CONTRACTS

A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. (Art. 1305)

Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.

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

Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as it may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract.

Contract defineda. A contract from the Latin “contractus” and from the French “contract” is a “juridical

convention manifested in legal form by virtue of which, one or more persons (or parties) bind themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do or not to do.”

b. It is the agreement of two or more persons (or parties) for the purpose of creating, modifying, extinguishing a juridical relation between them.

c. Limited to that which produces patrimonial liabilitiesd. Binding effect of contract based on the following principles;

Obligations arising from the contract have the force of law between the contracting parties

There must be mutuality between the parties based on their essential equality, to which is repugnant to have one party bound by the contract leaving the other free therefrom

PRINCIPAL CHARACTERISTICS: 1. Autonomy of wills – parties may stipulate anything as long as not illegal, immoral,

etc. 2. Mutuality – performance or validity binds both parties; not left to will of one of

parties3. Obligatory Force – parties are bound from perfection of contract:

a. fulfill what has been expressly stipulated b. all consequences w/c may be in keeping with good faith, usage & law

4. Relativity – binding only between the parties, their assigns, heirs; strangers cannot demand enforcement

Cases: Manila Railroad Co. v. La Compana TransatlanticaDKH Holdings Corp. v. CA

STAGES OF A CONTRACTA. Preparation (or Conception or Generacion) – Here the parties are progressing with their

negotiations; they have not yet arrived at any definite agreement, although there may have been a preliminary offer, and bargaining.

B. Perfection (or birth) – Here the parties have at long last came to a definite agreement, the elements of definite subject matter and valid cause have been accepted by mutual consent.

C. Consummation (or death or termination) – Here the terms of the contract are performed, and the contract may be said to have been fully executed.

PARTIES TO A CONTRACT

Auto-contracts Necessary for the existence of a contract that 2 distinct persons enter into it No general prohibitions, only special prohibitions such as Art. 1491 (Persons who cannot

acquire by purchase, even at a public or judicial action) Auto-contracts are generally Valid – existence of a contract is not determined by the

number of persons who intervene in it, but by the number of parties. Not by te number individual wills but by number of declaration of wills.

Freedom to contract Art. 1306- the contracting parties may establish such stipulations, clauses, terms and

conditions as may be deem convenient, provided they are not contrary to law, morals, good customs, public order and public safety.

Cases – Gabriel v. Monte de Piedad- Pakistan Int’l Airlines v. Ople

Special disqualifications

Art. 87, FC – inter vivos donation between spouses Art. 1490 – husband and wife generally cannot sell property to each other, subject to

exceptions Art. 1491 – Special prohibition as to who cannot acquire by purchase Art. 1782 – persons prohibited from giving each other any donation/ advantage, cannot

enter into universal partnership

The law speaks of a meeting of minds between two “persons.” The meeting of the minds really refers to two “parties”. If at the time of supposed perfection, one of the parties had already previously died, there can be no meeting of the minds; hence, no contract. (Coronel v. Ona, 33 Phil. 456)

While a promissory note is unilateral (in that only one party has signed it and is bound thereby), still such a contract includes two parties (the debtor and the creditor). Thus the signer is not the only party, nor the only one who can sue on such a contract. There can be no obligor without an oblige (Dilag v. Heirs of Fortunato Resurreccion, 76 Phil. 650)

The meeting of the minds may arise because of an express or implied accord (such as when services as an interpreter and guide, whether solicited or not, were accepted and duly rendered; here, an obligation to pay for such services exists) (Perez v. Pomar, 2 Phil 682)

I. ESSENTIAL REQUISITES (Art. 1261) - Those without which there can be no contract. (Art. 1318)

Those common to all contracts:

A. Consent of the contracting parties- it is the meeting of the minds between the parties on the subject matter and the cause of the contract, even of neither one has been delivered.

- It is the manifestation of the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract..

Requisites of consent:1. There must be two or more parties.

Note: One person may represent two or more parties, unless there are contradictory or prejudicial interest involved. (Garchitorena v. Sotelo, 74 Phil. 25)

2. The parties must be capable or capacitated (hence if one party be insane, the contract is merely voidable).

3. There must be no vitiation of consent.4. There must be no conflict between what was expressly declared and what was

really intended. Otherwise, the remedy may be reformation, as when the parties really intended to be bound; or else the contract is void as when the contract is fictitious or absolutely simulated.)

5. The intent must be declared properly (that is, whatever legal formalities are required must be complied with).

Requisites for the Meeting of the Minds:a. An offer that must be certain

- In order that an offer can be considered certain, it must not be vague, misleading, or made as a joke. Therefore a declaration of a person of his intention to enter into a contract is not an offer that is certain (Rosenstock v. Burke, 46 Phil. 217). If the offer is withdrawn before it is accepted, there is no meeting of the minds (Jose Benares, et. al. v. Capitolio Subd. Inc., L-7330, Nov. 29, 1960)

b. And an acceptance that must be unqualified and absoluteNote: if the acceptance is qualified, let us say by a condition, this merely constitute a counter-offer.

- If there is completely no acceptance or if the offer is expressly rejected, there is no meeting of the minds (Leoquinco v. postal Savings Bank, 47 Phil. 772; Gamboa v. Gonzales, 17 Phil. 381). If the acceptance be qualified or not absolute, there is no concurrence of minds. There merely is a counter-offer (Batangas v. Cojuangco, 78 Phil. 481). If one promises to act as surety for another’s obligation as a purchaser (Pacific Tobacco Corp. v. CA and Manila Surety and Fidelity Co., inc., L-10894, March 24, 1958)

ACCEPTANCE THRU CORRESPONDENCEa. Rule – acceptance made by letter or telegram does not bind the offerer except from

the time it came to his knowledge. The contract in such a case is presumed to have been entered into in the place where the offer was made.

b. The knowledge may be actual or constructive (as when the letter of acceptance has been received in the house of the offerer by a person possessed of reasonable discernment.) If actual knowledge be required, proof of this would be almost impossible, for even when the letter containing the answer has been opened and read, the offerer can always claim, in some cases truthfully. That while he was reading the same, his mind was elsewhere, and he did not actually know the contents of said answer.

ELEMENTS OF VALID OFFER a. definite b. complete c. intentional

ELEMENTS OF VALID ACCEPTANCE a. unequivocal b. unconditional

WHEN OFFER BECOMES INEFFECTIVE: 1. death, civil interdiction, insanity or insolvency of either party before acceptance is

conveyed2. express or implied revocation of the offer by the offeree3. qualified or conditional acceptance of the offer4. subject matter becomes illegal or impossible before acceptance is communicated

PERIOD FOR ACCEPTANCE 1. stated fixed period in the offer 2. no stated fixed period

a) offer is made to a person present – acceptance must be made immediately b) offer is made to a person absent – acceptance may be made within such time

that, under normal circumstances, an answer can be received from him.

OPTION - option may be withdrawn anytime before acceptance is communicated but not when supported by a consideration other than purchase price: option money

Ang Yu v. CA (1994 ) states that a unilateral promise to buy or sell, if not supported by a distinct consideration, may be withdrawn but may not be done whimsically or arbitrarily; the right of the grantee here is damages and not specific performance;

Equatorial v. Mayfair(264 SCRA 483 ) held that an option clause in order to be valid and enforceable must indicate the definite price at which the person granting the option is willing to sell, contract can been forced and not only damages;

Paranaque Kings V CA (1997) states that right of first refusal may be enforced by specific performance.

PERSONS WHO CANNOT GIVE CONSENT TO A CONTRACT: 1. Minors 2. Insane or demented persons3. Illiterates/ deaf-mutes who do not know how to write4. Intoxicated and under hypnotic spell5. Art 1331 - person under mistake; mistake may deprive intelligence6. Art 1338 - person induced by fraud (dolo causante)

Note: Dolus bonus (usual exaggerations in trade) are not in themselves fraudulent.

