairs at the lessor’s cost. (1559a)

Obligation of lessee to notify lessor.

To the obligations of the lessee under Article 1657, Article 1663adds the obligation to notify the lessor of any usurpation and of

621

the need for repairs. In both cases, the lessee shall be liable forthe damages which, through his negligent failure to give the re-quired notice, may be suffered by the lessor.

(1) Usurpation or untoward act by a third person. — The purposeof the notice is to enable the owner to maintain his civil posses-sion, by suit if necessary. (Simpao vs. Dizon, 1 Phil. 261 [1901].) Apossessor must be respected in his possession. (Art. 539.)

The owner is entitled to defend his property from any aggres-sion in order to prevent serious injury to his interests which wouldhappen if this was left to the lessee who has no interest and hasno real right in the property leased. Whatever may be the natureof the disturbance occurring, so long as it may affect the posses-sion or the right of the owner over the leased property, he is enti-tled to institute the proper action. It would be a judicial absurd-ity to deny him such a right and trust and the defense of his inter-ests to the lessee whose obligations and rights are entirely differ-ent. (Roxas vs. Mijares, 9 Phil. 252 [1907].)

(2) Need of repairs. — As the lessee is in possession and if re-pairs are necessary, which it is the duty of the owner to make, thelessee should call upon the owner to make the necessary repairs.If the owner then fails to perform his duty, action would lie. It isnot the duty of the lessor to constantly inspect the premises to seeif there is a need to make repairs. (Gregorio Araneta, Inc. vs. LyricFilm Exchange, Inc., 58 Phil. 736 [1933].)

The last paragraph is new, adopting the principle laid downin a Court of Appeals case, to wit:

“We believe that this provision does not deprive the les-see of the right to adopt certain measures to protect his inter-ests and avoid losses and damages or minimize them, mak-ing for his account the repairs of the nature mentioned inArticle 1554, paragraph 2, and to later claim against the les-sor what he spent for them so long as having advised him ofthe necessity of said repairs the lessor should fail to makethem. Such right becomes clearer above all when the repairsare urgent which can not be delayed without serious damageto the lessee or to the public.


622 LEASE Art. 1664

It appears unjust to us to impose upon the lessee inter-ested in the continuance of the lease the attitude of resigningto bear the losses and damages and satisfying himself withthe hope of claiming them afterwards from the lessor. To in-terpret Article 1556 in this manner is to give it a limited sensethat it would not only diminish its practical utility but it wouldmake it an anachronism in this modern age of progress andadvancement in which we live. And it can not be said that togrant the lessee the right which we mention is to open to himthe way of taking the law into his own hands since it is only ameans of protection, a defense, always justified when theyare prompted by culpable and negligent acts of him who inthe last analysis would have to answer for losses and dam-ages if they are not avoided.’’ (Johnson-Pickett Rope Co. vs.Grey, [C.A.] 40 O.G. [Supp. 11] 239.)

ART. 1664. The lessor is not obliged to answer fora mere act of trespass which a third person may causeon the use of the thing leased: but the lessee shallhave a direct action against the intruder.

There is a mere act of trespass when the third per-son claims no right whatever. (1560a)

Rule in case of mere act of trespass.

There are two (2) kinds of trespass with respect to property:Mere act of trespass (disturbance in fact) where a third person claimsno right whatever, as in forcible entry; and trespass in law (distur-bance in law) where a third person claims a legal right to theproperty, such as an action to recover possession based on own-ership.

In case of a mere act of trespass by a third person upon theleased property, the lessor is not liable to the lessee for the distur-bance of the latter’s possession. The lessee shall have a direct ac-tion against the usurper or intruder. In case of trespass in law, thereal party in interest is the lessor who becomes liable to the les-see. The lessor may maintain an action to recover title (accionreinvindicatoria) or to establish his better right of possession (accion

623

publiciana). It has been held that the act of the Japanese armedforces in evicting the lessee from the leased premises and occu-pying the same was a trespass in law under the rules of “belliger-ent occupation.’’ Our Constitution (Sec. 2, Art. II.) adopts the gen-erally accepted principles of international law as part of the lawof the land. (Vda. De Villaruel vs. Manila Motor Co.,4 104 Phil.926 [1958].)

A lessor is not responsible for his lessee’s eviction throughcondemnation proceedings and cannot be held liable for damagestherefor. The lessee must look to the expropriating plaintiff for hiscompensation. (Sayo vs. Manila Railroad Co., 43 Phil. 551 [1922].)

In connection with Article 1664, Manresa makes this commen-tary on the reason for the non-liability of the lessor in trespass infact only:

“A necessary condition of the enjoyment of the lessee, thechief feature of the lease, is the possession he must have tothe thing; without that, there can be no enjoyment. True it isthat the lessee does not hold such possession in the capacityof owner and that, therefore, he cannot and should not de-rive from it the effects which, under other circumstances,would ensue; but, after all, he is a possessor. If we carefullyexamine that relation of possession, we shall see that it is dou-ble; on the one hand, he possesses the thing as a condition ofenjoying it while, on the other, he possesses his right to theenjoyment of the thing. In certain respects, he holds posses-sion of the thing in the name of its owner, in so far as thislatter has not ceased to hold it for the purpose of prescrip-tion, for example, because he leases the property; but the pos-session of his right of use pertains to him in his own name, asacquired by virtue of a just title, that is, the contract of lease.If then, the trespass in fact only refers to the use of the thingwho but the lessee can have the personality to oppose it?

4The reverses Reyes vs. Caltex [Phil.], Inc. (94 Phil. 654 [1959].), distinguishing itfrom the ruling in Lo Ching vs. Archbishop of Manila (81 Phil. 602 [1948].) where the Japa-nese army took possession of the leased premises and delivered the same to a German,who occupied them until liberation in January, 1945. The deprivation went beyond thelimits set by the Hague Conventions.


624 LEASE Art. 1665

It must be carefully noted that Article 1560 [now Art. 1664]speaks of trespass in fact only in the use of the property leasedand that if such trespass is translated into anything materialwhich affects the property itself, then only so far as it is a dis-turbance of the use of the property is it incumbent upon thelessee to repel it.

True it is that, pursuant to paragraph 3, of Article 1554[now 1654], the lessor must maintain the lessee in the peacefulenjoyment of the lease during all of the time covered by thecontract, and that, in consequence thereof, he is obliged to re-move such obstacles as impede said enjoyment, but, as inwarranty in a case of eviction, the obstacles to enjoymentwhich the lessor must remove are those that in some manneror order cast doubt upon the right by virtue of which the lessorhimself executed the lease and, strictly speaking, it is this rightthat the lessor should guarantee to the lessee.

Briefly, if the act of the trespass is not accompanied or pre-ceded by anything which reveals a really juridic intention onthe part of the trespasser, in such wise that the lessee can onlydistinguish the material fact, stripped of all legal forms orreason, we understand it to be trespass in fact only (de merobecho).’’ (Goldstein vs. Roces, 34 Phil. 562 [1916].)

ART. 1665. The lessee shall return the thing leased,upon the termination of the lease, just as he receivedit, save what has been lost or impaired by the lapse oftime, or by ordinary wear and tear, or from an inevita-ble cause. (1561a)

Return of thing leased upon expirationof lease.

At the expiration of the lease, the lease must return the prop-erty to the lessor in the same condition as he received it. He is notliable for loss or depreciation due to: (1) lapse of time; (2) ordi-nary wear and tear; and (3) inevitable cause or fortuitous event.

(1) Such obligation to return the leased premises is notdeemed fulfilled if the lessor cannot resume possession becauseof some impediment for which the lessee is responsible, or when

625

there is an occupant, placed by the lessee, who refuses to leave.In such instance, the relation of landlord and tenant is not dis-solved, and the lessee will be considered as holding over and heldliable for the injuries resulting from the lessor’s inability to havedominion of the property subject-matter of the lease. (Arevalo vs.Llantos, 5 C.A. Rep. 310; Tanangco vs. Tuazon, [C.A.] 57 O.G.6259.)

(2) As a general rule, the whole of the property subject to thelease and not only a part thereof, must be returned to the lessor.(Godoy vs. Ramirez, 168 SCRA 85 [1988]; Syjuco vs. Court ofAppeals, 172 SCRA 111 [1989].)

(3) There is no legal obstacle for the owner to allow a default-ing tenant to remain in the rented property one month, one yearor even more. That consent, no matter how long it may last, makesthe tenant’s possession lawful. Only when that consent is with-drawn and the owner demands the tenant to leave the propertyis when the owner’s right of possession is asserted and the ten-ant’s refusal or failure to move out makes his possession unlaw-ful, because it is violative of the owner’s preferential right of pos-session. (Maceda vs. Pedraza, [C.A.], G.R. No. 8644-R, April 11,1953.)

ART. 1666. In the absence of a statement concern-ing the condition of the thing at the time the leasewas constituted, the law presumes that the lessee re-ceived it in good condition, unless there is proof tothe contrary. (1562)

Presumption of receipt of thing leasedin good condition.

Article 1666 establishes the legal presumption that the lesseereceived the thing leased in good condition at the beginning ofthe lease. Upon the termination of the lease, he must retain it inthe same good condition. (Art. 1664.)

The presumption is merely prima facie. The lessee may provethe contrary. No such presumption arises where there is a state-ment or representation, written or oral, concerning the actualcondition of the thing at the time the lease was constituted.


626 LEASE Art. 1667

ART. 1667. The lessee is responsible for the dete-rioration or loss of the thing leased, unless he provesthat it took place without his fault. This burden of proofon the lessee does not apply when the destruction isdue to earthquake, flood, storm or other natural ca-lamity. (1563a)

Responsibility of lessee for deteriorationor loss of thing leased.

The general rule is that the lessee is responsible on the pre-sumption that he is guilty of fault or negligence. Hence, the bur-den of proof is upon the lessee to overcome the presumption.

There is no such presumption when the destruction is due toa natural calamity. In such case, it is unjust to impose upon thelessee the burden of proving due diligence. It is more probablethat the lessee was not negligent. (Report of the Code Commis-sion, p. 143.) The burden of proving that the lessee was negligentlies on the lessor.

(1) In the absence of proof that the current of the river was soswift that the collision was unavoidable, or that the wind that blewwas strong and unexpected which carried inevitably the craft tothe scow causing one to collide with the other, we cannot acceptthe theory that the sinking was caused by a fortuitous event. Theburden is upon the defendants to show that there was no negli-gence on their part or on the part of their agent, for such negli-gence is presumed from the mere sinking of the craft. (Santos vs.Villegas, [C.A.], 40 O.G. [Supp. 5] 135.)

(2) When a question arises as to the responsibility of a lesseefor the loss of the thing leased resulting from fire, and the trialcourt finds that reasonable precautions were taken by the lesseeto prevent fires, but that nevertheless a fire did occur, of inscruta-ble origin which destroyed the property in spite of all reasonableefforts that cold be put forth to prevent it, this is equivalent to afinding that lessee was without fault and that the loss was due toan inevitable cause. (Lizares vs. Hernaez, 40 Phil. 981 [1920].)

Ordinarily, fire is not a natural calamity. It is not mentionedin Article 1667. The lessee must prove he was without fault.

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(3) When a loss of leased property occurs, there is a presump-tion against the lessee, which makes him responsible, in the ab-sence of proof that the loss happened without his fault. But thequestion whether there has been fault on his part must be deter-mined in relation with other provisions of the Civil Code as wellas in the light of the general principles of jurisprudence. UnderArticle 1665, the lessee of lands is not responsible for a loss re-sulting from inevitable cause: and in Article 1174 the general ruleis declared that, in the absence of express provision to the con-trary, no one is liable for events which can not be foreseen orwhich, if foreseen, were inevitable. (Ibid.)

(4) Under a stipulation in a lease contract that the lesseewould be responsible for necessary repairs on the building leased,the failure of the lessee to make the repairs which caused the even-tual destruction of the building, renders him liable to the lessor.(Gonzales vs. Mateo, 74 Phil. 573 [1942].)

ART. 1668. The lessee is liable for any deteriorationcaused by members of his household and by guestsand visitors. (1564a)

Deterioration caused by others.

The liability of the lessee for any deterioration to the leasedproperty extends to members of his household, and to guests andvisitors. He is made legally responsible for their acts as in quasi-delicts (see Arts. 2176, 2180.) under the principle of “commandresponsibility.’’

The liability of the lessee for the acts of third persons is basedon the contract itself, under which the lessee has assumed cus-tody of the thing of which the lessor has been dispossessed. Thereis no need of proving that he was negligent in selecting and su-pervising his household helpers, visitors and guests. He is liablefrom the mere fact of having allowed them into the immovableleased. (A.M. Tolentino, op. cit., p. 241, citing 10 Planiol & Ripert714.)

The law makes no distinction between intentional and negli-gent acts of the third persons. The lessee, however, may recover


628 LEASE Art. 1669

from them what he has paid in satisfaction of the claim of thelessor.

ART. 1669. If the lease was made for a determinatetime. It ceases upon the day fixed, without the needof a demand. (1565)

Lease made for a determinate time.

When the lease is for a definite period stipulated in a contractof lease, the lease terminates on the day fixed without need of ademand or notice to vacate and return possession.

(1) When the lessee refuses to pay the new rent but contin-ues in his possession of the premises, he becomes a deforciantwithholding the property unlawfully. (see Bulahan vs. Tuason, 109Phil. 251 [1960].) But if he agrees to pay the increased rent, hecannot be ejected until he fails to comply with said obligation.(Vda. De Nuñga vs. Chan, 25 SCRA 441 [1968].)

(2) The continuous possession of the leased premises after theend or expiration of the time fixed in the contract, with the acqui-escence of the lessor, constitutes an implied renewal of the lease,not for the period of the original contract, but for the time estab-lished in Articles 1682 and 1687, so that if rentals were stipulatedto be paid monthly, the new lease is deemed to have been renewedfrom month to month and may be terminated each month upondemand. (Roman Catholic Archbishop of Manila vs. De Ocampo,1 C.A. Rep. 391.)

(3) Under Section 2, Rule 72 of the Rules of Court, a demandon the lessee is a prerequisite to an action for unlawful detainer,when the action is ‘for failure to pay rent due or to comply withthe conditions of his lease,’ and not where the action is to termi-nate the lease because of the expiration of its term. (De Santos vs.Vivas, 96 Phil. 538 [1955]; Co Tiamco vs. Diaz, 75 Phil. 672 [1944].)

(4) In a contract of lease of urban property for an indefiniteperiod, a notice to increase the rent is equivalent to a notice of thetermination of the contract. (Laguda vs. Javellana, [C.A.], 57 O.G.7178; Iturralde vs. Magcauas, 9 Phil., 599 [1907]; Cortes vs. Ramos,46 Phil. 184 [1924].)

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(5) Where a lease contract expressly stipulates that the lessormay terminate the lease when his children shall need the same,the lease shall be deemed terminated when the condition happens.(Ducusin vs. Court of Appeals, 122 SCRA 280 [1983].) When theagreement between the lessor and the lessee is that the lease isonly temporary and that it may be terminated in case the formerneeds the same for business, the lease is deemed terminated whenthe lessee is notified accordingly. (Madriaga vs. Court of Appeals,163 SCRA 461 [1988].)

Extension or renewal of lease.

(1) Authority of court. — A court is without authority to ex-tend a lease where the stipulated period of the contract has al-ready expired, especially if the lessor is unwilling to extend thesame. Such extension is completely devoid of legal basis. (Gindoyvs. Tapucar, 75 SCRA 31 [1977].)

(2) Lease not to be deemed extended or renewed by implication. —Where a lease contract expressly stipulates that the lease shall notbe deemed extended or renewed by implication beyond the con-tractual period for any cause or reason whatsoever but only bynegotiations, the mere fact that the lessee was willing to pay whathe claimed to be a reasonable rent — which was less than thatdemanded by the lessor — did not operate in any sense to extendthe lease. To hold that there had been such implied renewal of thelease simply because the lessee continued to occupy the premisesafter the expiration of the fixed period of the lease, would lead tothe absurd consequence that all that an overstaying lessee wouldhave to do to defeat the right of the lessor to change the prevail-ing rentals would be to resist and delay the ejectment action.(Ramon Magsaysay Award Foundation vs. Court of Appeals, 134SCRA 136 [1985]; Teresa Realty vs. Sison, 4 SCRA 958 [1962].)

(3) Lease extendible for a similar period. — A stipulation that alease is “extendible’’ for a further similar period is to be under-stood as giving the lessee the right to the additional period or toquit upon the expiration of the first term. The word “extendible’’standing without qualification in a contract of lease means thatthe term of the lease may be extended and is equivalent to a prom-ise by the lessor to extend and as a unilateral stipulation obliges


630 LEASE Art. 1669

the lessor to fulfill his promise. As a general rule, in construingsuch a provision, where there is an uncertainty or doubt, the les-see is favored, and not the lessor, because the latter, having thepower of stipulating in his favor, has neglected to do so; and uponthe principle that a grant should be taken most strongly againstthe grantor. (Cruz vs. Alberto, 39 Phil. 991 [1919]; Koh vs.Ongsiako, 36 Phil. 185 [1917]; Ledesma vs. Javellana, 121 SCRA794 [1983], see Cañete vs. San Antonio Agro-Industrial Dev. Corp.,113 SCRA 723 [1982].)

(4) Lease renewable at option of both parties. — A stipulation thatthe lease of a parcel of land will be “renewable for another 10 yearsat the option of both parties under such terms, conditions andrentals reasonable at the time,’’ means that there should be mu-tual agreement as to the renewal of the lease. (Fernandez vs. Courtof Appeals, 166 SCRA 577 [1988]; Mallare vs. Hernando, 151 SCRA484 [1987].)

(5) Option to renew given to lessor. — In Cruz and Koh (supra.),the option to renew the lease was given to the lessee. If the op-tion is given to the lessor, the lessee cannot renew the lease againstthe former’s refusal. (Ong Ching vs. Ramolete, 51 SCRA 13 [1973].)The lease is deemed terminated. (De Leon Vda. de Roxas vs. Courtof Appeals, 63 SCRA 762 [1975]; Tuason, Jr. vs. De Asis, 107 Phil.131 [1960].)

(6) Extension exclusively for the benefit of lessor. — The stipula-tion in a lease contract extending the lease term beyond that origi-nally agreed upon, in order to save the lessor the trouble of reim-bursing the lessee in cash for the expenses incurred on the leasedpremises was exclusively for the benefit of the lessor; hence, thelatter has the right to terminate the lease upon the expiration ofthe original period, or at any other time thereafter, by tenderingto the lessee, or consigning to the court, the outstanding balanceof his expenditures. The lessor should be given the option to ei-ther reimburse the balance of the expenditures or demand thatthe lessee should account for and credit the lessor for the fruits ofthe properties since the expiration of the lease against the balancedue to the lessee, turning over any excess to the lessor. (Litao vs.National Assoc. of Retired Civil Employees, 8 SCRA 648 [1963].)

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(7) Option to renew given to lessee. — Where a lessee is giventhe option to continue or renew the contract of lease and is silentupon the rentals, the old terms are to be followed in the renewedlease. (Gustilo vs. Court of Appeals, 120 SCRA 927 [1983].) A cov-enant to renew a lease which makes no provision as to the termsof the extension or renewal implies an extension or renewal uponthe same terms as provided in the original lease. (Ledesma vs.Javellana, supra.) The continued possession of the lessee is evi-dence of his exercise of the option to extend the lease. There is nonecessity to notify the lessor of the extension in the absence ofstipulation to the contrary.

ILLUSTRATIVE CASE:

Before the expiration of the lease, the lessor communicated to thelessee the terms and conditions under which the lease shall be re-newed but after the lease expired, the lessor accepted a month’s pay-ment of rent sent by the lessee, which is less than the amount thelessor had indicated to the lessee.

Facts: Petitioner-lessor Roxas and respondent-lessee SY onOctober, 1967 entered into a contract whereby the latter agreedto lease a building for P550.00 a month for 10 years or untilSeptember, 1977. On June 1, 1971, Roxas sent a letter-request toSY for increase of rentals to which the latter declined. On Au-gust 11, 1977, Roxas wrote another letter reminding SY of theforth coming termination of their contract with the addendumthat following the expiration of the contract, the rental will beincreased to P4,000.00 a month, with three (3) years to be paidin advance together with a yearly increase of 15%.

SY posted a reply dated August 4, 1977, indicating mean-while to study Roxas’ proposition until the end of September.In October 6, 1977, with Sy’s indecision, Roxas sent SY anotherletter demanding that SY vacate the premises within five (5)days from receipt. SY, without signifying willingness or unwill-ingness, simply sent Roxas on October 14, 1977, a letter con-taining a check for P550.00 corresponding to the rental for Oc-tober contrary to the demand to vacate the place.

The Court of First Instance modified the decision of themunicipal trial court by ordering Sy to pay Roxas “the amountof P1,500.00 monthly rental for 10 years effective October, 1977.’’


632 LEASE Art. 1669

Issues: (a) Whether or not the petitioner, as lessor, had theright to demand an increase in the monthly rental of the leasedpremises from P550.00 to P4,000.00 as a condition for a renewalor extension of the lease; and

(b) Whether or not there was an implied renewal of thelease contract.

Held: “We resolve the first issue in the affirmative in ac-cordance with settled jurisprudence on the matter.’’

(1) Right of lessor to fix rents. — “In the case of Lim Si vs.Lim (98 Phil. 868 [1956].), this Tribunal categorically stated: ‘Onlythe owner has the right to fix the rents. The court cannot deter-mine the rents and compel the lessor or owner to conformthereto and allow the lessee to occupy the premises on the ba-sis of the rents fixed by it.’

A subsequent case, that of Bulahan, et al. vs. Tuason (109Phil. 251 [1960].), is almost on all fours with the case at bar.There, the lease contracts were to expire on December 31, 1953.As early as January of the same year, therein lessors sent lettersto the lessees reminding them of the expiry date of their leasecontracts and offering to renew the same at an increased rental.The lessees, however, ignored the proposed terms for the re-newal of the lease contracts, and after the expiration thereof,they continued to occupy the premises but refused to pay thenew rent fixed by the lessors. The lessees filed an action for thecourt to fix a reasonable rental and a reasonable duration forthe lease of the properties there in question. Holding for thelessors, this Court ruled as follows:

‘The rule is settled that the owner of the land leasedhas the right not only to terminate the lease at the expira-tion of the term, but also to demand a new rate of rent. Thetenant or lessee has the option either to accept the new rentor vacate the premises. As (lessees), after the terminationof their lease, refused either to pay the new rent or to va-cate the lots after the termination of their lease, they haveevidently become deforciants, and can be ousted judiciallywithout the need of a demand.’

The Bulahan ruling is reiterated in the more recent case ofGindoy vs. Hon. Tapucar. (75 SCRA 31 [1977].)

The case of Velasco vs. Court of Agrarian Relations andDomingo (109 Phil. 642 [1960].) cited by respondent Court ofFirst Instance is not in point. It involved a contract of lease of a

633

parcel of agricultural land, the existence of which agreementwas not disputed by the parties. It was a case of reformation ofsuch contract voluntarily entered into on the ground that therental agreed upon was excessive. It had nothing to do withthe right of a lessor to demand an increase in rental as a condi-tion for a renewal of a lease contract.

Likewise, the cases of Peligrino vs. General Base Metals, Inc.,(39 SCRA 216 [1971].) Teresa Realty, Inc. vs. Sison (4 SCRA 958[1962].), and the five Tuason cases in 107 Phil. 131 (1960), citedby respondent Court of First Instance, do not support its rulingthat the court has the authority to fix a reasonable rental whenthe lessor tries to demand, after the termination of a lease con-tract, an exorbitant rental for the renewal of the lease.

In Peligrino, the contract of lease was for an indefinite pe-riod and the rents agreed upon were payable on a monthly ba-sis. The company that acquired the lease-hold rights of the origi-nal lessee refused to pay the increased rental demanded by thelessor. This Court held that the company was entitled to haveits right of possession extended for one year, and reduced theincreased rental which it found to be excessive. In the instantcase, on the other hand, the contract of lease is for a definiteterm of ten (10) years which had already expired, and respond-ent-lessee has not shown any right to continue in possession ofthe premises owned by petitioner.

In the case of Teresa Realty, Inc., this Court affirmed the trialcourt’s finding that the increased rental demanded by the les-sor was reasonable for it represented only 12% of the assessedvalue of the leased property. Such a finding was, however, madeby the Court only for the purpose of determining how muchtherein lessee Sison should pay the lessor Teresa Realty, Inc. asrental for the period during which the case remained pendingfinal decision, and not for the purpose, as in the case at bar, offixing the rent to be paid by the lessee during a supposed ex-tension or renewal of the lease contract.

The aforementioned Tuason cases are inapplicable for sub-stantially the same reason as the Peligrino case, i.e., the Tuasonlease contracts were not for a fixed period but from year to year.This Court held that “if at the end of the year, the owner de-mands a rental which is exorbitant, . . . the courts may deter-mine what is a reasonable rental and allow the lessee to con-tinue with the lease. (107 Phil. 131 [1960].)


634 LEASE Art. 1669

According to [the] Court, petitioner’s statement in his let-ter to private respondent dated August 11, 1977, Exh. C, that ‘IfI will not receive a reply within 15 days from date of your re-ceipt, it is understood that you are amenable, and I will nolonger accept any other offers for the lease of the building,’ cou-pled with the circumstance that petitioner in fact did not leasethe property to another person after September 30, 1977, andfurther, that private respondent paid P550.00, the monthly rentalpaid for the month of October, 1977, taken together all lead tothe conclusion that the ten-year lease contract entered into onOctober 16, 1967 was tacitly renewed. The Court of First In-stance also stated thus: ‘(that petitioner) did not return the checkto the (private respondent) . . . shows he was agreeable to therenewal of the terms of the lease contract for another ten (10)years.’

We do not agree. Petitioner’s letter of August 11, 1977 wasa reminder to private respondent of the impending expirationof the lease contract, with a statement that was in effect an offeror proposal to renew the contract on the terms and conditions,namely: (1) that the rental would be P4,000.00 a month; (2) thatthree years advance rental should be paid by private respond-ent; and (3) that a 15% yearly increase in rental would be im-posed. In other words, petitioner laid down the foregoing stipu-lations as conditions sine qua non for any subsequent contractthat might be negotiated with private respondent. Thus clearfrom the letter, is that if private respondent were not agreeableto any or all of the new stipulations, there would be no renewalof the lease. Private respondent was to communicate his replywithin fifteen (15) days from receipt of Exh. C, absent whichpetitioner would take it to mean that his conditions were ac-ceptable to private respondent and their contract renewed onthe specified terms. However, private respondent’s letter, Exh.F, evidently posted before the expiration of the period allowedwithin which to decide, did not give a categorical affirmativeor negative answer to petitioner’s proposition, and merelymanifested the said lessee’s desire to study the matter until theend of the following month of September, 1977, or up to thetermination of the then existing contract of lease.

Petitioner’s failure to reply to the letter, Exh. F, can only betaken to mean that he acceded to the request for additional time.For the obvious reason that the lease contract was expiring, itbecame more imperative for private respondent to make a fi-nal decision within and not later than the extended period which

635

he asked for. Thus, when petitioner did not hear from privaterespondent at the end of the aforesaid month of September,private respondent ceased to have any legal right to possessand occupy the premises in question commencing the first dayof the following month of October.

That the petitioner did not lease the property to another isunderstandable, as he had no idea as to when private respond-ent intended to vacate the premises. Thus, although petitionermight have had offers from third persons, circumstances be-yond his control held him back from finalizing any kind ofagreement involving the property in question.’’

(2) Effect of acceptance of the P500.00 check. — “Likewise, pe-titioner’s acceptance of the P500.00 check supposedly to an-swer for the rental for the month of October, 1977, cannot betaken against him. As in the case of Hautea vs. Magallon andSoriano (12 SCRA 514 [1964].), such acceptance is irrelevant tothe issue. This is an ejectment case premised on the expirationof the lease contract between the parties, and not on any al-leged violation of a lease contract for non-payment of rent.Moreover, petitioner had no other choice but to keep the checksent to him. Private respondent, after all, continued to stay inthe premises and use the same for his hardware and construc-tion materials business.’’ (Roxas vs. Alcantara, 113 SCRA 21[1982].)

ART. 1670. If at the end of the contract the lesseeshould continue enjoying the thing leased for fifteendays with the acquiescence of the lessor, and unlessa notice to the contrary by either party has previouslybeen given, it is understood that there is an impliednew lease, not for the period of the original contract,but for the time established in Articles 1682 and 1687.The other terms of the original contract shall be re-vived. (1566a)

Implied new lease.

(1) When it takes place. — An implied new lease (tacitareconduccion) arises when the lessee, with the acquiescence of thelessor, holds over after the expiration of the contract of lease, underthe same terms and conditions except that instead of the original


636 LEASE Art. 1670

period, the period of the new lease will be according to the char-acter of the property and mode of payment of the rent, i.e., thatestablished in Article 1682 (rural lease) whose period extends toone (1) year or period necessary to gather the fruits or in Article1687 (urban lease) whose period depends upon the periods ofpayment. Thus, where the rent for a 10-year period lease whichhas expired was paid monthly, the implied new lease must bedeemed from month to month and may be terminated after eachmonth.

(2) Terms which are revived. — The original terms of the origi-nal contract which are revived are only those which are germaneto the lessee’s right of continued enjoyment of the property leasedor related to such possession, such as the amount of rental, thedate when it must be paid, the care of the property, the responsi-bility for repairs, etc. No such presumption may be indulged inwith respect to special agreements (e.g., preferential right givento lessee to purchase leased property) which by their nature areforeign to the right of occupation or enjoyment inherent in a con-tract of lease. (Dizon vs. Magsaysay, 57 SCRA 250 [1974]; Dizonvs. Court of Appeals, 302 SCRA 288 [1999]; Guda vs. Leynes, 403SCRA 318 [2003].)

(3) Requisites. — The requisites for an implied renewal of leaseare:

(a) The term of the original contract of lease are:

(b) The lessee continues enjoying the thing leased for atleast 15 days;

(c) The continuation of the occupation by the lessee is withthe acquiescence of the lessor; and

(d) The lessor or lessee has not previously given a noticeto vacate.

The notice required under Article 1670 is the one given afterthe expiration of the lease period for the purpose of aborting animplied renewal of lease. The notice to vacate constitutes anexpress act on the part of the lessor that he no longer consents tothe continued occupation by the lessee of the leased property.(Tagbilaran Integrated Settlers Assoc. vs. Court of Appeals, 444SCRA 193 [2004].)

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A lessor who gives notice after the 15-day period has no causeof action for unlawful detainer as there is already an implied newlease.

Instances when implied renewalnot applicable.

(1) Stipulation against implied renewal. — There can be no im-plied renewal of the lease where the parties stipulated that therewould be no renewal by implication (Ramon Magsaysay AwardFoundation vs. Court of Appeals, 134 SCRA 136 [1985].) or thatthe renewal requires mutual consent. (Agaloos vs. IntermediateAppellate Court, 139 SCRA 546 [1985].)

(2) Invalidity of original lease. — Where the original lease wasdeclared void for being repugnant to the Constitution and thelessor and the lessee could not agree on the rental to be paid, theacceptance by the former of monthly payments from the latterwith reservation or condition cannot be considered as evidenceof an implied new lease. (Estate of J. Santos vs. De Veyra, 28 SCRA1108 [1969].)

(3) Acceptance of rentals beyond original term. — Similarly, theacceptance of rentals beyond the original term by the lessor whohad previously informed the lessee that she was not renewing thelease and, in fact, later demanded the lessee to vacate the prop-erty, did not signify that she had agreed to the implied renewalof the lease where the lessee remained in possession and had topay rentals for the use of the property. Instead of implied renewal,there was an express termination of the contract of lease. (Torresvs. Court of Appeals, 216 SCRA 404 [1992].)

(4) Acceptance of rentals less than amounts stipulated. — The factthat the lessor had accepted partial payments from the lessee, inamounts less than the stipulated monthly rentals, may not beconsidered as a renewal of lease contract. While a lessor may tol-erate the continued default of the lessee, hoping that the latterwould eventually pay all his back rentals, said lessor could notvery well refuse to accept payments by the lessee just because theydid not cover full unpaid rentals. That would have been unwiseand unbusiness-like. If he did that, he might get nothing from hisdelinquent lessee. (Uichangco vs. Laurilla, 108 Phil. 828 [1960].)


638 LEASE Art. 1671

ART. 1671. If the lessee continues enjoying thething after the expiration of the contract, over thelessor’s objection, the former shall be subject to theresponsibilities of a possessor in bad faith. (n)

Continuous possession by lessee over lessor’sobjection.

The lessee may, with the acquiescence of the lessor, continueenjoying the thing leased after the expiration of the contract andthereby create an implied new lease. (Art. 1670.) If he continuesthe lease over the objection of the lessor, he becomes a possessorin bad faith and subjects himself to the liabilities of such posses-sor.5

The remedy of the lessor is to bring an action of unlawfuldetainer to recover possession of the premises and the rents orfair rental value of the premises.

Damages in forcible entry and unlawfuldetainer cases.

(1) While damages may be adjudged in forcible and detainer

5Art. 449. He who builds, plants or sows in bad faith on the land of another, loseswhat is built, planted or sown without right to indemnity. (362)

Art. 450. The owner of the land on which anything has been built, planted or sownin bad faith may demand the demolition of the work, or that the planting or sowing beremoved, in order to replace things in their former condition at the expense of the per-son who built, planted or sowed; or he may compel the builder or planter to pay theprice of the land, and the sower the proper rent. (363a)

Art. 451. In the cases of the two preceding articles, the landowner is entitled todamages from the builder, planter or sower. (n)

Art. 452. The builder, planter or sower in bad faith is entitled to reimbursement forthe necessary expenses of preservation of the land. (n)

Art. 526. He is deemed a possessor in good faith who is not aware that there existsin his title or mode of acquisition any flaw which invalidates it.

He is deemed a possessor in bad faith who possesses in any case contrary to theforegoing. x x x

Art. 546. Necessary expenses shall be refunded to every possessor; but only thepossessor in good faith may retain the thing until he has been reimbursed therefor. x x x

Art. 549. The possessor in bad faith shall reimburse the fruits received and thosewhich the legitimate possessor could have received, and shall have a right only to theexpenses mentioned in paragraph 1 of Article 546 and in Article 443. The expenses in-curred in improvements for pure luxury or mere pleasure shall not be refunded to thepossessor in bad faith; but he may remove the objects for which such expenses havebeen incurred, provided that the thing suffers no injury thereby, and that the lawfulpossessor does not prefer to retain them by paying the value they may have at the timehe enters into possession. (455a)

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cases, these damages mean “rents’’ or “the reasonable compen-sation for the use and occupation of the premises,’’ or “fair rentalvalue of the property.”

(a) Profits which the plaintiff might have received wereit not for the forcible entry or detainer do not represent a fairrental value. Although Section 1 of Rule 70 uses the word“damages,’’ the authors of the Rules of Court in drafting Sec-tion 6 (now Sec. 17.) of Rule 70 on the judgment to be pro-nounced, eliminated the word “damages,’’ placing in lieuthereof, the word “reasonable compensation for the use andoccupation of the premises.’’

(b) The damages which a plaintiff expects to obtain fromhis business to be located in the premises, or for material in-jury caused to the premises cannot also be claimed in connec-tion with or as incidental to an action of illegal detainer orforcible entry. Actual moral and exemplary damages are dif-ferent from rentals or “reasonable compensation for the useand occupation of the premises,’’ hence, they cannot beawarded. (Baens vs. Court of Appeals, 125 SCRA 634 [1983].)

(2) Fair rental value is recoverable in the concept of actualdamages. It is clear from Section 17 of Rule 70 that the trial courtis empowered to award reasonable compensation only if the claimis true. In fixing the reasonable amount of rent, the court mustbase its action on the evidence adduced by the parties. Fair rentalvalue has been defined as the amount at which a willing lesseewould pay and a willing lessor would receive, for the use of cer-tain property neither being under compulsion and both partieshaving a reasonable knowledge of all facts, such as the extentcharacter and utility of the property, sales and holding prices ofsimilar land and the highest and best use of the property. (AsianTransmission Corporation vs. Canlubang Sugar Estates, 410 SCRA202 [2003].)

ART. 1672. In case of an implied new lease, theobligation contracted by a third person for the securityof the principal contract shall cease with respect tothe new lease. (1567)


640 LEASE Art. 1673

Effect of implied new lease on accessory obligationscontracted by a third person.

The renewal of the lease is, in effect, a novation of the originalcontract of lease. (Art. 1291.) The renewal of lease is considered anew lease. The general rule is that when the principal obligationis extinguished in consequence of a novation, accessory obliga-tions (e.g., guaranty) are also extinguished. (Art. 1296.)

ART. 1673. The lessor may judicially eject the les-see for any of the following causes:

(1) When the period agreed upon, or that which isfixed for the duration of lease under Articles 1682 and1687, has expired;

(2) Lack of payment of the price stipulated;

(3) Violation of any of the conditions agreed uponin the contract;

(4) When the lessee devotes the thing leased toany use or service not stipulated which causes thedeterioration thereof; or if he does not observe therequirement in No. 2 of Article 1657, as regards theuse thereof.

The ejectment of tenants of agricultural lands isgoverned by special laws. (1569a)

Causes for judicial ejectment of lessee.

Article 1673 enumerates the causes for which the lessor mayjudicially eject the lessee. With respect to tenants of agriculturallands, their ejectment is governed by special laws. (see Art. 1684.)

(1) Article 1673 must be read in conjunction with Section 2,Rule 70 of the Rules of Court, which provides that a demand topay or to comply with the conditions of the lease and to vacatethe premises is a condition precedent for the institution of anejectment suit against the lessee. The import of these provisionsis to grant the lessor the option of extrajudicially terminating thelease by simply serving a written notice upon the lessee. Thisextrajudicial termination has the same effect as rescission. Thus,

641

in Dio vs. Concepcion (296 SCRA 579 [1998].), reiterating the rul-ing in Vda. De Pamintuan vs. Tiglao (53 Phil. 1 [1929].), it was ex-plained that the rescission of lease of contracts under Article 1659is not one that requires an independent action, unlike resolutionof reciprocal obligations under Article 1191 of the Civil Code.(Chua vs. Victorio, 428 SCRA 447 [2004].)

(2) Section 2, Rule 70 is applicable only where there is a les-sor-lessee relationship under a contract of lease and only in in-stances where the grounds relied upon for ejectment is non-pay-ment of rentals or violation of any of the conditions of the lease.In such situations, notice to vacate is crucial. A demand is a pre-requisite to an action for unlawful detainer where the action isbased on either ground but not where the action is to terminatethe lease because of the expiration of its term. (Lanuza vs. Muñoz,429 SCRA 562 [2004]; Co Tiamco vs. Diaz, 75 Phil. 672 [1946].)

Expiration of the period.

The period in a contract of lease may be conventional or thatfixed by agreement of the parties; or legal or that fixed by law inaccordance with Article 1682 in case of rural leases and Article1687 in case of urban leases.

(1) Ejectment lies without the need of a demand, when theperiod of the lease has expired. The notice of the lessor is imma-terial. (Santos vs. Court of Appeals, 128 SCRA 428 [1984].) He isfree to dispose of the leased property to another lessee. (Zarrogavs. Sleeper, 25 Phil. 650 [1913]; Barreras vs. Garcia, 169 SCRA 401[1989].)

(2) A lease on a month-to-month basis is for a definite periodand may be terminated at the end of any month. (Lesaca vs.Cuevas, 125 SCRA 384 [1983].) It is valid for the parties to stipu-late that either party may terminate a month-to-month lease on a30-day notice. (Cruz vs. Puno, 120 SCRA 497 [1983].)

(3) The lessee must restore possession of the leased propertyafter the expiration of the stipulated period. The unlawful hold-ing or deprivation of possession is to be counted from the date ofthe demand to vacate. (Dakudao vs. Consolacion, 122 SCRA 877[1983].) Prior possession of the plaintiff is not necessary in an


642 LEASE Art. 1673

unlawful detainer case. (Pharma Industries, Inc. vs. Pajarilla, 100SCRA 339 [1980].)

(4) Possession of land by tolerance becomes an unlawful de-tainer, from the time a demand to vacate is made. (Prieto vs. Reyes,4 SCRA 430 [1965]; Lesaca vs. Cuevas, 125 SCRA 385 [1983].)

(5) A notice giving the lessee the alternative either to pay theincreased rental or otherwise to vacate the leased premises is notthe demand contemplated in an unlawful detainer case. The de-mand to vacate must be definite, subject to no condition; other-wise, the lessor cannot bring the action of unlawful detainer.(Murga vs. Chan, 25 SCRA 441 [1968].)

(6) A lessor’s letter to the lessee demanding payment of backrentals, and that if the latter failed to pay, an ejectment suit wouldbe filed against him is a sufficient notice. The omission of the word“vacate’’ in the notice is immaterial. (Golden Gate Realty Corp.vs. Intermediate Appellate Court, 152 SCRA 684 [1987].)

(7) It is not a valid defense in ejectment cases that the lessorrefused to receive the rent. The lessee must consign in court therent due from him. (Magen vs. Avelino, 127 SCRA 602 [1984];Cursino vs. Bautista, 176 SCRA 66 [1989].)

Lack of payment of stipulated rental.

The lessee is obliged to pay the price of the lease according tothe terms stipulated. (Art. 1657[1].) His failure to comply with thisprincipal duty entitles the lessor to ask for rescission of the leaseor fulfillment, with right to damages in either case. (Art. 1659.)

(1) Mere failure to pay rents, or a breach of contract to payrents, does not render the possession of the lessee per se unlaw-ful, nor may the action for his ejectment from the land accrue uponsuch failure or breach. In accordance with Section 2, Rule 70 ofthe Rules of Court, the right to bring the action of ejectment orunlawful detainer must be counted from the time the defendanthas failed to pay rents as agreed upon in a contract, but it is thefailure to pay the rents after a demand therefor is made that entitlesthe lessor to bring an action of unlawful detainer. (Zobel vs. Abreu,98 Phil. 343 [1955]; Cetus vs. Court of Appeals, 176 SCRA 72 [1989];Cursino vs. Bautista, 176 SCRA 65 [1989].)

643

(2) If the default in the payment of rent is based on the factthat the rent sought to be collected is not that agreed upon, anaction for ejectment will not lie. (Belmonte vs. Marin, 76 Phil. 198[1946]; Gomez vs. Ng Fat, 76 Phil. 555 [1946].)

(3) A lessor has the right to increase the rent from and afterthe expiration of the period of lease, and if the tenant thereafterremains in possession without agreeing to the increase, he isbound to pay the reasonable value of the use and occupation ofthe property leased. This reasonable amount is a question of evi-dence. (Iturralde vs. Garduño, 9 Phil. 605 [1907]; Iturralde vs.Evangelista, 7 Phil. 588 [1906].)

(4) The lessor has the right not only to terminate the lease atthe expiration of the term, but to demand a new rate of rent. Thequestion whether or not the new rate of rent fixed by the owneris reasonable must be decided according to the evidence. The tes-timony of the owner that another person was willing to lease theproperty at an annual rent equal to that demanded by the plain-tiff of the defendant, is prima facie proof that the new rate of rentdemanded by him is reasonable. (Cortez vs. Ramos, 46 Phil. 184[1924].)

(5) Where the lessee refuses to pay the stipulated rentals andthe lessor initiates an ejectment suit, the juridical bond betweenthe parties is severed. They cease to be connected by the link of alessor-lessee relation. No amount of subsequent payment by thelessee can automatically restore the parties to what they once were.Nor will the lessor’s acceptance of the increased rentals have theeffect of reviving the earlier contract of lease. Upon the momentof acquiescence by the lessor to the increased amount, an entirelynew contract of lease is entered into, forging an entirely new ju-ridical relation. (Chua vs. Victorio, 428 SCRA 447 [2004].)

Violation of any condition agreed upon.

The contract of lease may provide for accidental stipulations,clauses, terms and conditions as the parties may deem conven-ient.

(1) A violation of any such conditions, etc. agreed upon wouldconstitute breach of the lease contract. Thus, a violation by the


644 LEASE Art. 1673

lessee of the prohibition against devoting the property to a usenot stipulated in the contract, or introducing improvements with-out the consent of the lessor, is enough ground to eject the lessee.

(2) A demand is a prerequisite in an action of unlawful de-tainer when it is for failure to comply with any of the conditionsof the lease, but not when that action is to terminate the leasebecause of the expiration of the term. (Art. 1669.)

(3) A lease contract may validly stipulate that the lessor maytake possession of the leased premises without resorting to judi-cial action, upon failure of the lessee to comply with any of theterms and conditions of the contract. (Consing vs. Jamadre, 64SCRA 1 [1975]; see Arts. 1159, 1306.)

(4) When a lease provides for the payment of the rent ininstallments, each failure to pay an installment is a separate causeof action. In an action upon such a lease for the recovery of rent,all installments due and demandable at the time the action isbrought, should be pleaded, and failure to do so will constitute abar to a subsequent action for the payment of that rent.(Intramuros Administration vs. Contacto, 402 SCRA 581 [2003].)

Improper use of the leased property.

The second principal duty of the lessee is to use the thingleased, exercising the diligence of a good father of a family, ac-cording to the terms of the contract, or in the absence of stipula-tion, the nature of the thing leased. (Art. 1657[2].) It is his duty toreturn the thing, upon the termination of the lease, just as he re-ceived it. (Art. 1665.)

The law presumes that he received it in good condition. (Art.1666.) Without the duty to take care of the thing, the lessee wouldnot be liable even if it is lost or destroyed through his fault ornegligence, thus rendering illusory the obligation to return.

Regulation of rentals of certain residentialunits.

A number of laws have been enacted freezing rentals for acertain period of time at their current level for the benefit of the

645

lower income group.6 The common feature of these laws is thesuspension of the application of paragraph (1) of Article 1673 ofthe Civil Code (except when the lease is for a definite period)during the period of their effectivity, to lease of a dwelling unitor of land on which another’s dwelling is located.

(1) Presidential Decree No. 20 (Oct. 12, 1972) which amendedR.A. No. 6359, prohibits the increase of the monthly rental agreedupon between the lessor and the lessee when said monthly rentaldoes not exceed P300.00.

(2) B.P. Blg. 25 (April 10, 1979) prohibits for a duration of five(5) years from its effectivity, the increase of monthly rentals of allresidential units not exceeding P300.00, for any one (1) year pe-riod, by more than 10% of the monthly rentals existing at the timeof the approval of the Act.

(3) B.P. Blg. 877 (June 6, 1985) provides that beginning July 1,1985 and for a duration of two and half years thereafter endingDecember 31, 1987, monthly rentals of all residential units notexceeding P480 shall not be increased by the lessor by more than10% in 1985, 20% in 1986 and 20% in 1987, which increases shallbe cumulative and compounded.

(4) R.A. No. 6643 (Dec. 28, 1987) extends the effectivity of B.P.Blg. 877 for another two (2) years, fixing the allowable maximumincrease for the two-year period to not more than 20% in 1988 and20% in 1989, which increases shall be cumulative and com-pounded.

(5) R.A. No. 7644 (Dec. 28, 1992) extends the effectivity of B.P.Blg. 877 for five (5) years, fixing the allowable maximum increasefor the five-year period from 1993 to 1997 at 20% yearly, whichincreases shall be cumulative and compounded.

(6) R.A. No. 8437 (Dec. 22, 1997) extends the effectivity of B.P.Blg. 877 for four (4) years, fixing the allowable maximum increase


6Following liberation, after the war, when there was an acute shortage of housing,C.A. No. 689 (Oct. 15, 1945) entitled “An Act of penalize speculation of rents of build-ings destined for dwelling purposes’’ was passed. This was amended by R.A. No. 66(Oct. 18, 1946) under which a lessee cannot be ejected for non-payment of rents, wheresuch non-payment is not willful and deliberate. Both acts expired on October 15, 1949.

646 LEASE Art. 1673

for the four-year period from 1998 to 2001 at 15% yearly, whichincreases shall be cumulative and compounded.

Rental Reform Act of 2002.

This is R.A. No. 91617 (Dec. 22, 2001), “An Act establishingreforms in the regulation of rentals of certain residential units,providing the mechanisms therefor and for other purpose.’’ Thepertinent provisions are copied verbatim hereunder:

SECTION 1. Short Title. — This Act shall be known andcited as the “Rental Reform Act of 2002.’’

SEC. 2. Declaration of Policy. — The State shall, for the com-mon good, undertake a continuing program of urban land re-form and housing which will make available at affordable costdecent housing and basic services to underprivileged andhomeless citizens in urban centers and resettlement areas.

Toward this end, the State shall establish reforms in theregulation of rentals of certain residential units.

SEC. 3. Monthly Rentals and Maximum Increases. — Begin-ning 01 January 2002 and for a duration of three (3) years there-after ending on 31 December 2004, the monthly rentals of allresidential units in the National Capital Region and otherhighly urbanized cities not exceeding Seven thousand fivehundred pesos (P7,500.00) and the monthly rentals of all resi-dential units in all other areas not exceeding Four thousandpesos (P4,000.00) shall not be increased annually by the les-sor, without prejudice to existing contracts, by more than tenpercent (10%).

SEC. 4. Definition of Terms. — The following terms as usedin this Act shall be understood as:

(a) “Rental” shall mean the amount paid for the use oroccupancy of a residential unit whether payment is made ona monthly or other basis.

(b) “Residential unit” shall refer to an apartment, houseand/or land on which another’s dwelling is located and used

7There is a pending bill in Congress to extend the effectivity of the Act.

647

for residential purposes and shall include not only buildings,parts or units thereof used solely as dwelling places, board-ing houses, dormitories, rooms and bedspaces offered for rentby their owners, except motels, motel rooms, hotels, hotelrooms, but also those used for home industries, retail storesor other business purposes if the owner thereof and his or herfamily actually live therein and use it principally for dwell-ing purposes.

(c) “Immediate members of family of the lessee or lessor”for purposes of repossessing the leased premises, shall be lim-ited to his or her spouse, direct descendants or ascendants,by consanguinity or affinity.

(d) “Lessee” shall mean the person renting a residentialunit.

(e) “Owner/Lessor” shall include the owner or adminis-trator or agent of the owner of the residential unit.

(f) “Sublessor” shall mean the person who leases or rentsout a residential unit leased to him by an owner.

(g) “Sublessee” shall mean the person who leases or rentsout a residential unit from a sublessor.

(h) “Assignment of lease” shall mean the act contemplatedin Article 1649 of the Civil Code of the Philippines.

SEC. 5. Rental and Deposit. — Rental shall be paid in ad-vance within the first five (5) days of every current month orthe beginning of the lease agreement unless the contract oflease provides for a later date of payment. The lessor cannotdemand more than one (1) month advance rental and two (2)months deposit.

SEC. 6. Assignment of Lease or Subleasing. — Assignmentof lease or subleasing of the whole or any portion of the resi-dential unit, including the acceptance of boarders orbedspacers, without the written consent of the owner/lessoris prohibited.

SEC. 7. Grounds for Judicial Ejectment. — Ejectment shallbe allowed on the following grounds:


648 LEASE Art. 1673

(a) Assignment of lease or subleasing of residential unitsin whole or in part, including the acceptance of boarders orbedspacers, without the written consent or the owner/lessor;

(b) Arrears in payment of rent for a total of three (3)months: Provided, That in the case of refusal by the lessor toaccept payment of the rental agreed upon, the lessee may ei-ther deposit, by way of consignation, the amount in court, orwith the city or municipal treasurer, as the case may be, or ina bank in the name of and with notice to the lessor, withinone (1) month after the refusal of the lessor to accept payment.

The lessee shall thereafter deposit the rental within ten(10) days of every current month. Failure to deposit the rentalsfor three (3) months shall constitute a ground for ejectment. Ifan ejectment case is already pending, the court upon propermotion may order the lessee or any person or persons claim-ing under him to immediately vacate the leased premiseswithout prejudice to the continuation of the ejectment pro-ceedings. At any time, the lessor may, upon the authority ofthe court, withdraw the rentals deposited.

The lessor, upon authority of the court in case of consig-nation or upon joint affidavit by him and the lessee to be sub-mitted to the city or municipal treasurer and to the bank wheredeposit was made, shall be allowed to withdraw the depos-its;

(c) Legitimate need of the owner/lessor to repossess hisor her property for his or her own use or for the use of anyimmediate member of his or her family as a residential unit:Provided, however, That the lease for a definite period has ex-pired: Provided, further, That the lessor has given the lesseeformal notice three (3) months in advance of the lessor’s in-tention to repossess the property and: Provided, finally, Thatthe owner/lessor is prohibited from leasing the residentialunit or allowing its use by a third party for a period of at leastone year from the time of repossession;

(d) Need of the lessor to make necessary repairs of theleased premises which is the subject of an existing order ofcondemnation by appropriate authorities concerned in orderto make the said premises safe and habitable: Provided, That

649

after said repair, the lessee ejected shall have the first prefer-ence to lease the same premises: Provided, however, That thenew rental shall be reasonably commensurate with the ex-penses incurred for the repair of the said residential unit and:Provided, finally, That if the residential unit is condemned orcompletely demolished, the lease of the new building will nolonger be subject to the aforementioned first-preference rulein this subsection; and

(e) Expiration of the period of the lease contract.

SEC. 8. Prohibition Against Ejectment by Reason of Sale orMortgage. — No lessor or his successor-in-interest shall beentitled to eject the lessee upon the ground that the leasedpremises have been sold or mortgaged to a third person re-gardless of whether the lease or mortgage is registered or not.

SEC. 9. Rent-to-Own Scheme. — At the option of the lessor,he or she may engage the lessee in a written rent-to-own agree-ment that will result in the transfer of ownership of the par-ticular dwelling in favor of the latter. Such an agreement shallbe exempt from the coverage of Section 3 of this Act.

SEC. 10. Application of the Civil Code and Rules of Court ofthe Philippines. — Except when the lease is for a definite pe-riod, the provisions of paragraph (1) of Article 1673 of the CivilCode of the Philippines, insofar as they refer to residentialunits covered by this Act, shall be suspended during theeffectivity of this Act, but other provisions of the Civil Codeand the Rules of Court on lease contracts, insofar as they arenot in conflict with the provisions of this Act shall apply.

SEC. 11. Coverage of this Act. — All residential units in theNational Capital Region and other highly urbanized cities thetotal monthly rental for each of which does not exceed Seventhousand five hundred pesos (P7,500.00) and all residentialunits in all other areas the total monthly rental for each ofwhich does not exceed Four thousand pesos (P4,000.00) as ofthe effectivity date of this Act shall be covered, without preju-dice to existing contracts.

SEC. 12. Penalties. — A fine of not less than Five thousandpesos (P5,000.00) nor more than Fifteen thousand pesos


650 LEASE Art. 1674

(P15,000.00) or imprisonment of not less than one (1) monthand one (1) day to not more than six (6) months or both shallbe imposed on any person, natural or juridical, found guiltyof violating any provision of this Act.

x x x x x x x x x

ART. 1674. In ejectment cases where an appeal istaken, the remedy granted in Article 539, second para-graph, shall also apply, if the higher court is satisfiedthat the lessee’s appeal is frivolous or dilatory, or thatthe lessor’s appeal is prima facie meritorious. Theperiod of ten days referred to in said article shall becounted from the time the appeal is perfected. (n)

Preliminary mandatory injunction to restorepossession pending appeal.

Chapter 2, although entitled “Lease of Rural and UrbanLands,’’ refers not only to the lease of lands but also to the build-ings standing thereon on the principle that the accessory followsthe principal. While Article 5398 seems to refer only to forcibleentry actions, Article 1674 expressly refers to ejectment cases orthose in which there is a pre-existing relationship of lessor andlessee. (Sycip vs. Soriano, [C.A.] 52 O.G. 1474.)

(1) Ground. — The lessor is entitled to a writ of preliminaryinjunction to restore him in his possession in case the higher courtis satisfied that the lessee’s appeal is frivolous or dilatory (i.e.,without merit) or the lessor’s appeal is prima facie meritorious. Forthe purpose of Article 1674, it is enough that the plaintiff is theowner of the land and the defendant is in temporary occupancythereof whether under a lease contract or on mere tolerance or

8Art. 539. Every possessor has a right to be respected in his possession; and shouldhe be disturbed therein he shall be protected in or restored to said possession by themeans established by the laws and the Rules of Court.

A possessor deprived of his possession through forcible entry may within ten daysfrom the filing of the complaint present a motion to secure from the competent court, inthe action for forcible entry, a writ of preliminary mandatory injunction to restore himin his possession. The court shall decide the motion within thirty (30) days from filingthereof. (446a)

651

under a temporary permit. Where, after the termination of thelease contract or the revocation of the permit, the lessee or occu-pant unlawfully prolongs his occupation of the premises, there isunlawful detainer. (De La Cruz vs. Bocar, 99 Phil. 492 [1956].)

(2) Summary character. — Article 1674 is an consonance withthe summary character of an ejectment suit which is an expedi-tious means for recovering possession of realty but the effective-ness of which is often frustrated by the lessee’s dilatory tacticsoften tolerated by Municipal Trial Courts. (Mara, Inc. vs. Estrella,65 SCRA 471 [1975]; Devesa vs. Montecillo, 27 SCRA 822 [1969];De Laureano vs. Adil, 72 SCRA 148 [1976]; Palanca vs. Chua KengKian, 27 SCRA 357 [1969].) Actions for forcible entry and unlaw-ful detainer involve perturbation of social order which must beresolved as promptly as possible and accordingly, technicalitiesor details of procedure which may cause unnecessary delay arecarefully avoided. (Montemayor vs. Bermejo, Jr., 425 SCRA 403[2004].)

(3) Rationale. — The remedy is intended “to put an end to thepresent state of the law which unjustly allows the lessee to con-tinue in possession during an appeal.’’ (Report of the Code Com-mission, p. 143.) The ordinary action to revindicate ownership orto recover possession as a right is not expeditious; yet in suchaction where judgment is rendered in favor of the plaintiff, thetrial court may, under Section 2, Rule 39 of the Rules of Court,“upon good reasons,’’ order immediate execution of the judgment.This being so, there is more reason to order immediate executionof the judgment in a case of unlawful detainer with respect to therestoration of possession where it is obvious that the defendanthas no valid defense and that his appeal is dilatory or frivolous.(Abellana vs. Gomez, [C.A.] 63 O.G. 6201.)

(4) Remedy given to lessor. — The remedy is available to thelessor in unlawful detainer cases but only in case of an appeal. Inthe original case, the possession of the lessee is presumed to belawful. In forcible entry case, the writ may be granted even whenthere is no appeal. (par. 2, Art. 539.) The 10-day period for filing amotion to secure the writ shall be counted from the date whenthe petitioning party (lessor) is notified of the perfection of theappeal. (De La Cruz vs. Bocar, supra.)


652 LEASE Arts. 1675-1676

(5) Issuance vested in “higher court.’’ — The issuance of the writis expressly vested by Article 1674 in the “higher court’’ or appel-late court. Thus, the Regional Trial Court in ejectment cases, be-ing an appellate court, may grant the writ. (Sycip vs. Soriano,supra.)

(6) Superdeas bond and monthly deposit by lessee. — The prelimi-nary mandatory injunction refers to the possession of the realtyin litigation. The superdeas bond and monthly deposit are pri-marily designed to insure that the lessor would be paid back theback rentals. (De Laureano vs. Adil, 72 SCRA 148 [1976].) Shouldthe lessee fail to make the payments from time to time during thependency of the appeal, execution shall issue. (Sec. 19, Rule 70,Rules of Court.) Article 1674 provides an additional ground forexecution before judgment.

ART. 1675. Except in cases stated in Article 1673,the lessee shall have a right to make use of the peri-ods established in Articles 1682 and 1687. (1570)

Use by lessee of legal period.

Unless there is a proper ground for his ejectment (Art. 1673.),the lessee is entitled to make use of the (conventional) periodagreed upon (Art. 1669.) or the (legal) period established in Arti-cles 1682 and 1687.

ART. 1676. The purchaser of a piece of land whichis under a lease that is not recorded in the Registry ofProperty may terminate the lease, save when there isa stipulation to the contrary in the contract of sale, orwhen the purchaser knows of the existence of thelease.

If the buyer makes use of this right, the lessee maydemand that he be allowed to gather the fruits of theharvest which corresponds to the current agriculturalyear and that the vendor indemnify him for damagessuffered.

653

If the sale is fictitious, for the purpose of extin-guishing the lease, the supposed vendee cannot makeuse of the right granted in the first paragraph of thisarticle. The sale is presumed to be fictitious if at thetime the supposed vendee demands the terminationof the lease, the sale is not recorded in the Registryof Property. (1571a)

Termination of lease by purchaserof leased land.

Although 1676 makes express reference only to sales, its in-tent and reason justify its application to any other form of aliena-tion (A.M. Tolentino, op. cit., p. 250, citing De Buen: Colin &Capitant 374.), like donation. It applies only to lease for a fixedterm and not to those from month to month. Where the lease ison a month to month basis and the purchaser seeks to recover fromthe lessee property which said lessee had leased from the ven-dor, the purchaser’s right of action is not based on the provisionsof Article 1676 authorizing him to terminate the lease but is basedon his right as the owner or vendee to recover possession from atenant holding over after the termination of the right to hold pos-session. In such a case, the vendee’s action is governed by theprovisions of the Rules of Court, Rule 70, on forcible entry anddetainer. (Rivera vs. Trinidad, 48 Phil. 396 [1925]; Alicante vs.Tordesillas, [C.A.] 46 O.G. 142.)

Lease binds only the parties, their assigns and heirs. (Art.1311.) It does not create a real right unless recorded in the Regis-try of Property in which case it shall be binding upon third per-sons. (Art. 1648.) The purchaser is not entitled to terminate thelease even if he has no actual knowledge of its existence. He hasconstructive knowledge which is equivalent to actual knowledge.

Unrecorded lease.

The purchaser may terminate the lease unless:

(1) There is a stipulation in the contract of sale he must re-spect the existing lease;

(2) He knows of the existence of the lease; or


654 LEASE Art. 1677

(3) The property is sold fictitiously just to terminate the lease.

An innocent purchaser for value without notice of an unre-corded lease has a right to rely on the certificate of title. If the leaseis not annotated thereon, the lessee does not deserve to be pro-tected. A purchaser with full knowledge of the existence of anunrecorded lease is bound to respect it because actual knowledgeis equivalent to registration. The lease, in effect, becomes a partof the contract of sale.

It has been held that the right granted in the second paragraphof Article 1676 to a lessee to gather the fruits of the crop corre-sponding to the current agricultural year, does not extend to thegathering of fishes, which require two years before they are of anycommercial value. (Manila Building and Loan Assn. vs. Green,[C.A.] O.G. 2088, citing 10 Manresa 645, 1908 Ed.)

The last paragraph states when the sale is presumed to be fic-titious. It “is calculated to discourage the practice which has de-veloped in recent years of fictitiously selling the premises in or-der to oust the lessee before the termination of the lease.’’ (Re-port of the Code Commission, p. 143.)

ART. 1677. The purchaser in a sale with the rightof redemption cannot make use of the power to ejectthe lessee until the end of the period for the redemp-tion. (1572)

Where sale subject to right of redemption.

In case of sale with right of repurchase by the vendor (Art.1601.), the vendee cannot terminate an existing lease entered intobetween the vendor and a third person until after the period forredemption has expired. He may, however, make use of the powerto oust the lessee if any of the grounds for ejectment under Arti-cle 1673 is present.

This limitation contained in said article refers to the tenant orlessee who has contracted with the vendor and who has had norelation whatever with the purchaser under an agreement of re-demption. Such tenant is a third person with respect to said ven-dor and purchaser. If the vendor should by redemption recover

655

the property, the lessee would again be entitled to the enjoymentof the lease; wherefore, the limitation of the purchaser’s right isproper and just. (Dorado vs. Viriña, 34 Phil. 246 [1916].)

Article 1677 is not applicable to a case where the vendor, ondisposing of real property under right of repurchase, continuesnevertheless in possession thereof by virtue of a special agree-ment, not as owner, but as a tenant of the purchaser by the pay-ment of rent. So, a vendor who remains in possession as a lesseeand violates any of the conditions agreed upon in the contract oflease (Art. 1673.) may be evicted by the vendee even before theend of the redemption period. (Gonzales vs. Salas, 49 Phil. 1[1926].)

ART. 1678. If the lessee makes, in good faith, use-ful improvements which are suitable to the use forwhich the lease is intended, without altering the formor substance of the property leased, the lessor uponthe termination of the lease shall pay the lessee one-half of the value of the improvements at that time.Should the lessor refuse to reimburse said amount,the lessee may remove the improvements, eventhough the principal thing may suffer damage thereby.He shall not, however, cause any more impairmentupon the property leased than is necessary.

With regard to ornamental expenses, the lesseeshall not be entitled to any reimbursement, but he mayremove the ornamental objects, provided no damageis caused to the principal thing, and the lessor doesnot choose to retain them by paying their value at thetime the lease is extinguished. (n)

Right of lessee with regard to usefulimprovements and ornamental expenses.

(1) Reimbursement or removal as to useful improvements. – Un-der Article 1573 of the old Civil Code (deleted in present CivilCode), the lessee was not entitled to be reimbursed for any im-provements made by him although he could remove them pro-


656 LEASE Art. 1678

vided the principal did not suffer injury, and he could set-off hisliability for damages against said improvements. Now, under thepresent article, he is given the right to reimbursement of one-halfof their value or to their removal should the lessor refuse to reim-burse.

The Code Commission justifies the change as follows:

“The first paragraph is intended to prevent the unjust en-richment of the lessor, which is allowed by Article 1573 of thepresent Code. Expenses for useful improvements are reim-bursed to a possessor in good faith, under Articles 453 [nowArt. 456] and 361 [now Art. 448] of the Code now in force.True, the lessee is not a possessor in good faith in the sensethat he believes himself to be the owner, but neither is he apossessor in bad faith. He is in possession by virtue of acontract, so his possession is lawful. The reform requires: (1)that lessee should make the improvements in good faith; (2)that the improvements be suitable to the use for which thelease is intended; and (3) that the form and substance of theproperty leased be not altered. These requisites will preventthe lessee from making such valuable improvements that thelessor may never recover the property leased.

Moreover, the lessee has a right to make reasonable im-provements to attain his purpose in entering upon the lease.

The lessor is to pay only one-half of the value of the im-provements at the time the lease terminates because the les-see has enjoyed the same. On the other hand, the lessor willenjoy them indefinitely thereafter.’’ (Report, pp. 144-145.)

(2) Requirements. — With respect to useful improvements, tobe entitled to reimbursement, there are three (3) requisites:

(a) The lessee should make useful improvements in goodfaith;

(b) The improvements must be suitable to the use forwhich the lease is intended; and

(c) The form and substance of the property leased shouldnot be altered. (Susana Realty, Inc. vs. Hernandez, [C.A.] 54O.G. 2206.)

657

The improvements can be considered made in good faith ifthey are not in violation of the lease contract.

The right to indemnity under Article 1678 (par. 1.) arises onlyif the lessor opts to appropriate the improvements. (Lopez vs.Sarabia, 439 SCRA 35 [2004].)

Note that under Article 1678 (par. 2.), the lessor, not the les-see, is given the option provided for therein. (Lapeña vs. Morfe,101 Phil. 997 [1995].) So, the lessee cannot compel the lessor toappropriate the improvements and pay him one-half of theirvalue. (Chua Beng She vs. Lee Chy Kao, 6 C.A. Rep. 490.)

Certainly, the lessee has no right to reimbursement by the les-sor of improvements made after the termination of the lease. (Phil.National Bank vs. Pineda, 29 SCRA 262 [1969]; Imperial Insurance,Inc. vs. Simon, 14 SCRA 855 [1965].)

(3) With regard to ornamental expenses. — This is provided inthe second paragraph of the article. The rule is similar to the ex-penses for pure luxury of a possessor in good faith.9

Right of lessee over necessary repairs.

Necessary repairs are those made for the preservation of thething upon which they have been expended. When a repair isessential to preserve the thing rented in a condition suitable tothe use agreed upon, it is, in law deemed a necessary repair.(Alburo vs. Villanueva, 7 Phil. 279 [1906].)

Repairs, for example, made on the plumbing system and elec-trical wiring are necessary repairs, and the lessee is entitled to fullreimbursement of the total amount spent therefor.

However, repairs of the window screens, kitchen cabinets andwooden fixtures in the house constitute useful improvements only,for which the lessee, under Article 1678 is entitled to claim one-half the value thereof at the termination of the lease. (Ty vs. Acuña,[CA], 57 O.G. 5732.) The construction of a garage, as well as the

9Art. 548. Expenses for pure luxury or mere pleasure shall not be refunded to thepossessor in good faith; but he may remove the ornaments with which he has embel-lished the principal thing if it suffers no injury thereby, and if his successor in the pos-session does not prefer to refund the amount expended. (454)


658 LEASE

filling and fencing of a lot, are not necessary expenses. (Valenciavs. Ayala de Roxas, 13 Phil. 45 [1909]; Rivera vs. Roman CatholicArchbishop, 40 Phil. 717 [1920]; Robles vs. Lazarraga, 42 Phil. 584[1921]; Flores vs. Lim, 50 Phil. 738 [1926]; Valenzuela vs. Lopez,51 Phil. 279 [1927].)

ART. 1679. If nothing has been stipulated concern-ing the place and the time for the payment of the lease,the provisions of Article 1251 shall be observed asregards the place; and with respect to the time, thecustom of the place shall be followed. (1574)

Place and time for payment of lease.

(1) Article 125110 applies to the obligation of a lessee to payrent which is usually in the form of money, an indeterminate thing.Payment should be at the place designated in the least contract;in the absence of stipulation, at the domicile of the lessee or theplace where the leased premises are located, or if the rent is pay-able in the form of a determinate thing, wherever the thing mightbe at the moment the contract was entered into.

(2) As regards the time of payment, the custom of the placeshall be followed unless there is a contrary stipulation in the leasecontract.

— oOo —

Art. 1679

10See note 1.

659

SECTION 3. — Special Provisions forLeases of Rural Lands

ART. 1680. The lessee shall have no right to a re-duction of the rent on account of the sterility of theland leased, or by reason of the loss of fruits due toordinary fortuitous events; but he shall have such rightin case of the loss of more than one-half of the fruitsthrough extraordinary and unforeseen fortuitousevents, save always when there is a specific stipula-tion to the contrary.

Extraordinary fortuitous events are understood tobe: fire, war, pestilence, unusual flood, locusts, earth-quake, or others which are uncommon, and which thecontracting parties could not have reasonably fore-seen. (1575)

ART. 1681. Neither does the lessee have any rightto a reduction of the rent if the fruits are lost afterthey have been separated from their stalk, root ortrunk. (1576)

Reduction of rent in rural leases.

(1) Application. — Article 1680 is a special provision for leasesof rural lands. It cannot be applied analogously to ordinary leases,for precisely because of its special character, it was meant to ap-ply only to a special specie of lease. It is a provision of social jus-tice designed to relieve poor farmers from the harsh consequencesof their contracts, with rich landowners. In this light, the articleprovides no refuge to lessees whose financial standing or social

659

660 LEASE Arts. 1680-1681

position is equal to, or even better than the lessor. (Laguna TayabasBus Co. vs. Manabat, 58 SCRA 650 [1974].)

(2) Requisites. — The lessee is entitled to reduction of rent ifthe following requisites are present:

(a) The land leased is rural;

(b) More than one-half of the fruits have been lost;

(c) The loss occurred through extraordinary and unfore-seen fortuitous event; and

(d) There is no specific stipulation that the lessee is nev-ertheless not entitled to reduction.

(3) Cases that do not justify reduction. — The lessee is not enti-tled to reduction of rent in the following cases:

(a) on account of the sterility of the land leased;

(b) by reason of the loss of the fruits due to ordinary for-tuitous events, regardless of the extent of the loss;

(c) by reason of the loss of less than one-half of the fruitseven though extraordinary and unforeseen events;

(d) by reason of the loss of the fruits through extraordi-nary but foreseen1 events, regardless of the extent of the loss;

(e) by reason of the loss of more than one-half of the fruitsthrough extraordinary and unforeseen events, where there isa specific stipulation to the contrary; and

(f) where the loss of the fruits occurred after they havealready been gathered, regardless of the extent of the loss.

(3) Other cases:

(a) Where by the terms of the contract of lease the rent isfixed at an aliquot part of the crops, the tenant cannot demanda reduction on account of loss of more than half of the crop byfortuitous events under Article 1680, and the failure to deliverthe stipulated proportion of the crop gathered entitles thelandlord to evict the tenant. That article does not refer to a

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

661

contract of this nature. (Hijos de I. De La Rama vs. Benedicto,1 Phil. 495 [1902].)

(b) Where a bidding was held by a municipality for thelease of the municipal fishponds, and the lease was awardedby lot and by area of the fishponds involved, reduction of therent is not proper although it turns out that the areas of thefishponds were actually smaller than those given in the no-tice of bid. Since the lessee undertook to make all the neces-sary repairs and maintain the dikes at all times, he is not enti-tled to reimbursement for the repairs of the damages due totyphoon and action of the sea. (Sibug vs. Municipality ofHagonoy, 98 Phil. 542 [1956].)

Fortuitous events.

Under Article 1680, the fortuitous event must not only be ex-traordinary or uncommon but also one which the contractingparties could not have reasonably foreseen. One of the essentialcharacteristics of fortuitous events is that “the cause of the un-foreseen and unexpected occurrence or of the failure of the debtorto comply with his obligation must be “independent of the hu-man will.’’ The phrase must be given the meaning of “independ-ent of the will of the debtor or his agents.’’

(1) War, although dependent upon the will of the combatants,is recognized in the second paragraph of Article 1680 as an ex-traordinary fortuitous event; and violence of robbers, while notindependent of the human will, is recognized as caso fortuito thatexcused non-performance and has been always so recognized inthe ancient law (“fuerza de ladrones,’’ in Law II, Tit. 33, PartidaVII). The will of a third person who prevents performance of theobligation is an inevitable cause, fuerza mayor, which comes un-der the general description of caso fortuito in Article 11742 of theCivil Code. (Reyes vs. Crisostomo, [C.A.] 47 O.G. 3625.)