RULE ON CONTRACTS ENTERED INTO BY MINORS

General Rule: VOIDABLE

EXCEPTIONS:1. Upon reaching age of majority – they ratify the same2. They were entered unto by a guardian and the court having jurisdiction had approved

the same 3. They were contracts for necessities such as food, but here the persons who are bound

to give them support should pay therefor 4. Minor is estopped for having misrepresented his age and misled the otherparty (when

age is close to age of majority as in the Mercado v Espiritu & SiaSuan v Alcantara cases)

In the Sia Suan v Alcantara case, there is a strong dissent by J. Padilla to the effect that the minor cannot be estopped if he is too young to give consent; one that is too young to give consent is too young to be estopped. Subsequently,

In Braganza v Villa-Abrille, the dissent became the ruling. Minors could not be estopped.

DISQUALIFIED TO ENTER INTO CONTRACTS: (contracts entered into are void ) 1. those under civil interdiction

2. hospitalized lepers 3. prodigals 4. deaf and dumb who are unable to read and write 5. those who by reason of age, disease, weak mind and other similar causes, cannot

without outside aid, take care of themselves and manage their property, becoming an easy prey for deceit and exploitation

CAUSES WHICH VITIATE FREEDOM 1. violence

REQUISITE:a. Irresistable physical forceb. Such force is the determining cause for giving consent

2. Intimidation REQUISITE:

a. Determining cause for the contractb. Threatened act is unjust and unlawfulc. Real and seriousd. Produces a well grounded fear that the person making it will carry it over

3. undue influence

Test of undue influence: Whether or not the influence exerted has so overpowered or subjugated the mind of a contracting party as to destroy his free agency, making him express the will of another rather than his own (Coso v. Fernandez Deza, G.R. No. 16763, Dec. 22. 1921)

SIMULATED CONTRACTS a. absolute – no intention to be bound at all, fictitious only – void from beginning b. relative – there is intention to be bound but concealed; concealed contract binds:

1.no prejudice to 3rd persons2. not contrary to law, morals, etc.

B. OBJECT certain which is the subject matter of the contract – the thing, right or service which is the subject matter of the obligation arising from the contract

REQUISITES: a) Within the commerce of man - either existing or in potency b) Licit or not contrary to law, good customs c) Possible d) Determinate as to its kind or determinable w/o need to enter into a new contract e) Transmissible

Art. 1347. All things which are not outside the commerce of men, including future things, may be the object of a contract. All rights which are not intransmissible may also be the object of contracts.

No contract may be entered into upon future inheritance except in cases expressly authorized by law.

All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the object of a contract. (1271a)

Art. 1348. Impossible things or services cannot be the object of contracts. (1272)Art. 1349. The object of every contract must be determinate as to its kind. The fact that

the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the parties. (1273)

C. Cause of the obligation which is established – it is the immediate, direct or most proximate reason which explains and justifies the creation of an obligation through the will of the contracting parties.

– reason why parties enter into contract

Requisites:1. Existing at the time of the celebration of the contract2. Licit or lawful3. True

Moral obligation as cause:1. Where the moral obligation arises wholly from ethical considerations,

unconnected with any civil obligations, it cannot constitute a sufficient cause or consideration to support an onerous contract. (Fisher v. Robb, G.R. No. L-46274, Nov. 2, 1939)

2. Where such moral obligation is based upon a previous civil obligation which has already been barred by the statute of limitations at the time when the contract is entered into, it constitutes a sufficient cause or consideration to support a contract (Villaroel v. Estrada, G.R. No. 47362, Dec. 19, 1940), it is then already a moral obligation.

Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274)

Art. 1351. The particular motives of the parties in entering into a contract are different from the cause thereof. (n)

Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy. (1275a)

Art. 1353. The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon another cause which is true and lawful. (1276)

Art. 1354. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary. (1277)

Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence. (n)

II. KINDS OF CONTRACTS

As to cause 1. Onerous – with valuable consideration2. Gratuitous – founded on liberality3. Remunerative – prestation is given for service previously rendered not as obligation

As to importance or dependence of one upon another 1. principal – contract may stand alone 2. accessory – depends on another contract for its existence; may not exist on its own 3. Preparatory – not an end by itself; a means through which future contracts may be

made

As to parties obliged: 1. Unilateral – only one of the parties has an obligation 2. Bilateral – both parties are required to render reciprocal prestations

As to name or designation: 1. Nominate 2. Innominate

a) Do ut des – I give that you may giveb) Do ut facias – I give that you may doc) Facio ut des – I do that you may gived) Facio ut facias – I do that you may do

As to perfection or formation: A. Consensual – perfected by mere consent (e.g. sale)

B. Real – perfected by delivery (e.g. depositum, pledge, commodatum)

C. Formal or Solemn – those where special formalities are essential before the contract may be perfected.

1. Donations

Art. 748 Donation of a movable - may be made orally or in writing. Oral donation - requires the simultaneous delivery of the thing or of the

document representing the right donated. Value of personal property donated exceeds five thousand pesos – the

donation and the acceptance shall be made in writing, otherwise the donation shall be void.

Art. 749 Donation of an immovable – it must be made in a public document,

specifying therein the property donated and the value of the charges which the donee must satisfy.

The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor.

If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments.

2. Partnership where real property contributed

Art. 1771 A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary.

Art. 1773 A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not made, signed by the parties, and attached to the public instrument.

3. Antichresis

Art. 2134 The amount of the principal and of the interest shall be specified in

writing; otherwise, the contract of antichresis shall be void.

4. Agency to sell real property or an interest therein

Art. 1874 When a sale of a piece of land or any interest therein is through an agent,

the authority of the latter shall be in writing; otherwise, the sale shall be void.

5. Stipulation to charge interest

Art. 1956 No interest shall be due unless it has been expressly stipulated in writing.

6. Stipulation limiting common carrier’s duty of extraordinary diligence to ordinary diligence

Art. 1744 A stipulation between the common carrier and the shipper or owner

limiting the liability of the former for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence shall be valid, provided it be:

a. In writing, signed by the shipper or ownerb. Supported by a valuable consideration other than the service

rendered by the common carrierc. Reasonable, just and not contrary to public policy

7. Chattel mortgage

Art. 2140 By chattel mortgage, personal property is recorded in the Chattel

Mortgage Register as a security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge and not a chattel mortgage.

8. Sale of large cattle

III. FORMALITY – Arts. 1356, 1357, 1358 - in some kind of contracts only as contracts are generally consensual; form is a manner in which a contract is executed or manifested

FORM OF CONTRACTS – in some kind of contracts only as contracts are generally consensual; form is a manner in which a contract is executed or manifested.

a. Informal – may be entered into whatever form as long as there is consent, object & cause.

b. Formal – required by law to be in certain specified form such as: donation of real property, stipulation to pay interest, transfer of large cattle, sale of land thru agent, contract of antichresis, contract of partnership, registration ofchattel mortgage, donation of personal prop in excess of 5,000.

c. Real – creation of real rights over immovable prop – must be written

WHEN FORM IS IMPORTANT: 1) for validity (formal/solemn contracts) 2) for enforceability (statute of frauds) 3) for convenience

General Rule: contract is valid & binding in whatever form provided that 3 essential requisites concur

Exception: a. Law requires contract to be in some form for validity - donation & acceptance of real

property. b. Law requires contract to be in some form to be enforceable - Statute of Frauds;contract

is valid but right to enforce cannot be exercised; need ratification to be enforceable.d. c. Law requires contract to be in some form for convenience - contract is valid

& enforceable, needed only to bind 3rd parties ex: public documents needed for the ff:

1. contracts w/c object is creation, transmission or reformation of real rights over immovables

2. cession, repudiation, renunciation of hereditary rights/CPG3. power to administer property for another

4.) cession of action of rights proceeding from an act appearing in a public inst. 5.) all other documents where amount involved is in excess of 500 ( must be written

even private docs )

General rule: Contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present (Art. 1356)

Exceptions: 1. When the law requires that the contract be in a certain form to be valid (Arts.

1357-1358)2. When the law requires that the contract be in a certain form to be enforceable

(Statute of Frauds)3. When the law requires that a contract be in some form for the convenience of the

parties or for the purpose of affecting third persons (Art. 1356) Contracts which must appear in writing:1. Donation of personal property whose value exceeds five hundred pesos (Art. 748)2. Sale of a piece of land or any interest therein through an agent (Art. 1874)3. Agreements regarding payment of interest in contracts of loan (Art. 1956)4. Antichresis (Art. 2134)

Contracts which must appear in a public document:1. Donation of immovable properties (Art. 749)2. Partnership where immovable property or real rights are are contributed to the

common fund (Arts 1171 and 1773).3. Acts and contracts which have for their object the creation, transmission,

modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein is governed Articles 1403, No. 2 and 1405 (Art. 1358, no. 1)

4. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains (Art. 1358, no. 2)

5. The power to administer property or any other power which has for its object a n act appearing or which should appear in a public document or should prejudice a third person (Art. 1358 no. 3)

6. The cession of actions or rights proceeding from an act appearing in a public document (Art. 1358 no. 4)

Contracts which must be registered:1. Chattel Mortagages (Art. 2140)2. Sale or transfer of large cattle (Cattle Registration Act)

IV. DEFECTIVE CONTRACTS – contracts which may be invalidated

A. RESCISSIBLE CONTRACTS – Contracts which are valid but are defective because of injury or damage to either of the contracting parties or to third persons, as a consequence of which it may be rescinded by means of a proper action for rescission.

– Those which have caused a particular economic damage either to one of the parties or to a 3rd person and which may be set aside even if valid. It may be set aside in whole or in part, to the extent of the damage caused.

REQUISITES:

A. Contract must be rescissible

(1) Under art 1381:

i. Contracts entered into by persons exercising fiduciary capacity (a) Entered into by guardian whenever ward suffers damage by more than

1/4 of value of object (b) Agreed upon in representation of absentees, if absentee suffers lesion

by more than ¼ of value of property (c) Contracts where rescission is based on fraud committed on creditor

(accion pauliana) (d) Objects of litigation; contract entered into by defendant w/o knowledge

or approval of litigants or judicial authority (e) Payment by an insolvent – on debts w/c are not yet due; prejudices

claim of others (f) Provided for by law - art 1526, 1534, 1538, 1539, 1542, 1556, 1560,

1567 and 1659

ii. Under Art 1382 - Payments made in a state of insolvency a.. Plaintiff has no other means to obtain reparation b. Plaintiff must be able to return whatever he may be obliged to return

due to rescission c. The things must not have been passed to 3rd parties who did not act in

bad faithd. It must be made within the prescribed period

OBLIGATION CREATED BY THE RESCISSION OF THE CONTRACT:

Mutual Restitution 1. Things w/c are the objects of the contract & their fruits 2. Price with interest

Note: Mutual restitution N.A. when: 1. creditor did not receive anything from contract 2. thing already in possession of party in good faith; subject to indemnity only; if

there are 2 or more alienations – liability of 1st infractor

Art. 1381 Rescissible contracts:

1. Those which are entered into by the guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof

2. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number

3. Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them

4. Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority

5. All other contracts specially declared by law to be subject to rescission6. Payments made in a state of insolvency for obligations whose fulfillment the

debtor could not be compelled at the time they were affected.

Requisites of rescission:1. Contracts must be rescissible under arts. 1381 and 13822. Party asking for rescission must have no other legal means to obtain

reparation for the damages suffered by him (Art. 1383)3. Person demanding rescission must be able to return whatever he may be

obliged to restore if rescission is granted (Art. 1385)4. Things which are the object of the contract must not have passed legality to

the possession of a third person acting in good faith (Art. 1385)5. Action must be brought within four years (Art. 1389)

Effect of rescission:1. As to the parties – mutual restitution together with the fruits and interest.

(Note: This is applicable only to rescissory actions on the ground of lesion and not to rescissory actions on the ground of fraud)

2. As to third person Bad faith or not legally in possession – obliged to return Legally in possession and not in bad faith – no rescission however

indemnity for damages may be demanded from the person causing the loss

Prescriptive Period: 1. Under Art. 1381 no. 1 – within 4 years from the time of the termination of

the incapacity of the ward2. Under Art. 1381 no. 2 – within 4 years from the time the domicile of the

absentee is known3. Under Art. 1381 nos. 3 and 4 as well as Art. 1382 – within 4 years from the

time of the discovery of fraud4. In certain contracts of sale especially declared by law to be rescissible – 6

months or even 40 days, counted from the day of delivery (Arts. 1542, 1571, 1577)

1. Difference with Rescission (resolution) under Art. 1191

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

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

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

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

B. VOIDABLE CONTRACTS – Arts. 1328-1344, 1390-1402 – those which possess all the essential elements for validity but the consent is vitiated either by lack of legal capacity of one of the contracting parties, or by mistake, violence, intimidation, undue influence or fraud even though there may have been no damage to the contracting parties.

– intrinsic defect; valid until annulled; defect is due to vice of consent or legal incapacity

CHARACTERISTICS: a. Effective until set aside b. May be assailed or attacked only in an action for that purpose c. Can be confirmed ( Note: CONFIRMATION IS THE PROPER TERM FOR CURING

THE DEFECT OF A VOIDABLE CONTRACT)d. Can be assailed only by the party whose consent was defective or his heirs or assigns

WHAT CONTRACTS ARE VOIDABLE:

A. THOSE WHERE ONE OF THE PARTIES IS INCAPABLE OF GIVING CONSENT TO A CONTRACT (legal incapacity)

(1) minors ( below 18 )(2) insane unless acted in lucid interval(3) deaf mute who can’t read or write(4) persons specially disqualified: civil interdiction(5) in state of drunkenness(6) in state of hypnotic spell

B. THOSE WHERE THE CONSENT IS VITIATED BY MISTAKE, VIOLENCE, INTIMIDATION, UNDUE INFLUENCE OR FRAUD (vice of consent)

(1) mistake – false belief into something

REQUISITES: 1. Refers to the subject of the thing which is the object of the contract 2. Refers to the nature of the contract 3. Refers to the principal conditions in an agreement 4. Error as to person - when it is the principal consideration of the contract5. Error as to legal effect - when mistake is mutual and frustrates the real purpose of parties

(2) violence – serious or irresistible force is employed to wrest consent

(3) intimidation – one party is compelled by a reasonable & well-grounded fear of an imminent & grave danger upon person & property of himself, spouse, ascendants or descendants (moral coercion)

(4) undue influence – person takes improper advantage of his power over will of another depriving latter of reasonable freedom of choice

(5) fraud – thru insidious words or machinations of contracting parties, other is induced to enter into contract w/o w/c he will not enter (dolo causante)

Voidable or annullable contracts even though there may have been no damage to the contracting parties:1. Those where one of the parties is incapable of giving consent to a contracts2. Those where the consent is vitiated by mistake, violence, intimidation, undue

influence or fraud. These contracts are binding, unless they are annulled by a proper action

in court. They are susceptible of ratification. (Art. 1390)

Modes to extinguish an action for annulment:1. Prescription (Art. 1391)

Prescriptive period for annulment:a. Contracts entered into by incapacitated person – within 4 years from the

time guardianship ceasesb. Where consent is vitiated by violence, intimidation or undue influence –

within 4 years from the time such violence, intimidation or undue influence ceases

c. Where consent is vitiated by mistake or fraud – within 4 years from the time of the discovery of such mistake or fraud

These periods apply only to the parties to the contract and not to third persons.

Discovery of fraud must be reckoned from the time the document was registered in the office of the register of deeds. Registration constitutes constructive notice to the whole world. (Carantes v. CA, G.R. No. 33360, April 25, 1977)

2. Ratification (Arts. 1392-1396) – The act or means by virtue of which efficacy is given to a contract which suffers from a vice of curable nullity. This may extinguish the action for annulment of a voidable contract. It cleanses the contract of its defects from the moment it was constituted.

Requisites:a. Contract is tainted with a vice susceptible of being curedb. Confirmation is effected by the person who is entitled to do so under the lawc. It is effected with knowledge of the vice or defect of the contractd. Cause of the nullity or defect have already disappeared

3. Loss of the thing which is the object of the contract through fraud or fault of the person who is entitled to institute the action

Who may institute action for annulment (Art. 1394) General rule: Action for annulment may be instituted by all who are thereby

obliged principally or subsidiarily. A stranger to the contract cannot institute an action for annulment.