2Art. 1174. Except in cases expressly specified by the law, or when it is otherwisedeclared by stipulation, or when the nature of the obligation requires the assumption ofrisk, no person shall be responsible for those events which, could not be foreseen, orwhich, though foreseen, were inevitable. (1105a)

Arts. 1680-1681 LEASE OF RURAL AND URBAN LANDSSpecial Provisions for Leases of Rural Lands

662 LEASE Arts. 1680-1681

(2) War, already existing when the contract was entered doesnot come under category of fortuitous event contemplated in thearticle. Neither are typhoons because in this country it cannot besaid that they are extraordinary or uncommon and cannot be rea-sonably foreseen by the contracting parties. (Estrada vs.Hermogeno, [C.A.] 50 O.G. 4919.) When the cause already existedwhen the contract was executed, the same cannot be ascribed toa fortuitous event or circumstance beyond the control of the lessee.(Cuyugan vs. Dizon, 79 Phil. 80 [1947]; Laguna Tayabas Bus Co.vs. Manabat, supra.)

(3) Fire is not ordinary a fortuitous event. Floods must beunusual. Typhoons and floods submerging the land under waterlasting for about a day or two and the water receding immedi-ately after, are conditions that could be foreseen. But when thedepth of the water was from 6 to 8 feet, the inundation of thericefields lasting from two to three weeks, and after the water hadreceded the ricefields were infested by rodents causing destruc-tion on the crops, the occurrence were extraordinary and unfore-seen fortuitous events, that even granting they could have beenforeseen, they were, however, inevitable. Such condition of thefloods is, “unusual’’ as contemplated in Article 1680 which couldjustify the reduction of rents. (Panayotti vs. Tan Lim Te, [C.A.] 56O.G. 4568.)

Percentage of reduction.

Article 1680 does not determine the percentage of reductionof the rental to which the lessee becomes entitled. It is logical thatthe rent stipulated be reduced in the same ratio that the actualreceipts bear to the normal income obtainable from the landleased. The rent must be reduced proportionately. Manresa’s for-mula, which is deemed equitable, is as follows:

Normal fruits are to fruits actually received as rent stipu-lated is to X.

In a case, it appeared from the record that the appellant ob-tained during the first year P28,000 for the sale of fish and P7,000for the sale of nipa leaves, or a total of P35,000, in Japanese cur-rency which, at the proved exchanged rate of 14 to one, repre-sented around P2,500 in Philippine currency. But for the second

663

year appellant only obtained P800. The testimony of the appel-lant’s witness about the receipts of the lessee was not found cred-ible, since he was not placed in charge of the fishpond until 1947.In consequence, the rent for the second year, was reduced to 8/25ths of P14,000 (the rent originally stipulated), i.e., P4,480. Forthe third year (1946-1947), no rental was due since the lessee wasdispossessed completely and received nothing on account of theproducts. (Reyes vs. Crisostomo, supra.)

ART. 1682. The lease of a piece of rural land, whenits duration has not been fixed, is understood to havebeen made for all the time necessary for the gather-ing of the fruits which the whole estate leased mayyield in one year, or which it may yield once, althoughtwo or more years may have to elapse for the pur-pose. (1577a)

Duration of rural lease.

(1) The duration is that fixed in the contract of lease betweenthe parties.

(2) In the absence of stipulation, the duration is fixed by law,to wit:

(a) the time necessary to gather the fruits which ordinar-ily would cover one (1) year in case of agricultural crops; or

(b) more than one (1) year in case the land may yield onlyonce and two or more years may have to elapse for the pur-pose.

Since the duration of a lease depends upon the stipulationsin the contract of lease, it can not be affected by the more or lessvaluable improvements voluntarily made by the lessee upon theproperty. Thus, the fact that the defendant or his ancestors hadbuilt a house and planted fruit trees on the land in question, whichimpressed upon the contract the character of an indefinite termand implied long duration, would not affect the stipulated dura-tion, for the reason that the duration of lease contracts dependson what many have been stipulated by the parties at the timewhen the same were entered into, and not on the more or less

Art. 1682 LEASE OF RURAL AND URBAN LANDSSpecial Provisions for Leases of Rural Lands

664 LEASE Art. 1683

importance of the improvements introduced or effected by thetenant on the leased property. (Iturralde vs. Garduño, 9 Phil. 605[1906].)

ART. 1683. The outgoing lessee shall allow the in-coming lessee or the lessor the use of the premisesand other means necessary for the preparatory laborfor the following year; and, reciprocally, the incominglessee or the lessor is under obligation to permit theoutgoing lessee to do whatever may be necessary forthe gathering or harvesting and utilization of the fruits,all in accordance with the custom of the place. (1578a)

Obligation of outgoing/incoming lesseeor lessor.

Even before the end of the lease, in the absence of a contrarystipulation, a reciprocal obligation/privilege is given by thepresent article as follows:

(1) The outgoing lessee shall allow the incoming lessee or les-sor to make the necessary work preparatory for the crop the fol-lowing year; and

(2) The incoming lessee and lessor shall permit the outgoinglessee to gather or harvest and utilize the fruits he has produced.

In a case, where the lease of a sugar hacienda was to expirewith the 1953-1954 crop-year and the lessor sued the lessee inNovember 27, 1953 to allow him to cultivate the fields alreadyharvested, a writ of injunction secured by the lessor to restrainthe lessee from preventing him to enter the land was held prop-erly issued. The action is not for unlawful detainer to eject thelessee before the expiration of the lease but one based on Article1683. (Escay vs. Teodoro, 105 Phil. 141 [1959].) In another case,where the lease of a sugar hacienda with an area of 192 hectareswas to expire with the 1938-1939 crop-year, the lessee was requiredto allow the lessor to take possession in August, 1938 of 80 hec-tares of the hacienda which was not cultivated to enable him tocultivate it for the 1939-1940 crop-year. (Jison vs. Hernaez, 74 Phil.66 [1942].)

665

The privilege given to the outgoing lessee to harvest the fruitsevidently indicates that existing crops at the termination of thelease shall belong to him.

ART. 1684. Land tenancy on shares shall be gov-erned by special laws, the stipulations of the parties,the provisions on partnership and by the customs ofthe place. (1579a)

ART. 1685. The tenant on shares cannot be ejectedexcept in cases specified by law. (n)

Rules governing law tenancy on shares.

Land tenancy on shares is primarily governed by special laws,and suppletorily, by the stipulations of the parties, the provisionson partnership, and the customs of the place.

According to the Code Commission, “land tenancy should begoverned by special laws because agrarian problems need legis-lative solution from time to time, as changing conditions maywarrant. Only those laws of a more or less permanent natureshould be included in a Civil Code. It goes without saying thatthe customs of the place, referred to in the article should not becontrary to law or to public policy, such as social justice.’’ (Report,p. 146.)

Special laws on land tenancy.

Agricultural tenancy is now governed by (1) R.A. No. 3844,as amended, otherwise known as the Code of Agrarian Reformsof the Philippines, (2) Presidential Decree No. 27, as amended(particularly by Exec. Order No. 228.), otherwise known as theTenants Emancipation Decree, (3) Executive Order No. 229 whichprovides the mechanisms needed initially to implement the Com-prehensive Agrarian Reform Program (CARP) as instituted byProclamation No. 131, (4) R.A. No. 6657, otherwise known as theComprehensive Agrarian Reform Law (CARL) of 1988, whichinstitutes a new Comprehensive Agrarian Reform Program, and(5) other existing laws and regulations related to agrarian reforminsofar as they are not inconsistent with the CARL of 1988.


666 LEASE Arts. 1684-1685

Incidentally, agricultural tenancy is classified into share ten-ancy, where the produce is divided between the landholder andthe tenant in proportion to their respective contributions; andleasehold tenancy, where rent is paid by the tenant either in per-centage of the production or a fixed amount in money, or both.

Agricultural share tenancy has been abolished.

Extinguishment of leasehold relation.

The following are the causes or modes by which the agricul-tural leasehold relation may be extinguished:

(1) Abandonment of the landholding without the knowledgeof the lessor;

(2) Voluntary surrender of the landholding by the lessee, writ-ten notice of which shall be served three (3) months in advance;

(3) Absence of a successor or heir in the event of death or per-manent incapacity (such as total blindness, insanity, etc.) of thelessee (Sec. 8, R.A. No. 3844, as amended by R.A. No. 6839.);

(4) Termination of the leasehold by the lessee under Section28;

(5) Acquisition of the land in question by the lessee;

(6) Mutual consent of the parties; and

(7) Judicial ejectment of the lessee under Section 36. (infra.)

Causes for dispossession of leasehold tenant.

They are the following:

(1) Declaration of suitability for non-agricultural purposes. —Declaration of the landholding by the Department of AgrarianReform (now Land Reform) to be suited for residential, commer-cial, industrial or some other urban purposes;

(2) Non-compliance with obligations. — Failure of the lessee tosubstantially comply with his contractual and legal obligationsexcept if caused by fortuitous event;

(3) Use of land contrary to stipulations. — Planting crops orusing the landholdings for a purpose other than what had beenpreviously agreed upon;

667

(4) Non-adoption of proven farm practices. — Failure of the les-see to adopt proven farm practices;

(5) Wrongful injury to land. — Substantial damage or destruc-tion or unreasonable deterioration of the land or other substan-tial improvements thereon through the fault or negligence of thelessee;

(6) Non-payment of rental. — Failure of the lessee to pay thelease rental; and

(7) Employment of sub-lessee. — Employing a sub-lessee exceptif the lessee is ill or temporarily incapacitated. (Sec. 36, Ibid.)

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668 LEASE

SECTION 4. — Special Provisions for theLease of Urban Lands1

ART. 1686. In default of a special stipulation, thecustom of the place shall be observed with regard tothe kind of repairs on urban property for which thelessor shall be liable. In case of doubt it is understoodthat the repairs are chargeable against him. (1580a)

Kind of repairs on urban propertyby lessor.

The lessor is obliged to make the necessary repairs on theproperty leased. (Art. 1654[2].) The kind of repairs he is requiredto make is that provided in the lease agreement, and in the ab-sence of a special stipulation, the same must be determined inaccordance with the custom of the place.

In case of doubt as to who shall bear the cost of the repairs, itis understood that it is chargeable against the lessor. While it isthe duty of the lessor to make on the property leased all repairsnecessary in order to keep it in serviceable condition for the pur-pose for which it was intended, the parties are at liberty to stipu-late the contrary, in which case, the lessor is relieved of that duty.(Gonzales vs. Mateo, 74 Phil. 373 [1942].) The right to repair maybe waived by the lessee or he may assume the duty to repair.

1Presidential Decree No. 1517 (June 11, 1978) proclaimed urban land reform in thePhilippines. The President shall proclaim specific parcels of urban and urbanizable landsas Urban Land Reform Zones. Within the urban zones, legitimate tenants who haveresided on the land for 10 years or more and have built-their homes on the land andresidents who have legally occupied the land by contract continuously for the last 10years, shall not be dispossessed of the land and shall be allowed the right of first refusalto purchase the same within a reasonable time and for reasonable prices, under termsand conditions to be determined by the Urban Zone Expropriation and Land Manage-ment Committee. Proclamation No. 1893 and 1907 specified the urban land reform zonesin metropolitan. (Secs. 4, 6, thereof.)

668

669

ART. 1687. If the period for the lease has not beenfixed, it is understood to be from year to year, if therent agreed upon is annual; from month to month, if itis monthly; from week to week, if the rent is weekly;and from day to day, if the rent is to be paid daily.However, even though a monthly rent is paid, and noperiod for the lease has been set, the courts may fix alonger term for the lease after the lessee has occu-pied the premises for over one year. If the rent isweekly, the courts may likewise determine a longerperiod after the lessee has been in possession for oversix months. In case of daily rent, the courts may alsofix a longer period after the lessee has stayed in theplace for over one month. (1581a)

Duration of lease depending on periodat which rent payable.

(1) Application of provision. — Article 1687 is based on the pre-sumed intention of the parties. It applies only to a lease withouta fixed period (Art. 1669.) and to a lessee, that is, one who has acontract of lease with the owner. Hence, a sublessee, much less amere occupant, is not entitled to its benefits. (Acasion vs.Corporacion de los PP Dominicos de Filipinas, 100 Phil. 523[1956].)

Article 1687 does not apply where there is a fixed period,whether such period is definite or indefinite.

(a) A lease contract on a month-to-month basis is a leasewith a definite period; it expires at the end of each monthwithout the need of a demand. (Sy Yong Gim vs. Sia Song Peck[C.A.] 50 O.G. 1180.) A previous demand by the lessor to va-cate can justify ejectment. (Junson vs. Martinez, 405 SCRA 390[2003].) The lease is terminable at the end of each month upondemand to vacate by the lessor. The subsequent acceptanceby the lessor of rental payments does not, absent anycircumstance that may indicate a contrary conclusion,legitimize the unlawful character of the lessee’s possession.(Chua vs. Court of Appeals, 242 SCRA 744 [1995]; TagbilaranIntegrated Settlers’ Assoc. vs. Court of Appeals, 444 SCRA 193

Art. 1687 LEASE OF RURAL AND URBAN LANDSSpecial Provisions for the Lease of Urban Lands

670 LEASE Art. 1687

[2004]; LL and Company Dev. and Agro-Industrial Corp. vs.Huang Chao Chun, 378 SCRA 612 [2002].)

(b) A lease stipulating that the lessee will vacate as soonas the lessor needed the premises, fixes a period. (Lim vs.Legarda Vda. De Prieto, 53 O.G. 7678.) If it is shown that thelessor needs the property, the lease is considered terminatedas of the end of the month after proper notice or demand tovacate is given. (Junson vs. Martinez, supra.)

(c) Article 1687 finds no application in the case of a leasecontract with a period subject to a resolutory condition, i.e.,“the lease period x x x shall continue for an indefinite periodprovided the lessee is up-to-date in the payment of hismonthly rentals.’’ (Jespayo Realty Corp. vs. Court of Appeals,390 SCRA 27 [2002].)

The lessor is within his right to increase the rental eachperiod (year, month, or day, as the case may be) subject to ex-isting laws; and the lessee is similarly within his right to refuseto acquiesce. Upon this refusal, the contract of lease betweenthe parties is terminated. The lessor thus has the right to de-mand that the lessee vacate the leased property. (Chua vs.Victorio, 428 SCRA 447 [2004].)

(2) Two distinct provisions. — Article 1687 has two (2) distinctprovisions, to wit:

(a) If the contract has no fixed duration, the law fixes theterm according as the parties have agreed to pay the rentalsannually, monthly, weekly, or daily; and

(b) Even if the parties have agreed as to the periodical pay-ment of rentals, the law empowers the courts, nevertheless,to exercise their discretion in fixing the term, if the lessee hasstayed in the premises for a certain length of time. It shouldbe noted that the second portion gives the court discretionand does not compel it to fix the duration of the contract.

Article 1687 contemplates a situation where neither of theparties being at fault, the lessor decided to terminate the contractof lease. (Susana Realty, Inc. vs. Hernandez, [C.A.] 54 O.G. 2206.)

(3) Implied new lease. — A lease whose duration is dependentupon the mode of payment of the rental may also arise, where at

671

the expiration of a lease for a fixed term, the lessee should con-tinue to enjoy the thing leased for at least 15 days with the acqui-escence of the lessor, not for the period of the original contract,but for the time established in Article 1687. (Art. 1670.)

(4) Discretion of court to fix a longer period. — Under the formerprovision of the old Civil Code (Art. 1581 thereof.), “the leaseceases, without the necessity of a special notice, upon the expira-tion of the term.’’ Now, the court is authorized to fix a longer termif the lessee who is not at fault has been in occupation of thepremises for a certain period and the lessor decided to terminatethe lease. It may, however, legally refuse to do so, if the circum-stances surrounding the case warrants such action. (Prieto vs.Santos, 98 Phil. 509 [1956]; Divino vs. De Marcos, 45 SCRA 180[1972]; Ramirez vs. Sy Chit, 121 SCRA 1364 [1967]; Guiang vs.Samano, 196 SCRA 114 [1990]; Heirs of M. Suico vs. Court ofAppeals, 266 SCRA 444 [1997].)

(a) The extension of the lease should be commensuratewith the period during which the lessee had been occupyingthe premises. Where the lessee had stayed for 50 years, an ex-tension of three (3) years was held reasonable. (GregorioAraneta, Inc. vs. De Mesa, 35 SCRA 137 [1970].)

(b) Article 1687 does not contemplate an unwarrant ex-tension of the period of the lease as to make the period in-definite. The court may not grant an extension beyond theperiod sought by the lessee himself. Thus, if the lessee askedfor a one-year extension, the court should not grant two (2)years. (Imperial Insurance, Inc. vs. Simon, 14 SCRA 855 [1965].)

(c) Article 1687 does not apply to a lease whose termina-tion is expressly left to the lessee. In such a case, a term maybe fixed under the general provisions of Article 1197.2

(Eleizegui vs. Lawn Tennis Club, 2 Phil. 309 [1903].)


2Art. 1197. If the obligation does not fix a period, but from its nature and the cir-cumstances it can be inferred that a period was intended, the courts may fix the dura-tion thereof.

The courts shall also fix the duration of the period when it depends upon the willof the debtor.

In every case, the courts shall determine such period as may under the circum-stances have been probably contemplated by the parties. Once fixed by the courts, theperiod cannot be changed by them. (1128a)

672 LEASE Art. 1687

(d) Article 1687 does not grant a lessee an absolute rightto an extension of the lease term but merely gives the courtsthe discretion to allow additional time for the lessee to pre-pare for his eventual ejection. (Melotindos vs. Tobias, 391SCRA 299 [2002].)

(e) Article 1197 is not applicable where the duration ofthe lease is left to the will of the lessor. In a lease, the lessor isthe creditor and the lessee, the debtor. (Lim vs. Legarda Vda.De Prieto, 53 O.G. 7678.)

(f) The stipulation that the lease can be renewed at theoption of both parties implies that the lease cannot be renewedwithout the lessor’s consent. (Fernandez vs. Court of Appeals,166 SCRA 577 [1988]; Cruz vs. Alberto, 39 SCRA 991 [1971].)

(g) The lessee cannot be granted an extension of the leasewhen the parties stipulated that the lease shall not be renewedor extended by implication. (Ramon Magsaysay Award Foun-dation vs. Court of Appeals, 134 SCRA 136 [1985].)

(h) The mere fact that Article 1687 does not authorize thecourt to fix the term of the lease whhen the rental is payableyearly, would not prevent it from fixing the period of the leaseunder Article 1197.

(i) It is not necessary for the lessor to file an independentaction. The power to extend the period of lease may be exer-cised by the court as an incident of the ejectment suit. (Ramirezvs. Sy Chit, supra; Divinagracia vs. Court of Appeals, 104 SCRA180 [1981].) It would be an idle and costly procedure to requirea lessor to file one action to have the term of the lease fixed,with all the possible delays attendant upon a lawsuit, and thenfile another action for ejectment on the ground that the periodfixed in the first one has expired. (Legarda Vda. De Prieto vs.Lim, [C.A.] 51 O.G. 5254.)

(j) A subsequent agreement between the parties to a leasecontract over a parcel of land, authorizing an agent to sell theland owned by the lessor and the improvements thereon,owned by the lessee, and fixing the rental a month until theproperty shall have been actually sold, does not make thepurported sale a condition precedent for the termination of

673

the lease. Rather, it merely authorizes the lessee to remain inpossession until the sale is effected, or it becomes clear thatthe property could not be sold. Where the agent resigns hiscommission because of his expressed inability to sell the prop-erty on the terms specified, then said agreement becomes func-tus officio and its binding force is terminated. The consequenceis that the situation of the parties reverted to what it was be-fore said agreement. Since the former agreement did notspecify the period of lease, then it was on a month-to-monthbasis because the rental was monthly. (Cajucom vs. ManilaRemnant Co., Inc., 17 SCRA 1049 [1966].)

(k) There is no law conferring on a lessee the preferentialright to occupy the premises over other prospective lesseesafter the termination of the lease. To compel the owner to grantthe lessee that concession would be sheer intrusion on the rightof ownership which is violative of the due process clause ofthe Constitution. (Hunniecutt vs. Flores, [C.A.] 59 O.G. 2772.)

ART. 1688. When the lessor of a house, or partthereof, used as a dwelling for a family, or when thelessor of a store, or industrial establishment, alsoleases the furniture, the lease of the latter shall bedeemed to be for the duration of the lease of thepremises. (1582)

Lease of premises together with furniture.

The provision does not say that the lease of the premises ispresumed to include the furniture, but that the lessor also leasesthe furniture. The lease of the furniture shall be deemed to be forthe duration of the lease of the premises because the former isconsidered as an accessory to the latter.

Nevertheless, under the attendant circumstances, it may beinferred that the intention of the parties is that the lease of thepremises also covers the furniture contained therein although notexpressly included by the terms of the lease agreement.

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674 LEASE

Chapter 3

WORK AND LABOR

SECTION 1. — Household Service

New provisions.

Articles 1689 to 1699 on Household Service, like Articles 1700to 1712 on Contract of Labor are new provisions. The latter is gov-erned generally by the special laws on labor.

According to the Code Commission:

“There is a section ‘Household Service.’ The domestic serv-ants in the Philippines have not, as a general rule, been fairlytreated. Social justice is to be measured by the manner in whichthe humblest servant is dealt with, for no social system canrise above its lowliest class any more than a chain is strongerthan its weakest link. Consequently, under the heading of‘Household Service,’ there are provisions to strengthen theright of domestic servants.’’ (Report, 15.)

ART. 1689. Household service shall always be rea-sonably compensated. Any stipulation that householdservice is without compensation shall be void. Suchcompensation shall be in addition to the house help-er’s lodging, food, and medical attendance.

Scope of household service.

Household or domestic service is that rendered by a domesticservant, who works in the house or with the family with whomthe helper usually lives. (Rosales vs. Tan Que, [C.A.] 46 O.G. 4328.)

674

675

The family he serves is that of his master and no one else. Theterm includes service performed by a family driver. (Balolong vs.Uy, [C.A.] 52 O.G. 5561; Basco vs. Coronel, 5 C.A. Rep. 997;Ancheta vs. Colcol, [C.A.] 55 O.G. 3317.)

A laborer, worker, or employee in a commercial, or industrialenterprise is not a domestic servant. Thus, a waiter and any per-son employed in a hotel, club, corporation, or society, to serve itsmembers, are not “domestic servants,’’ in the proper sense of thisterm under Article 1689. (Zamora vs. Sy, [C.A.] 52 O.G. 1513;Rosales vs. Tan Que, supra.)

Reasonable compensation for household service.

A house helper or domestic servant is entitled to reasonablecompensation in addition to suitable lodging, food and medicalattendance. Household service cannot be gratuitous.

Any stipulation that household service is without compensa-tion is against public morals and void. No agreement may sub-sist in law in which it is stipulated that any domestic service shallbe absolutely gratuitous, unless it be admitted that slavery maybe established in this country through a covenant entered intobetween the interested parties. (De Los Reyes vs. Alojado, 16 Phil.499 [1910].)

ART. 1690. The head of the family shall furnish,free of charge, to the house helper, suitable andsanitary quarters as well as adequate food and medicalattendance.

Obligations of head of the family.

The term “head of family,’’ as used in the law, may refer tothe husband or father, the wife or mother, or any person who livesalone or with another or other persons, but has servant/s in hisor her employ.

Some of the obligations imposed on the head of the family arealso applicable to the other members of the family, to wit.

(1) to furnish, free of charge, to the house helper, suitable and

Art. 1690 WORK AND LABORHousehold Service

676 LEASE Art. 1690

sanitary quarters as well as adequate food and medical attend-ance (Art. 1690.);

(2) to give an opportunity to the house helper who is underthe age of 18, for at least elementary education (Art. 1691.);

(3) to provide the house helper suitable clothing (Art. 1693.);

(4) to treat the house helper in a just and humane manner (Art.1693.);

(5) to allow the house helper four (4) days’ vacation eachmonth, with pay, and not to require him/her to work more than10 hours a day;

(6) to bear the funeral expenses in case of death of the househelper (Art. 1696.);

(7) to terminate the contract before that expiration of the termonly for a just cause (Art. 1697.);

(8) to pay the house helper unjustly dismissed compensationalready earned plus that for 15 days by way of indemnity (Ibid.);and

(9) to give the house helper, upon demand, a written state-ment on the nature and duration of the service and the conductand efficiency of the house helper. (Art. 1699.)

Medical attendance.

The right of house helpers to medical attendance — exclusiveof hospitalization — is purely statutory in character, and wherespecifically conferred by statute, is deemed subject to the “rule ofnecessity,’’ in the sense that it is dependent upon the need for saidmedical attendance. Hence, the determination of the questionwhether “expenses of hospitalization’’ are included in “medicalattendance’’ must depend upon the circumstances surroundingeach case.

Even assuming that house helpers’ expenses of hospitaliza-tion can, in proper cases, be deemed to be within the purview of“medical attendance,’’ it will only be fair that, except in cases ofextreme urgency, the party who may have to defray the cost ofmedical attendance and/or hospitalization, be given a say in thechoice of the physician who will treat the patient and/or the hos-

677

pital in which he will be confined. (Cuajao vs. Chua Lo Tan, 6SCRA 136 [1962].)

ART. 1691. If the house helper is under the age ofeighteen years, the head of the family shall give anopportunity to the house helper for at least elemen-tary education. The cost of such education shall be apart of the house helper’s compensation, unless thereis a stipulation to the contrary.

Opportunity for at least elementary education.

Under the provision, the cost of such education is chargeableto the house helper’s compensation unless there is an agreementto the contrary.

Literally, construed, a house helper under 18 years of age isnot entitled to secondary education at the head of the family’sexpense; if 18 years or above, not even to elementary education.

ART. 1692. No contract for household service shalllast for more than two years. However, such contractmay be renewed from year to year.

Duration of household service.

The duration is limited to two (2) years. However, the con-tract may be renewed from year to year. A contract for more thantwo (2) years is void as to the excess.

ART. 1693. The house helper’s clothes shall be sub-ject to stipulation. However, any contract for house-hold service shall be void if thereby the house helpercannot afford to acquire suitable clothing.

Clothes of the house helper.

The house helper is entitled to suitable clothing subject tostipulation between the parties. If the house helper cannot affordto acquire suitable clothing, the house helper cannot waive thisright by stipulation. Any such stipulation is void.

Arts. 1691-1693 WORK AND LABORHousehold Service

678 LEASE Arts. 1694-1695

ART. 1694. The head of the family shall treat thehouse helper in a just and humane manner. In no caseshall physical violence be used upon the house helper.

Treatment of house helper.

A house helper shall be treated by the head of the family in ajust and humane manner. Whatever the infractions he/she mayhave committed, will not justify the use of physical violence uponhis/her person.

A similar provision is contained in Article 147 of the LaborCode of the Philippines, except that the obligation is imposed onan employer. (Pres. Decree No. 442, as amended.)

ART. 1695. House helpers shall not be required towork more than ten hours a day. Every house helpershall be allowed four days vacation each month, withpay.

Ten-hour a day work.

The prohibition contained in Article 1695 is against requiringhouse helpers to work more than the prescribed period.1 What isunlawful is for house helpers to be compelled by their employersto do so, but not for both parties to agree otherwise upon pay-ment of additional compensation. However, unless the existenceof such agreement is clearly established whatever doubt there maybe should be resolved in favor of the house helper. This rule ofconstruction in case of doubt is necessary lest the law be made arefuge of unscrupulous heads of the family. (Balolong vs. Uy,[C.A.], 52 O.G. 556; Basco vs. Coronel, 5 C.A. 997.)

The househelper cannot demand payment of compensationfor overtime work done, unless such overtime work be requiredby the employer, or is demanded by the nature of the work.(Zamora vs. Sy, [C.A.] 52 O.G. 1513.)

1Art. 1418. When the law fixes, or authorizes the fixing of the maximum number ofhours of labor, and a contract is entered into whereby a laborer undertakes to worklonger than the maximum thus fixed, he may demand additional compensation for servicerendered beyond the time limit.

679

Vacation leave.

Such vacation leave with pay, if not enjoyed, could not be ac-cumulated. The house helper is not entitled to payment for suchleave, unless he had asked therefor and his employer refused hisrequest, for in such case there is an implied agreement on the partof the employer to pay for such vacation. (Zamora vs. Sy, supra.)

ART. 1696. In case of death of the house helper,the head of the family shall bear the funeral expensesif the house helper has no relatives in the place wherethe head of the family lives, with sufficient meanstherefor.

Funeral expenses.

This article applies only “if the house helper has no relativesin the place where the head of the family lives, with sufficientmeans therefor.’’ The head of the family must bear the funeralexpenses where the relatives, although with sufficient means, donot live in the same locality.

ART. 1697. If the period for household service isfixed neither the head of the family nor the househelper may terminate the contract before the expira-tion of the term, except for a just cause. If the househelper is unjustly dismissed, he shall be paid the com-pensation already earned plus that for fifteen days byway of indemnity. If the house helper leaves withoutjustifiable reason, he shall forfeit any salary due himand unpaid, for not exceeding fifteen days.

Termination of household service.

(1) If no period for household service is fixed, the head of thefamily may terminate the same at any time by giving notice (Art.1698.) but he must act in good faith and under circumstances toavoid undue prejudice to the house helper.

(2) If a period is fixed, neither party may terminate the con-tract before the expiration of the term, except for a just cause.

Arts. 1696-1697 WORK AND LABORHousehold Service

680 LEASE Art. 1698

(a) In case of unjust dismissal, the house helper is enti-tled to be paid the compensation already earned plus 15 dayswages as indemnity.

(b) If the house helper leaves withut justifiable reason, heforfeits any salary earned and unpaid, for not more than 15days.

ART. 1698. If the duration of the household serviceis not determined either by stipulation or by the na-ture of the service, the head of the family or the househelper may give notice to put an end to the servicerelation, according to the following rules:

(1) If the compensation is paid by the day, noticemay be given on any day that the service shall end atthe close of the following day;

(2) If the compensation is paid by the week, no-tice may be given, at the latest, on the first businessday of the week, that the service shall be terminatedat the end of the seventh day from the beginning ofthe week;

(3) If the compensation is paid by the month, no-tice may be given, at the latest, on the fifth day of themonth, that the service shall cease at the end of themonth.

Notice to terminate service relationwhere no period fixed.

The head of the family or the house helper, as the case maybe, may give the notice to put an end to the service relation ac-cording to the rule provided in the present article, depending asto whether the compensation is paid by the day, by the week, orby the month.

In lieu of the required notice, the monetary value may be givenby the head of the family. Thus, where a house helper, being paidby the month, is dismissed without notice by the head of the fam-ily, the latter is liable to pay the former the equivalent of one (1)

681

month’s pay. (Balolong vs. Uy, supra; Ancheta vs. Colcol, [C.A.]55 O.G. 3317.)

ART. 1699. Upon the extinguishment of the servicerelation, the house helper may demand from the headof the family a written statement on the nature andduration of the service and the efficiency and con-duct of the house helper.

Written statement from head of the family.

The written statement mentioned in the provision may be-come necessary in case the house helper applies for employmentin another household or even in other kinds of work.

— oOo —

Art. 1699 WORK AND LABORHousehold Service

682 LEASE

SECTION 2. — Contract for a Piece of Work

ART. 1713. By the contract for a piece of work thecontractor binds himself to execute a piece of workfor the employer, in consideration of a certain priceor compensation. The contractor may either employonly his labor or skill, or also furnish the material.(1588a)

Contract for a piece of work distinguishedfrom lease of service.

Article 1713 defines a contract for a piece of work. This kindof lease (locatio operis) is distinguished from lease of service (loca-tio operarum) as follows:

(1) In the first (Arts. 1689, 1700.), the direct object of the con-tract is the result, the complete and finished work done by theindependent contractor (lessor or promissor), while in the second,it is the service itself by the hired servant or laborer/employee;

(2) In the first, the person for whom the services are to beperformed controls only the result or end to be accomplished,while in the second, he also controls the manner and means to beused to produce the stipulated result;

(3) In the first, the risk is upon the independent contractor,while in the second, even if the result intended is not accomplishedwithout fault of the lessor, remuneration is still due for the serv-ice rendered;

(4) In the first, the price is generally not payable until the workis completed and accepted, while in the second, it is after the serv-ice has been performed; and

(5) In the first, there is no relation of employer-employee (al-

682

683

though the contract is referred to in the law as employer), whilein the second, such a relation exists. (Art. 1644.)

In both, there is a price certain or compensation and the rela-tion of principal and agent does not exist between the lessor andthe lessee. (Art. 1644.) There is also no employer-employee rela-tion between a common carrier and the passenger, or owner orshipper of goods. (Art. 1722.)

ART. 1714. If the contractor agrees to produce thework from material furnished by him, he shall deliverthe thing produced to the employer and transfer do-minion over the thing. This contract shall be governedby the following articles as well as by the pertinentprovisions on warranty of title and against hidden de-fects and the payment of price in a contract of sale.(n)

Material furnished by the contractor.

Here, the contractor furnishes both the material and his labor.“Some jurists consider this as a contract of sale. Indeed, it is verysimilar to sale.’’ (Report of the Code Commission, p. 147.); hence,he has the obligation:

(1) to deliver the thing produced to the employer;

(2) to transfer dominion over the thing; and

(3) to warrant against eviction and hidden defects. (see Art.1545, et seq., Part I.)

Accordingly, the contract shall be governed not only by theprovisions of Section 3 but also by the pertinent provisions onwarranty of title and against hidden defects and the payment ofprice in a contract of sale.

ART. 1715. The contractor shall execute the workin such a manner that it has the qualities agreed uponand has no defects which destroy or lessen its valueor fitness for its ordinary or stipulated use. Shouldthe work be not of such quality, the employer may

Arts. 1714-1715 WORK AND LABORContract for a Piece of Work

684 LEASE Art. 1715

require that the contractor remove the defect or ex-ecute another work. If the contractor fails or refusesto comply with this obligation, the employer may havethe defect removed or another work executed, at thecontractor’s cost. (n)

Remedy of employer in case of defects.

The contractor must execute the work in accordance with thequalities stipulated and without defects which destroy or lessenits value or fitness for the use intended. (see Art. 1561, Part I.)

If the contractor does not comply with his contract, the em-ployer may:

(1) require the contractor to remove the defect or execute an-other; or

(2) have the defect removed or another work executed, at theexpense of the contractor if fails or refuses to do so.

The above rules arise from the nature of the contract. (Reportof the Code Commission, p. 147.)

Article 1715 may be available only when there is proof of de-fects in the work. In the absence of proof to the contrary the workis presumed satisfactory. (Ramcar, Inc. vs. Garcia, 4 SCRA 1087[1962]; see Art. 1169.) The measure of damages for failure to com-plete a construction, is the amount spent by the owner to com-plete it and correct its defects. (Marker vs. Garcia, 5 Phil. 557[1905].)

ILLUSTRATIVE CASE:

Petitioners accepted only the offer of respondent to make a topo-graphic survey rejecting the offer to make a subdivision survey, anddiscrepancies arose as a result of the absence of the latter survey.

Facts: Respondent S offered to make two (2) surveys forpetitioner Philam: a topographic and a subdivision survey of a45 hectare housing project for the petitioner. For the proposedsubdivision survey, S stated that he would relocate all theboundary monuments of the project area. Philam accepted theoffer only in so far as the topographic survey is concerned.

685

Philam, in seeking to recover damages claims, that itincurred additional expenses caused by the resurvey of theproperty, the additional grading work done in the new roadlay-out, the charges in the design of the buildings and residen-tial houses to be constructed, and the charge in the shippingarea which became smaller due to the fact that the actual areaof the project is less than what appeared in the topographicmap.

For his defense, S contends that under his contract he isnot required to prepare a plan which shows the exact bounda-ries of the project nor the exact measurement of said bounda-ries; and that inasmuch as a topographic survey could be pre-pared on a property even without indicating definitely its metesand bounds, he proceeded with the topographic survey andsubmitted the result of his work. He disclaims liability for lossesarising from the discrepancies referred to by a representativeas well as the architect of Philam whose attention he called be-fore preparing the topographic map, as he was informed thathe should proceed even without a survey plan because timewas then of the essence and that whatever discrepancies mayarise as a result of the absence of such horizontal survey couldbe remedied later.

Issue: Has S been at fault or remiss in the performance ofhis duty to prepare the topographic map pursuant to his con-tract with Philam?

Held: No. (1) Use of topographic map which is not linearlyplotted. — “When a topographic map which is not linearlyplotted and whose boundaries are consequently not accurateis used in sketching the road lay-out and other parts of the sub-division scheme, such procedure would be improper unless thesketch is intended to be merely a preliminary lay-out, subjectto final adjustment after a fixed boundary survey has beenmade. x x x.

In planning a scheme for a new housing project, thereshould be not only a topographic survey of the entire projectarea but also an accurate planimetric survey of the same indi-cating the exact boundaries thereof.’’

(2) Obligation of contractor under article not absolute. — “Pe-titioner would have us construe the obligation of the contrac-tor to execute the work in such a manner that it had the quali-ties agreed upon and was free from defects which destroyed or

Art. 1715 WORK AND LABORContract for a Piece of Work

686 LEASE Arts. 1716-1717

lessened its value or fitness as well-nigh absolute. It wouldimpose the duty on the party thus bound to perform such workto attain, in each and every case, a degree of perfectibility onpain of being visited with a liability for damages. That is tomisread Art. 1715. It is to give it an interpretation at war withthe demands of reason. It might have been otherwise if the workagreed upon to be performed consisted of machinery, whichmust be constructed according to specification, otherwise itwould not serve the purpose contemplated. Such is not the case,however. As Justice Holmes noted, there is no such principle‘against using common sense in construing laws.’