Exception: If a third person is prejudiced in his rights with respect to one of the contracting parties, and can show detriment which would positively result to him from the contract in which he has no intervention. (Teves v. People’s Homesite & Housing Corp., G.R. No. 21498, June 27, 1968)

Effects of annulment; If contract has not yet been consummated – parties shall be released from the

obligations arising therefrom If contract has already been consummated:

a. (Art. 1398) - Contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law.

- In obligations to render service, the value thereof shall be the basis for damages.

b. (Art. 1399) - When the defect of the contract consists in the incapacity of one of the contracting parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him.

c. (Art. 1400) – Whenever the person obliged by the decree of annulment to return the thing cannot do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date.

d. (Art. 1401) - The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings.

If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff.

e. (Art. 1402) - As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him.

C. UNENFORCEABLE CONTRACTS – Arts. 1403-1407, 1317 - valid but cannot compel its execution unless ratified; extrinsic defect; produce legal effects only after ratified.

– Those which cannot be enforced by proper action in court unless they are ratified because, either:

a. They are entered into without or in excess of authorityb. They do not comply with the statute of fraudsc. Both contracting parties do not possess the required legal capacity

KINDS/VARIETIES: 1. Unauthorized/No sufficient authority – entered into in the name of another when:

a. no authority conferred b. in excess of authority conferred ( ultra vires )

Note: Curable by RATIFICATION

2. Both parties incapable of giving consent - minor or insane persons

Note: Curable by ACKNOWLEDGEMENT

3. Failure to comply with Statute of Frauds a. Agreement to be performed within a year after making contractb. Special promise to answer for debt, default or miscarriage of anotherc. Agreement made in consideration of promise to marry.d. Agreement for sale of goods, chattels or things in action at price not less than

500;except ion: auction when recorded sale in sales book e. Agreement for lease of property for more than 1 year & sale of real property

regardless of price f. Representation as to credit of another

2 WAYS OF CURING UNENFORCEABLE CONTRACTS: 1. Failure of defendant to object in time, to the presentation of parole evidence in

court, the defect of unenforceability is cured.

2. Acceptance of benefits under the contract. If there is performance in either part and there is acceptance of performance, it takes it out of unenforceable contracts; also estoppel sets in by accepting performance, the defect is waived

Unenforceable contracts, unless ratified:1. Those entered into in the name of another person by one who has been given

no authority or legal representation, or who has acted beyond his powers.

2. Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

Statute of Frauds (Art. 1403 no. 2): In the following cases, an agreement hereafter made shall be unenforceable by

action, unless the same or some note or memorandum thereof, be in writing and subscribed by the party charged, or by his agent, evidence thereof, of the agreement cannot be received without the writing, or a secondary evidence of its contents.

a. An agreement that by its terms is not to be performed within a year from the making thereof

b. A special promise to answer for the debt, default, or miscarriage of anotherc. An agreement made in consideration of marriage, other than a mutual

promise to marryd. An agreement for the sale of goods, chattels or things in action, at a price

not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum

e. An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein

f. A representation as to the credit of a third person

Ratification of Contracts infringing the statute of frauds (Art. 1405):Such contracts may be ratified by:1. Failure to object to the representation of oral evidence to prove such contracts2. Acceptance of benefits under these contracts

D. VOID CONTRACTS – Arts. 1409, 1346 – In general, they are those which lack absolutely either in fact or in law one or some of the elements essential for its validity.

– of no legal effect

CHARACTERISTICS:

a. It produces no effect whatsoever either against or in favor of anyone. b. There is no action for annulment necessary as such is ipso jure. A judicial

declaration to that effect is merely a declaration.c. It cannot be confirmed, ratified or cured.

d. If performed, restoration is in order, except if pari delicto will applye. The right to set up the defense of nullity cannot be waivedf. Imprescriptible g. Anyone may invoke the nullity of the contract whenever its juridical effects are asserted against him.

Contracts which are inexistent and void ab initio (Art. 1409): 1. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy2. Those which are absolutely simulated or fictitious.3. Those whose cause or object did not exist at the time of the transaction4. Those whose object is outside the commerce of men5. Those which contemplate an impossible service6. Those where the intention of the parties relative to the principal object of the contract cannot be ascertained7. Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.

Prescription: The action or defense for the declaration of the inexistence of a contract does

not prescribe (Art. 1410).

Principle of In Pari Delicto (Arts. 1411-1419)General rule: When the defect of a void contract consists in the illegality of the cause or object of the contract and both of the parties are at fault or in pari delicto, the law refuses them any remedy and leaves them where they are.

Exceptions:1. Payment of usurious interest (art. 1413)2. Payment of money or delivery of property for an illegal purpose, where the party

who paid or delivered repudiates the contract before the purpose has been accomplished, or before any damage has been caused to a third person (Art. 1414)

3. Payment of money or delivery of property made by an incapacitated person (Art. 1415)

4. Agreement or contract not illegal per se but merely prohibited by law and the prohibition is designed for the plaintiff’s protection (Art. 1416)

5. Payment of any amount in excess of the maximum price of any article or commodity fixed by law (Art. 1417)

6. Contract whereby a laborer undertakes to work longer than the maximum number of hours fixed by law (Art. 1418)

7. Contract whereby a laborer accepts a wage lower than the minimum wage fixed by law (Art. 1419)

8. In case of divisible contracts, the legal terms may be enforced separately from the illegal terms (Art. 1420)

9. One who lost in gambling because of fraudulent schemes practiced on him. He is allowed to recover his losses (Art. 315, 3 (b) , RPC), even if gambling is prohibited.

Principle of in pari delicto is applicable only to void contracts and not to inexistent contracts.

Rules when only one of the parties is at fault:1. Executed contracts – guilty party is barred from recovering what he has

given to the other party by reason of the contract. Innocent party may demand for the return of what he has given.

2. Executory contracts – neither of the contracting parties can demand for the fulfillment of any obligation from the contract nor may be compelled to comply with such obligation.

Comparison of defective contracts:

Void contract:1. Defect is caused by lack of essential elements or illegality2. Do not, as a general rule produce any legal effect3. Action for the declaration or nullity or inexistence or defense of nullity or

inexistence does not prescribe4. Not cured by prescription5. Cannot be ratified6. Assailed by a contracting party and a third person whose interest is directly

affected7. Assailed directly or collaterally

Voidable contract:1. Defect is caused by vice of consent2. Valid and enforceable until annulled by a competent court3. Action for annulment or defense of annullability may prescribe4. Cured by prescription 5. Can be ratified6. Assailed only by contracting party7. Assailed directly or collaterally

Rescissible contract:1. Defect is caused by injury/damage either to one of the parties or to a third person2. Valid and enforceable until rescinded by a competent court3. Action for rescission may prescribe4. Cured by prescription5. Need not be ratified6. Assailed by a contracting party and a third person who is prejudiced or damaged

by the contract7. Assailed directly only

Unenforceable contract:1. Defect is caused by lack of form, authority or capacity of both parties not cured

by prescription2. Cannot be enforced by a proper action in court3. Corresponding action for recovery, if there was a total or partial performance of

the unenforceable contract under No. 1 or 3 of Art. 1403 may prescribe4. Not cured by prescription5. Can be ratified6. Assailed only by a contracting party7. Assailed directly or collaterally

1. Pactum commissorium - Arts. 2088, 2130, 1390 - AUTOMATIC FORECLOSURE

Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a)

Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void.

Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties:

(1) Those where one of the parties is incapable of giving consent to a contract;(2) Those where the consent is vitiated by mistake, violence, intimidation, undue

influence or fraud.These contracts are binding, unless they are annulled by a proper action in court. They

are susceptible of ratification.

2. Pactum de non alienando – Art. 2130 - NOT TO ALIENATE

Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgaged shall be void.

3. Pactum leonina – Art. 1799 - ONE PARTY BEARS THE LION’S SHARE OF THE RISK

Art. 1799. A stipulation which excludes one or more partners from any share in the profits or losses is void. (1691)

V. Effect of Contracts – Art. 1311

– Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. (1257a)

Principle of relativity – This article stresses the principle of relativity – that is contracts are generally effective only between the PARTIES, their ASSIGNS, and their HEIRS.

Exceptions to the Principle of Relativitya. Where the obligations arising from the contract are not transmissible by their nature,

by stipulation, or by provision of law.b. Where there is a stipulation pour autrui ( a stipulation in favor of a third party)c. Where a third person induces another to violate his contractd. Where in some cases, third persons may be adversely affected by a contract where

they did not participatee. Where the law authorizes the creditor to sue on a contract entered into by his debtor

Discussion of the general rulea. Contracts take effect only between the parties, their assigns , and heirs, and therefore

generally, its terms cannot determine the rights of third persons (Bautista, et al, v. Judge Piguing, L-10006, Oct. 31, 1957; Phil. Nat. Bank v. Luzon Surety Co. Inc., L-1112, May 28, 1958; Nat. Labor Union v. Int. Oil Factory, L-13845, may 30, 1960. The revocation for example, of a deed of sale is not conclusive on those individuals who are not parties thereto (Real Monasterio de la Purisima Concepcion v. Domingo Fabian et. al., L-28470, Sept. 19, 1968, Phil. Law Dec. Vol. 1968 D, p.21). However, a person who takes advantage of a contract, although he is not a signatory thereto, can properly be bound by the terms thereof. He cannot take advantage of a contract when it suits him to do so, and reject its provision when he thinks otherwise. (Northern Motors, Inc. v. Prince Line, L-13884, Feb. 29, 1960; Cenon Villanueva v. Barber-Wilhelmsen Line, et. al, L-14764, Nov. 23, 1960)

SALES

I. INTRODUCTION

A. DEFINITION OF SALE – 1458, 1470

A contract where by one obligates himself to transfer ownership of and to deliver a determinate thing, and the other to pay a price certain in money or its equivalent. (Art.1458)

The seller need not be the owner of the thing sold at the time the sale is perfected. However, it is a must that he is the owner at the time the thing sold is delivered.

A contract of sale may either be: 1. Absolute – one where the title to the property is not reserved to the vendor or if the vendor is not granted the right to rescind the contract based on the fulfillment or non-fulfillment, as the case may be, of the prescribed condition.2. Conditional – one where the vendor is granted the right to unilaterally rescind the contract predicated on the fulfillment or non-fulfillment, as the case may be, of the prescribed condition.

DIGNOS VS. CA

Facts: The Dignos spouses owned a parcel of land, which was sold to plaintiff-appellant Jabil for the sum of P28,000 payable in two installments. Meanwhile, the Dignos spouses sold the same land to Cabigas spouses. As the Dignos spouses refused to accept the second payment and upon discovery of the second sale, Jabil brought this suit.

Petitioners contend that the Deed of Sale is a mere contract to sell and not anabsolute sale; that the same is subject to two positive conditions. It is further contended that in said contract, title or ownership over the property was expressly reserved in the vendor until the suspensive condition of full and punctual payment of the balance of the purchase price shall have

been met. Thus, there is no actual sale until full payment is made.

Issue: WON the contract is a Deed of Absolute Sale or a Contract to Sell.

Ruling: The contract is a Deed of Absolute Sale. A Deed of Sale is absolute in nature although denominated as a “Deed of Conditional Sale” where nowhere in the contract in question is a proviso or stipulation to the effect that title to the property sold is reserved in the vendor until full payment of the purchase price, nor is there a stipulation giving the vendor the right to unilaterally rescind the contract the moment the vendee fails to pay within a fixed period.

Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as it may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract.

Acap v. CA [G.R. No. 118114. December 7, 1995.]

Facts: The title to Lot 1130 of the Cadastral Survey of Hinigaran, Negros Occ iden t a l was ev idenced by OCT R-12179 . The l o t ha s an a r ea o f 13,720 sq. m. The title was issued and is registered in the name of spouses Santiago Vasquez and Lorenza Oruma. After both spouses died, their only son Felixberto inherited

the lot. In 1975, Felixberto executed a duly notarized document entitled “Declaration of Heirship and Deed of Absolute Sale” in favor of Cosme Pido. Since 1960, Teodoro Acap had been the tenant of a portion of the said land, covering an area of 9,500sq. m. When ownership was transferred in 1975 by Felixberto to Cosme Pido, Acap

continued to be the registered tenant thereof and religiously paid his leasehold rentals to Pido and thereafter, upon Pido’s death, to his widow Laurenciana. The controversy began when Pido died interstate and on 27 November 1981, his surviving heirs executed a notarized document denominated as “Declaration of Heirship and Waiver of Rights of Lot 1130 Hinigaran Cadastre,” wherein they declared to have adjudicated upon themselves the parcel of land in equal share, and that they waive, quitclaim all right, interests and participation over t he pa r ce l o f l and i n f avo r o f Edy de l o s Reyes . The documen t was s i g n e d b y a l l o f P i d o ’ s h e i r s . E d y d e l o s R e y e s d i d n o t s i g n s a i d document. It will be noted that at the time of Cosme Pido’s death, title to the property continued to be registered in the name of the Vasquez spouses. Upon obtaining the Declaration of Heirship with Waiver of Rights in his favor, de los Reyes filed the same with the Registry of Deeds a s pa r t o f a no t i c e o f an adve r se c l a im aga in s t t he o r i g ina l certificate of title. Thereafter, delos Reyes sought for Acap to personally inform him thathe had become the new owner of the land and that the lease rentals thereon should be paid to him. Delos Reyes alleged that he and Acap entered into an oral lease agreement wherein Acap agreed to pay 10cavans of palay per annum as lease rental. In 1982, Acap allegedly complied with said obligation. In 1983, however, Acap refused to pay any further lease rentals on the land, prompting delos Reyes to seek the assistance of the then Ministry of Agrarian Reform (MAR) in Hinigaran, Neg ros Occ iden t a l . The MAR inv i t ed Acap , who s en t h i s w i f e , t o a conference

scheduled on 13 October 1983. The wife stated that the she and her husband did not recognize delos Reyes’s claim of ownership over the land. On 28 April 1988, after the lapse of four (4) years, delos Reyes field a complaint for recovery of possession and damages against Acap, alleging that as his leasehold tenant, Acap refused and failed topay the agreed annual rental of 10 cavans of palay despite repeated demands. On 20 August 1991, the lower court rendered a decision infavor of delos Reyes, ordering the forfeiture of Acap’s preferred right of a Certificate of Land Transfer under PD 27 and his farm holdings, the return of the farmland in Acap’s possession to delos Reyes, and Acap to pay P5,000.00 as attorney’s fees, the sum of P1,000.00 as expenses of litigation and the amount of P10,000.00 as actual damages. Aggrieved, petitioner appealed to the Court of Appeals. Subsequently, the CA affirmed the lower court’s decision, holding that de los Reyes had acquired ownership of Lot No. 1130 of the Cadastral Survey of Hinigaran, Negros Occidental based on a document entitled “Declaration of Heirship and Waiver of Rights”, and ordering the dispossession of Acap as leasehold tenant of the land for failure to pay rentals. Hence, the petition for review on certiorari. The Supreme Court granted the petition, set aside the decision of the RTC Negros Occidental, dismissed the complaint for recovery of possession and damages against Acap for failure to properly state acause of action, without prejudice to private respondent taking the proper legal steps to establish the legal mode by which he claims to have acquired ownership of the land in question.

Asserted right or claim to ownership not sufficient per se to give riseto ownership over the res

An asserted right or claim to ownership or a real right over a thing arising from a juridical act, however justified, is not per se sufficient to give rise to ownership over the res. That right or title must be completed by fulfilling certain conditions imposed by law. Hence, ownership and real rights are acquired only

pursuant to a legal mode or process. While title is the juridical justification, mode is the actual process of acquisition transfer of ownership over a thing in question.