Petitioner, however, appears to be of a different mind. Ig-noring the vital circumstance that precluded respondentSantamaria’s work from being as satisfactory as was hoped for,for which it could not escape responsibility as it rejected hisoffer to conduct both a topographic and a subdivision survey,it would interpret this codal provision without any thought ofthe canons of fairness. It would stretch its meaning in an un-warranted manner. No legal norm should be susceptible to sucha reproach.’’ (Philippine American Life Ins. Co. vs. Santamaria, 31SCRA 798 [1970].)

ART. 1716. An agreement waiving or limiting thecontractor’s liability for any defect in the work is voidif the contractor acted fraudulently. (n)

Agreement waiving or limiting contractor’sliability for defects.

The agreement or “stipulation, if the contractor acted fraudu-lently is contrary to public policy’’ (Report of the Code Commis-sion, p. 147.) and is void. Article 1716 is similar to Article 1553(Part I.) which declares void any stipulation exempting the ven-dor from the obligation to answer for eviction if he acted in badfaith.

ART. 1717. If the contractor bound himself to fur-nish the material, he shall suffer the loss if the workshould be destroyed before its delivery, save whenthere has been delay in receiving it. (1589)

687

Risk of loss where material furnishedby contractor.

Here, the contractor furnishes both his labor and material. Heshall suffer the loss if the work should be destroyed even if dueto a fortuitous event, before its delivery, unless the lessee-owneris guilty of mora accipiendi, in which case the risk is shifted to him.Thus, where the contractor of a building completed its construc-tion and the owner wrongfully refused to accept delivery, the lat-ter must bear the loss although there has been no actual deliveryby reason of the loss of the building by fire. (Tuason vs. Zamora& Sons, 2 Phil. 305 [1903]; Atlantic Gulf Co. vs. Insular Govern-ment, 10 Phil. 166 [1908].)

The contract is not extinguished, and, therefore. The contrac-tor may be required to do the work again, unless there is a stipu-lation to the contrary or a repetition of the work has become im-possible.

ART. 1718. The contractor who has undertaken toput only his work or skill, cannot claim any compen-sation if the work should be destroyed before its de-livery, unless there has been delay in receiving it, orif the destruction was caused by the poor qualityof the material, provided this fact was communicatedin due time to the owner. If the material is lost througha fortuitous event, the contract is extinguished.(1590a)

Risk of loss where contractorfurnished only his work.

Under the present article, the contractor has undertakien toput only his work or skill and the work is destroyed by a fortui-tous event before its delivery. He cannot claim any compensationfor his labor or work unless:

(1) the lessee-owner is guilty of mora accipiendi; or

(2) the destruction was caused by the poor quality of thematerial furnished by the owner, provided the contractor com-municated this fact in due time to the owner.


688 LEASE Art. 1719

If the material is lost through a fortuitous event, the contractis extinguished. The contractor is not liable for damages or for thevalue of the materials. If the loss or destruction is due to the con-tractor’s fault, he may be obliged to do the work all over again.

ART. 1719. Acceptance of the work by the employerrelieves the contractor of liability for any defect in thework, unless:

(1) The defect is hidden and the employer is not,by his special knowledge, expected to recognize thesame; or

(2) The employer expressly reserves his rightsagainst the contractor by reason of the defect. (n)

Effect of acceptance by the employer.

The acceptance of the work by the lessee-owner without ob-jection or protest relieves the contractor of liability except in thecases mentioned.

(1) The acceptance of the building without objecting with ref-erence to the work or material furnished in the construction ofthe house has the effect of acknowledging that the work andmaterial had been performed and furnished substantially asagreed upon. This acceptance, of course, would not prevent thedefendant from subsequently raising the objection that there ex-isted hidden defects in the construction of said house. (Choy vs.Heredia, 12 Phil. 259 [1908]; Campbell vs. Behn Meyer Co., 3 Phil.590 [1904]; Naval vs. Benavides, 8 Phil. 250 [1907]; Chan Suancovs. Alonso, 14 Phil. 517 [1909].)

(2) The acceptance of a building under protest is not a waiverof any claim for damages for defects in its construction. (Ang Toavs. Alvarez, 11 Phil. 146 [1908]; Marker vs. Garcia, 5 Phil. 557[1905]; Casimiro vs. Tamparong, 78 Phil. 804 [1947].)

(3) From the very nature of things, it is impossible to deter-mine by the simple inspection of a concrete wall, floor, or plat-form whether it has been made of reinforced concrete, for the rea-son that this work is done by embedding iron or steel rods in the

689

concrete in such manner as to increase its strength. (Limjap vs. J.Machuca & Co., 38 Phil. 451 [1918].)

ART. 1720. The price or compensation shall be paidat the time and place of delivery of the work, unlessthere is a stipulation to the contrary. If the work is tobe delivered partially, the price or compensation foreach part having been fixed, the sum shall be paid atthe time and place of delivery, in the absence of stipu-lation. (n)

Time and place of payment of priceor compensation.

In the absence of stipulation to the contrary:

(1) The price or compensation shall be paid at the time andplace of delivery (see Art. 1582, Part I.);

(2) In case the work is to be delivered partially, and the priceor compensation for each part has been fixed, the same shall bepaid at the time and place of delivery of said part.

ILLUSTRATIVE CASES:

1. Architect/contractor who was guilty of delay in the submis-sion of working drawings and specifications of a proposed condo-minium building, was ordered by the Court of Appeals to return theamount paid to him for the building plans which he submitted ontime as per contract, and attorney’s fees.

Facts: In a letter-agreement between petitioner J. Gonzales,architect and contractor, and respondent Endel Corp. for theconstruction of a condominium building on the latter’s lot,Gonzales agreed to undertake the preparation of plans of saidbuilding as well as the supervision of its construction.

Endel sued for rescission of its contract which Gonzales,alleging that the latter’s neglect and delay in completing thedrawings and specifications within three (3) months, or by April30, 1972, conformably with the practice of architects, to enableEndel to complete plans for financing and make public an-nouncements of said project, resulted in great damage andprejudicial to it.


690 LEASE Art. 1720

Traversing the complaint, Gonzales alleges, among others:there was no delay; assuming there was delay, it was due toEndel’s refusal to discuss with him the preparation of said draw-ings and specifications, and Endel did not inform him of itsdesire to abandon the construction and had he been so informed,he would not have incurred expenses in preparing the work-ing drawings and specifications.

The Court of Appeals affirmed the rescission of the con-tract, holding Gonzales obligated to return to Endel the amountof P20,000 paid by Endel for the preparation of the plans, withlegal interest and P2,000 as attorney’s fees.

Issue: Is Gonzales liable to Endel for the return of the amountof P20,000.00 and for the payment of attorney’s fees.

Held: No. (1) Compensation apportioned according to stage ofservices to be rendered. — “It is fundamental that contracts are tobe interpreted according to their liberal meaning when the termsand conditions are clear and leave no doubt as to the intentionof the contracting parties. An examination of the contract re-veals that the compensation of Gonzales was apportioned inaccordance with the stage of services to be rendered.

Upon his being commissioned. Gonzales receivedP10,000.00 under item 5(a) of the contract. And under item 5(b), he was paid P20,000.00 upon approval of the plans by theEngineering Department of Ayala Securities Corporation.Gonzales is entitled to those payments by the very terms of thecontract. He had performed the services required and hadearned his fees.’’

(2) Effect of abandonment of project for payments received forservices already rendered. — “The fact that the condominiumproject was later abandoned should not result in the forfeitureby Gonzales of those payments. Nor the fact that the contracthas been rescinded and would ordinarily create the obligationto return the things which were the object of the contract, andthe price with its interest. Upon a showing that an architect hasfully performed services relating to the completion of specifi-cations and general working drawings, he is entitled to recoverpayments specified for such services even though the project isthereafter abandoned so as to prevent performance of otherservices for which additional compensation has been provided.’’

(3) Delay only with submission of working drawings and speci-fications. — “While it may be true that Gonzales incurred in

691

delay, as found by both the Trial and Appellate Courts, whichfinding is binding on us, that delay was only with respect tothe submission of working drawings and specifications as pro-vided in item 5(c) of the letter-agreement. By reason of thatdelay, Gonzales is not entitled to the compensation providedtherefor, or P20,000.00, even though he may have already sub-mitted those drawings and specifications to Endel. Besides, thedelay in the presentation of those working drawings are notthe only cause for the failure of the contract. Endel itself haddecided to abandon the project for other reasons. If time were,indeed, of the essence of the contract, as Endel alleges, it couldhave cancelled it in April, 1972 and it should not have allowedGonzales to continue working further on the drawings andspecifications under item 5(c) of the agreement.

Neither do we deem it just and equitable that Endel shouldrecover attorney’s fees under Article 2208 of the Civil Code.(Gonzales vs. Court of Appeals, 126 SCRA 630 [1983].)

——— ———— ———-

2. Petitioner requires respondent (contractor) to file a new per-formance bond equal to the cost of the entire unfinished work insteadof 20% of the cost of the next stage of the construction to be under-taken by respondent.

Facts: Pursuant to a contract with petitioner City of Pasayfor the construction of a new Pasay City Hall, respondent V.D.Isip proceeded with the construction of the building as per dulyapproved plans and specifications. After the respondent filedan action for specific performance with damages against thepetitioner, the parties entered into a compromise agreementwhich was approved by the trial court. There was an amountstill due from the petitioner to the respondent.

The pertinent provisions of the compromise agreement areas follows:

x x x x x x x x x

[1] “Whereas, one of the conditions set forth in the pro-posal is that the Contractor shall start the construction of thePasay City Hall building as per plans and specifications bystages advancing the necessary amount needed for each stageof work and the Party of the First Part to reimburse the amountspent on the work accomplished by the Contractor before pro-ceeding on the next stage; Provided, The First Party shall sup-ply the cement needed;


692 LEASE Art. 1720

xxx xxx xxx

2. That the work shall be done in stages to be deter-mined by the City Engineer considering structural and func-tional criteria and consistent with funds immediately avail-able for the purpose;

3. That the Contractor shall advance the necessaryamount needed for each stage of work; Provided, That theContractor shall, before starting each stage of work, informthe First Party in writing as to the amount necessary to beadvanced by the former; . . .

4. That the Party of the First Part shall reimburse theContractor the cost of the work completed as estimated bythe City Engineer for each stage of work before the Con-tractor proceed to the next stage; x x x x x x’’

[2] “H. That detailed, separate reports on the progressof the construction work during each stage shall regularly besubmitted to the City Engineer and the City Mayor;

xxx xxx xxx

2. That within a reasonable period of time, at least ninety(90) days from the final approval of this Compromise Agree-ment by this Honorable Court, the defendant Pasay City Gov-ernment shall pay and remit the amount of SIX HUNDREDTHIRTEEN THOUSAND NINETY-SIX PESOS (P613,096.00). . . to the plaintiff contractor, who, in turn, immediately uponreceipt thereof, shall be bound and obliged to commence andstart the construction work corresponding to the next stagethereof; . . .’’

xxx xxx xxx’’

[3] “B. That immediately upon final approval hereof bythis Honorable Court, the plaintiff contractor will submit andfile in favor of Pasay City Government a new performance bondin the amount required by pertinent law, rules and regulations,in proportion to the remaining value or cost of the unfinishedwork of the construction as per approved plans and specifica-tions . . .’’

Petitioner claims that since respondent has not put up aperformance bond in the sufficient amount equivalent to 20%of the remaining cost of construction as per agreement, it can-not be obliged to pay the sum due respondent as yet.’’

693

Issue: Did the contracting parties envision a stage by stageconstruction on the part of respondent and payment on the partof petitioner?

Held: Yes. (1) Stage by stage construction and payment approach.— “This is manifested in the compromise agreement, to quote:[1].

An sub-paragraph H of paragraph 1 and paragraph 2 ofthe compromise agreement also reiterated the stage by stageconstruction and payment as follows: [2].

Subparagraph B of paragraph 1 of the compromise agree-ment, to wit: [3] read together with the stage-by-stage construc-tion and payment approach, would inevitably lead to the con-clusion that the parties to the compromise contemplated a di-visible obligation necessitating therefore a performance bond‘in proportion to’ the uncompleted work.’’

(2) Performance bond to cover only remaining cost of next stageof work to be done. — “What is crucial in sub-paragraph B ofparagraph 1 of the compromise agreement are the words “inproportion.’’ If the parties really intended the legal rate of 20%performance bond to refer to the whole unfinished work, thenthe provision should have required the plaintiff contractorto submit and file a new performance bond to cover the remain-ing value/cost of the unfinished work of the construction.Using the words in proportion then significantly changedthe meaning of the paragraph to ultimately mean a perform-ance bond equal to 20% of the next stage of work to be done.’’(Pasay City Government vs. Court of First Instance, 132 SCRA 156[1984].)

ART. 1721. If, in the execution of the work, an actof the employer is required, and he incurs in delay orfails to perform the act, the contractor is entitled to areasonable compensation.

The amount of the compensation is computed, onthe one hand, by the duration of the delay and amountof the compensation stipulated, and on the other hand,by what the contractor has saved in expenses by rea-son of the delay, or is able to earn by a different em-ployment of his time and industry. (n)


694 LEASE Arts. 1722-1723

Default of the employer.

If the employer incurs in delay or fails to perform an act re-quired of him under the contract, the contractor is entitled to rea-sonable compensation to be determined by considering the fol-lowing:

(1) the duration of the delay;

(2) the amount of compensation stipulated;

(3) expenses saved by the contractor by reason of the delay;and

(4) the amount he would have earned by a different employ-ment of his time and industry.

The general rule is that an obligor incurs in delay from thetime the obligee judicially or extrajudicially demands from himthe fulfillment of his obligation. (Art. 1169.)

ART. 1722. If the work cannot be completed on ac-count of a defect in the material furnished by the em-ployer, or because of orders from the employer, with-out any fault on the part of the contractor, the latterhas a right to an equitable part of the compensationproportionally to the work done, and reimbursementfor proper expenses made. (n)

Non-completion attributable to employer.

The present article grants the contractor the right to an equi-table part of the compensation due him under the contract and toreimbursement for his expenses, if the work cannot be completedbecause the materials furnished by the employer are defective orbecause of orders from the employer. The amount of compensa-tion to which the contractor shall be proportional to the work al-ready done.

ART. 1723. The engineer or architect who drew upthe plans and specifications for a building is liablefor damages if within fifteen years from the comple-tion of the structure, the same should collapse by rea-

695

son of a defect in those plans and specifications, ordue to the defects in the ground. The contractor islikewise responsible for the damages if the edificefalls, within the same period, on account of defects inthe construction or the use of materials of inferiorquality furnished by him, or due to any violation ofthe terms of the contract. If the engineer or architectsupervises the construction, he shall be solidarily li-able with the contractor.

Acceptance of the building, after completion, doesnot imply waiver of any of the causes of action byreason of any defect mentioned in the preceedingparagraph.

The action must be brought within ten years fol-lowing the collapse of the building. (n)

Liability of engineer or architect/contractorfor collapse of building constructed.

(1) Liability of engineer or achitect. — The engineer or architectwho drew up the plans and specifications shall be liable for dam-ages, if:

(a) The collapse took place within 15 years from the com-pletion of the structure;

(b) it took place by reason of a defect in the plans andspecifications, or due to the defects in the ground; and

(c) The action for damages is brought within 10 years fol-lowing the collapse of the building.

(2) Liability of contractor. — The contractor is likewise respon-sible for the damages if:

(a) The edifice falls within the same period;

(b) The collapse took place on account of defects in theconstruction or the use of materials of inferior quality fur-nished by him, or due to any violation of the terms of the con-tract; and

(c) The action for damages is brought within 10 years fol-lowing the collapse of the building.


696 LEASE Art. 1723

(3) Solidary liability. — In case the engineer or architect super-vised or directed the construction he shall be solidarily liable (seeArts. 1207, 1216.) with the contractor.

Note that Article 1723 speaks of a building that should “col-lapse’’ or edifice that “falls’’; hence, it does not apply to minordefects. (see Bosque vs. Chipco, 14 Phil. 95 [1909].) However, athird person suffering damage as a result of any defect in the con-struction may proceed, against the engineer or architect or con-tractor. (Art. 2192.)

(4) Effect of acceptance of work. — The general rule in a contractfor a piece of work is that acceptance of the work by the employerrelieves the contractor of liability for any defect in the work. (Art.1719.) But mere acceptance of the building after competition, doesnot imply waiver of any of the causes of action arising from anydefect in the construction.

The owner of a building is not estopped from claiming dam-ages for defective construction by the circumstance that the costof construction has been paid to the contractor, before discoveryof the defects, upon certificates as to the progress of the work is-sued by the architect representing the owner. (Hospicio de SanJose vs. Findley Miller Timber Co., 50 Phil. 277 [1926].) A contrac-tor’s engagement is to build according to plans and specifications.Since the designs are made by the architect, the builder-contrac-tor is not responsible as to the sufficiency or inadequacy of thestructure carrying the weight of the building. (Koster vs. Zulueta,97 Phil. 945 [1956].)

ILLUSTRATIVE CASE:

After an earthquake, the building in question sustained majordamage, but after three subsequent earthquakes, the damage causedresulted in its eventual demolition for which the architect and thebuilder-contractor were sought to be held liable.

Facts: The Philippine Bar Association (PBA) decided to con-struct an office building. For the plans, specifications, and de-signs, it contracted the services of J.F. Nakpil & Sons (Nakpils)and for the construction, United Construction Company, Inc.(United). The building was completed in June 1966.

697

On August 2, 1998, an unusually strong earthquake hit Ma-nila and its environs, and the building sustained major dam-age. The front columns of the building buckled, causing thebuilding to tilt foreward dangerously. As a temporary meas-ure, the building was shored up by United. On November 29,1968, PBA commenced an action against United claiming thatthe collapse of the building was caused by defects in the con-struction. United, in turn, filed a third party complaint againstNakpils, alleging that the collapse of the building was due tothe defects in the architects’ plans, specifications, and designs.’

At the pre-trial, the court, with the agreement of the par-ties, appointed a lawyer and structural engineer as commis-sioner to make findings on technical issues. On April 30, 1979,the building was authorized to be demolished at the expenseof PBA, but not before another earthquake of high intensity onApril 7, 1970 followed by other strong earthquakes on April 9and 10, 1970, caused further damage to the property. The ac-tual demolition was undertaken by the buyer of the damagedbuilding.

The commissioner submitted his report on September 25,1970 with the findings that while the damage sustained by thebuilding was caused directly by the August 2, 1968 earthquake,they were also caused by the defects in the plans and specifica-tions prepared by Nakpils; United deviations from said plansand specifications and its failure to observe the workmanshipin the construction of the building; and failure of PBA to exer-cise the requisite degree of supervision in the construction ofthe building.

This is a motion for reconsideration of the October 3, 1986of the Supreme Court, filed by United.

Issues: (a) Did the findings of the commissioner, adoptedby the trial court, the Court of Appeals, and the Supreme Court,negate the premise that the subject building collapsed; hence,Article 1723 is not applicable?

(b) Had PBA the legal duty to provide full time and activesupervision in the construction of the building?

(c) Was there bad faith on the part of Nakpils and United?

Held: (1) After partial collapse, there was unavoidable collapse.— “United gave considerable emphasis on the fact that the PBAbuilding did not collapse as found by the trial court and af-firmed by the Court of Appeals. Otherwise stated, United


698 LEASE Art. 1723

wishes to stress that subject building did not disintegrate com-pletely as the term ‘collapse’ is supposed to connote.

Be that as it may, it will be observed that in the assaileddecision, this Court is in complete accord with the findings ofthe trial court and affirmed by the Court of Appeals, that afterthe April 2, 1968 earthquake, the building in question was nottotally lost, the collapse was only partial and the building couldstill be restored at the expense of P900,000.00. But after the sub-sequent earthquakes on April 7, 9, and 12, 1970, there was noquestion that further damage was caused to the property re-sulting in an eventual and unavoidable collapse or demolition (com-plete collapse). In fact, on April 30, 1970, the building was au-thorized by the trial court to be demolished at the expense ofthe plaintiff. Note that a needed demolition is in fact a form of‘collapse’.

The bone of contention is, therefore, not on the fact of col-lapse but on who should shoulder the damages resulting fromthe partial and eventual collapse. As ruled by this Court in saiddecision, there should be no question that the NAKPILS andUNITED are liable for the damage.

Citing the case of Tucker v. Milan (49 O.G. 4379, 4380) as thecase in point, the pertinent portion of the decision reads:

‘One who negligently creates a dangerous conditioncannot escape liability for the natural and probable conse-quences thereof, although the act of a third person, or anact of God for which he is not responsible, intervenes toprecipitate the loss.’’’

(2) Charging PBA with full supervision of construction with-out legal or contractual basis. — “United argues that it is the legalduty of PBA to provide full-time and active supervision in theconstruction of subject building. Failing to cite any provisionof law to support its arguments, United insists on the inherentlegal duty of the owner, reinforced by practice, usage and cus-tom, to exercise such supervision. Apart from the fact thatUnited seems to have completely contradicted its own viewthat this construction involves highly technical matters and,therefore, beyond the ambit of ordinary understanding andexperience, the contrary appears to be more in accord with or-dinary practice, which is to avail oneself of the services of ar-chitects and engineers whose training and expertise make themmore qualified to provide effective supervision of the construc-tion. In fact, it was on the suggestion of Juan F. Nakpil, one of

699

the petitioners herein, that the construction was undertaken onan administration basis. Thus, the trial court did not err in hold-ing that charging the owner with full time supervision of theconstruction has no legal or contractual basis.’’

(3) Wanton negligence of United and Nakpils equivalent to badfaith. — United points out that bad faith is a question of factwhich was not established. The Commissioner, the trial court,and the Court of Appeals, all of which are triers of fact, alleg-edly concede that there was negligence but not bad faith.

A careful study of the decision will show that there is nocontradiction between the above finding of negligence by thetrial court which was affirmed by the Court of Appeals and theruling of this Court. On the contrary, on the basis of such find-ing, it was held that such wanton negligence of both the de-fendant and the third-party defendants in effecting the plans,designs, specifications, and construction of the PBA building isequivalent to bad faith in the performance of their respectivetasks. (Nakpil & Sons vs. Court of Appeals, 160 SCRA 334 [1988].)

Note: United and Nakpils were held solidarily liable fordamages under Article 1723. (Ibid., 144 SCRA 596 [1986].)

ART. 1724. The contractor who undertakes to builda structure or any other work for a stipulated price, inconformity with plans and specifications agreed uponwith the landowner, can neither withdraw from thecontract nor demand an increase in the price on ac-count of the higher cost of labor or materials, savewhen there has been a change in the plans and speci-fications, provided:

(1) Such change has been authorized by the pro-prietor in writing; and

(2) The additional price to be paid to the contrac-tor has been determined in writing by both parties.(1593a)

Right of contractor to withdrawor ask for increase in price.

An owner may withdraw at will from the construction of thework (Art. 1725.) but not the contractor.


700 LEASE Art. 1724

(1) General rule. — If the building of a structure or any otherwork is for a stipulated price in accordance with agreed plans andspecifications, the contractor cannot withdraw from the contract,or demand an increase in the contract price even if the cost of laboror materials should increase. Neither can he claim a reasonablevalue of the work done based on quantum meruit. The contractbeing for a definite work at a stipulated price for the cost of theconstruction, the contractor assumes the risk that the cost mightgo up arising from increase in cost of labor and materials.

(2) When increase in price justified. — It is justified when therehas been a change in the plans and specifications, subject to two(2) conditions:

(a) The change has been authorized in writing by the pro-prietor; and

(b) The additional price to be paid to the contractor hasbeen agreed upon by both parties, also in writing.

Under the old Civil Code (Art. 1593 thereof.), the authoriza-tion need not be in writing and there may be a recovery on quan-tum meruit. (Tiu vs. Habana, 45 Phil. 707 [1924].) There was nocondition for the recovery of the additional price that said pricebe agreed in writing. Article 1724 apparently revokes the rulingin Hamano vs. Papa (54 Phil. 264 [1929].) that the contractor mayrecover for extra labor and materials although the changes in theplans and specifications were not in writing. The contractor whohas no such written authorization cannot recover additional priceand is not justified in suspending the construction upon the re-fusal of the owner. (Santos vs. Cruz, 4 C.A. Rep. 1192.)

(3) Purpose of written authorization. — According to the CodeCommission, the two (2) conditions have been added “to avoid amisunderstanding between the parties.’’ (Report, p. 148.) Theevident purpose is to prohibit oral testimony and prevent litiga-tion for additional costs incurred by reason of additions or changesin the original plan.

The requirement for a written authorization is not merely toprohibit admission of oral testimony against the objection of theadverse party. This can be inferred from the fact that the provi-sion is not included among those specified in the Statute of Frauds.

701

(Art. 1403.) As it does not appear to have been intended as anextension of the Statute of Frauds, it must have been adopted asa substantive provision or a condition precedent to recovery. (SanDiego vs. Sayson, 2 SCRA 1175 [1961]; Weldon Construction Corp.vs. Court of Appeals, 154 SCRA 618 [1987].) This is true even ifthe changes have benefited the owner. The contractor cannot re-cover. (Marquez vs. Cruz, [C.A.] 54 O.G. 2547.)

(4) Applicability of Article 1724. — The provision refers to con-tractors who undertake “to build a structure or any other work’’and contemplates disputes arising from increased cost of laborand materials. It does not apply to an architect claiming paymentfor his professional services as such. (Arenas vs. Court of Appeals,169 SCRA 558 [1989].)

It cannot apply to work done upon a vessel, which is noterected on a piece of land, like the conversion of a yatch into apassenger and cargo vessel. The additional work done on thevessel may be orally authorized. Regarding this matter, the ap-plicable rules are the general rules on contract. As a general rule,a contract may be oral or written. (Royal Lines, Inc. vs. Court ofAppeals, 143 SCRA 608 [1986].)

ART. 1725. The owner may withdraw at will fromthe construction of the work, although it may havebeen commenced, indemnifying the contractor for allthe latter’s expenses, work, and the usefulness whichthe owner may obtain therefrom, and damages.(1594a)

Right of owner to withraw.

Article 1725 provides an exception to the general rule in con-tracts, that after a contract is perfect, the parties are bound by theiragreement and neither party may withdraw therefrom (Arts. 1159,1345.); otherwise, the aggrieved party is entitled to demand forspecific performance or rescission with damages in either case.(Arts. 1170, 1191.) It grants the owner the exceptional right towithdraw from a building contract, provided he indemnifies thecontractor for all the latters’ expenses, work, and the usefulnesshe obtained therefrom, plus damages.


702 LEASE Art. 1726

The right of the owner to withdraw from a building contractis absolute. The contractor cannot insist upon completing the con-tract and enforcing payment of the full amount of the contractprice. The right of the owner to desist being absolute, it followsthat its exercise cannot be made to depend upon whether the con-tract price has or has not been paid in advance, wholly or par-tially. If the total amounts paid the builder at the time the ownerelects to abandon the projected building are more than sufficientto reimburse him for his outlay and to indemnify him for the lossof his prospective profit, the builder must be subject to an actionfor the recovery of the difference between the amounts receivedby him and those which he would have been entitled to recoverunder Article 1728 had no payment been made him at the time ofthe abandonment of the project by the owner. (Adams vs. SociedadNaton, 39 Phil. 838 [1919].)

ART. 1726. When a piece of work has been en-trusted to a person by reason of his personalqualifications, the contract is rescinded upon hisdeath.

In this case the proprietor shall pay the heirs ofthe contractor in proportion to the price agreed upon,the value of the part of the work done, and of the ma-terials prepared, provided the latter yield him somebenefit.

The same rule shall apply if the contractor cannotfinish the work due to circumstances beyond his con-trol. (1595)

Rescission of contract.

The present article provides for two instances:

(1) Death of contractor. — When a piece of work has been en-trusted to a person by reason by his personal qualifications, andthat person dies before the completion of the work, the contractis rescinded. (see Javier Security Special Agency vs. Shell Craft &Bulton Corp., 7 SCRA 198 [1963].) The obligation arising out ofsuch contract is personal in nature; hence, it is not transmissibleto the heirs but is extinguished by death. (Art. 1311.) In this case,

703

the proprietor shall pay the heirs of the contractor as provided inthe second paragraph of Article 1726 the proportionate value ofthe work done.

(2) Unavoidable circumstances. — The rule applies if it has be-come impossible to finish the work beyond the control of thecontractor.

ART. 1727. The contractor is responsible for thework done by persons employed by him. (1596)

Liability of contractor for work doneby his workers.

The contractor is liable for any damage to the work causedby persons employed by him. For breach of contract (culpa con-tractual), the defense of due diligence in the selection and super-vision of his employees charged to do the work is not available tothe contractor although it may mitigate his damages. (see ManilaRailroad Co. vs. Compania Transatlantica, 38 Phil. 875 [1918].)

The fact that the contractor failed to comply with his contrac-tual obligation, is sufficient basis for affixing liability for damages.

ART. 1728. The contractor is liable for all the claimsof laborers and others employed by him, and of thirdpersons for death or physical injuries during the con-struction. (n)

Liability of contractor for deathor physical injuries.

The present article make the contractor liable for damagesarising from death or physical injuries, claimed by laborers andothers employed by him, and by third persons. Note that the li-ability is limited to death or injuries “during the construction.’’

Under Article 1711, employers are obliged to pay compensa-tion for the death of, or injuries to, their laborers, workmen, me-chanics or other employees, if such death or personal injury aroseout of and in the course of the employment, even though the eventmay have been purely accidental or entirely due to a fortuitousevent.

Arts. 1727-1728 WORK AND LABORContract for a Piece of Work

704 LEASE Art. 1729

ART. 1729. Those who put their labor upon or fur-nish materials for a piece of work undertaken by thecontractor have an action against the owner up to theamount owing from the latter to the contractor at thetime the claim is made. However, the following shallnot prejudice the laborers, employees and furnishersof materials:

(1) Payments made by the owner to the contrac-tor before they are due;

(2) Renunciation by the contractor of any amountdue him from the owner.

This article is subject to the provisions of speciallaws. (1597a)

Subsidiary liability of owner to laborersand materialmen.

The contractor is primarily liable for the payment of the com-pensation of his laborers and the price of materials he uses. Theowner has no direct contractual relation with the contractor’slaborers and suppliers of materials.

Article 1729 gives two (2) instances when laborers andmaterialmen have a right of action not only against the contrac-tor but also directly against the owner. It is intended to protectthe laborers and materialmen from being taken advantage of byunscrupulous contractors and from possible connivance betweenthe owner and the contractor. Under Article 2242(3) and (4), theclaims of laborers and materialmen enjoy preference among thecreditors of the owner. (Velasco vs. Court of Appeals, 95 Phil. 616[1954].)

Special laws regarding contractor’s bond.

(1) Act No. 3688 provides that “any person, * * * or corpora-tion entering into a formal contract with the Government of thePhilippine Islands for * * * the prosecution and completion of anypublic work, * * * shall be required, before commencing such work,to execute the usual penal bond, with good and sufficient sure-ties, with the additional obligation that such contractor or his or

705

its sub-contractors shall promptly make payments to all personssupplying him or them with labor and materials in the prosecu-tion of the work provided for in such contract. x x x.’’

The claim of the government under the Act enjoys priorityover other claims. (Bautista vs. Auditor General, 97 Phil. 244[1955].) The remedy of a person who furnished materials in theconstruction of a public building is to intervene in the action ofthe Government on the contactor’s bond. If the government doesnot institute such suit, he may file an action in the name of theGovernment against said bond. (New Manila Lumber Co. vs.Republic, 107 Phil. 824 [1960].)

(2) Act No. 3959 makes it obligatory for any person, company,firm or corporation owning any work of any kind executed bycontract to require the contractor to furnish a bond guaranteeingthe payment of the laborers and provides penalties for its viola-tion. Where the builder did not require the contractor to furnisha bond in an amount equivalent to the cost of labor and to executean affidavit showing that the wages of the laborers employed inthe work have been paid, he is solidarily liable with the contrac-tor for the payment of such wages. (David vs. Cabigao, 96 Phil.163 [1954].)

Article 1729 which provides that its provisions are subject tospecial laws, is not applicable to the University of the Philippines(U.P.) which is subject to Act No. 3688, a special law for the pro-tection of persons furnishing materials and labor for the construc-tion of public works. (U.P. vs. Gabriel, 154 SCRA 684 [1987].)

ART. 1730. If it is agreed that the work shall beaccomplished to the satisfaction of the proprietor, itis understood that in case of disagreement the ques-tion shall be subject to expert judgment.

If the work is subject to the approval of a third per-son, his decision shall be final, except in case of fraudor manifest error. (1598a)

Satisfactory completion of work.

(1) If the work is to be performed to the “satisfaction of the


706 LEASE Art. 1731

proprietor,’’ the question shall be referred to a person who is anexpert on the matter for decision in case of disagreement.

(2) If the work is subject to the approval of a third person, hisdecision shall be final except in case fraud or manifest error.

(a) The certificate of the architect, who had been ap-pointed by and represented the owner of the buildings, thatthe buildings had been completed, was sufficient to show thecompletion of the contract and to entitle the builder to the rightto recover the balance due under his contract. The owner ofthe buildings was bound by the certificate of his own archi-tect as to the completion of the buildings. (Takao vs. Belando,49 Phil. 957 [1926].)

(b) When it is not expressly agreed in the contract that thematerials furnished and the labor performed shall, before ac-ceptance, be passed upon by a third person, such approvalby a third person can not be insisted upon. Thus, where anordinance of the City of Manila provides that before a steamboiler shall be permitted to operate within the city limits, itshall be passed upon and approved by a particular city offi-cial, the approval of such official is not a condition precedentto the enforcement of the contract with respect to the collec-tion of the amount due under the agreement for the materialsfurnished and the labor performed, unless the terms of thecontract expressly provide therefor. If it was not agreed that athird person had to approve the work, no third person maydecide upon the fulfillment of the contract. (Taylor vs. Pierce,70 Phil. 103 [1911].)

ART. 1731. He who has executed work upon a mov-able has a right to retain it by way of pledge until he ispaid. (1600)

Mechanic’s lien.

The right of a worker to be paid for work done on a movableis in the nature of a mechanic’s lien. He has a right to retain it byway of pledge until he is paid. The laborer’s wages shall be a lienon the goods manufactured or the work done. (Art. 1707.)

707

(1) Where the vendee of a truck brought it to the vendor’sshop for repairs, the latter has the right to retain the truck untilthe cost of the repair had been paid. (Bachrach Motor Co. vs.Mendoza, 43 Phil. 410 [1922].)

(2) Where the mortgagee in a chattel mortgage covering anautomobile personally delivers the automobile, which has suf-fered great damage by reason of an accident, to a mechanic forrepairs, requests that they be made and superintends and advisesat various times during the progress of the repairs, he is person-ally liable for the value of the repairs made. (Bachrach vs. Man-tel, 25 Phil. 410 [1913].)

(3) Where the mortgagor of a chattel retains possession of theproperty with the right to use the same, the cost of any repairsmade thereon by an artisan, to the extent reasonably necessary tothe continued use of the chattel, will, under Article 1731, consti-tute a lien on the chattel superior to the mortgage, so long as theperson making such repairs retains the chattel in his possession.A person who buys the chattel at a sale made to enforce this lienwill obtain a valid title. (Bank of the Phil. Islands vs. Walter A.Smith & Co., 55 Phil. 533 [1931].)

(4) The repair man is not a party to the terms and provisionsin a chattel mortgage to the effect that the mortgagor cannot en-cumber the auto for subsequent repairs without the written con-sent of the mortgagee, and in the absence of personal knowledgeof their existence, he is not legally bound by such provisions inthe chattel mortgage. (Phil. Trust Co. vs. Smith Navigation Co.,64 Phil. 830 [1937].)

(5) Article 1731 is not applicable to salaried employees. Wherea lumber company sold and delivered lumber to a bank, whichattempts to export it but is prevented by the employees of thelumber company who have done work on the lumber and havenot been paid for their work, the bank has a right to an injunctionto restrain the employees of the lumber company from interfer-ing or impeding the bank in the exportation of lumber. (CharteredBank vs. Constantino, 56 Phil. 717 [1932].)

— oOo —


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Published & Distributed by

Comments and Caseson

SALES and LEASE

By

HECTOR S. DE LEONLl.B., University of the Philippines

Author: Philippine Constitutional Law:Principles and Cases (2 vols.); Comments and Cases on

Succession; Comments and Cases onCredit Transactions; The Corporation Code

of the Philippines Annotated; The Insurance Code of thePhilippines Annotated; etc.

Co-Author: Comments and Cases on Property; Commentsand Cases on Obligations and Contracts; Comments and Cases

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and Election Law; The Philippine Negotiable Instruments Law(and Allied Laws) Annotated; The Fundamentals of Taxation;

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2005

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iii

PREFACE

This volume is primarily intended to provide law studentswith a basic text in the study of the Civil Code provisions onSALES (including Barter or Exchange) and the Bulk Sales Law.This sixth edition now includes the Civil Code provisions onLEASE (except Contract on Labor and Common Carriers).