Classes of modes of acquiring ownership

Under Article 712 of the Civil Code, the modes of acquiring ownership are generally classified into two (2) classes, namely, the original mode(i.e, through occupation, acquisitive prescription, law or intellectual creation) and the derivative mode (i.e., through succession mortis causa o r t r ad i t i on a s a r e su l t o f c e r t a i n con t r ac t s , such a s s a l e , ba r t e r , donation, assignment or mutuum).

Contract of Sale; “Declaration of Heirship and Waiver of Rights” an extrajudicial settlement between heirs under Rule 74 of the Rules of Court

In a Contract of Sale, one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other party to pay a price certain in money or its equivalent. On the other hand, a declaration of heirship and waiver of rights operates as a public instrument when filed with the Registry of Deeds whereby the intestate heirs adjudicate and divide the estate left by the decedent among t hemse lve s a s t hey s ee f i t . I t i s i n e f f ec t an ex t r a jud i c i a l settlement between the heirs under Rule 74 of the Rules of Court. In thepresent case, the trial court erred in equating the nature and effect of t he Dec l a r a t i on o f He i r sh ip and Wa ive r o f R igh t s t he s ame wi th a contract (deed) of sale.

Sale of hereditary rights and waiver of hereditary rights distinguished

There is a marked difference between a sale of hereditary rights and a wa ive r o f he r ed i t a ry r i gh t s . The f i r s t p r e sumes t he ex i s t ence o f a contract or deed of sale between the parties. The second is, technically speaking, a mode of extinction of ownership where there is an abdication or intentional relinquishment of a known right with knowledge of its existence and intention to relinquish it, in favor of other persons who are co-heirs in the succession. In the present case, de los Reyes, being then a stranger to the succession of Cosme Pido, cannot conclusively claim ownership over the subject lot on the sole basis of the waiver document which neither recites the elements of either a sale, or a donation, or any other derivative mode of acquiring ownership.

Summon of Ministry of Agrarian Reform does not conclude actuality of sale nor notice of such sale

The conclusion, made by the trial and appellate courts, that a “sale” transpired between Cosme Pido’s heirs and de los Reyes and that Acap acquired actual knowledge of said sale when he was summoned by the Ministry of Agrarian Reform to discuss de los Reyes’ claim over the lot in question, has no basis both in fact and in law.

A notice of adverse claim does not prove ownership over the lot; Adverse claim not sufficient to cancel the certificate of tile and for another to be issued in his name

A notice of adverse claim, by its nature, does not however prove private respondent’s ownership over the tenanted lot. “A notice of adverse claim is nothing but a notice of a claim adverse to the registered owner, the validity of which is yet to be established in court at some future date, and is no better than a notice of lis pendens which is a notice of a case already pending in court.” In the present case, while the existence of said adverse claim was duly proven (thus being filed with the Registry of Deeds which contained the Declaration of Heirship with Waiver of

rights an was annotated at the back of the Original Certificate of Title to the land in question), there is no evidence whatsoever that a deed of s a l e was execu t ed be tween Cosme P ido ’ s he i r s and de l o s Reyes transferring the rights of the heirs to the land in favor of de los Reyes. De los Reyes’ right or interest therefore in the tenanted lot remains an adverse claim which cannot by itself be sufficient to cancel the OCT to the land and title to be issued in de los Reyes’ name.

Transaction between heirs and de los Reyes binding between pa r t i e s , bu t c anno t a f f ec t r i gh t o f Acap t o t enan t ed l and w i thou t corresponding proof thereof

While the transaction between Pido’s heirs and de los Reyes may be binding on both parties, the right of Acap as a registered tenant to the land cannot be perfunctorily forfeited on a mere allegation of de los Reyes’ ownership without the corresponding proof thereof. Acap had been a registered tenant in the subject land since 1960 and religiously p a i d l e a s e r e n t a l s t h e r e o n . I n h i s m i n d , h e c o n t i n u e d t o b e t h e registered tenant of Cosme Pido and his family (after Pido’s death), evenif in 1982, de los Reyes allegedly informed Acap that he had become the new owner of the land.

No unjustified or deliberate refusal to pay the lease rentals to the landowner / agricultural lessor

De los Reyes never registered the Declaration of Heirship with Waiver of Rights with the Registry of Deeds or with the MAR, but instead, he filed a notice of adverse claim on the said lot to establish ownership thereof (which cannot be done). It stands to reason, therefore, to hold that there was no unjustified or deliberate refusal by Acap to pay the lease rentals or amortizations to the landowner/agricultural lessor which, in this case, de los Reyes failed to established in his favor by clear and convincing evidence. This notwithstanding the fact that initially, Acap may have, in good faith, assumed such statement of de los Reyes to be true and may have in fact delivered 10 cavans of palay as annual rental for 1982 to latter. For in 1983, it is clear that Acap had misgivings over de los Reyes’ claim of ownership over the said land because in the October1983 MAR conference, his wife Laurenciana categorically denied all of de los Reyes’ allegations. In fact, Acap even secured a certificate from the MAR dated 9 May 1988 to the effect that he continued to be the registered tenant of Cosme Pido and not of delos Reyes.

Sanction of forfeiture of tenant’s preferred right and possession of farmholdings should not be applied

The sanction of forfeiture of his preferred right to be issued a Certificate of Land Transfer under PD 27 and to the possession of his farmholdings s h o u l d n o t b e a p p l i e d a g a i n s t A c a p , s i n c e d e l o s R e y e s h a s n o t established a cause of action for recovery of possession against Acap.

Toyota Shaw v. CA [G.R. No. 116650. May 23, 1995

Fac t s : Some t ime i n June 1989 , Luna L . Sosa wan t ed t o pu rchase a Toyota Lite Ace. It was then a seller’s market and Sosa had difficulty finding a dealer with an

available unit for sale. But upon contracting Toyota Shaw, Inc., he was told that there was an available unit. So on 14June 1989 , Sosa and h i s son , G i lbe r t , wen t t o t he Toyo t a Shaw Boulevard,

Pasig, Metro Manila. They met Popong Bernardo, a sales representative of Toyota. Sosa emphasized to Bernardo that he needed the Lite Ace not later than 17 June 1989 because he, his family, and balikbayan guest would use it on 18 June 1989 to go Marinduque, his home province, where he would celebrate his birthday on 19 June. He added that if he does not arrive in his hometown with the new car, hewould become a “laughing stock.” Bernardo assured Sosa that a unit would be ready for pick up at 10:00 a.m. on 17 June 1989. Bernardo then signed a document entitled “Agreements Between Mr. Sosa &Popong Bernardo of Toyota Shaw, Inc,” stipulating that all necessary documents will be submitted to Toyota Shaw (Popong Bernardo) a week after, upon arrival of Mr. Sosa from the Province (Marinduque) where the unit will be used on the 19 June; that the downpayment of P100,000.00 will be paid by Mr. Sosa on 15 June 1989; and that the Toyota Shaw, Inc.will be released a yellow Lite Ace unit. It was also agreed upon by the parties that the balance of the purchase price would be paid by credit financing through B.A. Finance, and for this Gilbert, on behalf of his father, signed the documents of Toyota and B.A. Finance pertaining to the application for financing. The next day, Sosa and Gilbert went to Toyota to deliver the downpayment of P100,000.00. They met Bernardo who then accomplished a printed Vehicle Sales Proposal (VSP) 928, on which Gilbert signed under the subheading “conforme”. This document shows that the customer’s name is “Mr. Luna Sosa” with home address at 2316 Guijo Street, United Parañaque II; that the model series of the vehicle is a “Lite Ace 1500″ described as “4 Dr minibus”; that payment is by “installment,” to be financed by “B.A.,” with the initial