It attempts to explain in a simple manner, the law andprinciples governing the subject so that they may be easilyunderstood. To help the student in the proper interpretation oflegal provisions and to show their practical application in specificsituations, it gives illustrations based on everyday life and onactual cases which have been reduced to their bare essentials. Itincludes the doctrines laid down by the Supreme Court up toits latest available decisions.

Members of the Bar and the Bench will find the book auseful reference.

HECTOR S. DE LEON

July 2005

v

TABLE OF CONTENTS

PREFACE ......................................................................................................... iii

Part I

SALES

(Title VI, Arts. 1458-1637)

Introduction .................................................................................................... 1

1. Governing law ..................................................................................... 12. Sources of our law on sales ............................................................... 1

Chapter 1. — NATURE AND FORM OF THE CONTRACT

Article 1458 ..................................................................................................... 4

1. Concept of contract of sale ................................................................ 42. Characteristics of a contract of sale ................................................. 53. Essential requisites of a contract of sale ......................................... 84. Natural and accidental elements ...................................................... 105. Effect of absence of price/non-payment of price ......................... 126. Transfer of title to property for a price, essence of sale .............. 137. Kinds of contract of sale .................................................................... 148. Contract of sale and contract to sell with reserved

title distinguished ....................................................................... 179. Contract to sell and conditional sale distinguished ..................... 22

10. Other cases of contract to sell ........................................................... 24

Article 1459 ..................................................................................................... 25

1. Requisites concerning object ............................................................. 252. Kinds of illicit things .......................................................................... 263. Right to transfer ownership .............................................................. 27

Article 1460 ..................................................................................................... 30

1. Subject matter must be determinate ................................................ 30

Article 1461 ..................................................................................................... 34

vi

1. Sale of things having potential existence ....................................... 342. Sale of a mere hope or expectancy .................................................. 343. Sale of thing expected and sale of hope itself distinguished ..... 354. Presumption in case of doubt ........................................................... 36

Article 1462 ..................................................................................................... 37

1. Goods which may be the object of sale .......................................... 372. Future goods as object of sale ........................................................... 38

Article 1463 ..................................................................................................... 39

1. Sale of undivided interest in a thing ............................................... 39

Article 1464 ..................................................................................................... 39

1. Sale of an undivided share of a specific mass ............................... 40

Article 1465 ..................................................................................................... 42

1. Sale of thing subject to a resolutory condition .............................. 42

Article 1466 ..................................................................................................... 42

1. Sale distinguished from agency to sell ........................................... 432. Contract creating both a sale and an agency relationship .......... 45

Article 1467 ..................................................................................................... 45

1. Sale distinguished from contractfor a piece of work ...................................................................... 46

Article 1468 ..................................................................................................... 47

1. Sale distinguished from barter ......................................................... 472. Sale distinguished from lease ........................................................... 493. Sale distinguished from dation in payment .................................. 49

Article 1469 ..................................................................................................... 50

1. When price considered certain ......................................................... 502. Effect where price fixed by third person designated ................... 533. Effect where price not fixed by third person designated ............ 54

Article 1470 ..................................................................................................... 54

1. Effect of gross inadequacy of price in voluntary sales ................ 542. Effect of gross inadequacy of price in involuntary sales ............ 57

Article 1471 ..................................................................................................... 58

1. Effect where price is simulated ........................................................ 58

Article 1472 ..................................................................................................... 60

1. Price on a given day at particular market ...................................... 60

Article 1473 ..................................................................................................... 60

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1. Fixing of price by one of the contracting parties,not allowed ................................................................................... 60

Article 1474 ..................................................................................................... 61

1. Effect of failure to determine price .................................................. 612. Concept of reasonable price .............................................................. 623. Determination of fair market value ................................................. 62

Article 1475 ..................................................................................................... 63

1. Perfection of contract of sale ............................................................. 632. When definite agreement on manner of payment essential ....... 683. Effect of failure to pay price ............................................................. 724. Right of owner to fix his own price ................................................ 75

Article 1476 ..................................................................................................... 75

1. Rules governing auction sales .......................................................... 762. Right of owner to prescribe terms of public auction ................... 78

Articles 1477-1478 .......................................................................................... 78

1. Ownership of thing transferred by delivery .................................. 782. Exceptions to the rule ......................................................................... 79

Article 1479 ..................................................................................................... 81

1. Kinds of promise treated in Article 1479 ........................................ 812. Effect of unaccepted unilateral promise ......................................... 813. Meaning of option ............................................................................... 824. Nature of option contract .................................................................. 825. Effect of accepted unilateral promise .............................................. 836. Full payment of price not necessary for exercise

of option to buy ........................................................................... 857. Article 1479 and Article 1324 compared ......................................... 868. Effect of bilateral promise to buy and sell ..................................... 103

Article 1480 ..................................................................................................... 103

1. Risk of loss or deterioration .............................................................. 1042. Scope of Article 1480 .......................................................................... 104

Article 1481 ..................................................................................................... 110

1. Sale of goods by description and/or sample ................................ 1102. Meaning of bulk of goods ................................................................. 112

Article 1482 ..................................................................................................... 112

1. Meaning of earnest money ................................................................ 1122. Earnest money and option money distinguished ......................... 113

Article 1483 ..................................................................................................... 114

1. Form of contract of sale ..................................................................... 114

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2. Sale of real property or an interest therein .................................... 1163. Modes of satisfaction of the Statute of Frauds .............................. 1174. Statute of Frauds applicable only to executory contracts ........... 1185. Legal recognition of electronic data messages and

electronic documents .................................................................. 1196. Legal recognition of electronic signatures ...................................... 1217. Communication of electronic data messages and

electronic documents .................................................................. 122

Article 1484 ..................................................................................................... 123

1. Remedies of vendor in sale of personal propertypayable in installments .............................................................. 124

2. Remedies alternative .......................................................................... 1243. Applicability of Article 1484 ............................................................. 1254. Right of vendor to recover unpaid balance

of purchase price ......................................................................... 1255. Meaning of certain terms as used in Article 1484 ........................ 1296. Recovery of deficiency after foreclosure prohibited .................... 1367. Sale or financing of real estate on installment

payments ....................................................................................... 137

Article 1485 ..................................................................................................... 139

1. Lease of personal property with option to buy ............................ 140

Article 1486 ..................................................................................................... 141

1. Stipulation authorizing the forfeiture of installmentsor rents paid ................................................................................. 142

Article 1487 ..................................................................................................... 142

1. Expenses for execution and registration ......................................... 142

Article 1488 ..................................................................................................... 144

1. Expropriation of property for public use ....................................... 144

Chapter 2. — CAPACITY TO BUY OR SELL

Article 1489 ..................................................................................................... 145

1. Persons who may enter into a contract of sale ............................. 1452. Kinds of incapacity ............................................................................. 1453. Liability for necessaries of minor or other

person without capacity to act ................................................. 1464. Sale by minors ..................................................................................... 146

Article 1490 ..................................................................................................... 146

1. Relative incapacity of husband and wife ....................................... 1472. Reason for prohibition under Article 1490 ..................................... 1473. Persons permitted to question sale .................................................. 148

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Article 1491 ..................................................................................................... 148

1. Incapacity by reason of relation to property ................................. 1492. Reasons for prohibitions under Article 1491 ................................. 1493. Prohibition with respect to guardians ............................................. 1504. Prohibition with respect to agents ................................................... 1505. Prohibition with respect to executors and administrators .......... 1516. Prohibition with respect to public officials and employees ....... 1537. Prohibition with respect to judges, etc., and lawyers .................. 1548. Other persons especially disqualified ............................................. 1579. Effect of sale in violation of prohibition ......................................... 157

10. Nullity of prohibited contracts differentiated ............................... 158

Article 1492 ..................................................................................................... 158

1. Prohibition extends to sales in legal redemption, etc. ................. 159

Chapter 3. — EFFECTS OF THE CONTRACT WHEN THETHING SOLD HAS BEEN LOST

Article 1493 ..................................................................................................... 160

1. Effect of loss of thing at the time of sale ........................................ 1602. When a thing considered lost ........................................................... 161

Article 1494 ..................................................................................................... 161

1. Effect of loss in case of specific goods ............................................ 161

Chapter 4. — OBLIGATIONS OF THE VENDOR

Section 1. –– General Provisions

Article 1495 ..................................................................................................... 163

1. Principal obligations of the vendor ................................................. 1632. Obligation to transfer ownership and deliver ............................... 163

Article 1496 ..................................................................................................... 166

1. Ways of effecting delivery ................................................................. 1662. Ways of effecting constructive delivery .......................................... 167

Section 2. –– Delivery of the Thing Sold

Article 1497 ..................................................................................................... 169

1. Concept of tradition or delivery ...................................................... 1692. Importance of tradition ...................................................................... 1693. Actual delivery of the thing sold ..................................................... 171

Article 1498 ..................................................................................................... 172

1. Execution of a public instrument or document ............................ 172

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2. Symbolic tradition ............................................................................... 180

Article 1499 ..................................................................................................... 180

1. Traditio longa manu ........................................................................... 1812. Traditio brevi manu ............................................................................ 181

Article 1500 ..................................................................................................... 181

1. Traditio constitutum possessorium ................................................. 181

Article 1501 ..................................................................................................... 181

1. Quasi-traditio ....................................................................................... 1822. Intention to deliver and to accept a transfer

of possession ................................................................................ 183

Article 1502 ..................................................................................................... 184

1. Contract of sale or return, and of sale on trialor approval or satisfaction ......................................................... 185

2. “Sale or return” distinguished from sale on trial ......................... 187

Article 1503 ..................................................................................................... 187

1. When ownership not transferred upon delivery .......................... 1882. Transfer of ownership where goods sold delivered to carrier ... 1893. Where seller or his agent is consignee ............................................ 1894. Where seller’s title only for purpose of security .......................... 1905. Significance where title held merely as security ........................... 1906. Where buyer or his agent is consignee but seller

retains order bill of lading ......................................................... 1917. Where a third person who retains the bill is consignee .............. 1928. Where bill of lading sent forward with draft attached ............... 1939. Distinctions in regard to the form of the bill of lading ............... 194

Article 1504 ..................................................................................................... 194

1. Risk of loss generally attends title ................................................... 1952. Risk of loss by fortuitous event after perfection

but before delivery ...................................................................... 195

Article 1505 ..................................................................................................... 199

1. Sale by a person not the owner ........................................................ 200

Article 1506 ..................................................................................................... 207

1. Sale by one having a voidable title .................................................. 207

Article 1507 ..................................................................................................... 208

1. Definition of terms .............................................................................. 2082. Nature and function of documents of title .................................... 2083. Most common forms of documents of title .................................... 2094. Laws governing documents of title ................................................. 209

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5. Classes of documents of titles .......................................................... 210

Article 1508 ..................................................................................................... 210

1. Negotiation of negotiable document by delivery ......................... 211

Article 1509 ..................................................................................................... 211

1. Negotiation of negotiable document by indorsement ................. 211

Article 1510 ..................................................................................................... 212

1. Negotiable documents of title marked “non-negotiable” ........... 212

Article 1511 ..................................................................................................... 213

1. Transfer of non-negotiable documents ........................................... 213

Article 1512 ..................................................................................................... 213

1. Persons who may negotiate a document ........................................ 213

Article 1513 ..................................................................................................... 214

1. Rights of person to whom document has been negotiated ........ 214

Article 1514 ..................................................................................................... 215

1. Rights of person to whom document has been transferred ....... 2162. Attachment of goods covered by document transferred ............ 216

Article 1515 ..................................................................................................... 216

1. Transfer of order document without indorsement ....................... 2172. Rule where document subsequently indorsed .............................. 217

Article 1516 ..................................................................................................... 217

1. Warranties on sale of documents ..................................................... 218

Article 1517 ..................................................................................................... 219

1. Indorser not a guarantor .................................................................... 219

Article 1518 ..................................................................................................... 219

1. When negotiation not impaired by fraud, mistake,duress, etc. ................................................................................. 219

Article 1519 ..................................................................................................... 220

1. Attachment or levy upon goods covered by anegotiable document .................................................................. 221

2. Where depositor not owner .............................................................. 221

Article 1520 ..................................................................................................... 221

1. Creditor’s remedies to reach negotiable documents .................... 222

Article 1521 ..................................................................................................... 222

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1. Place of delivery of goods sold ........................................................ 2232. Time of delivery of goods sold ......................................................... 2243. Delivery of goods in possession of a third person ....................... 2244. Hour of delivery of goods sold ........................................................ 2255. Duty of seller to put goods in deliverable condition ................... 225

Article 1522 ..................................................................................................... 226

1. Delivery of goods less than quantity contracted .......................... 2262. Delivery of goods more than quantity contracted ....................... 2283. Delivery of goods mixed with others ............................................. 2294. Effect of indivisibility of subject matter ......................................... 2295. Application of usage of trade, special agreement,

or course of dealing ................................................................. 229

Article 1523 ..................................................................................................... 230

1. Delivery to carrier on behalf of buyer ............................................ 2312. Seller’s duty after delivery to carrier .............................................. 2313. Definition of shipping terms ............................................................. 2324. Presumption arising from payment of freight .............................. 233

Article 1524 ..................................................................................................... 233

1. Delivery, simultaneous with payment of price ............................. 2332. When delivery must be made before payment

of price ........................................................................................ 234

Article 1525 ..................................................................................................... 235

1. Meaning of unpaid seller ................................................................... 2352. Where whole of price has not been paid ........................................ 235

Article 1526 ..................................................................................................... 236

1. Special remedies of an unpaid seller of goods .............................. 2362. Nature of unpaid seller’s possessory lien on the goods ............. 2373. Unpaid seller’s lien on the price ...................................................... 2374. Basis of rights of unpaid seller ......................................................... 237

Article 1527 ..................................................................................................... 238

1. When unpaid seller’s possessory lien may be exercised ............ 2382. Unpaid seller as bailee for the buyer .............................................. 239

Article 1528 ..................................................................................................... 239

1. Lien generally not lost by part delivery ......................................... 240

Article 1529 ..................................................................................................... 240

1. When unpaid seller loses possessory lien ...................................... 2402. Revival of lien after delivery ............................................................ 241

Article 1530 ..................................................................................................... 241

1. Right of seller to stop goods in transitu .......................................... 241

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2. Requisites for the exercise of right of stoppage in transitu ..................................................................................... 242

3. Basis and nature of right of stoppage in transitu .......................... 242

Article 1531 ..................................................................................................... 243

1. When goods are in transit ................................................................. 2442. When goods considered no longer in transit ................................ 2443. Attornment by the bailee ................................................................... 2444. Effect of refusal of carrier to attorn or deliver

the goods ....................................................................................... 2455. Delivery to a ship, etc. chartered or owned by buyer ................. 2456. Effect of partial delivery .................................................................... 245

Article 1532 ..................................................................................................... 246

1. Ways of exercising the right to stop ................................................ 2462. Effect of outstanding bill of lading .................................................. 247

Article 1533 ..................................................................................................... 247

1. Unpaid seller’s right of resale .......................................................... 248

Article 1534 ..................................................................................................... 250

1. Unpaid seller’s right of rescission ................................................... 250

Article 1535 ..................................................................................................... 251

1. Effect of sale of goods subject to lien or stoppagein transitu .................................................................................... 251

Article 1536 ..................................................................................................... 252

1. Right of vendor to withhold delivery in sale on credit ............... 252

Article 1537 ..................................................................................................... 253

1. Condition of thing to be delivered .................................................. 2532. Right of vendee to the fruits ............................................................. 254

Article 1538 ..................................................................................................... 255

1. Rules in case of loss, deterioration, or improvementof thing before delivery ........................................................... 255

Article 1539 ..................................................................................................... 257

1. Sale of real property by unit of measure or number ................... 2582. When vendee entitled to rescind sale of real property ............... 258

Article 1540 ..................................................................................................... 259

1. Where immovable of a greater area or number ............................ 259

Article 1541 ..................................................................................................... 259

1. Application of Articles 1539 and 1540 to judicial sales ............... 259

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Article 1542 ..................................................................................................... 260

1. Sale of real estate made for a lump sum ........................................ 2602. Conflict between area stated and boundaries ............................... 265

Article 1543 ..................................................................................................... 266

1. Prescription of actions ........................................................................ 266

Article 1544 ..................................................................................................... 267

1. Rules as to preference of ownership in case of a double sale ... 2672. Possession of property sold .............................................................. 2693. Registration of immovable sold ....................................................... 2694. Requirement of good faith ................................................................ 2735. Other rulings on application of rules .............................................. 286

Section 3. –– Conditions and Warranties

Article 1545 ..................................................................................................... 291

1. Meaning of condition ......................................................................... 2912. Effect of non-fulfillment of condition ............................................. 292

Article 1546 ..................................................................................................... 294

1. Meaning of warranty .......................................................................... 2942. Terminology used by parties not controlling ................................ 2943. Kinds of warranty ............................................................................... 2944. Meaning of express warranty ........................................................... 2955. Effect of express warranty ................................................................. 2956. Effect of expression of opinion ......................................................... 296

Article 1547 ..................................................................................................... 298

1. Meaning of implied warranty ........................................................... 2982. Implied warranties in sale ................................................................. 2983. Nature of implied warranty .............................................................. 3004. When implied warranty not applicable .......................................... 300

Subsection 1. — Warranty in Case of Eviction

Article 1548 ..................................................................................................... 302

1. Meaning of eviction ............................................................................ 3032. Essential elements of warranty against eviction ........................... 3033. Trespass contemplated by warranty against eviction .................. 3044. Vendor’s liability is waivable ........................................................... 304

Article 1549 ..................................................................................................... 304

1. Vendee has no duty to appeal from judgment .............................. 304

Article 1550 ..................................................................................................... 305

1. Effect of prescription .......................................................................... 305

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Article 1551 ..................................................................................................... 306

1. Deprivation for nonpayment of taxes ............................................. 306

Article 1552 ..................................................................................................... 306

1. Liability of judgment debtor ............................................................. 306

Article 1553 ..................................................................................................... 307

1. Stipulation waiving warranty ........................................................... 307

Article 1554 ..................................................................................................... 307

1. Kinds of waiver of eviction ............................................................... 3072. Effect of waiver by vendee ................................................................ 3083. Presumption as to kind of waiver ................................................... 308

Article 1555 ..................................................................................................... 308

1. Rights and liabilities in case eviction occurs ................................. 3092. Right of second purchaser to whom warranty assigned............. 311

Article 1556 ..................................................................................................... 312

1. Alternative rights of vendee in case of partial eviction .............. 3122. Remedy of rescission not available in case of total

eviction ....................................................................................... 313

Article 1557 ..................................................................................................... 313

1. Final judgment of eviction essential ................................................ 313

Article 1558 ..................................................................................................... 313

1. Formal summons to vendor essential ............................................. 314

Article 1559 ..................................................................................................... 315

1. Vendor to be made co-defendant ..................................................... 315

Article 1560 ..................................................................................................... 316

1. Where immovable sold encumbered with non-apparent burden .......................................................................................... 316

Subsection 2. — Warranty Against Hidden Defects of,or Encumbrances Upon, the Thing Sold

Article 1561 ..................................................................................................... 317

1. Definition of terms .............................................................................. 3182. Requisites for warranty against hidden defects ............................ 3183. When defect important ...................................................................... 3194. When defect hidden ............................................................................ 3195. Where defect patent or made known .............................................. 321

Article 1562 ..................................................................................................... 322

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1. Implied warranties of quality ........................................................... 3222. Warranty of merchantability distinguished from

warranty of fitness ...................................................................... 3243. Fitness for a particular purpose and merchantability ................. 325

Article 1563 ..................................................................................................... 325

1. Sale under a patent or trade name .................................................. 325

Article 1564 ..................................................................................................... 326

1. Effect of usage of trade ...................................................................... 327

Article 1565 ..................................................................................................... 327

1. Merchantability of goods sold by sample ...................................... 327

Article 1566 ..................................................................................................... 328

1. Responsibility of vendor for hidden defects ................................. 3282. Doctrines of “caveat venditor” and “caveat emptor” .................. 328

Article 1567 ..................................................................................................... 330

1. Alternative remedies of the buyer to enforce warranty .............. 330

Article 1568 ..................................................................................................... 330

1. Effect of loss of thing sold on account of hidden defects ........... 330

Article 1569 ..................................................................................................... 331

1. Effect of loss of defective thing sold ............................................... 331

Article 1570 ..................................................................................................... 332

1. Warranty in judicial sales .................................................................. 3322. Right of purchaser in judicial sales ................................................. 333

Article 1571 ..................................................................................................... 334

1. Prescription of actions in cases of implied/expresswarranty ..................................................................................... 334

Article 1572 ..................................................................................................... 334

1. Sale of two or more animals together ............................................. 335

Article 1573 ..................................................................................................... 335

1. Sale of two or more things together ................................................ 336

Article 1574 ..................................................................................................... 336

1. Sale of animals at fairs or at public auctionsor as condemned....................................................................... 336

Article 1575 ..................................................................................................... 336

1. When sale of animals void ................................................................ 336

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Article 1576 ..................................................................................................... 337

1. What constitutes redhibitory defect of animals? .......................... 337

Article 1577 ..................................................................................................... 337

1. Limitation of action in sale of animals ........................................... 337

Article 1578 ..................................................................................................... 338

1. Responsibility of vendor where animal dies ................................. 338

Article 1579 ..................................................................................................... 338

1. Liability of buyer in case sale of animal is rescinded .................. 338

Article 1580 ..................................................................................................... 339

1. Alternative remedies of vendee in sale of animals ...................... 339

Article 1581 ..................................................................................................... 339

1. Form of sale of large cattle ................................................................ 339

Chapter 5. — OBLIGATIONS OF THE VENDEE

Article 1582 ..................................................................................................... 340

1. Principal obligations of vendee ........................................................ 3402. Pertinent rules ...................................................................................... 3413. Liability of vendee for obligations of company

bought out .................................................................................. 342

Article 1583 ..................................................................................................... 344

1. Rules governing delivery in installments ....................................... 344

Article 1584 ..................................................................................................... 346

1. Buyer’s right to examine the goods ................................................ 346

Article 1585 ..................................................................................................... 347

1. Modes of manifesting acceptance .................................................... 3482. Delivery and acceptance, separate acts ........................................... 349

Article 1586 ..................................................................................................... 349

1. Acceptance, not a bar to action for damages ................................. 3492. Notice to seller of breach of promise or warranty ....................... 350

Article 1587 ..................................................................................................... 350

1. Where buyer’s refusal to accept justified ....................................... 350

Article 1588 ..................................................................................................... 351

1. Where buyer’s refusal to accept wrongful ..................................... 351

Article 1589 ..................................................................................................... 352

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1. Liability of vendee for interest where paymentis made after delivery .............................................................. 352

Article 1590 ..................................................................................................... 353

1. Right of vendee to suspend payment of price .............................. 3532. Right of vendee to demand rescission ............................................ 354

Article 1591 ..................................................................................................... 355

1. Right of vendor to rescind sale of immovable property ............. 355

Article 1592 ..................................................................................................... 355

1. Rule where automatic rescission of sale of immovableproperty stipulated ..................................................................... 356

2. Right of seller to rescind not absolute ............................................ 3573. When Article 1592 not applicable .................................................... 359

Article 1593 ..................................................................................................... 362

1. Rule where automatic rescission of sale of movableproperty stipulated ..................................................................... 363

2. Reason for the rule with respect to movableproperty ......................................................................................... 363

Chapter 6. — ACTIONS FOR BREACH OF CONTRACTOF SALE OF GOODS

Article 1594 ..................................................................................................... 365

1. Provisions governing breach of contract of sale of goods .......... 3652. Actions available ................................................................................. 365

Article 1595 ..................................................................................................... 366

1. Seller’s right of action for the price ................................................. 3662. Where ownership in goods has not passed ................................... 3673. Recovery of price payable on a day certain ................................... 368

Article 1596 ..................................................................................................... 368

1. Seller’s right of action for damages ................................................. 3692. Measure of damages for non-acceptance ....................................... 3693. Measure of damages for repudiation or countermand ................ 371

Article 1597 ..................................................................................................... 371

1. Seller’s right of rescission before delivery ..................................... 3712. Giving of notice required ................................................................... 3723. Seller’s right of rescission for breach of contract .......................... 372

Article 1598 ..................................................................................................... 373

1. Buyer’s right to specific performance ............................................. 374

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Article 1599 ..................................................................................................... 374

1. Remedies of buyer for breach of warranty by seller .................... 3762. Remedies alternative .......................................................................... 3763. Recoupment in diminution of the price ......................................... 3764. Action or counterclaim for damages ............................................... 3775. Recoupment and counterclaims, distinguished ............................ 3776. When rescission by the buyer not allowed .................................... 3787. Rights and obligations of buyer in case of rescission .................. 378

Chapter 7. — EXTINGUISHMENT OF SALE

Article 1600 ..................................................................................................... 379

1. Causes of extinguishment of sale ..................................................... 379

Section 1. — Conventional Redemption

Article 1601 ..................................................................................................... 380

1. Conventional redemption defined ................................................... 3802. Subject matter of conventional redemption ................................... 3803. Nature of conventional redemption ................................................ 3804. Option to buy and right of repurchase distinguished ................. 3825. Right to redeem and right of repurchase distinguished ............. 383

Article 1602 ..................................................................................................... 383

1. Equitable mortgage defined .............................................................. 3842. The “pacto de retro” problem ........................................................... 3843. “Pacto de retro” and mortgage, distinguished.............................. 3864. Subsequent sale of property by vendor a retro ............................. 3895. When contract with right to repurchase presumed an

equitable mortage ........................................................................ 3897. Intention to execute mortgage may be fairly inferred ................. 3948. Price in pacto de retro sales usually lower .................................... 402

Articles 1603-1604 .......................................................................................... 403

1. Presumption in case of doubt ........................................................... 4032. Effect where contract held as an equitable mortgage .................. 4063. “Pacto de retro” sales not favored ................................................... 407

Article 1605 ..................................................................................................... 407

1. When vendor may ask for redemption ........................................... 407

Article 1606 ..................................................................................................... 408

1. Period for exercise of right of redemption ..................................... 4082. When Article 1606, par. 3, not applicable ....................................... 4133. Date from which period is reckoned ............................................... 4154. Effect of stipulation extending period of repurchase ................... 4165. Reason for limiting period of redemption ..................................... 416

xx

6. Validity of penal clause providing automatictermination of redemption period ........................................ 416

Article 1607 ..................................................................................................... 417

1. Judicial order for recording of consolidation of ownership ....... 4182. Action to consolidate ownership ..................................................... 419

Article 1608 ..................................................................................................... 420

1. Nature of right to redeem.................................................................. 420

Article 1609 ..................................................................................................... 421

1. Rights acquired by vendee a retro ................................................... 421

Article 1610 ..................................................................................................... 421

1. Right of vendor’s creditors to redeem ............................................ 421

Article 1611 ..................................................................................................... 422

1. Redemption in sale of part of undivided immovable ................. 422

Articles 1612-1613 .......................................................................................... 423

1. Redemption in joint sale by co-owners/co-heirsof undivided immovable ........................................................... 423

2. Effect of redemption by co-owner of entire property .................. 424

Article 1614 ..................................................................................................... 426

1. Redemption in separate sales by co-ownersof undivided immovable ......................................................... 426

Article 1615 ..................................................................................................... 426

1. Redemption against heirs of vendee ............................................... 426

Article 1616 ..................................................................................................... 427

1. Obligations of vendor a retro in case of redemption ................... 4272. Offer to redeem and tender of payment generally

required ......................................................................................... 4303. Consignation of price generally not required ............................... 431

Article 1617 ..................................................................................................... 431

1. Right of parties as to fruits of land ................................................. 432

Article 1618 ..................................................................................................... 433

1. Right of vendor a retro to recover thingsold free from charges ................................................................ 433

Section 2. — Legal Redemption

Article 1619 ..................................................................................................... 435

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1. Legal redemption defined ................................................................. 4352. Transfer of ownership by onerous title ........................................... 4353. Dation in payment defined ............................................................... 4354. Nature of dation in payment ............................................................ 4365. Basis and nature of right of legal redemption ............................... 4366. Instances of legal redemption ........................................................... 437

Article 1620 ..................................................................................................... 442

1. Right of legal redemption of co-owner ........................................... 4422. By whom and against whom right may be exercised.................. 4443. When right cannot be invoked ......................................................... 4444. Price of redeemption .......................................................................... 4455. Purpose of the grant of right to co-owners .................................... 446

Article 1621 ..................................................................................................... 446

1. Right of legal redemption of adjacent ownersof rural lands ................................................................................ 447

2. Meaning of rural lands ....................................................................... 4493. Use of property a determining factor ............................................. 4494. Preference as between two or more adjacent owners

of rural lands ................................................................................ 4495. Purpose of the grant of right to owners of adjoining

rural lands .................................................................................. 450

Article 1622 ..................................................................................................... 451

1. Rights of pre-emption and legal redemptionof adjacent owners of urban lands .......................................... 451

2. Meaning of urban land ...................................................................... 4533. Urban and rural lands distinguished .............................................. 4534. Meaning of “to speculate” ................................................................. 4545. Purpose of the grant of right to owners of adjoining

urban lands ................................................................................ 455

Article 1623 ..................................................................................................... 455

1. Exercise of right of preemption or redemption ............................. 4562. Period for exercise of right ................................................................ 4563. Notice by vendor or prospective vendor ....................................... 4584. How right exercised ............................................................................ 464

Chapter 8. — ASSIGNMENT OF CREDITS AND OTHERINCORPOREAL RIGHTS

Article 1624 ..................................................................................................... 470

1. Assignment of credit defined ........................................................... 4702. Nature of assignment of credit ......................................................... 4703. Perfection of contract for assignment of credit ............................. 4714. Assignment distinguished from other terms ................................. 472

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Article 1625 ..................................................................................................... 472

1. Binding effect of assignment ............................................................. 472

Article 1626 ..................................................................................................... 473

1. Consent of debtor to assignment not required ............................. 4732. Effect of payment by debtor after assignment of credit .............. 473

Article 1627 ..................................................................................................... 474

1. Extent of assignment of credit .......................................................... 474

Article 1628 ..................................................................................................... 474

1. Warranties of the assignor of credit ................................................ 4752. Liabilities of the assignor of credit .................................................. 475

Article 1629 ..................................................................................................... 476

1. Duration of assignor’s liability where debtor’ssolvency guaranteed ................................................................... 476

2. Reasons for the rule ............................................................................ 477

Article 1630 ..................................................................................................... 478

1. Sale of successional or hereditary rights ........................................ 478

Article 1631 ..................................................................................................... 479

1. Sale of whole of certain rights, rents, or products ....................... 479

Article 1632 ..................................................................................................... 480

1. Liability of vendor of inheritance for fruits received .................. 480

Article 1633 ..................................................................................................... 480

1. Liability of vendee for debts of and charges on estate ................ 480

Article 1634 ..................................................................................................... 481

1. Legal redemption in sale of credit or otherincorporeal right in litigation .................................................... 481

2. Purpose of grant of right to debtor ................................................. 484

Article 1635 ..................................................................................................... 484

1. Exceptions to debtor’s right to legal redemption ......................... 485

Chapter 9. — GENERAL PROVISIONS

Article 1636 ..................................................................................................... 487

1. Definition of terms .............................................................................. 488

Article 1637 ..................................................................................................... 489

1. Sale of immovable subject to registration law .............................. 490

xxiii

BARTER OR EXCHANGE

(Title VII, Arts. 1638-1641)

Article 1638 ..................................................................................................... 491

1. Barter defined ...................................................................................... 4912. Perfection and consummation of the contract ............................... 491

Article 1639 ..................................................................................................... 493

1. Effect where giver not lawful owner of thing delivered ............. 493

Article 1640 ..................................................................................................... 493

1. Effect of eviction .................................................................................. 493

Article 1641 ..................................................................................................... 494

1. Applicability of provisions on sales ................................................ 494

THE BULK SALES LAW

(Act No. 3952, as amended.)