cash outlay of P100,000.00 (downpayment: P53,148.00; insurance: P13,970.00; BLT registration fee: P1,067.00; CHMO fee: P2,715.00; Service fee: P500.00;and accessories: P29,000.00) and the balance to be financed isP274,137.00. The spaces provided for “delivery terms” were not filled-up. It also contains conditions of sales providing that the sale is subject to the availability of the unit, and that the stated price is subject to change without prior notice, and that the price prevailing and in effect that time of selling will apply. Rodrigo Quirante, the Sales Supervisor of Bernardo, checked and approved the VSP. On 17 June (9:30 a.m.), Bernardo called Gilbert to inform him that the vehicle would not be ready for pick up at 10:00 a.m. as previously agreed upon but at 2:00 p.m. that same day. At 2:00 p.m., Sosa and Gilbert met Bernardo at the latter’s office. According to Sosa, Bernardo informed them that the Lite Ace was being readied for delivery. After waiting for about an hour, Bernardo told them that the car could not be delivered because it was acquired by a more influential person. Toyota contends, however, that the Lite Ace was not delivered to Sosa because of the disapproval of B.A. Finance of the credit financing application of Sosa. It further alleged that a particular unit had already been reversed and earmarked for Sosa but could not be released due to the uncertainty of payment of the balance of the purchase price. Toyota t hen gave Sosa t he op t i on t o pu rchase t he un i t by pay ing t he fu l l purchase price in cash but Sosa refused. After it became clear that the Lite Ace would not be delivered to him, Sosa asked that his downpayment be refunded. Toyota did so on the very same day by issuing a Far East Bank check for the full amount of P100,000.00, the receipt of which was shown by a check voucher of

Toyota, which Sosa signed with the reservation, “without prejudice to our future claims for damages.” Thereafter, Sosa sent two letters to Toyota: one on 27 June1989 demanding the refund, within 5 days from receipt, of the downpayment of P100,000.00 plus interest from the time he paid it and the payment of damages with a warning that in case of Toyota’s failure to do so he would be constrained to take legal action; and the other on 4November 1989 (signed by M.O. Caballes, Sosa’s counsel) demanding P1M representing interest and damages, again, with a warning that legal action would be taken if payment was not made within 3 days. Toyota’s counsel answered through as letter dated 27 November 1989 8 refusing to accede to the demands of Sosa. But even before the answer was made and received by Sosa, the latter filed on 20 November 1989 with the RTC Marinduque (Branch 38) a complaint against Toyota for damages under Articles 19 and 21 of the Civil Code in the total amount of P1,230,000.00. After trial on the issue agreed upon during the pre-trial session, the trial court rendered on 18February 1992 a decision in favor of Sosa. It ruled that the “Agreement between Mr. Sosa and Popong Bernardo,” was a valid perfected and contract of sale between Sosa and Toyota which bound Toyota to deliver the vehicle to Sosa, and

further agreed with Sosa that Toyota acted in bad faith in selling to another the unit already reserved for him; that Bernardo, as an authorized sales executive of Toyota Shaw, was the latter’s agent and thus bound Toyota Shaw; that Luna Sosa proved his social standing in the community and suffered besmirched reputation, wounded f ee l i ngs and s l e ep l e s s n igh t s f o r wh ich he ough t t o be compensated; and thus rendered judgment ordering Toyota Shaw to pay Sosa the sum of P75,000 as moral damages, P10,000 as exemplary damages, P30,000 as attorney’s fees plus P2,000 lawyer’s transportation fare per trip in attending to the hearing of the case,P2,000 for Sosa’s transportation fare per trip in attending the hearing of the case, and to pay the cost of the suit. Dissatisfied with the trial court’s judgment, Toyota appealed to the Court of Appeals (CA-GR CV 40043). In its decision promulgated on 29July 1994, the Court of Appeals affirmed in toto the appealed decision. Hence the petition for review by certiorari by Toyota Shaw. The Supreme Court granted the petition, and dismissed the challenged decision of the Court of Appeals and that of Branch 38 of the Regional Trial Court of Marinduque, and the counterclaim therein; without pronouncement as to costs.

Contract of sale defined; Kinds

Article 1458 of the Civil Code defines a contract of sale as “By the contract of the sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the o the r t o pay t he r e fo r a p r i c e c e r t a i n i n money o r i t s equ iva l en t . A contract of sale may be absolute or conditional.

Contract of sale, when perfected; Effect

Article 1475 of the Civil Code specifically provides when the contract of sale is deemed perfected, i.e. “The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts.

The “Agreements between Mr. Sosa & Popong Bernardo of Toyota Shaw, Inc.” executed on 4 June 1989, is not a contract of sale.

No obligation on the part of Toyota to transfer ownership of a determinate thing to Sosa and no correlative obligation on the part of the latter to pay therefor a price certain appears therein. The provision on the downpayment of P100,000.00 made no specific reference to a sale, it could only refer to a s a l e on i n s t a l lmen t ba s i s , a s t he VSP execu t ed t he fo l l owing day confirmed. But nothing was mentioned about the full purchase price and the manner the installments were to be paid. Neither logic nor recourse to one’s imagination can lead to the conclusion that such agreement is a perfected contract of sale.

Definitive price is an essential element in the formation of a binding and enforceable contract of sale

A de f in i t e ag reemen t on t he manne r o f paymen t o f t he p r i c e i s an essential element in the formation of a binding and enforceable contract of sale. This is so because the agreement as to the manner of payment goes into the price such that a disagreement on the manner of payment is tantamount to a failure to agree on the price. Definiteness as to the price is an essential element of a binding agreement to sell personal property.

No meeting of the minds

The “Agreements between Mr. Sosa & Popong Bernardo of Toyota Shaw, Inc.” shows the absence of a meeting of minds between Toyota and Sosa. Sosa did not even sign it. Further, Sosa was well aware from its title, written in bold letters, and thus knew that he was not dealing with Toyota but with Popong Bernardo and that the latter did not misrepresent that he had the authority to sell any Toyota vehicle.

Prudence and reasonable diligence in inquiring authority of agent

Sosa knew that Bernardo was only a sales representative of Toyota and hence a mere agent of the latter. It was incumbent upon Sosa to act with ordinary prudence and reasonable diligence to know the extent of Bernardo’s authority as an agent in respect of contracts to sell Toyota’s vehicles. A person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent.

Three stages in the contract of sale

There are three stages in the contract of sale, namely (a) preparation, concep t i on , o r gene ra t i on , wh ich i s t he pe r i od o f nego t i a t i on and ba rga in ing , end ing a t t he momen t o f ag reemen t o f t he pa r t i e s ; ( b ) perfection of birth of the contract, which is the moment when the parties come to agree on the terms of the contract; and (c) consummation or death, which is the fulfillment or performance of the terms agreed upon in the contract. In the present case, the “Agreements between Mr. Sosa& Popong Bernardo of Toyota Shaw, Inc.” may be considered as part of the initial phase of the generation of negotiation stage of a contractsale. The second phase of the generation or negotiation stage was the execution of the VSP (the downpayment of the purchase price wasP53 ,148 .00 wh i l e t he ba l ance t o be pa id on i n s t a l lmen t shou ld be financed by B.A. Finance. It is assumed that B.A Finance was acceptable to Toyota).

Financing companies defined

Financ ing compan i e s a r e de f i ned i n Sec t i on 3 ( a ) o f RA 5980 , a s amended by PDs 1454 and 1793, as “corporations or partnerships, excep t t hose r egu l a t ed by t he Cen t r a l Bank o f t he Ph i l i pp ine s , t he Insurance Commission and the and the Cooperatives Administration Office, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, either by discounting or factoring commercial papers or accounts receivable, or by buying and selling contracts, leases, chattel mortgages, or other evidence of indebtedness, or by leasing of motor vehicles, heavy equipment and industrial machinery, business and office machines and equipment, appliances and other movable property.”

Parties in a sale on installment basis financed by a financing company; No meeting of minds as financing application was disapproved

In a sale on installment basis which is financed by a financing company,3 parties are thus involved: (1) the buyer who executes a note or notes for the unpaid balance of the price of the thing purchased on installment, (2) the seller who assigns the notes or discounts them with a financing company, and (3) the financing company which is subrogated in the place of the seller, as the creditor of the installment buyer. Since B.A. Finance did not approve Sosa’s application, there was then no meeting of minds on the sale on installment basis.