Section 1 .......................................................................................................... 495

1. Purpose of the law .............................................................................. 4952. Scheme of the law ............................................................................... 4953. Constitutionality of the law .............................................................. 4954. Construction of the law ..................................................................... 496

Section 2 .......................................................................................................... 496

1. When sale or transfer in bulk ........................................................... 4962. When sale or transfer in bulk not covered

by the Bulk Sales Law ................................................................ 4973. Meaning of stock ................................................................................. 4974. Meaning of merchandise ................................................................... 4975. Meaning of fixtures ............................................................................. 498

Sections 3-5 ..................................................................................................... 498

1. Protection accorded to creditors by the law .................................. 5002. Creditors contemplated by law ........................................................ 5003. Waiver and estoppel of creditors ..................................................... 5014. Effects of false statements in the schedule of creditors ............... 5015. Effect of violation of law on transfer .............................................. 5026. Remedies available to creditors ........................................................ 502

Sections 6-7 ..................................................................................................... 503

1. Acts punished by law ......................................................................... 503

Sections 8-12 ................................................................................................... 503

xxiv

APPENDICES

1. The Subdivision and Condominium Buyer’s ProtectiveDecree (P.D. No. 957, as amended byP.D. No. 1216 and No. 1344) ..................................................... 505

2. Realty Installment Buyer Protection Act(R.A. No. 6552) ............................................................................. 522

3. Anti-Fencing Law (P.D. No. 1612) ...................................................... 523

4. Consumer Act of the Philippines (R.A. No. 7394) .......................... 525

5. Manufacture, Importation, Distribution and Saleof Laundry and Industrial Detergents ContainingHard Surfactants (R.A. No. 8970) ............................................. 548

6. Comprehensive Dangerous Drugs Act of 2002(R.A. No. 9165) ............................................................................. 550

7. Chain Saw Act of 2002 (R.A. No. 9175) ............................................. 555

8 Tobacco Regulation Act of 2003 (R.A. No. 9211) ................. ........... 557

Part II

LEASE

(Title VIII, Arts. 1642-1699, 1713-1731)

Chapter 1. — GENERAL PROVISIONS

Article 1642 ..................................................................................................... 560

1. Concept and nature of contract of lease ......................................... 5602. Kinds of lease according to subject matter .................................... 5613. Characteristics and elements of the contract ................................. 561

Article 1643 ..................................................................................................... 562

1. Lease of things .................................................................................... 5622. Estoppel against lessee ....................................................................... 5743. Lease distinguished from sale .......................................................... 5754. Conditional sales of goods ................................................................ 5765. Lease distinguished from commodatum ........................................ 5766. Lease distinguished from mutuum ................................................. 5777. Lease distinguished from usufruct .................................................. 5778. Lease distinguished from deposit .................................................... 5789. Lease of chattels distinguished from employment ....................... 579

10. Service as driver under the boundary system............................... 579

Article 1644 ..................................................................................................... 580

1. Lease of work or service .................................................................... 580

xxv

2. Lease of work or service distinguished from agency .................. 5813. Lease of work or service distinguished from partnership .......... 5864. Compensation in lease of work or service ..................................... 586

Article 1645 ..................................................................................................... 589

1. Lease of consumable goods ............................................................... 589

Chapter 2. — LEASE OF RURAL AND URBAN LANDS

Section 1. — General Provisions

Article 1646 ..................................................................................................... 590

1. Rural lands distinguished from urban lands ................................. 5902. Persons disqualified to become lessees .......................................... 5913. Lease of real property by aliens ....................................................... 591

Article 1647 ..................................................................................................... 592

1. Proper authority required if leased to be recordedin Registry of Property ............................................................ 592

Article 1648 ..................................................................................................... 593

1. Effect of registration of lease of real estate .................................... 5932. Leases of personal property .............................................................. 5943. Effect of actual notice of unregistered lease by purchaser ......... 594

Article 1649 ..................................................................................................... 595

1. Assignment of lease of lessee ........................................................... 595

Article 1650 ..................................................................................................... 596

1. Sublease by lessee of thing leased ................................................... 596

Article 1651 ..................................................................................................... 600

1. Direct liability of sublessor to lessor ............................................... 600

Article 1652 ..................................................................................................... 600

1. Subsidiary liability of sublessee to lessor ....................................... 601

Article 1653 ..................................................................................................... 602

1. Warranty of the lessor ........................................................................ 6022. Lessor’s warranty distinct from his liability for damages .......... 602

Section 2. — Rights and Obligations of the Lessorand the Lessee

Article 1654 ..................................................................................................... 604

1. Obligations of the lessor .................................................................... 604

xxvi

Article 1655 ..................................................................................................... 608

1. Effect of destruction of thing leased by fortuitous event ............ 608

Article 1656 ..................................................................................................... 609

1. Right of lessor to continue same business or industryengaged in by lessee ................................................................ 609

Article 1657 ..................................................................................................... 609

1. Obligations of the lessee .................................................................... 609

Article 1658 ..................................................................................................... 612

1. Suspension of the payment of rent .................................................. 612

Article 1659 ..................................................................................................... 613

1. Alternative remedies of aggrieved party ....................................... 6132. Rescission of lease contract ............................................................... 614

Article 1660 ..................................................................................................... 617

1. Dwelling place or building dangerous to life or health .............. 617

Article 1661 ..................................................................................................... 618

1. Alteration of form of lease ................................................................ 618

Article 1662 ..................................................................................................... 619

1. Rule in case of urgent repairs ........................................................... 619

Article 1663 ..................................................................................................... 620

1. Obligation of lessee to notify lessor ................................................ 620

Article 1664 ..................................................................................................... 622

1. Rule in case of mere act of trespass ................................................. 622

Article 1665 ..................................................................................................... 624

1. Return of thing leased upon expiration of lease ........................... 624

Article 1666 ..................................................................................................... 625

1. Presumption of receipt of thing leased in good condition ......... 625

Article 1667 ..................................................................................................... 626

1. Responsibility of lessee for deterioration or lossof thing leased ........................................................................... 626

Article 1668 ..................................................................................................... 627

1. Deterioration caused by others ........................................................ 627

Article 1669 ..................................................................................................... 628

xxvii

1. Lease made for a determinate time ................................................. 6282. Extension or renewal of lease ........................................................... 629

Article 1670 ..................................................................................................... 635

1. Implied new lease ............................................................................... 6352. Instances when implied renewal not applicable ........................... 637

Article 1671 ..................................................................................................... 638

1. Continuous possession by lessee over lessor’s objection ............ 6382. Damages in forcible entry and unlawful detainer cases ............. 638

Article 1672 ..................................................................................................... 639

1. Effect of implied new lease on accessory obligationscontracted by a third person .................................................. 640

Article 1673 ..................................................................................................... 640

1. Causes for judicial ejectment of lessee ............................................ 6402. Expiration of the period ..................................................................... 6413. Lack of payment of stipulated rental .............................................. 6424. Violation of any condition agreed upon ......................................... 6435. Improper use of the leased property ............................................... 6446. Regulation of rentals of certain residential units .......................... 6447. Rental Reform Act of 2002 ................................................................. 646

Article 1674 ..................................................................................................... 650

1. Preliminary mandatory injunction to restore possessionpending appeal ......................................................................... 650

Article 1675 ..................................................................................................... 652

1. Use by lessee of legal period ............................................................ 652

Article 1676 ..................................................................................................... 652

1. Termination of lease by purchaser of leased land ........................ 6532. Unrecorded lease ................................................................................. 653

Article 1677 ..................................................................................................... 654

1. Where sale subject to right of redemption ..................................... 654

Article 1678 ..................................................................................................... 655

1. Right of lessee with regard to useful improvementsand ornamental expenses ........................................................ 655

2. Right of lessee over necessary repairs ............................................ 657

Article 1679 ..................................................................................................... 658

1. Place and time for payment of lease ............................................... 658

xxviii

Section 3. — Special Provisions for Leasesof Rural Lands

Articles 1680-1681 .......................................................................................... 659

1. Reduction of rent in rural leases ...................................................... 6592. Fortuitous events ................................................................................. 6613. Percentage of reduction ..................................................................... 662

Article 1682 ..................................................................................................... 663

1. Duration of rural lease ....................................................................... 663

Article 1683 ..................................................................................................... 664

1. Obligation of outgoing/incoming lessee or lessor ....................... 664

Articles 1684-1685 .......................................................................................... 665

1. Rules governing law tenancy on shares ......................................... 6652. Special laws on land tenancy ............................................................ 6653. Extinguishment of leasehold relation .............................................. 6664. Causes for dispossession of leasehold tenant ................................ 666

Section 4. — Special Provisions for theLease of Urban Lands

Article 1686 ..................................................................................................... 668

1. Kind of repairs on urban property by lessor ................................. 668

Article 1687 ..................................................................................................... 669

1. Duration of lease depending on period at whichrent payable ............................................................................... 669

Article 1688 ..................................................................................................... 673

1. Lease of premises together with furniture ..................................... 673

Chapter 3. — WORK AND LABOR

Section 1. — Household ServiceNew provisions .............................................................................................. 674

Article 1689 ..................................................................................................... 674

1. Scope of household service ............................................................... 6742. Reasonable compensation for household service ......................... 675

Article 1690 ..................................................................................................... 675

1. Obligations of head of the family .................................................... 6752. Medical attendance ............................................................................. 676

Article 1691 ..................................................................................................... 677

xxix

1. Opportunity for at least elementary education ............................. 677

Article 1692 ..................................................................................................... 677

1. Duration of household service ......................................................... 677

Article 1693 ..................................................................................................... 677

1. Clothes of the house helper .............................................................. 677

Article 1694 ..................................................................................................... 678

1. Treatment of house helper ................................................................. 678

Article 1695 ..................................................................................................... 678

1. Ten-hour a day work .......................................................................... 6782. Vacation leave ...................................................................................... 679

Article 1696 ..................................................................................................... 679

1. Funeral expenses ................................................................................. 679

Article 1697 ..................................................................................................... 679

1. Termination of household service .................................................... 679

Article 1698 ..................................................................................................... 680

1. Notice to terminate service relation where no period fixed ....... 680

Article 1699 ..................................................................................................... 681

1. Written statement from head of the family .................................... 681

Section 2. — Contract for a Piece of Work

Article 1713 ..................................................................................................... 682

1. Contract for a piece of work distinguished fromlease of service .......................................................................... 682

Article 1714 ..................................................................................................... 683

1. Material furnished by the contractor .............................................. 683

Article 1715 ..................................................................................................... 683

1. Remedy of employer in case of defects .......................................... 684

Article 1716 ..................................................................................................... 686

1. Agreement waiving or limiting contractor’s liabilityfor defects ................................................................................... 686

Article 1717 ..................................................................................................... 686

1. Risk of loss where material furnished by contractor ................... 687

Article 1718 ..................................................................................................... 687

xxx

1. Risk of loss where contractor furnished only his work .............. 687

Article 1719 ..................................................................................................... 688

1. Effect of acceptance by the employer .............................................. 688

Article 1720 ..................................................................................................... 689

1. Time and place of payment of price or compensation ................ 689

Article 1721 ..................................................................................................... 693

1. Default of the employer ..................................................................... 694

Article 1722 ..................................................................................................... 694

1. Non-completion attributable to employer ..................................... 694

Article 1723 ..................................................................................................... 694

1. Liability of engineer or architect/contractor for collapseof building constructed ........................................................... 695

Article 1724 ..................................................................................................... 699

1. Right of contractor to withdraw or ask for increase in price ..... 699

Article 1725 ..................................................................................................... 701

1. Right of owner to withdraw ............................................................. 701

Article 1726 ..................................................................................................... 702

1. Rescission of contract ......................................................................... 702

Article 1727 ..................................................................................................... 703

1. Liability of contractor for work done by his workers ................. 703

Article 1728 ..................................................................................................... 703

1. Liability of contractor for death or physical injuries ................... 703

Article 1729 ..................................................................................................... 704

1. Subsidiary liability of owner to laborers and materialmen ........ 7042. Special laws regarding contractor’s bond ...................................... 704

Article 1730 ..................................................................................................... 705

1. Satisfactory completion of work ...................................................... 705

Article 1731 ..................................................................................................... 706

1. Mechanic’s lien .................................................................................... 706

— oOo —

505

APPENDICES

1. THE SUBDIVISION AND CONDOMINIUMBUYER’S PROTECTIVE DECREE*

(P.D. No. 957, as amended by P.D. No. 1216and No. 1344)

REGULATING THE SALE OF SUBDIVISION LOTS AND CONDO-MINIUMS, PROVIDING PENALTIES FOR VIOLATION THEREOF.

WHEREAS, it is the policy of the State to afford its inhabitants therequirements of decent human settlement and to provide them withample opportunities for improving their quality of life;

WHEREAS, numerous reports reveal that many real estate subdi-vision owners, developers, operators, and/or sellers have reneged ontheir representations and obligations to provide and maintain properlysubdivision roads, drainage, sewerage, water systems, lighting systems,and other similar basic requirements, thus endangering the health andsafety of home and lot buyers;

WHEREAS, reports of alarming magnitude also show cases of swin-dling and fraudulent manipulations perpetrated by unscrupulous sub-division and condominium sellers and operators, such as failure to de-liver titles to the buyers or titles free from liens and encumbrances, andto pay real estate taxes, and fraudulent sales of the same subdivisionlots to different innocent purchasers for value;

*Executive Order No. 648 (Feb. 7, 1981) transferred the regulatory functions of theNational Housing Authority under the Decree and other related laws to the HumanSettlements Regulatory Commission, which was renamed Housing and Land Use Regu-latory Board (HLURB) by Executive Order No. 90 (Dec. 14, 1986).

P.D. No. 957 was promulgated to encompass all questions regarding subdivisionsand condominiums. It is aimed at providing for an appropriate government agency, theHLURB, to which all parties aggrieved in the implementation of its provisions and theenforcement of contractual rights with respect to said category or real estate may takerecourse. (Arranza vs. B.F. homes, Inc., 128 SCAD 119, 333 SCRA 799 [2000]; AMA Com-puter College, Inc. vs. Factora, 378 SCRA 121 [2002].)

505

506 SALES

WHEREAS, these acts not only undermine the land and housingprogram of the government but also defeat the objectives of the NewSociety, particularly the promotion of peace and order and enhancementof the economic, social and moral condition of the Filipino people;

WHEREAS, this state of affairs had rendered it imperative that thereal estate subdivision and condominium businesses be closely super-vised and regulated, and that penalties be imposed on fraudulent prac-tices and manipulations committed in connection therewith.

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of thePhilippines, by virtue of the powers vested in me by the Constitution,do hereby decree and order:

Title I

TITLE AND DEFINITIONS

SECTION 1. Title. — This Decree shall be known as THE SUBDIVI-SION AND CONDOMINIUM BUYER’S PROTECTIVE DECREE.1

SEC. 2. Definition of Terms. — When used in this Decree, the follow-ing terms shall, unless the context otherwise indicates, have the follow-ing respective meanings:

a) Person. — “Person” shall mean a natural or a juridical per-son. A juridical person refers to business firm whether a corpora-tion, partnership, cooperative or association or a single proprietor-ship.

b) Sale or sell. — “Sale” or “sell” shall include every disposi-tion, or attempt to dispose, for a valuable consideration, of a subdi-vision lot, including the building and other improvements thereof,if any, in a subdivision project or a condominium unit in a condo-minium project. “Sale” and “sell” shall also include a contract to sell,a contract of purchase and sale, an exchange, an attempt to sell, anoption of sale or purchase, a solicitation of a sale, or an offer to sell,directly or by an agent, or by a circular, letter, advertisement or oth-erwise.

A privilege given to a member of a cooperative, corporation,partnership, or any association and/or the issuance of a certificateor receipt evidencing or giving the right of participation in, or right

1R.A. No. 4726, the Condominium Act, defines condominium, establishes require-ments for its creation, and governs its incidents. (see Comments and Cases on Property,1993 ed., by De Leon & De Leon, Jr.)

Secs. 1-2

507

to, and land in consideration of payment of the membership fee ordues, shall be deemed a sale within the meaning of this definition.

c) Buy and purchase. — The term “buy” and “purchase” shallinclude any contract to buy, purchase, or otherwise acquire for avaluable consideration a subdivision lot, including the building andother improvements, if any, in a subdivision project or a condo-minium unit in a condominium project.

d) Subdivision project. — “Subdivision project” shall mean atract or a parcel of land registered under Act No. 496 which is par-titioned primarily for residential purposes into individual lots withor without improvements thereon, and offered to the public for sale,in cash or in installment terms. It shall include all residential, com-mercial, industrial and recreational areas, as well as open spaces andother community and public areas in the project.

e) Subdivision lot. — “Subdivision lot” shall mean any of thelots, whether residential, commercial, industrial, or recreational, ina subdivision project.

f) Complex subdivision plan. — “Complex subdivision plan”shall mean a subdivision plan of a registered land wherein a street,passageway or open space is delineated on the plan.

g) Condominium project. — “Condominium project” shall meanthe entire parcel of real property divided or to be divided primarilyfor residential purposes into condominium units, including all struc-tures thereon.

h) Condominium unit. — “Condominium unit” shall mean apart of the condominium project intended for any type of independ-ent use or ownership, including one or more rooms or spaces locatedin one or more floors (or part of parts of floors) in a building orbuildings and such accessories as may be appended thereto.

i) Owner. — “Owner” shall refer to the registered owner of theland subject of a subdivision or a condominium project.

j) Developer. — “Developer” shall mean the person who de-velops or improves the subdivision project or condominium projectfor and in behalf of the owner thereof.

k) Dealer. — “Dealer” shall mean any person directly engagedas principal in the business of buying, selling or exchanging realestate whether on a full-time or part-time basis.

l) Broker. — “Broker” shall mean any person who, for commis-sion or other compensation, undertakes to sell or negotiate the saleof a real estate belonging to another.

Sec. 2 1. THE SUBDIVISION AND CONDOMINIUMBUYER’S PROTECTIVE DECREE

508 SALES

m) Salesman. — “Salesman” shall refer to the person regularlyemployed by a broker to perform, for and in his behalf, any or allthe functions of a real estate broker.

n) Authority. — “Authority” shall mean the National HousingAuthority.2

Title II

REGISTRATION AND LICENSE TO SELL

SEC. 3. National Housing Authority. — The National Housing Au-thority shall have exclusive jurisdiction to regulate the real estate tradeand business in accordance with the provisions of this Decree.

SEC. 4. Registration of Projects. — The registered owner of parcel ofland who wishes to convert the same into a subdivision project shallsubmit his subdivision plan to the Authority which shall act upon andapprove the same, upon a finding that the plan complies with the Sub-division Standards and Regulations enforceable at the time the plan issubmitted. The same procedure shall be followed in the case of a planfor a condominium project except that, in addition, said Authority shallact upon and approve the plan with respect to the building or build-ings included in the condominium project in accordance with the Na-tional Building Code. (R.A. No. 6541.)

The subdivision plan, as so approved, shall then be submitted tothe Director of Lands for approval in accordance with the procedureprescribed in Section 44 of the Land Registration Act (Act No. 496, asamended by R.A. No. 440.): Provided, That in case of complex subdivi-sion plans, court approval shall no longer be required. The condominiumplan, as likewise so approved, shall be submitted to the Register of Deedsof the province or city in which the property lies and the same shall beacted upon subject to the conditions and in accordance with the proce-dure prescribed in Section 4 of the Condominium Act. (R.A. No. 4726.)

The owner or the real estate dealer interested in the sale of lots orunits, respectively, in such subdivision project or condominium projectshall register the project with the Authority by filing therewith a swornregistration statement containing the following information:

a) Name of the owner;

b) The location of the owner’s principal business office, andif the owner is a non-resident Filipino, the name and address of his

2Now, Housing and Land Use Regulatory Board.

Secs. 3-4

509

agent or representative in the Philippines authorized to receivenotice;

c) The names and addresses of all the directors and officers ofthe business firm, if the owner be a corporation, association, trust,or other entity, and of all the partners, if it be a partnership;

d) The general character of the business actually transacted orto be transacted by the owner; and

e) A statement of the capitalization of the owner, including theauthorized and outstanding amounts of its capital stock and the pro-portion thereof which is paid-up.

The following documents shall be attached to the registration state-ment:

a) A copy of the subdivision plan or condominium plan as ap-proved in accordance with the first and second paragraphs of thissection.

b) A copy of any circular, prospectus, brochure, advertisement,letter or communication to be used for the public offering of the sub-division lots or condominium units;

c) In case of a business firm, a balance sheet showing theamount and general character of its assets and liabilities and a copyof its articles of incorporation or articles of partnership or associa-tion, as the case may be, with all the amendments thereof and exist-ing by-laws or instruments corresponding thereto.

d) A title to the property which is free from all liens and en-cumbrances: Provided, however, That in case any subdivision lot orcondominium unit is mortgaged, it is sufficient if the instrument ofmortgage contains a stipulation that the mortgagee shall release themortgage on any subdivision lot or condominium unit as soon asthe full purchase price for the same is paid by the buyer.

The person filing the registration statements shall pay the registra-tion fees prescribed therefor by the Authority.

Thereupon, the Authority shall immediately cause to be publisheda notice of the filing of the registration statement at the expense of theapplicant-owner or dealer, in two newspapers of general circulation, onepublished in English and another in Pilipino, once a week for two con-secutive weeks, reciting that a registration statement for the sale of sub-division lots or condominium units has been filed in the National Hous-ing Authority; that the aforesaid registration statement, as well as thepapers attached thereto, are open to inspection during business hours

Sec. 4 1. THE SUBDIVISION AND CONDOMINIUMBUYER’S PROTECTIVE DECREE

510 SALES

by interested parties, under such regulations as the Authority may im-pose; and that copies thereof shall be furnished to any party upon pay-ment of the proper fees.

The subdivision project of the condominium project shall be deemedregistered upon completion of the above publication requirement. Thefact of such registration shall be evidenced by a registration certificateto be issued to the applicant-owner or dealer.

SEC. 5. License to sell. — Such owner or dealer to whom has beenissued a registration certificate shall not, however, be authorized to sellany subdivision lot or condominium unit in the registered project un-less he shall have first obtained a license to sell the project within twoweeks from the registration of such project.

The Authority, upon proper application therefor, shall issue to suchowner or dealer of a registered project a license to sell the project if, af-ter an examination of the registration statement filed by said owner ordealer and all the pertinent documents attached thereto, he is convincedthat the owner or dealer is of good repute, that his business is finan-cially stable, and that the proposed sale of the subdivision lots or con-dominium units to the public would not be fraudulent.

SEC. 6. Performance Bond. — No license to sell subdivision lots orcondominium units shall be issued by the Authority under Section 5 ofthis Decree unless the owner or dealer shall have filed an adequate per-formance bond approved by said Authority to guarantee the construc-tion and maintenance of the roads, gutters, drainage, sewerage, watersystem, lighting systems, and full development of the subdivisionproject or the condominium project and the compliance by the owneror dealer with the applicable laws and rules and regulations.

The performance bond shall be executed in favor of the Republic ofthe Philippines and shall authorize the Authority to use the proceedsthereof for the purposes of its undertaking in case of forfeiture as pro-vided in this Decree.

SEC. 7. Exempt transactions. — A license to sell and performance bondshall not be required in any of the following transactions:

a) Sale of a subdivision lot resulting from the partition of landamong co-owners and co-heirs.

b) Sale or transfer of a subdivision lot by the original purchaserthereof and any subsequent sale of the same lot.

c) Sale of a subdivision lot or a condominium unit by or forthe account of a mortgage in the ordinary course of business whennecessary to liquidate a bona fide debt.

Secs. 5-7

511

SEC. 8. Suspension of license to sell. — Upon verified complaint filedby a buyer of a subdivision lot or a condominium unit or any interestedparty, the Authority may, in its discretion, immediately suspend theowner’s or dealer’s license to sell pending investigation and hearing ofthe case as provided in Section 13 hereof.

The Authority may motu proprio suspend a license to sell if, in itsopinion, any information in the registration statement filed by the owneror dealer is or has become misleading, incorrect, inadequate or incom-plete or the sale or offering for sale of the subdivision or condominiumproject may work or tend to work a fraud upon prospective buyers.

The suspension order may be lifted, after notice and hearing, theAuthority is convinced that the registration statement is accurate or thatany deficiency therein has been corrected or supplemented or that thesale to the public of the subdivision or condominium project will nei-ther be fraudulent nor result in fraud. It shall also be lifted upon dis-missal of the complaint for lack of legal basis.

Until the final entry of an order of suspension, the suspension ofthe right to sell the project, though binding upon all persons notifiedthereof, shall be deemed confidential unless it shall appear that the or-der of suspension has in the meantime been violated.

SEC. 9. Revocation of registration certificate and license to sell. — TheAuthority may, motu proprio or upon verified complaint filed by a buyerof a subdivision lot or condominium unit, revoke the registration of anysubdivision project or condominium project and the license to sell anysubdivision lot or condominium unit in said project by issuing an or-der to this effect, with his findings in respect thereto, if upon examina-tion into the affairs of the owner or dealer during a hearing as providedfor in Section 14 hereof, it shall appear there is satisfactory evidence thatthe said owner or dealer:

a) Is insolvent; or

b) Has violated any of the provisions of this Decree or any ap-plicable rule or regulation of the Authority, or any undertaking ofhis/its performance bond; or

c) Has been or is engaged or is about to engage in fraudulenttransactions; or

d) Has made any misrepresentation in any prospectus, bro-chure, circular or other literature about the subdivision project orcondominium project that has been distributed to prospective buy-ers; or

e) Is of bad business repute; or

Secs. 8-9 1. THE SUBDIVISION AND CONDOMINIUMBUYER’S PROTECTIVE DECREE

512 SALES

f) Does not conduct his business in accordance with law orsound business principles.

Where the owner or dealer is a partnership or corporation or anunincorporated association, it shall be sufficient cause for cancellationof its registration certificate and its license to sell, if any member of suchpartnership or any officer or director of such corporation or associationhas been guilty of any act or omission which would be cause for refus-ing or revoking the registration of an individual dealer, broker or sales-man as provided in Section 11 hereof.

SEC. 10. Registers of subdivision lots and condominium units. — A recordof subdivision lots and condominium units shall be kept in the Author-ity wherein shall be entered all orders of the Authority affecting thecondition or status thereof. The registers of subdivision lots and condo-minium units shall be open to public inspection subject to such reason-able rules as the Authority may prescribe.

Title III

DEALERS, BROKERS AND SALESMEN

SEC. 11. Registration of dealers, brokers and salesmen. — No real estatedealer, broker or salesman shall engage in the business of selling subdi-vision lots or condominium units unless he has registered himself withthe Authority in accordance with the provisions of this section.

If the Authority shall find that the applicant is of good repute andhas complied with the applicable rules of the Authority, including thepayment of the prescribed fee, he shall register such applicant as a dealer,broker or salesman upon his filing a bond, or other security in lieuthereof, in such sum as may be fixed by the Authority conditioned uponhis faithful compliance with the provisions of this Decree: Provided, Thatthe registration of a salesman shall cease upon the termination of hisemployment with a dealer or broker.

Every registration under this section shall expire on the thirty-firstday of December of each year. Renewal of registration for the succeed-ing year shall be granted upon written application therefor made notless than thirty nor more than sixty days before the first day of the en-suing year and upon payment of the prescribed fee, without the neces-sity of filing further statement or information, unless specifically re-quired by the Authority. All applications filed beyond said period shallbe treated as original applications.

The names and addresses of all persons registered as dealers, bro-kers or salesmen shall be recorded in a Register of Brokers, Dealers and

Secs. 10-11

513

Salesmen kept in the Authority which shall be open to public inspec-tion.

SEC. 12. Revocation of registration as dealers, brokers or salesmen. —Registration under the preceding section may be refused or any regis-tration granted thereunder, revoked by the Authority if, after reason-able notice and hearing, it shall determine that such applicant or regis-trant:

1) Has violated any provision of this Decree or any rule orregulation made hereunder; or

2) Has made a material false statement in his application forregistration; or

3) Has been guilty of a fraudulent act in connection with anysale of a subdivision lot or condominium unit; or

4) Has demonstrated his unworthiness to transact the businessof dealer, broker, or salesman, as the case may be.

In case of charges against a salesman, notice thereof shall also begiven the broker or dealer employing such salesman.

Pending hearing of the case, the Authority shall have the power toorder the suspension of the dealer’s broker’s, or salesman’s registration:Provided, That such order shall state the cause for the suspension.

The suspension or revocation of the registration of a dealer or bro-ker shall carry with it all the suspension or revocation of the registra-tions of all his salesmen.

Title IV

PROCEDURE FOR REVOCATION OFREGISTRATION CERTIFICATE

SEC. 13. Hearing. — In the hearing for determining the existence ofany ground or grounds for the suspension and/or revocation of regis-tration certificate and license to sell as provided in Sections 8 and 9 hereofthe following shall be complied with:

a) Notice. — No such hearing shall proceed unless the respond-ent is furnished with a copy of the complaint against him or is no-tified in writing of the purpose of such hearing.

b) Venue. — The hearing may be held before the officer or of-ficers designated by the Authority on the date and place specifiedin the notice.


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c) Nature of proceedings. — The proceedings shall be non-liti-gious and summary in nature without regard to legal technicalitiesobtaining in courts of law. The Rules of Court shall not apply in saidhearing except by analogy or in a suppletory character and when-ever practicable and convenient.

d) Power incidental to the hearing. — For the purpose of the hear-ing or other proceeding under this Decree, the officer or officers des-ignated to hear the complaint shall have the power to administeroaths, subpoena witnesses, conduct ocular inspections, take depo-sitions, and require the production of any book, paper, correspond-ence, memorandum or other record which are deemed relevant ormaterial to the inquiry.

SEC. 14. Contempt. —

a) Direct contempt. — The officer or officers designated by theAuthority to hear the complaint may summarily adjudge in directcontempt any person guilty of misbehavior in the presence of or sonear the said hearing officials as to obstruct or interrupt the proceed-ings before the same or of refusal to be sworn or to answer as awitness or to subscribe an affidavit or deposition when lawfullyrequired to do so. The person found guilty of direct contempt un-der this section shall be punished by a fine not exceeding Fifty Pe-sos (P50.00) or imprisonment not exceeding five (5) days or both.

b) Indirect contempt. — The officer or officers designated to hearthe complaint may also adjudge any person in indirect contempt ongrounds and in the manner prescribed in Rule 71 of the RevisedRules of Court.

SEC. 15. Decision. — The case shall be decided within thirty (30) daysfrom the time the same is submitted for decision. The Decision may orderthe revocation of the registration of the subdivision or condominiumproject the suspension, cancellation, or revocation of the license to selland/or the forfeiture, in whole or in part, of the performance bondmentioned in Section 6 hereof. In case forfeiture of the bond is ordered,the Decision may direct the provincial or city engineer to undertake orcause the construction of roads and other requirements for the subdivi-sion or condominium as stipulated in the bond, chargeable to theamount forfeited. Such decision shall be immediately executory andshall become final after the lapse of 15 days from the date of receipt ofthe Decision.

SEC. 16. Cease and Desist Order. — Whenever it shall appear to theAuthority that any person is engaged or about to engage in any act orpractice which constitutes or will constitute a violation of the provisions

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of this Decree or of any rule or regulation thereunder it may upon duenotice and hearing as provided in Section 13 hereof issue a cease anddesist order to enjoin such act or practice.

SEC. 17. Registration. — All contracts to sell deeds of sale and othersimilar instruments relative to the sale or conveyance of the subdivi-sion lots and condominium units whether or not the purchase price ispaid in full shall be registered by the seller in the Office of the Registerof Deeds of the province or city where the property is situated.

Whenever a subdivision plan duly approved in accordance withSection 4 hereof, together with the corresponding owner’s duplicatecertificate of title, is presented to the Register of Deeds for registration,the Register of Deeds shall register the same in accordance with theprovisions of the Land Registration Act, as amended: Provided, however,That if there is a street, passageway or required open space delineatedon a complex subdivision plan hereafter approved and defined in thisDecree, the Register of Deeds shall annotate on the new certificate of titlecovering the street passageway or open space a memorandum to theeffect that except by way of donation in favor of a city or municipality,no portion of any street passageway or open space so delineated on theplan shall be closed or otherwise disposed of by the registered ownerwithout the requisite approval as provided under Section 22 of thisDecree.

SEC. 18. Mortgages. — No mortgage on any unit or lot shall be madeby the owner or developer without prior written approval of the au-thority. Such approval shall not be granted unless it is shown that theproceeds of the mortgage loan shall be used for the development of thecondominium or subdivision project and effective measures have beenprovided to ensure such utilization. The loan value of each lot or unitcovered by the mortgage shall be determined and the buyer thereof ifany shall be notified before the release of the loan. The buyer may at hisoption pay his installment for the lot or unit directly to the mortgageewho shall apply the payments to the corresponding mortgage indebt-edness secured by the particular lot or unit being paid for, with a viewto enabling said buyer to obtain title over the lot or unit promptly afterfull payment thereof.

SEC. 19. Advertisements. — Advertisement that may be made by theowner or developer through newspaper, radio television leaflets, circu-lar or any other form about the subdivision or the condominium or itsoperations or activities must reflect the real facts and must be presentedin such manner that will not tend to mislead or deceive the public.

The owner or developer shall be answerable and liable for the fa-cilities, improvements, infrastructures or other forms of development


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represented or promised in brochures, advertisements and other salespropaganda disseminated by the owner or developer or his agents andthe same shall form part of the sales warranties enforceable against saidowner or developer jointly and severally. Failure to comply with thesewarranties shall also be punishable in accordance with the penaltiesprovided for in this Decree.

SEC. 20. Time of Completion. — Every owner or developer shall con-struct and provide the facilities, improvements, infrastructures and otherforms of development including water supply and lighting facilitieswhich are offered and indicated in the approved subdivision or condo-minium plans, brochures, prospectus, printed matters, letters or in anyform of advertisement within one year from the date of the issuance ofthe license for the subdivision or condominium project or such otherperiod of time as may be fixed by the Authority.

SEC. 21. Sales Prior to Decree. — In cases of subdivision lots or con-dominium units sold or disposed of prior to the effectivity of this De-cree, it shall be incumbent upon the owner or developer of the subdivi-sion or condominium project to complete compliance with his or itsobligations as provided in the preceding section within two years fromthe date of this Decree unless otherwise extended by the Authority orunless an adequate performance bond is filed in accordance with Sec-tion 6 hereof.

Failure of the owner or developer to comply with the obligationsunder this and the preceding provisions shall constitute a violationpunishable under Sections 38 and 39 of this Decree.

SEC. 22. Alteration of Plans. — No owner or developer shall changeor alter the roads, open spaces, infrastructures, facilities for public useand/or other form of subdivision development as contained in the ap-proved subdivision plan and/or represented in its advertisements with-out the permission of the Authority and the written conformity or con-sent of the duly organized homeowners association or in the absence ofthe latter by the majority of the lot buyers in the subdivision.

SEC. 23. Non-Forfeiture of Payments. — No installment payment madeby a buyer in a subdivision or condominium project for the lot or unithe contracted to buy shall be forfeited in favor of the owner or devel-oper when the buyer, after due notice to the owner or developer, de-sists from further payment due to the failure of the owner or developerto develop the subdivision or condominium project according to theapproved plans and within the time limit for complying with the same.Such buyer may at his option be reimbursed the total amount paid in-

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cluding amortization interests but excluding delinquency interests withinterest thereon at the legal rate.3

SEC. 24. Failure to Pay Installments. — The rights of the buyer in theevent of his failure to pay the installments due for reasons other thanthe failure of the owner or developer to develop the project shall begoverned by Republic Act No. 6552.

Where the transaction or contract was entered into prior to theeffectivity of Republic Act No. 6552 on August 26, 1972, the defaultingbuyer shall be entitled to the corresponding refund based on theinstallments paid after the effectivity of the law in the absence of anyprovision in the contract to the contrary.

SEC. 25. Issuance of Title. — The owner or developer shall deliverthe title of the lot or unit to the buyer upon full payment of the lot orunit. No fee except those required for the registration of the deed of salein the Registry of Deeds shall be collected for the issuance of such title.In the event a mortgage over the lot or unit is outstanding at the time ofthe issuance of the title to the buyer, the owner or developer shall re-deem the mortgage or the corresponding portion thereof within sixmonths from such issuance in order that the title over any fully paid lotor unit may be secured and delivered to the buyer in accordance here-with.

SEC. 26. Realty Tax. — Real estate tax and assessment on a lot or unitshall be paid by the owner or developer without recourse to the buyerfor as long as the title has not passed the buyer: Provided, however, Thatif the buyer has actually taken possession of and occupied the lot or unithe shall be liable to the owner or developer for such tax and assessmenteffective the year following such taking of possession and occupancy.

SEC. 27. Other Charges. — No owner or developer shall levy uponany lot or unit buyer a fee for an alleged community benefit. Fees tofinance services for common comfort, security and sanitation may becollected only by a properly organized homeowners association andonly with the consent of a majority of the lot or unit buyers actuallyresiding in the subdivision or condominium project.

SEC. 28. Access to Public Offices in the Subdivision. — No owner ordeveloper shall deny any person free access to any government office

3As the law vests upon the buyer the option to demand reimbursement or to waitfor development of the subdivision, the buyer who opted for the latter alternative maynot be ousted from the subdivision. (Relucio vs. Brillante-Garfin, 187 SCRA 405 [1990];see Casa Filipina Realty Corporation vs. Office of the President, 58 SCAD 773, 241 SCRA16 [1995]; Eugenio vs. Drilon, 67 SCAD 78, 252 SCRA 106 [1996]; Rancel Realty Corp. vs.Court of Appeals, 252 SCRA 127 [1996].)


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or public establishment located within the subdivision or which maybe reached only by passing through the subdivision.

SEC. 29. Right of Way to Public Road. — The owner or developer of asubdivision without access to any existing public road or street mustsecure a right of way to a public road or street and such right of waymust be developed and maintained according to the requirement of thegovernment authorities concerned.

SEC. 30. Organization of Homeowners Association. — The owner ordeveloper of a subdivision project or condominium project shall initi-ate the organization of a homeowners association among the buyers andresidents of the projects for the purpose of promoting and protectingtheir mutual interest and assist in their community development.

SEC. 31. Roads, Alleys, Sidewalks and Open Spaces. — The owner asdeveloper of a subdivision shall provide adequate roads, alleys, andsidewalks. For subdivision projects one (1) hectare or more, the owneror developer shall reserve thirty percent (30%) of the gross area for openspace. Such open space shall have the following standards allocatedexclusively for parks, playgrounds and recreational use:

a) 9% of gross area for high density or social housing (66 to 100family lot per gross hectare).

b) 7% of gross area for medium density or economic housing(21 to 65 family lot per gross hectare).

c) 3.5% of gross area for low-density or open market housing(20 family lots and below per gross hectare).

These areas reserved for parks, playgrounds and recreational useshall be non-alienable public lands and non-buildable. The plans of thesubdivision project shall include tree planting on such parts of the sub-division as may be designated by the Authority.

Upon their completion as certified to by the Authority, the roads,alleys, sidewalks, and playgrounds shall be donated by the owner ordeveloper to the city or municipality and it shall be mandatory for thelocal governments to accept: Provided, however, That the parks and play-grounds may be donated to the Homeowners Association of the projectwith the consent of the city or municipality concerned. No portion ofthe parks and playgrounds donated thereafter shall be converted to anyother purpose or purposes. (as amended by P.D. No. 1216.)

SEC. 32. Phases of Subdivision. — For purposes of complying withthe provisions of this Decree, the owner or developer may divide thedevelopment and sale of the subdivision into phases, each phase to covernot less than ten hectares. The requirement imposed by this Decree onthe subdivision as a whole shall be deemed imposed on each phase.

Secs. 29-32

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SEC. 33. Nullity of waivers. — Any condition, stipulation, or provi-sion in contract of sale whereby any person waives compliance with anyprovision of this Decree or of any rule or regulation issued thereundershall be void.

SEC. 34. Visitorial powers. — This Authority, through its duly author-ized representative may, at any time, make an examination into thebusiness affairs, administration, and condition of any person, corpora-tion, partnership, cooperative, or association engaged in the businessof selling subdivision lots and condominium units. For this purpose,the official authorized to do so shall have the authority to examine un-der oath the directors, officers, stockholders or members of any corpo-ration, partnership, association, cooperative or other persons associatedor connected with the business and to issue subpoena or subpoena ducestecum in relation to any investigation that may arise therefrom.

The Authority may also authorize the Provincial, City or Munici-pal Engineer, as the case may be, to conduct an ocular inspection of theproject to determine whether the development of said project conformsto the standards and specifications prescribed by the government.

The books, papers, letters, and other documents belonging to theperson or entities herein mentioned shall be open to inspection by theAuthority or its duly authorized representative.

SEC. 35. Takeover Development. — The Authority may take over orcause the development and completion of the subdivision or condo-minium project at the expense of the owner or developer, jointly andseverally, in cases where the owner or developer has refused or failedto develop or complete the development of the project as provided forin this Decree.

The Authority may, after such takeover, demand, collect and receivefrom the buyers the installment payments due on the lots, which shallbe utilized for the development of the subdivision.

SEC. 36. Rules and Regulations. — The Authority shall issue the nec-essary standards, rules and regulations for the effective implementationof the provisions of this Decree. Such standards, rules and regulationsshall take effect immediately after their publication three times a weekfor two consecutive weeks in any newspaper of general circulation.

SEC. 37. Deputization of law enforcement agencies. — The Authoritymay deputize the Philippine Constabulary4 or any law enforcementagency in the execution of its final orders, rulings or decisions.

4Now, Philippine National Police (PNP).


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SEC. 38. Administrative Fines. — The Authority may prescribe andimpose fines not exceeding ten thousand pesos for violations of theprovisions of this Decree or of any rule or regulation thereunder. Finesshall be payable to the Authority and enforceable through writs of ex-ecution in accordance with the provisions of the Rules of Court.

SEC. 39. Penalties. — Any person who shall violate any of the pro-visions of this Decree and/or any rule or regulation that may be issuedpursuant to this Decree shall, upon conviction, be punished by a fine ofnot more than twenty thousand pesos (P20,000.00) and/or imprison-ment of not more than ten years: Provided, That in the case of corpora-tions, partnerships, cooperatives, or associations, the President, Man-ager or Administrator or the person who has charge of the administra-tion of the business shall be criminally responsible for any violation ofthis Decree and/or the rules and regulations promulgated pursuantthereto.

SEC. 40. Liability of controlling persons. — Every person who directlyor indirectly controls any person liable under any provision of this De-cree or of any rule or regulation issued thereunder shall be liable jointlyand severally with and to the same extent as such controlled personunless the controlling person acted in good faith and did not directly orindirectly induce the act or acts constituting the violation or cause ofaction.

SEC. 41. Other remedies. — The rights and remedies provided in thisDecree shall be in addition to any and all other rights and remedies thatmay be available under existing laws.

SEC. 42. Repealing clause. — All laws, executive orders, rules andregulations, or parts thereof inconsistent with the provisions of thisDecree are hereby repealed or modified accordingly.

SEC. 43. Effectivity. — This Decree shall take effect upon its approval.

DONE in the City of Manila, this 12th day of July, in the year of OurLord, nineteen hundred and seventy-six.

———— ———— ————

NOTE: Presidential Decree No. 1344 (dated April 12, 1978) vests inthe National Housing Authority (NHA), exclusive jurisdiction to hearand decide certain cases. Its provisions are hereunder reproduced:

“SECTION 1. In the exercise of its functions to regulate the real es-tate trade and business and in addition to its powers provided for inP.D. No. 957, the National Housing Authority shall have exclusive ju-risdiction to hear and decide cases of the following nature:

Secs. 38-43

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a) Unsound real estate business practices;

b) Claims involving refund and any other claims filed by sub-division lot or condominium unit buyer against the project owner,developer, dealer, broker, or salesman; and

c) Cases involving specific performance of contractual andstatutory obligations filed by buyers of subdivision lot or condo-minium unit against the owner, developer, dealer, broker, or sales-man.

SEC. 2. The decision of the National Housing Authority shall be-come final and executory after the lapse of 15 days from the date of itsreceipt. It is appealable only to the President of the Philippines and inthe event the appeal is filed and the decision is not reversed and/oramended within a period of 30 days, the decision is deemed affirmed.Proof of the appeal of the decision must be furnished the National Hous-ing Authority.

SEC. 3. As soon as the decision has become final and executory, theNational Housing Authority shall on motion of the interested party, is-sue a writ of execution enforceable in accordance with the provisionsof the Rules of Court of the Philippines.

SEC. 4. This Decree shall take effect immediately.”

Section 1 of Presidential Decree No. 1344, expanded the jurisdictionof the NHA, now the HLURB, under Presidential Decree No. 957 toinclude:

(1) any claims filed by condominium buyer against the projectowner, developer, dealer, broker or salesman, and

(2) cases involving specific performance of contractual andstatutory obligations filed by buyer of condominium unit againstthe owner, developer, dealer, broker or salesman.

Corollarily, a transaction to “buy’’ and “purchase’’, under Presiden-tial Decree 957 has been defined as “any contract to buy, purchase, orotherwise acquire for a valuable consideration x x x a condominium unitin a condominium project.’’ The term “buyer’’ is not limited to thosewho enter into contracts of sale. Its concept is broad enough as to in-clude those who “acquire for a valuable consideration’’ a condominiumunit. Thus, a buyer of said unit seeking to enforce the performance ofan obligation arising from such transaction, or claiming damagestherefrom, may bring an action with the HLURB. (AMA ComputerCollege, Inc. vs. Factora, 378 SCRA 121 [2002].)


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2. REALTY INSTALLMENT BUYERPROTECTION ACT

(R.A. No. 6552)

AN ACT TO PROVIDE PROTECTION TO BUYERS OF REAL ESTATEON INSTALLMENT PAYMENTS

SECTION 1. This Act shall be known as the “Realty InstallmentBuyer Protection Act.”

SEC. 2. It is hereby declared a public policy to protect buyers of realestate on installment payments against onerous and oppressive condi-tions.

SEC. 3. In all transactions or contracts involving the sale or financ-ing of real estate on installment payments, including residential condo-minium apartments but excluding industrial lots, commercial buildingsand sales to tenants under Republic Act Numbered Thirty-eight hun-dred forty-four as amended by Republic Act Numbered Sixty-threehundred eighty-nine, where the buyer has paid at least two years ofinstallments, the buyer is entitled to the following rights in case he de-faults in the payment of succeeding installments:

(a) To pay, without additional interest, the unpaid installmentsdue within the total grace period earned by him which is herebyfixed at the rate of one-month grace period for every one year ofinstallment payments made: Provided, That this right shall be exer-cised by the buyer only once in every five years of the life of thecontract and its extensions, if any.

(b) If the contract is cancelled, the seller shall refund to thebuyer the cash surrender value of the payments on the propertyequivalent to fifty percent of the total payments made and, after fiveyears of installments, an additional five percent every year but notto exceed ninety percent of the total payments made: Provided, Thatthe actual cancellation of the contract shall take place after thirtydays from receipt by the buyer of the notice of cancellation or thedemand for rescission of the contract by a notarial act and upon fullpayment of the cash surrender value to the buyer.

Down payments, deposits or options on the contract shall be in-cluded in the computation of the total number of installment paymentsmade.

SEC. 4. In case where less than two years of installments were paid,the seller shall give the buyer a grace period of not less than sixty days

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from the date the installment became due. If the buyer fails to pay theinstallments due at the expiration of the grace period, the seller maycancel the contract after thirty days from receipt by the buyer of thenotice of cancellation or the demand for rescission of the contract by anotarial act.

SEC. 5. Under Sections 3 and 4, the buyer shall have the right to sellhis rights or assign the same to another person or to reinstate the con-tract by updating the account during the grace period and before ac-tual cancellation of the contract. The deed of sale or assignment shallbe done by notarial act.

SEC. 6. The buyer shall have the right to pay in advance anyinstallment or the full unpaid balance of the purchase price any timewithout interest and to have such full payment of the purchase priceannotated in the certificate of title covering the property.

SEC. 7. Any stipulation in any contract hereafter entered into con-trary to the provisions of Sections 3, 4, 5 and 6, shall be null and void.

SEC. 8. If any provision of this Act is held invalid or unconstitu-tional, no other provision shall be affected thereby.

SEC. 9. This Act shall take effect upon its approval.

APPROVED: August 26, 1972.

3. ANTI-FENCING LAW

(P.D. No. 1612)

WHEREAS, reports from law enforcement agencies reveal that thereis rampant robbery and thievery of government and private properties;

WHEREAS, such robbery and thievery have become profitable onthe part of the lawless elements because of the existence of ready buy-ers, commonly known as fence, of stolen properties;

WHEREAS, under existing law, a fence can be prosecuted only asan accessory after the fact and punished lightly;

WHEREAS, it is imperative to impose heavy penalties on personswho profit by the effects of the crimes of robbery and theft.

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of thePhilippines, by virtue of the powers vested in me by the Constitu-tion, do hereby order and decree as part of the law of the land the fol-lowing:

Secs. 5-9 3. ANTI-FENCING LAW

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SECTION 1. Title. — This decree shall be known as the “Anti-Fenc-ing Law.”

SEC. 2. Definition of Terms. — The following terms shall mean asfollows:

a) “Fencing” is the act of any person who, with intent to gainfor himself or for another, shall buy, receive, possess, keep, acquire,conceal, sell or dispose of, or shall buy and sell, or in any othermanner deal in any article, item, object or anything of value whichhe knows, or should be known to him, to have been derived fromthe proceeds of the crime of robbery or theft.

b) “Fence” includes any person, firm, association, corporationor other organization who/which commits the act of fencing.

SEC. 3. Penalties. — Any person guilty of fencing shall be punishedas hereunder indicated:

a) The penalty of prision mayor, if the value of the property in-volved is more than 12,000 pesos but not exceeding 22,000 pesos; ifthe value of such property exceeds the latter sum, the penalty pro-vided in this paragraph shall be imposed in its maximum period,adding one year for each additional 10,000 pesos, but the total pen-alty which may be imposed shall not exceed twenty years. In suchcases, the penalty shall be termed reclusion temporal and the acces-sory penalty pertaining thereto provided in the Revised Penal Codeshall also be imposed.

b) The penalty of prision correccional in its medium and maxi-mum periods, if the value of the property robbed or stolen is morethan 6,000 pesos but not exceeding 12,000 pesos.

c) The penalty of prision correccional in its minimum and me-dium periods, if the value of the property involved is more than 200pesos but not exceeding 6,000 pesos.

d) The penalty of arresto mayor in its medium period to prisioncorreccional in its minimum period, if the value of the property in-volved is over 50 pesos but not exceeding 200 pesos.

e) The penalty of arresto mayor in its medium period if suchvalue is over 5 pesos but not exceeding 50 pesos.

f) The penalty of arresto mayor in its minimum period, if suchvalue does not exceed 5 pesos.

SEC. 4. Liability of Official of Juridical Persons. — If the fence is a part-nership, firm, corporation or association, the president or the manager

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or any officer thereof who knows or should have known the commis-sion of the offense shall be liable.

SEC. 5. Presumption of Fencing. — Mere possession of any goods,article, item, object, or anything of value which has been the subject ofrobbery or thievery shall be prima facie evidence of fencing.

SEC. 6. Clearance/Permit to Sell/Used Secondhand Articles. — For pur-poses of this Act, all stores, establishments or entities dealing in the buyand sell of any good, article, item, object or anything of value obtainedfrom an unlicensed dealer or supplier thereof, shall before offering thesame for sale to the public, secure the necessary clearance or permit fromthe station commander or the Integrated National Police in the town orcity where such store, establishment or entity is located. The Chief ofConstabulary/Director General, Integrated National Police shall prom-ulgate such rules and regulations to carry out the provisions of this sec-tion. Any person who fails to secure the clearance or permit requiredby this section or who violates any of the provisions of the rules andregulations promulgated thereunder shall upon conviction be punishedas a fence.

SEC. 7. Repealing Clause. — All laws or parts thereof, which are in-consistent with the provisions of this Decree are hereby repealed ormodified accordingly.

SEC. 8. Effectivity. — This Decree shall take effect upon approval.

DONE in the City of Manila this 2nd day of March, in the year ofOur Lord, nineteen hundred and seventy-nine.

4. CONSUMER ACT OF THE PHILIPPINES

(R.A. No. 7394)

x x x x x x

ART. 2. Declaration of Basic Policy. — It is the policy of the state toprotect the interests of the consumer, promote his general welfare andto establish standards of conduct for business and industry. Towardsthis end, the State shall implement measures to achieve the followingobjectives.

a) protection against hazards to health and safety;

b) protection against deceptive, unfair and unconscionablesales acts and practices;

c) provision of information and education to facilitate soundchoice and the proper exercise of rights by the consumer;

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d) provision of adequate rights and means of redress; and

e) involvement of consumer representatives in the formulationof social and economic policies.

x x x x x x

ART. 15. Imported Products. — a) Any consumer product offered forimportation into the customs of the Philippine territory shall be refusedadmission if such product:

1) fails to comply with an applicable consumer product qual-ity and safety standard or rule;

2) is or has been determined to be injurious, unsafe and dan-gerous;

3) is substandard; or

4) has a material defect.

b) Samples of consumer products being imported into the Philip-pines in a quality necessary for purposes of determining the existenceof any of the above causes for nonadmission may be obtained by theconcerned department or agency without charge from the owner orconsignee thereof. The owner or consignee of the imported consumerproduct under examination shall be afforded an opportunity to a hear-ing with respect to the importation of such products into the Philippines.If it appears from examination of such samples or otherwise that animported consumer product does not conform to the consumer prod-uct safety rule or in injurious, unsafe and dangerous, is substandard orhas a material defect, such product shall be refused admission unlessthe owner or the consignee thereof manifests under bond that none ofthe above grounds for nonadmission exists or that measures have beentaken to cure them before they are sold, distributed or offered for saleto the general public.

Any consumer product, the sale or use of which has been bannedor withdrawn in the country of manufacture, shall not be imported intothe country.

c) If it appears that any consumer product which may not be asmodified that it can already be accepted, the concerned department maydefer final determination as to the admission of such product for a pe-riod not exceeding ten (10) days, and in accordance with such regula-tions as the department and the Commissioner of Customs shall jointlypromulgate, such product may be released from customs custody un-der bond for the purpose of permitting the owner or consignee as op-portunity to so modify such product.

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527

d) All modifications taken by an owner or consignee for the pur-pose of securing admission of an imported consumer product underparagraph (c) shall be subject to the supervision of the concerned de-partment. If the product cannot be so modified, or if the owner or con-signee is not proceeding to satisfactorily modify such product, it shallbe refused admission and the department may direct redelivery of theproduct into customs custody, and to seize the product if not soredelivered.

e) Imported consumer products not admitted must be exported,except that upon application, the Commissioner of Customs may per-mit the destruction of the product if within a reasonable time, the owneror consignee thereof fails to export the same.

f) All expenses in connection with the destruction provided forin this Article, and all expenses in connection with the storage cartageor labor with respect to any consumer product refused admission un-der this Article, shall be paid by the owner or consignee and, in defaultof such payment, shall constitute a lien against any future importationmade by such owner or consignee.

x x x x x x

ART. 16. Consumer Product for Export. — The preceding Article onsafety shall not apply to any consumer product if:

a) it can be shown that such product is manufactured, sold orheld for sale for export from the Philippines, or that such productwas imported for export, unless such consumer product is in factdistributed in commerce for use in the Philippines, and

b) such consumer product or the packaging thereof bears astamp or label stating that such consumer product is intended forexport and actually exported.

x x x x x x

ART. 18. Prohibited Acts. — It shall be unlawful for any person to:

a) manufacture for sale, offer for sale, distribute in commerce,or import into the Philippines any consumer product which is notin conformity with an applicable consumer product quality or safetystandard promulgated in this Act;

b) manufacture for sale, offer for sale, distribute in commerceor import into the Philippines any consumer product which has beendeclared as banned consumer product by a rule in this Act;

c) refuse access to or copying of pertinent records or fail orrefuse to permit entry of or inspection by authorized officers oremployees of the department;

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d) fail to comply with an order issued under Article 11 relat-ing to notifications of substantial product hazards and to recall, re-pair, replacement or refund of unsafe products;

e) fail to comply with the rule prohibiting stockpiling.

ART. 19. Penalties. — a) Any person who shall violate any provisionof Article 19 shall, upon conviction, be subject to a fine of not less thanone thousand pesos (P1,000.00) but not more than Ten thousand pesos(P10,000.00) or imprisonment of not less than two (2) months but notmore than one (1) year, or both upon the discretion of the court, if theoffender is an alien, he shall be deported after service of sentence andpayment of fine, without further deportation proceedings.

b) In case the offender is a naturalized citizen, he shall, in addi-tion to the penalty prescribed herein, suffer the penalty of cancellationof his naturalization certificate and its registration in the civil registerand immediate deportation after service of sentence and payment of fine.

c) Any director, officer or agent of a corporation who shall author-ize, order or perform any of the acts or practices constituting in wholeor in part a violation of Article 18, and who has knowledge or notice ofnoncompliance received by the corporation from the concerned depart-ment, shall be subject to penalties to which that corporation may besubject.

In case the violation is committed by, or in the interest of a foreignjuridical person duly licensed to engage in business in the Philippines,such license to engage in business in the Philippines shall immediatelybe revoked.

x x x x x x

ART. 40. Prohibited Acts. — The following acts and the causingthereof are hereby prohibited:

a) the manufacture, importation, exportation, sale, offering forsale, distribution or transfer of any food, drug, device or cosmeticthat is adulterated or mislabeled;

b) the adulteration or misbranding of any food, drug, device,or cosmetic;

c) the refusal to permit entry or inspection as authorized byArticle 36 to allow samples to be collected;

d) the giving of a guaranty or undertaking referred to in Arti-cle 41(b) hereof which guaranty or undertaking is false, except by aperson who relied upon a guaranty or undertaking to the same ef-fect signed by, and containing the name and address of, the person

Arts. 19, 40

529

residing in the Philippines from whom he received in good faith thefood, drug, device, or cosmetic or the giving of a guaranty or un-dertaking referred to in Article 41(b) which guaranty or undertak-ing is false;

e) forging, counterfeiting, simulating, or falsely representingor without proper authority using any mark, stamp, tag, lable, orother identification device authorized or required by regulationspromulgated under the provisions of this Act;

f) the using by any person to his own advantage, or reveal-ing, other than to the Department or to the courts when relevant inany judicial proceeding under this Act, any information concerningany method or process which as a trade secret is entitled to protec-tion;

g) the alteration, mutilation, destruction, obliteration, or re-moval of the whole or any part of the labeling of, or the doing ofany other act with respect to, a food, drug, device, or cosmetic, ifsuch act is done while such product is held for sale (whether or notthe first sale) and results in such product being adulterated ormislabeled;

h) the use, on the labeling of any drug or in any advertisingrelating to such drug, of any representation or suggestion that anapplication with respect to such drug is effective under Article 31hereof or that such drug complies with the provisions of such arti-cles;

i) the use, in labeling, advertising or other sales promotion,of any reference to any report or analysis furnished in compliancewith Section 19 of Executive Order No. 175, series of 1987;

j) the manufacture, importation, exportation, sale, offering forsale, distribution, or transfer of any drug or device which is not reg-istered with the Department pursuant to this Act;

k) the manufacture, importation, exportation, sale, offering forsale, distribution, or transfer of any drug or device by any personwithout the license from the Department required in this Act;

l) the sale or offering for sale of any drug or device beyondits expiration or expiry date;

m) the release for sale or distribution of a batch of drugs with-out batch certification when required under Article 34 hereof.

ART. 41. Penalties. — a) Any person who violates any of the provi-sions of Article 40 hereof shall, upon conviction, be subject to imprison-ment of not less than one (1) year but not more than five (5) years, or a


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fine of not less than Five thousand pesos (P5,000) but not more than Tenthousand pesos (P10,000), or both such imprisonment and fine, in thedistribution of the Court.

Should the offense be committed by a juridical person, the Chair-man of the Board of Directors, the President, General Manager, or thepartners and/or the persons directly responsible therefor shall be pe-nalized.

b) No person shall be subject to the penalties of sub-article (a) ofthis Article for: (1) having sold, offered for sale or transferred any prod-uct and delivered it, if such delivery was made in good faith, unless herefuses to furnish on request of the Department, the name and addressof the person from whom he purchased or received such product andcopies of all documents, if any there be, pertaining to the delivery ofthe product to him; (2) having violated Article 40(a) if he established aguaranty or undertaking signed by, and containing the name and ad-dress of, the person residing in the Philippines from whom he receivedin good faith the product; or (3) having violated Article 40(a), where theviolation exists because the product is adulterated by reason of contain-ing a color other than the permissible one under regulations promul-gated by the Department in this Act, if such person establishes a guar-anty or undertaking signed by, and containing the name and address,of the manufacturer of the color, to the effect that such color is permis-sible, under applicable regulations promulgated by the Department inthis Act.

x x x x x x

ART. 46. Prohibited Acts. — It shall be unlawful for any person to:

a) introduce or deliver for introduction into commerce of anymislabeled hazardous substance or banned hazardous substance;

b) alter, mutilate, destroy, obliterate or remove the whole orany part of the label of a mislabeled hazardous substance, or bannedhazardous substance, if such act is done while the substance is incommerce or while the substance is held for sale, whether or not itis the first sale;

c) receive in commerce any mislabeled hazardous substanceor banned hazardous substance and the delivery or preferred de-livery thereof of cost or otherwise;

d) give the guaranty or undertaking referred to in paragraph(b) of Article 93 and paragraph (b) of Article 45 if such guaranty orundertaking is false, except by a person who relied upon a guarantyor undertaking which he received in good faith;

Art. 46

531

e) introduce or deliver for introduction into commerce or re-ceive in commerce and subsequently deliver or preferred at cost orotherwise, or a hazardous substance in a reused food, drug, cosmeticor device container or in a container which, though not a reusedcontainer, is identifiable as a food, drug, cosmetic or device con-tainer, by its labeling or by other identification. The use of a usedfood, drug, cosmetic or device container for a hazardous substancedoes not diminish the danger posed by the hazardous substanceinvolved, therefore, such substance shall be deemed a mislabeledhazardous substance.

ART. 47. Penalties, exception. — a) Any person who violates any ofthe provisions of Article 46 shall, upon conviction, be subject to a fineof not less than One thousand pesos (P1,000) or an imprisonment of notless than six (6) months but not more than five (5) years or both uponthe discretion of the Court.

b) No person shall be subject to the penalties of paragraph a) ofthis Article for: (1) having violated paragraph (c) of Article 46 unless herefuses to furnish, upon request by the Department or his representa-tive, the name and address of the person from whom he purchased suchhazardous substances; and (2) having violated paragraph (a) of Article46, if he establishes a guaranty or undertaking signed by, and contain-ing the name and address of, the person from whom he received in goodfaith, the hazardous substance to the effect that the hazardous substanceis not a mislabeled hazardous substance or banned hazardous withinthe meaning of that term in this Act.

x x x x x x

ART. 50. Prohibited Against Deceptive Sales Act or Practices. — A de-ceptive act or practice by a seller or supplier in connection with a con-sumer transaction violates this Act whether it occurs before, during orafter the transaction. An act or practice shall be deemed deceptive when-ever the producer, manufacturer, supplier or seller, through conceal-ment, false representation or fraudulent manipulation, induces a con-sumer to enter into a sales or lease transaction of any consumer prod-uct or service.

Without limiting the scope of the above paragraph, the act or prac-tice of a seller or supplier is deceptive when it represents that:

a) a consumer product or service has the sponsorship, ap-proval, performance, characteristics, ingredients, accessories, uses,or benefits it does not have;

b) a consumer product or service is of a particular standard,quality, grade, style, or model when in fact it is not;


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c) a consumer product is new, original or unused, when in fact,it is a deteriorated, altered, reconditioned, reclaimed or second-handstate;

d) a consumer product or service is available to the consumerfor a reason that is different from the fact;

e) a consumer product or service has been supplied in accord-ance with the previous representation when in fact it is not;

f) a consumer product or service can be supplied in a quan-tity greater than the supplier intends;

g) a service or repair of a consumer product is needed whenin fact it is not;

h) a specific price advantage of a consumer product existswhen in fact it does not;

i) the sales act or practice involves or does not involve a war-ranty, a disclaimer of warranties, particular warranty terms or otherrights, remedies or obligations if the indication is false; and

j) the seller or supplier has a sponsorship, approval, or affili-ation he does not have.

ART. 51. Deceptive Sales Acts or Practices by Regulation. — The De-partment shall, after due notice and hearing, promulgate regulationsdeclaring as deceptive any sales act, practice or technique which is amisrepresentation of facts other than those enumerated in Article 50.

ART. 52. Unfair or Unconscionable Sales Act or Practice. — An unfairor unconscionable sales act or practice by a seller or supplier in connec-tion with a consumer transaction violates this Chapter whether it oc-curs before, during or after the consumer transaction. An act or prac-tice shall be deemed unfair or unconscionable whenever the producer,manufacturer, distributor, supplier or seller, by taking advantage of theconsumer’s physical or mental infirmity, ignorance, illiteracy, lack oftime or the general conditions of the environment or surroundings, in-duces the consumer to enter into a sales or lease transaction grosslyinimical to the interests of the consumer or grossly one-sided in favorof the producer, manufacturer, distributor, supplier or seller.

In determining whether an act or practice is unfair and unconscion-able, the following circumstances shall be considered:

a) that the producer, manufacturer, distributor, supplier orseller took advantage of the inability of the consumer to reasonablyprotect his interest because of his inability to understand the lan-guage of an agreement, or similar factors;

Arts. 51, 52

533

b) that when the consumer transaction was entered into, theprice grossly exceeded the price at which similar products or serv-ices were readily obtainable in similar transaction by like consumer;

c) that when the consumer transaction was entered into, theconsumer was unable to receive a substantial benefit from the sub-ject of the transaction;

d) that when the consumer transaction was entered into, theseller or supplier was aware that there was no reasonable probabil-ity or payment of the obligation in full by the consumer; and

e) that the transaction that the seller or supplier induced theconsumer to enter into was excessively one-sided in favor of theseller or supplier.

ART. 53. Chain Distribution Plans or Pyramid Sales Schemes. — Chaindistribution plans or pyramid sales schemes shall not be employed inthe sale of consumer products.

ART. 54. Home Solicitation Sales. — No business entity shall conductany home solicitation sale of any consumer product or service withoutfirst obtaining a permit from the Department. Such permit may be de-nied, suspended or revoked upon cause as provided in the rules andregulations promulgated by the Department, after due notice and hear-ing.

ART. 55. Home Solicitation Sales; When Conducted. — Homesolicitation sales may be conducted only between the hours of nineo’clock in the morning and seven o’clock in the evening of each work-ing day: Provided, That solicitation sales may be made at a time otherthan the prescribed hours where the persons solicited has previouslyagreed to the same.

ART. 56. Home Solicitation Sales; By Whom Conducted. — Homesolicitation sales shall only be conducted by a person who has the properidentification and authority from his principal to make such solicita-tions.

x x x x x x

ART. 62. Sealing and Testing of Instruments of Weights and Measures.— All instruments for determining weights and measures in all con-sumer and consumer related transactions shall be tested, calibrated andsealed every six (6) months by the official sealer who shall be the pro-vincial or city or municipal treasurer or his authorized representativeupon payment of fees required under existing law: Provided, That allinstruments of weights and measures shall continuously be inspectedfor compliance with the provisions of this Chapter.


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ART. 63. Use of Metric System. — The system of weights and meas-ures to be used for all products, commodities, materials, utilities, serv-ices and commercial transactions, in all contracts, deeds and other offi-cial and legal instruments and documents shall be the metric system.In accordance with existing laws and their implementing rules and regu-lations.

The Department of Trade and Industry shall also adopt standardmeasurement for garments, shoes and other similar consumer products.

PROHIBITED ACTS

ART. 64. Fraudulent Practices Relative to Weights and Measures. — Thefollowing acts relating to weights and measures are prohibited:

a) for any person other than the official sealer or his duly au-thorized representative to place or attach and official tag, seal,sticker, mark, stamp, brand or other characteristic sign used to in-dicate that such instrument of weight and measure has officiallybeen tested, calibrated, sealed or inspected;

b) for any person to imitate any seal, sticker, mark, stamp,brand, tag or other characteristic sign used to indicate that suchinstrument of weight or measure has been officially tested, cali-brated, sealed or inspected;

c) for any person other than the official sealer or his duly au-thorized representative to alter in any way the certificate or receiptgiven by the official sealer or his duly authorized representative asan acknowledgment that the instrument for determining weight ormeasure has been fully tested, calibrated, sealed or inspected;

d) for any person to make or knowingly sell or use any falseor counterfeit seal, sticker, brand, stamp, tag, certificate or licenseor any dye for printing or making the same or any characteristic signused to indicate that such instrument of weight or measure has beenofficially tested, calibrated, sealed or inspected;

e) for any person other than the official sealer or his duly au-thorized representative to alter the written or printed figures, let-ters or symbols on any official seal, sticker, receipt, stamp, tag, cer-tificate or license used or issued;

f) for any person to use or reuse any restored, altered, expired,damaged stamp, tag certificate or license for the purpose of mak-ing it appear that the instrument of weight or measure has beentested, calibrated, sealed or inspected;

Arts. 63, 64

535

g) for any person engaged in the buying and selling of con-sumer products or of furnishing services the value of which esti-mated by weight or measure to possess, use or maintain with inten-tion to use any scale, balance, weight or measure that has not beensealed or if previously sealed, the license therefor has expired andhas not been renewed in due time;

h) for any person to fraudulently alter any scale, balance,weight or measure after it is officially sealed;

i) for any person to knowingly use any false scale, balance,weight or measure, whether sealed or not;

j) for any person to fraudulently give short weight or meas-ure in the making of a scale;

k) for any person, assuming to determine truly the weight ormeasure of any article bought or sold by weight or measure, tofraudulently misrepresent the weight or measure thereof; or

l) for any person to produce the commission of any suchoffense above-mentioned by another.

Instruments officially sealed at some previous time which have re-mained unaltered and accurate and the seal or tag officially affixedthereto remains intact and in the same position and condition in whichit was placed by the official sealer or his duly authorized representa-tive shall, if presented for sealing, be sealed promptly on demand bythe official sealer or his authorized representative without penalty ex-cept a surcharge fixed by law or regulation.

ART. 65. Penalties. — a) Any person who shall violate the provisionsof paragraphs (a) to (f) and paragraph (l) of Article 64 or its implement-ing rules and regulations shall, upon conviction, be subject to a fine ofnot less than Two hundred pesos (P200.00) but not more than One thou-sand pesos (P1,000.00) or by imprisonment of not more than one (1) yearor both upon the discretion of the Court.

b) Any person who shall violate the provisions of paragraph (g)of Article 64 for the first time shall be subject to a fine of not less thanFive hundred pesos (P500.00) or by imprisonment of not less than one(1) month but not more than five (5) years or both, upon the discretionof the Court.

c) The owner-possessor or user of instrument of weight and meas-ure enumerated in paragraphs (h) to (k) of Article 64 shall, upon con-viction, be subject to a fine of not less than Three hundred pesos (P300.00)or imprisonment not exceeding one (1) year, or both, upon the discre-tion of the Court.


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x x x x x x

ART. 67. Applicable Law on Warranties. — The provisions of the CivilCode on conditions and warranties shall govern all contracts of sale withconditions and warranties.

ART. 68. Additional Provisions on Warranties. — In addition to theCivil Code provisions on sale with warranties, the following provisionsshall govern the sale of consumer products with warranty:

a) Terms of express warranty — Any seller or manufacturer whogiven an express warranty shall:

1) set forth the terms of warranty in clear and readily un-derstandable language and clearly identify himself as the war-rantor;

2) identify the party to whom the warranty is extended;

3) state the products or parts covered;

4) state what the warrantor will do in the event of a de-fect, malfunction or failure to conform to the written warrantyand at whose expense;

5) state what the consumer must do to avail of the rightswhich accrue to the warranty; and

6) stipulate the period within which, after notice of defect,malfunction or failure to conform to the warranty, the warran-tor will perform any obligation under the warranty.

b) Express warranty — operative from moment of sale. — Allwritten warranties or guarantees issued by a manufacturer, pro-ducer, or importer shall be operative from the moment of sale.

1) Sales Report. — All sales made by distributor of prod-ucts covered by this Article shall be reported to the manufac-turer, producer, or importer of the product sold within thirty (30)days from date of purchase, unless otherwise agreed upon. Thereport shall contain, among others, the date of purchase, modelof the product bought, its serial number, name and address ofthe buyer. The report made in accordance with this provisionshall be equivalent to a warranty registration with the manu-facturer, producer, or importer. Such registration is sufficient tohold the manufacturer, producer, or importer liable, in appro-priate cases, under its warranty.

2) Failure to make or send report. — Failure of the distribu-tor to make the report or send them the form required by themanufacturer, producer, or importer shall relieve the latter of

Arts. 67-68

537

its liability under the warranty: Provided, however, That the dis-tributor who failed to comply with its obligation to send thesales report shall be personally liable under the warranty. Forthis purpose, the manufacturer shall be obligated to make goodthe warranty at the expense of the distributor.

3) Retail. — The retailer shall be subsidiarily liable underthe warranty in case of failure of both the manufacturer and dis-tributor to honor the warranty. In such case, the retailer shallshoulder the expenses and costs necessary to honor the war-ranty. Nothing therein shall prevent the retailer from proceed-ing against the distributor or manufacturer.

4) Enforcement of warranty or guarantee. — The warrantyrights can be enforced by presentment of a claim. To this end,the purchaser need only to present to the immediate seller ei-ther the warranty card or the official receipt along with the prod-uct to be serviced or returned to the immediate seller. No otherdocumentary requirement shall be demanded from the pur-chaser. If the immediate seller is the manufacturer’s factory orshowroom, the warranty shall immediately be honored. If theproduct was purchased from a distributor, the distributor shalllikewise immediately honor the warranty. In the case of a re-tailer other than the distributor, the former shall take responsi-bility without cost to the buyer of presenting the warranty claimto the distributor in the consumer’s behalf.

5) Record of purchases. — Distributors and retailers coveredby this Article shall keep a record of all purchases covered by awarranty or guarantee for such period of time correspondingto the lifetime of the products’ respective warranties or guar-antees.

6) Contrary stipulations; null and void. — All covenants,stipulations or agreements contrary to the provisions of thisArticle shall be without legal effect.

c) Designation of warranties. — A written warranty shall clearlyand conspicuously designate such warranty as:

1) “Full warranty’’ if the written warranty meets the mini-mum requirements set forth in paragraph (d); and

2) “Limited warranty’’ if the written warranty does notmeet such minimum requirements.d) Minimum standards for warranties. — For the warrantor of a

consumer product to meet the minimum standards for warranty, heshall:


538 SALES

1) remedy such consumer product within a reasonabletime and without charge in case of a defect, malfunction or fail-ure to conform to such written warranty;

2) permit the consumer to elect whether to ask for a refundor replacement without charge of such product or part, as thecase may be, where after reasonable number of attempts to rem-edy the defect or malfunctions, the product continues to havethe defect or to malfunction.

The warrantor will not be required to perform the aboveduties if he can show that the defect, malfunction or failure toconform to a written warranty was caused by damage due tounreasonable use thereof.

e) Duration of warranty. — The seller and the consumer maystipulate the period within which the express warranty shall beenforceable. If the implied warranty on merchantability accompa-nies an express warranty, both will be of equal duration.

Any other implied warranty shall endure not less than sixty (60)days nor more than one (1) year following the sale of new consumerproducts.

f) Breach of warranties. — 1) In case of breach of express war-ranty, the consumer may elect to have the goods repaired or itspurchase price refunded by the warrantor. In case the repair of theproduct in whole or in part is elected, the warranty work must bemade to conform to the express warranty within thirty (30) days byeither the warrantor or his representative. The thirty-day period,however, may be extended by conditions which are beyond thecontrol of the warrantor or his representative. In case the refund ofthe purchase price is elected, the amount directly attributable to theuse of the consumer prior to the discovery of the nonconformityshall be deducted.

2) In case of breach of implied warranty, the consumermay retain in the goods and recover damages, or reject thegoods, cancel and contract and recover from the seller so muchof the purchase price as has been paid, including damages.

ART. 69. Warranties in Supply of Services. — a) In every contract forthe supply of services to a consumer made by a seller in the course of abusiness, there is an implied warranty that the services will be renderedwith due care and skill and that any material supplied in connectionwith such services will be reasonably fit for the purpose for which it issupplied.

Art. 69

539

b) Where a seller supplies consumer services in the course of abusiness and the consumer, expressly or by implication, makes knownto the seller the particular purpose for which the services are required,there is an implied warranty that the services supplied under the con-tract and any material supplied in connection therewith will be reason-ably fit for that purpose or are of such a nature or quality that they mightreasonably be expected to achieve that result, unless the circumstancesshow that the consumer does not rely or that it is unreasonable for himto rely, on the seller’s skill or judgment.

SEC. 70. Professional Services. — The provisions of this Act on war-ranty shall not apply to professional services of certified public account-ants, architects, engineers, lawyers, veterinarians, optometrists, phar-macists, nurses, nutritionists, dietitians, physical therapists, salesmen,medical and dental practitioners and other professionals engaged intheir respective professional endeavors.

ART. 71. Guaranty of Service Firms. — Service firms shall guaranteeworkmanship and replacement of spare parts for a period not less thanninety (90) days which shall be indicated in the pertinent invoices.

ART. 72. Prohibited Acts. — The following acts are prohibited: a) re-fusal without any valid legal cause by the local manufacturer or anyperson obligated under the warranty or guarantee to honor a warrantyor guarantee issued;

b) unreasonable delay by the local manufacturer or any personobligated under the warranty or guarantee in honoring the warranty;

c) removal by any person of a product’s warranty card for thepurpose of evading said warranty obligation;

d) any false representation in an advertisement as to the existenceof a warranty or guarantee.

ART. 73. Penalties. — a) Any person who shall violate the provisionsof Article 67 shall be subject to a fine of not less than Five hundred pe-sos (P500.00) but not more than Five thousand pesos (P5,000.00) or animprisonment of not less than three (3) months but not more than two(2) years or both, upon the discretion of the Court. A second convictionunder this paragraph shall also carry with it the penalty of revocationof his business permit and license.

b) Any person, natural or juridical, committing any of the illegalacts provided for in Chapter III, except with respect to Article 67, shallbe liable for a fine of not less than One thousand pesos (P1,000.00) butnot more than Fifty thousand pesos (P50,000.00) or imprisonment for a

Arts. 70-73 4. CONSUMER ACT OF THE PHILIPPINES

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period of at least one (1) year but not more than five (5) years, or both,at the discretion of the Court.

The imposition of any of the penalties herein provided is withoutprejudice to any liability incurred under the warranty or guarantee.

x x x x x x

ART. 76. Prohibited Acts on Labelling and Packaging. — It shall beunlawful for any person, either as principal or agent, engaged in thelabeling or packaging of any consumer product, to display or distrib-ute or to cause to be displayed or distributed in commerce any consumerproduct whose package or label does not conform to the provisions ofthis Chapter.

The prohibition in this Chapter shall not apply to persons engagedin the business of wholesale or retail distributors of consumer productsexcept to the extent that such persons:

a) are engaged in the packaging or labeling of such products;

b) prescribe or specify by any means the manner in which suchproducts are packaged or labeled; or

c) having knowledge, refuse to disclose the source of themislabeled or mispackaged products.

x x x x x x

SEC. 81. Price Tag Requirement. — It shall be unlawful to offer anyconsumer product for retail sale to the public without an appropriateprice tag, label or marking publicly displayed to indicate the price ofeach article and said products shall not be sold at a price higher thanthat stated therein and without discrimination to all buyers: Provided,That lumber sold, displayed or offered for sale to the public shall betagged or labeled by indicating thereon the price and the correspondingofficial name of the wood: Provided, further, That if consumer productsfor sale are too small or the nature of which makes it impractical to placea price tag thereon price list placed at the nearest point where the prod-ucts are displayed indicating the retail price of the same may suffice.

ART. 82. Manner of Placing Price Tags. — Price tags, labels or mark-ings must be written clearly, indicating the price of the consumer prod-uct per unit in pesos and centavos.

ART. 83. Regulations for Price Tag Placement. — The concerned de-partment shall prescribe rules and regulations for the visible placementof price tags for specific consumer products and services. There shallbe no erasures or alterations of any sort of price tags, labels or mark-ings.

Arts. 76, 81-83

541

x x x x x x

ART. 95. Penalties. — a) Any person who shall violate the provisionsof Title III, Chapter IV of this Act, or its implementing rules and regula-tions, except Articles 81 to 83 of the same Chapter, shall be subject to afine of not less than Five hundred pesos (P500.00) but not more thanTwenty thousand pesos (P20,000.00) or imprisonment of not less thanthree (3) months but not more than two (2) years or both, at the discre-tion of the Court: Provided, That, if the consumer product is one whichis not a food, cosmetic, drug, device or hazardous substance, the pen-alty shall be a fine of not less than Two hundred pesos (P200.00) but notmore than Five thousand pesos (P5,000.00) or imprisonment of not lessthan one (1) month but not more than one (1) year or both, at the discre-tion of the Court.

b) Any person who violates the provisions of Articles 81 to 83 forthe first time shall be subject to a fine of not less than Two hundred pesos(P200.00) but not more than Five thousand pesos (P5,000.00) or by im-prisonment of not less than one (1) month but not more than six (6)months or both, at the discretion of the Court. A second conviction un-der this paragraph shall also carry with it the penalty of revocation ofbusiness permit and license.

x x x x x x

ART. 97. Liability for the Defective Products. — Any Filipino or for-eign manufacturer, producer, and any importer, shall be laible for re-dress, independently of fault, for damages caused to consumers by de-fects resulting from design, manufacturer, construction, assembly anderection formulas and handling and making up, presentation or pack-ing of their products, as well as for the insufficient or inadequate infor-mation on the use and hazardous thereof.

A product is defective when it does not offer the safety rightfullyexpected of it, taking relevant circumstances into consideration, includ-ing but not limited to:

a) presentation of product;

b) use and hazardous reasonably expected of it;

c) the time it was put into circulation.

A product is not considered defective because another better qual-ity product has been placed in the market.

The manufacturer, builder, producer or importer shall not be heldliable when it evidences:

a) that it did not place the product on the market;


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b) that although it did place the product on the market suchproduct has no defect;

c) that the consumer or a third party is solely at fault.

ART. 98. Liability of Tradesman or Seller. — The tradesman/seller islikewise liable, pursuant to the preceding article when:

a) it is not possible to identify the manufacturer, builder, pro-ducer or importer;

b) the product is supplied, without clear identification of themanufacturer, producer, building or importer;

c) he does not adequately preserve perishable goods. Theparty making payment to the damaged party may exercise the rightto recover a part of the whole of the payment made against the otherresponsible parties, in accordance with their part or responsibilityin the cause of the damage effected.

ART. 99. Liability for Defective Services. — The service supplier is li-able for redress, independently of fault, for damages caused to consum-ers by defects relating to the rendering of the services, as well as forinsufficient or inadequate information on the fruition and hazardsthereof.

The service is defective when it does not provide the safety the con-sumer may rightfully expect of it, taking the relevant circumstances intoconsideration, including but not limited to:

a) the manner in which it is provided;

b) the result of hazards which may reasonably be expected ofit;

c) the time when it was provided.

A service is not considered defective because of the use or introduc-tion of new techniques.

The supplier of the services shall not be held liable when it is proven:

a) that there is no defect in the service rendered;

b) that the consumer or third party is solely at fault.

ART. 100. Liability for Product and Service Imperfection. — The sup-pliers of durable or nondurable consumer products are jointly liable forimperfections in quality that render the products unfit or inadequatefor consumption for which they are designed or decrease their value,and for those resulting from inconsistency with the information pro-vided on the container, packaging, labels or publicity messages/adver-

Arts. 98-100

543

tisement, with due regard to the variations resulting from their nature,the consumer being able to demand replacement to the imperfect parts.

If the imperfection is not corrected within thirty (30) days, the con-sumer may alternatively demand at his option:

a) the replacement of the product by another of the same kind,in a perfect state of use;

b) the immediate reimbursement of the amount paid, withmonetary updating, without prejudice to any losses and damages;

c) a proportionate price reduction.

The parties may agree to reduce or increase the term specified inthe immediately preceding paragraph; but such shall not be less thanseven (7) nor more than one hundred and eighty (180) days.

The consumer may make immediate use of the alternatives underthe second paragraph of this Article when by virtue of the extent of theimperfection, the replacement of the imperfect parts may jeopardize theproduct quality or characteristics, thus decreasing its value.

If the consumer opts for the alternative under sub-paragraph (a) ofthe second paragraph of this Article and replacement of the product isnot possible, it may be replaced by another of a different kind, mark ormodel: Provided, That any difference in price may result thereof shall besupplemental or reimbursed by the party which caused the damage,without prejudice to the provisions of the second, third and fourth para-graphs of this Article.

ART. 101. Liability for Product Quantity Imperfection. — Suppliers arejointly liable for imperfections in the quantity of the product when, indue regard for variations inherent thereto, their net content is less thanthat indicated on the container, packaging, labeling or advertisement,the consumer having powers to demand, alternatively, at his own op-tion.

a) the proportionate price;

b) the supplementing of weight or measure differential;

c) the replacement of the product by another of the same kind,mark or model, without said imperfections;

d) the immediate reimbursement of the amount paid, withmonetary updating without prejudice to losses and damages, if any.

The provisions of the fifth paragraph of Article 99 shall apply to thisArticle.

The immediate supplier shall be liable if the instrument used for


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weighing or measuring is not gauged in accordance with official stand-ards.

ART. 102. Liability for Service Quality Imperfection. — The servicesupplier is liable for any quality imperfections that render the servicesimproper for consumption or decrease their value, and for those result-ing from inconsistency with the information contained in the offer oradvertisement, the consumer being entitled to demand alternatively athis option:

a) the performance of the services, without any additional costand when applicable;

b) the immediate reimbursement of the amount paid, withmonetary updating without prejudice to losses and damages, if any;

c) a proportionate price reduction.

Reperformance of services may be entrusted to duly qualified thirdparties, at the supplier’s risk and cost.

Improper services are those which prove to be inadequate for pur-poses reasonably expected of them and those that fail to meet the pro-visions of this Act regulating service rendering.

ART. 103. Repair Service Obligation. — When services are providedfor the repair of any product, the supplier shall be considered implic-itly bound to use adequate, new, original replacement parts, or thosethat maintain the manufacturer’s technical specifications unless, other-wise authorized, as regards to the latter by the consumer.

ART. 104. Ignorance of Quality Imperfection. — The supplier’s igno-rance of the quality imperfections due to inadequacy of the productsand services does not exempt him from any liability.

ART. 105. Legal Guarantee of Adequacy. — The legal guarantee ofproduct or service adequacy does not require an express instrument orcontractual exoneration of the supplier being forbidden.

ART. 106. Prohibition in Contractual Stipulation. — The stipulation ina contract of a clause preventing, exonerating or reducing the obliga-tion to indemnify for damages effected, as provided for in this and inthe preceding Articles, is hereby prohibited, if there is more than oneperson responsible for the cause of the damage, they shall be jointly li-able for the redress established in the pertinent provisions of this Act.However, if the damage is caused by a component or part incorporatedin the product or service, its manufacturer, builder or importer and theperson who incorporated the component or part are jointly liable.

Arts. 102-106

545

ART. 107. Penalties. — Any person who shall violate any provisionof this Chapter or its implementing rules and regulations with respectto any consumer product which is not food, cosmetic, or hazardoussubstance shall upon conviction, be subject to a fine of not less than Fivethousand pesos (P5,000.00) and by imprisonment of not more than one(1) year or both upon the discretion of the Court.

In case of judicial persons, the penalty shall be imposed upon itspresident, manager or head. If the offender is an alien, he shall, afterpayment of fine and service of sentence, be deported without furtherdeportation proceedings.

x x x x x x

ART. 110. False, Deceptive or Misleading Advertisement. — It shall beunlawful for any person to disseminate or to cause the disseminationof any false, deceptive or misleading advertisement by Philippine mailor in commerce by print, radio, television, outdoor advertisement orother medium for the purpose of inducing or which is likely to inducedirectly or indirectly the purchase of consumer products or services.

An advertisement shall be false, deceptive or misleading if it is notin conformity with the provisions of this Act or if it is misleading in amaterial respect. In determining whether any advertisement is false,deceptive or misleading, there shall be taken into account, among otherthings, not only representations made or any combination thereof, butalso the extent to which the advertisement fails to reveal material factsin the light of such representations, or materials with respect to conse-quences which may result from the use or application of consumer prod-ucts or services to which the advertisement relates under the conditionsprescribed in said advertisement, or under such conditions as are cus-tomary or usual.

ART. 111. Price Comparisons. — Comparative price advertising bysellers of consumer products or services shall conform to the followingconditions: a) Where the comparison relates to a former price of theseller, the item compared shall either have been sold at that price withinthe ninety (90) days immediately preceding the date of the advertise-ment, or it shall have been offered for sale at least four (4) weeks duringsuch ninety-day period. If the comparison does not relate to an item soldor offered for sale during the ninety-day period, the date, time or sea-sonal period of such sale or offer shall be disclosed in the advertisement.

b) Where the comparison relates to a seller’s future price, the fu-ture price shall take effect on the date disclosed in the advertisement orwithin ninety (90) days after the price comparison is stated in the ad-vertisement. The stated future price shall be maintained by the seller

Arts. 107, 110-111 4. CONSUMER ACT OF THE PHILIPPINES

546 SALES

for a period of at least four (4) weeks after its effective date: Provided,That compliance thereof may be dispensed with in case of circumstancesbeyond the seller’s control.

c) Where the comparison relates to a competitor’s price, the com-petitor’s price shall relate to the consumer products or services adver-tised or sold in the ninety-day period and shall be representative of theprices similar consumer products or services are sold or advertised inthe locality where the price comparison was made.

ART. 112. Special Advertising Requirements for Food, Drug, Cosmetic,Device, or Hazardous Substance. — a) No claim in the advertisement maybe made which is not contained in the label or approved by the con-cerned department.

b) No person shall advertise any food, drug, cosmetic, device orhazardous substance in a manner that is false, misleading or deceptiveor is likely to create an erroneous impression regarding its character,value, quantity, composition, merit, or safety.

c) Where a standard has been prescribed for a food, drug, cosmetic,or device, no person shall advertise any article or substance in such amanner that it is likely to be mistaken for such product, unless the arti-cle complies with the prescribed standard or regulation.

d) No person shall, in the advertisement of any food, drug, cos-metic, device, or hazardous substance, make use of any reference to anylaboratory report of analysis required to be furnished to the concerneddepartment, unless such laboratory report is duly approved by suchdepartment.

e) Any businessman who is doubtful as to whether his advertise-ment relative to food, drug, cosmetic, device, or hazardous substancewill violate or does not conform with this Act or the concerned depart-ment’s pertinent rules and regulations may apply to the same for con-sideration and opinion on such matter before such advertisement isdisseminated to the public. In this case, the concerned department shallgive its opinion and notify the applicant of its action within thirty (30)days from the date of application; otherwise, the application shall bedeemed approved.

f) No person shall advertise any food, drug, cosmetic, device, orhazardous substance unless such product is duly registered and ap-proved by the concerned department for use in any advertisement.

ART. 113. Credit Advertising. — No advertisement to aid, promote,or assist, directly or indirectly, any extension of consumer creditmay:

Arts. 112-113

547

a) state that a specific periodic consumer credit amount orinstallment amount can be arranged, unless the creditor usually andcustomarily arranges credit payment or installments for that periodand in that amount; and

b) state that a specified down payment is required in exten-sion of consumer credit, unless the credit usually or customarilyarranges down payment in that amount.

ART. 114. Advertising of Open-end Credit Plan. — In case of an open-end credit plan, the rate of interest and other material features of theplan shall be disclosed in the advertisement.

ART. 115. Special Claims. — Any advertisement which makes spe-cial claims shall:

a) substantiate such claims; and

b) properly use research results, scientific terms, statistics orquotations.

x x x x x x

SEC. 123. Penalties. — a) Any person, association, partnership orcorporation who shall violate any of the provisions of Articles 110 to115 shall, upon conviction, be subject to a fine of not less than Five hun-dred pesos (P500.00) but not more than Five thousand pesos (P5,000.00)or an imprisonment of not less than one (1) month but not more thansix (6) months or both upon the discretion of the Court.

x x x x x x

ART. 147. Penalties. — Any creditor who is connection with any credittransaction fails to disclose to any person any information in violationof this Chapter or the implementing rules and regulations issued there-under shall be liable to such person in the amount of One thousand pe-sos (P1,000.00) or in amount equal to twice the finance charges requiredby such creditor in connection with such transaction, whichever is greater,except that such liability shall not exceed Three thousand pesos(P3,000.00) for any credit transaction and actual damages with the non-disclosure of the required information. Action to recover such penaltymay be brought by such person within one (1) year from the date of theoccurrence of the violation in any court of competent jurisdiction.

x x x x x x

ART. 173. Effectivity. — This Act shall take effect thirty (30) days fromthe date of its publication in the Official Gazette. (Published on June 15,1992, Vol. 88, No. 24, pp. 3639-3715.)

Approved, April 13, 1992.

Arts. 114-115, 123, 147, 173 4. CONSUMER ACT OF THE PHILIPPINES

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5. MANUFACTURE, IMPORTATION, DISTRIBUTIONAND SALE OF LAUNDRY AND INDUSTRIAL

DETERGENTS CONTAINING HARDSURFACTANTS

(R.A. No. 8970)

Section 1. Declaration of Policy. — It is hereby declared a policy ofthe State to protect, secure and safeguard the citizenry from the dangerand harmful effects of pollution as seen from the influx of imported de-tergents containing hard surfactants, a substance found to be a waterpollutant; for their physical and mental well-being and, in the end,pursue a vigorous campaign against the manufacture, importation, dis-tribution and sale of laundry and industrial detergents containing theharmful substance; and finally provide for its complete prohibition.

Sec. 2. Definition of Terms. — As used in this Act:

(a) “Hard Surfactants” shall refer to surfactants with low biode-gradability rate including chemicals such as hard or branded alkylbenzene, hard or branched alkyl benzene surfactants, hard orbranded dodecyl benzene sulfonates, branched dodecyl benzene,their sodium or potassium salts and other technical names referringto the same chemical compound;

(b) “Industrial detergent” shall refer to any cleaning product notdesigned for laundering different fabrics in the family wash but ismostly used in the manufacturing industry, such as but not limitedto the beverage industry, textile industry, meat, fish and fruit can-ning, dairy product processing and food processing industry;

(c) “Laundry detergent” shall refer to a product containing a sur-factant and other ingredients, formulated to clean and care for themany different fabrics in the family wash; and

(d) “Natural oleochemical” shall refer to chemicals derived fromprocessing plant-based natural oils such as but not limited to coco-nut, palm, palm kernel, sunflower, and grapeseed.

Sec. 3. Labels. — In addition to the requirements for the labeling ofproducts pursuant to Republic Act No. 7394, otherwise known as “TheConsumer Act of the Philippines,” all laundry and industrial detergentlabels must contain the following information legibly written or printedwith indelible ink: (a) name of product; (b) name of trade name andaddress of the person or company producing, importing or marketing

Secs. 1-3

549

the product; and (c) statement of the manufacturer or importer that theproduct does not contain hard surfactants.

Sec. 4. Prohibition. — The manufacture, importation, distributionand/or sale of laundry and industrial detergents containing hardsurfactants are hereby declared prohibited. The Bureau of Product Stand-ards shall review and revise the mandatory Philippine National Stand-ard for “Surface Active Agents-Synthetic Detergents for Laundry Use”in accordance with this Act and monitor compliance therewith.

For this purpose, the Bureau of Product Standards shall inspect laun-dry and industrial detergents, whether imported or locally-manufac-tured, to ensure that they are free from hard surfactants.

Sec. 5. Administrative Sanctions. — Any violation of this Act shall con-stitute a violation of a trade and industry law subject to the provisionsof Executive Order No. 913 dated 7 October 1983, as amended. The Bu-reau of Product Standards shall have the authority recommend, pursu-ant to Executive Order No. 913, as amended, the imposition of the ad-ministrative sanctions enumerated therein against the manufacturer,importer, distributor, and seller of laundry and industrial detergentscontaining hard surfactants.

In addition to the administrative sanctions imposable under Execu-tive Order No. 913, as amended, the Bureau of Product Standards ishereby authorized to recommend the imposition of the fines in case ofviolation of this Act as set forth in the following schedule:

(i) First Offense, a fine of Two hundred thousand pesos(P200,000.00);

(ii) Second Offense committed within one (1) year from the firstoffense, a fine of Three hundred thousand pesos (P300,000.00); and

(iii) Third offense committed within one (1) year from the sec-ond offense, a fine of Five hundred thousand pesos (P500,000.00).

The imposition of the foregoing administrative sanctions shall bewithout prejudice to the cancellation of the manufacturer’s license tooperate and/or the Product Standards Quality Mark pursuant to Re-public Act No. 4109, as amended.

Sec. 6. Penalties. — Any person who manufactures, imports, distrib-utes or sells laundry and industrial detergents found containing hardsurfactants shall be penalized by imprisonment of less than one (1) yearnor more than five (5) years and/or fine of not less than Five hundredthousand pesos (PhP500,000.00) nor more than One million pesos(PhP1,000,000.00), at the discretion of the court: Provided, That if theviolator is a corporation, firm, partnership or association, the penalty

Secs. 4-6 5. MANUFACTURE, IMPORTATION, DISTRIBUTION AND SALEOF LAUNDRY AND INDUSTRIAL DETERGENTS CONTAINING

HARD SURFACTANTS

550 SALES

shall be imposed upon the president or the manager or any officerthereof who knows or ought to have known the commission of theoffense: Provided, finally, That in case the guilty officer is a foreigner, heshall be immediately deported after service of sentence.

Sec. 7. Rules and Regulations. — The Bureau of Product Standards,in consultation with the relevant departments or agencies of the nationalgovernment such as, but not limited to, Environment ManagementBureau (EMB) of the Department of Environment and Natural Re-sources, Bureau of Customs (BOC), Bureau of Trade Regulations andConsumer Protection (BTRCP), shall issue the rules and regulations forthe effective implementation of this Act. Without prejudice to the con-stitutional right of every citizen to be safe from unreasonable search andseizure, the rules and regulations shall include the authority to conducta product check and inspection of establishments involved in the manu-facture, importation, distribution and sale of laundry and industrial de-tergents containing hard surfactants. Product check and inspection ofestablishments shall be conducted during business hours and the in-spection team shall be accompanied by two (2) responsible officers ofthe manufacturers.

Sec. 8. Fiscal Incentives. — The Board of Investments (BOI) may grantfiscal incentives to local manufacturers and processors who develop andmodernize their processing plants to produce coconut-based and othernatural oleochemical biodegradable surfactants. This shall not be lim-ited to assistance and incentives in the exportation of their products.

x x x x x x

Sec. 11. Effectivity. — This Act shall take effect fifteen (15) days afterits complete publication in the Official Gazette or in two (2) newspa-pers of general circulation, whichever comes earlier.

Approved, October 31, 2000.

6. COMPREHENSIVE DANGEROUS DRUGSACT OF 2002

(R.A. No. 9165)

x x x x x x

Sec. 4. Importation of Dangerous Drugs and/or Controlled Precursors andEssential Chemicals. — The penalty of life imprisonment to death and aranging from Five hundred thousand pesos (P500,000.00) to Ten mil-lion pesos (P10,000,000.00) shall be imposed upon any person, who,

Sec. 4

551

unless authorized by law, shall import or bring into the Philippines anydangerous drug, regardless of the quantity and purity involved, includ-ing any and all species of opium poppy or any part thereof or substancesderived therefrom even for floral, decorative and culinary purposes.

The penalty of imprisonment ranging from twelve (12) years andone (1) day to twenty (20) years and a fine ranging from One hundredthousand pesos (P100,000.00) to Five hundred thousand pesos(P500,000.00) shall be imposed upon any person, who, unless author-ized by law, shall import any controlled precursor and essential chemi-cal.

The maximum penalty provided for under this Section shall be im-posed upon any person, who, unless authorized under this Act, shallimport or bring into the Philippines any dangerous drug and/or con-trolled precursor and essential chemical through the use of a diplomaticpassport, diplomatic facilities or any other means involving his/herofficial status intended to facilitate the unlawful entry of the same. Inaddition, the diplomatic passport shall be confiscated and canceled.

The maximum penalty provided for under this Section shall be im-posed upon any person, who organizes, manages or acts as a “finan-cier” of any of the illegal activities prescribed in this Section.

The penalty of twelve (12) years and one (1) day to twenty (20) yearsof imprisonment and a fine ranging from One hundred thousand pesos(P100,000.00) to Five hundred thousand pesos (P500,000.00) shall beimposed upon any person, who acts as a “protector/coddler” of anyviolator of the provisions under this Section.

Sec. 5. Sale, Trading, Administration, Dispensation, Delivery, Distribu-tion and Transportation of Dangerous Drugs and/or Controlled Precursors andEssential Chemicals. — The penalty of life imprisonment to death and afine ranging from Five hundred thousand pesos (P500,000.00) to Tenmillion pesos (P10,000,000.00) shall be imposed upon any person, who,unless authorized by law, shall sell, trade, administer, dispense, deliver,give away to another, distribute dispatch in transit or transport anydangerous drug, including any and all species of opium poppy regard-less of the quantity and purity involved, or shall act as a broker in anyof such transactions.

The penalty of imprisonment ranging from twelve (12) years andone (1) day to twenty (20) years and a fine ranging from One hundredthousand pesos (P100,000.00) to Five hundred thousand pesos(P500,000.00) shall be imposed upon any person, who, unless author-ized by law, shall sell, trade, administer, dispense, deliver, give away to

Sec. 5 6. COMPREHENSIVE DANGEROUS DRUGS ACT OF 2002

552 SALES

another, distribute, dispatch in transit or transport any controlled pre-cursor and essential chemical, or shall act as a broker in such transac-tions.

If the sale, trading, administration, dispensation, delivery, distribu-tion or transportation of any dangerous drug and/or controlled precur-sor and essential chemical transpires within one hundred (100) metersfrom the school, the maximum penalty shall be imposed in every case.

For drug pushers who use minors or mentally incapacitated indi-viduals as runners, couriers and messengers, or in any other capacitydirectly connected to the dangerous drugs and/or controlled precur-sors and essential chemical trade, the maximum penalty shall be im-posed in every case.

If the victim of the offense is a minor or a mentally incapacitatedindividual, or should a dangerous drug and/or a controlled precursorand essential chemical involved in any offense herein provided be theproximate cause of death of a victim thereof, the maximum penalty pro-vided for under this Section shall be imposed.

The maximum penalty provided for under this Section shall be im-posed upon any person who organizes, manages or acts as a “financier”of any of the illegal activities prescribed in this Section.

The penalty of twelve (12) years and one (1) day to twenty (20) yearsof imprisonment and a fine ranging from One hundred thousand pesos(P100,000.00) to Five hundred thousand pesos (P500,000.00) shall beimposed upon any person, who acts as a “protector/coddler” of anyviolator of the provisions under this Section.

Sec. 6. Maintenance of a Den, Dive or Resort. — The penalty of life im-prisonment to death and a fine ranging from Five hundred thousandpesos (P500,000.00) to Ten million pesos (P10,000,000.00) shall be im-posed upon any person or group of persons who shall maintain a den,dive or resort where any dangerous drug is used or sold in any form.

The penalty of imprisonment ranging from twelve (12) years andone (1) day to twenty (20) years and a fine ranging from One hundredthousand pesos (P100,000.00) to Five hundred thousand pesos(P500,000.00) shall be imposed upon any person or group of personswho shall maintain a den, dive, or resort where any controlled precur-sor and essential chemical is used or sold in any form.

The maximum penalty provided for under this Section shall beimposed in every case where any dangerous drug is administered,delivered or sold to a minor who is allowed to use the same in such aplace.

Sec. 6

553

Should any dangerous drug be the proximate cause of the death ofa person using the same in such den, dive or resort, the penalty of deathand a fine ranging from One million pesos (P1,000,000.00) to Fifteenmillion pesos (P15,000,000.00) shall be imposed on the maintainer, ownerand/or operator.

If such den, dive or resort is owned by a third person, the same shallbe confiscated and escheated in favor of the government: Provided, Thatthe criminal complaint shall specifically allege that such place is inten-tionally used in the furtherance of the crime: Provided, further, That theprosecution shall prove such intent on the part of the owner to use theproperty for such purpose: Provided, finally, That the owner shall be in-cluded as an accused in the criminal complaint.

The maximum penalty provided for under this Section shall be im-posed upon any person who organizes, manages or acts as a “financier”of any of the illegal activities prescribed in this Section.

The penalty twelve (12) years and one (1) day to twenty (20) yearsof imprisonment and a fine ranging from One hundred thousand pesos(P100,000.00) to Five hundred thousand pesos (P500,000.00) shall beimposed upon any person, who acts as a “protector/coddler” of anyviolator of the provisions under this Section.

x x x x x x

Sec. 17. Maintenance and Keeping of Original Records of Transactionson Dangerous Drugs and/or Controlled Precursors and Essential Chemicals.— The penalty of imprisonment ranging from one (1) year and one (1)day to six (6) years and a fine ranging from Ten thousand pesos(P10,000.00) to Fifty thousand pesos (P50,000.00) shall be imposed uponany practitioner, manufacturer, wholesaler, importer, distributor, dealeror retailer who violates or fails to comply with the maintenance andkeeping of the original records of transactions on any dangerous drugand/or controlled precursor and essential chemical in accordance withSection 40 of this Act.

An additional penalty shall be imposed through the revocation ofthe license to practice his/her profession, in case of a practitioner, or ofthe business, in case of a manufacturer, seller, importer, distributor,dealer or retailer.

x x x x x x

Sec. 20. Confiscation and Forfeiture of the Proceeds or Instruments of theUnlawful Act, Including the Properties or Proceeds Derived from the IllegalTrafficking of Dangerous Drugs and/or Precursors and Essential Chemicals.— Every penalty imposed for the unlawful importation, sale, trading,

Secs. 17, 20 6. COMPREHENSIVE DANGEROUS DRUGS ACT OF 2002

554 SALES

administration, dispensation, delivery, distribution, transportation ormanufacture of any dangerous drug and/or controlled precursor andessential chemical, the cultivation or culture of plants which are sourcesof dangerous drugs, and the possession of any equipment, instrument,apparatus and other paraphernalia for dangerous drugs including otherlaboratory equipment, shall carry with it the confiscation and forfeiture,in favor of the government, of all the proceeds and properties derivedfrom the unlawful act, including, but not limited to, money and otherassets obtained thereby, and the instruments or tools with which theparticular unlawful act was committed, unless they are the property ofa third person not liable for the unlawful act, but those which are not oflawful commerce shall be ordered destroyed without delay pursuantto the provisions of Section 21 of this Act.

After conviction in the Regional Trial Court in the appropriate crimi-nal case filed, the Court shall immediately schedule a hearing for theconfiscation and forfeiture of all the proceeds of the offense and all theassets and properties of the accused either owned or held by him or inthe name of some other persons if the same shall be found to be mani-festly out of proportion to his/her lawful income: Provided, however, Thatif the forfeited property is a vehicle, the same shall be auctioned off notlater than five (5) days upon order of confiscation or forfeiture.

During the pendency of the case in the Regional Trial Court, no prop-erty, or income derived therefrom, which may be confiscated and for-feited, shall be disposed, alienated or transferred and the same shall bein custodia legis and no bond shall be admitted for the release of the same.

The proceeds of any sale or disposition of any property confiscatedor forfeited under this Section shall be used to pay all proper expensesincurred in the proceedings for the confiscation, forfeiture, custody andmaintenance of the property pending disposition, as well as expensesfor publication and court costs. The proceeds in excess of the aboveexpenses shall accrue to the Board to be used in its campaign againstillegal drugs.

x x x x x x

Sec. 30. Criminal Liability of Officers of Partnerships, Corporations, As-sociations or Other Juridical Entities. — In case any violation of this Act iscommitted by a partnership, corporation, association or any juridicalentity, the partner, president, director, manager, trustee, estate admin-istrator, or officer who consents to or knowingly tolerates such viola-tion shall be held criminally liable as a co-principal.

The penalty provided for the offense under this Act shall be imposedupon the partner, president, director, manager, trustee, estate admin-

Sec. 30

555

istrator, or officer who knowingly authorizes, tolerates or consents tothe use of a vehicle, vessel, aircraft, equipment or other facility, as aninstrument in the importation, sale, trading, administration, dispensa-tion, delivery, distribution, transportation or manufacture of dangerousdrugs, or chemical diversion, if such vehicle, vessel, aircraft, equipmentor other instrument is owned by or under the control or supervision ofthe partnership, corporation, association or juridical entity to which theyare affiliated.

Sec. 31. Additional Penalty if Offender is an Alien. — In addition to thepenalties prescribed in the unlawful act committed, any alien who vio-lates such provisions of this Act shall, after service of sentence, be de-ported immediately without further proceedings, unless the penalty isdeath.

x x x x x x

Sec. 102. Effectivity. — This Act shall take effect fifteen (15) days uponits publication in at least two (2) national newspapers of general circu-lation.

Approved: June 7, 2002.

7. CHAIN SAW ACT OF 2002

(R.A. No. 9175)

x x x x x x

Sec. 2. Declaration of Policy. –– It is the policy of the State, consistentwith the Constitution, to conserve, develop and protect the forest re-sources under sustainable management. Toward this end, the State shallpursue an aggressive forest protection program geared towards elimi-nating illegal logging and other forms of forest destruction which arebeing facilitated with the use of chain saws. The State shall thereforeregulate the ownership, possession, sale, transfer, importation and/oruse of chain saws to prevent them from being used in illegal logging orunauthorized clearing of forests.

Sec. 3. Definition of Terms. –– As used in this Act, the term:

(a) “Chain saw” shall refer to any portable power saw or simi-lar cutting implement, rendered operative by an electric or internalcombustion engine or similar means, that may be used for, but is notlimited to, the felling trees or the cutting of timber;

Secs. 2-3 7. CHAIN SAW ACT OF 2002

556 SALES

(b) “Chain saw dealer” shall refer to a person, natural or juridi-cal, engaged in the manufacture, importation, distribution, purchaseand/or sale of chain saws;

(c) “Department” shall refer to the Department of Environmentand Natural Resources; and

(d) “Secretary” shall refer to the Secretary of the Department ofEnvironment and Natural Resources.

x x x x x x

Sec. 7. Penal Provisions. ––

(1) Selling, Purchasing, Reselling, Transferring, Distributing or Possess-ing a Chain Saw without a Proper Permit. –– Any person who sells, pur-chases, transfers the ownership, distributes, or otherwise disposes orpossesses a chain saw without first securing the necessary permit fromthe Department shall be punished with imprisonment of four (4) years,two (2) months and one (1) day to six years or a fine of not less thanFifteen thousand pesos (P15,000.00) but not more than Thirty thousandpesos (P30,000.00) or both at the discretion of the court, and the chainsaw/s confiscated in favor of the government.

(2) Unlawful Importation or Manufacture of Chain Saw. –– Any personwho imports or manufacture a chain saw without obtaining prior au-thorization from the Department shall be punished by imprisonmentof not less than one (1) month nor more than six (6) months and a fineof not less than One thousand pesos (P1,000.00) nor more than Fourthousand pesos (P4,000.00).

(3) Tampering of Engine Serial Number. –– Any person who is foundto have defaced or tampered with the original registered engine serialnumber of any chain saw unit shall be punished by imprisonment ofnot less than one (1) month nor more than six (6) months and a fine ofnot less than One thousand pesos (P1,000.00) nor more than Four thou-sand pesos (P4,000.00).

(4) Actual Unlawful Use of Chain Saw.�–– Any person who is found tobe in possession of a chain saw and uses the same to cut trees and tim-ber in forest land or elsewhere except as authorized by the Departmentshall be penalized with imprisonment of six (6) years and one (1) day toeight (8) years or a fine of not less than Thirty thousand pesos(P30,000.00) but not more than Fifty thousand pesos (P50,000.00) or bothat the discretion of the court without prejudice to being prosecuted fora separate offense that may have been simultaneously committed. Thechain saw unlawfully used shall be likewise confiscated in favor of thegovernment.

Sec. 7

557

If the violation under this Section is committed by or through thecommand or order of another person, partnership or corporation, thepenalties herein provided shall likewise be imposed on such other per-son, or the responsible officer(s) in such partnership or corporation.

If the offender is a public official or employee, in addition to theabove penalties, he shall be removed from office and perpetually dis-qualified from holding any public office.

The chain saws confiscated under this Section shall be sold at pub-lic auction to qualified buyers and the proceeds thereof shall go to theDepartment.

x x x x x x

Sec. 15. Effectivity. –– This Act shall take effect fifteen (15) days afterits complete publication in the Official Gazette or in at least two nationalnewspaper of general circulation, whichever comes earlier.

Approved: November 7, 2002.

8. TOBACCO REGULATION ACT OF 2003

(R.A. No. 9211)

x x x x x x

Sec. 2. Policy. — It is the policy of the State to protect the populacefrom hazardous products and promote the right to health and instillhealth consciousness among them. It is also the policy of the State, con-sistent with the Constitutional ideal to promote the general welfare, tosafeguard the Interests of the workers and other stakeholders in the to-bacco industry. For these purposes, the government shall institute abalanced policy whereby the use, sale, and advertisements of tobaccoproducts shall be regulated in order to promote a healthful environmentand protect the citizens from the hazards of tobacco smoke, and at thesame time ensure that the interest of tobacco farmers, growers, work-ers and stakeholders are not adversely compromised.

Sec. 3. Purpose. — It is the main thrust of this Act to:

a. Promote a healthful environment;

b. Inform the public of the health risks associated with ciga-rette smoking and tobacco use;

c. Regulate and subsequently ban all tobacco advertisementsand sponsorships;

Secs. 2-3 8. TOBACCO REGULATION ACT OF 2003

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d. Regulate the labeling of tobacco products;

e. Protect the youth from being initiated to cigarette smokingand tobacco use by prohibiting the sale of tobacco products to mi-nors;

f. Assist and encourage Filipino tobacco farmers to cultivatealternative agricultural crops to prevent economic dislocation; and

g. Create an Inter-Agency Committee on Tobacco (IAC-To-bacco) to oversee the implementation of the provision of this Act.

x x x x x x

Sec. 9. Minimum Age Sales. — Under this Act, It shall be unlawful:

a. For any retailer or tobacco products to sell or distribute to-bacco products to any minor;

b. For any person to purchase cigarettes or tobacco productsfrom a minor;

c. For a minor to sell or buy cigarettes or any tobacco prod-ucts; and

d. For a minor to smoke cigarettes or any other tobacco prod-ucts.

It shall not be a defense for the person selling or distributing thathe/she did not know or was not aware of the real age of the minor.Neither shall it be a defense that he/she did not know nor had anyreason to believe that the cigarette or any other tobacco product wasfor the consumption of the minor to whom it was sold.

Sec. 10. Sale of Tobacco Products Within School Perimeters. — The saleor distribution of tobacco products is prohibited within one hundred(100) meters from any point of the perimeter of a school, public play-ground or other facility frequented particularly by minors.

Sec. 11. Signage. — Point-of-Sale establishments offering, distribut-ing or selling tobacco products to consumers, shall post the followingstatement in a clear and conspicuous manner: “SALE/DISTRIBUTIONTO OR PURCHASE BY MINORS OF TOBACCO PRODUCTS IS UN-LAWFUL” or “IT IS LAWFUL FOR TOBACCO PRODUCTS TO BESOLD/DISTRIBUTED TO OR PURCHASED BY PERSONS UNDER 18YEARS OF AGE.”

Sec. 12. Proof of Age Verification. — In case of doubt as to the age ofthe buyer, retailers shall verify, by means of any valid form of photo-graphic identification containing the date of birth of the bearer, that noindividual purchasing a tobacco is below eighteen (18) years of age.

Secs. 9-12

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x x x x x x

Sec. 41. Effectivity. — This Act shall take effect fifteen (15) days afterits publication in the Official Gazette and at least two (2) newspapers ofnational circulation.

Approved: June 23, 2003.

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Sec. 41 TOBACCO REGULATION ACT OF 2003

Comments & Cases on Sales and Lease

Documents

Transcript of Comments & Cases on Sales and Lease