Toyota’s version of circumstances leading to non-release of vehicle more credible

Toyota’s version that B.A. Finance disapproved Sosa’s application for which reason it suggested to Sosa that he pay the full purchase price is more credible. When the latter refused, Toyota cancelled the VSP and returned to him his P100,000.00. Sosa’s version, that the VSP was cancelled because the vehicle was delivered to another because of a more influential client, is contradicted by paragraph 7 of his complaint which states that Bernardo “for reasons known only to its representatives, refused and/or failed to release the vehicle to the plaintiff . Plaintiff demanded for an explanation, but nothing was given.”

VSP mere proposal and did not create demandable right in favor of Sosa when it was aborted

The VSP was a mere proposal which was aborted in lieu of subsequent events. Thus, the VSP created no demandable right in favor of Sosa for the delivery of the vehicle to him, and its non-delivery did not cause any legally indemnifiable injury.

Award of moral damages without legal basis

The award of moral damages is without legal basis. The only ground upon which Sosa claimed moral damages is that since it was known to his friends, townmates, and relatives that he was buying a Toyota Lite Ace which they expected to see on his birthday, he suffered humiliation, shame, and sleepless nights when the van was not delivered. The van became the subject matter of talks during his celebration that he may not have paid for it, and this created an impression against his business standing and reputation created an impression against his business standing and reputation. At the bottom of this claim is nothing but misplaced pride and ego. He should not have announced his plan to buy Toyo t a L i t e Ace knowing t ha t he migh t no t be ab l e t o pay t he fu l l purchase price. It was he who brought embarrassment upon himself by bragging about a thing which he did not own yet.

Award of exemplary damages without basis; Purpose of exemplary damages

Since Sosa is not entitled to moral damages and there being no awardfor temperate, liquidated, or compensatory damages, he is likewise not entitled to exemplary damages. Under Article 2229 of the Civil Code, exemplary or corrective damages are imposed by way of example or correction for the public good, in addition to moral, temperate, liquidated, or compensatory damages.

Award of attorney’s fees without basis

For attorney’s fees to be granted the court must explicitly state in thebody of the decision, and not only in the dispositive portion thereof, the legal reason for the award of attorney’s fees. No such explicit determination thereon was made in the body of the decision of the trial court. Thus, no reason exists for such award.

B. Elements of the Contract of Sale

1. ESSENTIAL REQUISITES (Art. 1505) - without which there can be no valid sale. Consent - consent to transfer ownership in exchange for the price Determinate subject matter Price certain money or its equivalent - the cause of consideration

2. Natural - inherent in the contract; even in their absence they are deemed to exist warranty against eviction (deprivation of the property bought) warranty against hidden defects Accidental - may be present or absent in the stipulation

Ex. Place or time of payment

C. STAGES IN THE CONTRACT OF SALE1.Generation/negotiation2. Perfection - meeting of the minds (Art. 1475); when the auctioneer announces its perfection

by the fall of the hammer in case of sale by auction (Art. 1476)3. Consummation - when the objects is delivered & the price is paid

D. OBLIGATIONS CREATED The buyer may compel the seller to deliver the thing bought (determinate thing), or theobligation

be complied with at the expense of the seller (indeterminate or generic) - Art.1165 Liable for damages in case fraud, negligence, or delay, and those who in any manner contravene

the tenor (Art 1170)

E. CHARACTERISTICS OF A CONTRACT OF SALE1. Consensual - perfected by mere consent2. Bilateral reciprocal - both parties are bound by obligations dependent upon each other3. Onerous - to acquire rights, valuable consideration must be given4. Commutative - values exchanged are almost equivalent to each other5. Principal - for sale to exist, no necessity to depend upon the existence of another contract6. Nominate - refers to it by special designation – “contract of sale “

NOMINATE AND PRINCIPAL

Romero v. CA 250 SCRA 15

Facts: Virgilio Romero and his foreign partners decided to put up a central warehouse in Metro Manila. Alfonso Flores, in behalf of Enriqueta Chua vda. De

Ongsiong, proposed the latter’s lot to Romero as the site for the said warehouse. A contract denominated as “Deed of Conditional Sale” was executed between Romero and

Ongsiong where the amount of P50,000 was received from Romero for the purpose of taking up an ejectment case against the squatters found therein. Ongsiong sought to return the amount she received from Romero as she claimed she is unab l e t o r i d t he l and o f squa t t e r s , no tw i th s t and ing t he f avo rab l e judgment already promulgated by the court in the ejectment case. Romero’s counsel refused the tender and expressed willingness to underwrite the expense of executing the judgment chargeable to the purchase price of the land. Ongsiong filed a case with the trial court for the rescission of the deed of “conditional” sale, and for the consignation of the amount of P50,000. The trial court rendered a decision in favor of Romero, which was reversed by the Court of Appeals.

Issue: Whether the “Deed of Conditional Sale” is a perfected contract of sale.

Held: The deed of sale, even if denominated as a deed

of conditional sale, may be treated as absolute in nature, especially if title to the p rope r ty so ld i s no t r e se rved i n t he vendo r o r i f t he vendo r i s no t granted the right to unilaterally rescind the contract predicated on the fulfillment or non-fulfillment of the prescribed condition. In determining the real character of contract, the substance and not the title given by the party is more significant. Upon perfection, i.e. where the seller obligates himself, for a price certain, to deliver and to transfer ownership of a specific thing or right to the buyer over which the latter agrees, the parties are bound not only to the fulfillment of what was expressly stipulated but also the consequences which may be in keeping with good faith, usage and law. Being a perfected contract of sale, no rescission can be had. The proper action is an action for damages. Arguendo that rescission is available as a remedy, as provide by Article1191 in reciprocal obligations, it may only be availed of by the injured party.

F. Sale of Title and Not Mode

Equatorial Realty vs. Mayfair Theater [G.R. No. 106063. November 21,1996.]

Facts: Carmelo & Bauermann Inc. (Carmelo) owned a parcel of land, together with two 2-storey buildings constructed thereon located at Claro M Recto Avenue, Manila (TCT 18529, Register of Deeds of Manila).On 1 June 1967, Carmelo entered into a contract of lease with Mayfair Theater for the latter’s lease of a portion of Carmelo’s property, i.e. a portion of the 2/F of the two-storey building with floor area of 1610sq.ms. and the second floor and mezzanine of the two-storey building situated at CM Recto Avenue, Manila with a floor area of 150 sq.ms. for use by Mayfair as a motion picture theater and for a term of 20 years. Mayfair

thereafter constructed on the leased property a movie house known as Maxim Theatre. On 31 March 1969, Mayfair entered into a second contract of lease with Carmelo for the lease of another portion of Carmelo’s property, i.e. a portion of the 2/F of the two-storey building with floor area of 1064 sq.ms. and two store spaces at the ground floor and mezzanine of the two-storey building situated at CM Recto Avenue, Manila with a floor area of 300 sq.ms. and bearing street numbers 1871 and 1875 for similar use as a movie theater and for a similar term of 20years. Mayfair put up another movie house known as ‘Miramar Theatre’ on this leased property. Both contracts of

lease provide identically worded paragraph 8, which reads “That if the LESSOR should desire to sell the leased premises, the lessee shall be given 30-days exclusive option to purchase the same. In the event, however, that the leased premises is sold to someone other than the Lessee, the lessor is bound and obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale thereof that the purchaser shall recognize this lease and be bound by all the terms and conditions thereof.” Sometime in August1974, Mr. Henry Pascal of Carmelo informed Mr. Henry Yang, President of Mayfair, through a telephone conversation that Carmelo was desirous of selling the entire Claro M. Recto property. Mr. Pascal told Mr. Yang that a certain Jose Araneta was offering to buy the whole property forUS$1,200,000, and Mr. Pascal asked Mr. Yang if the latter was willing to buy the property for P6 million to P7 million. Mr. Yang replied that he would let Mr. Pascal know of his decision. On 23 August 1974, Mayfair replied through a letter confirming the correspondence between Pascual and Yang and reiterating paragraph 8 of the two contracts of lease. Carmelo did no reply to this letter. On 18 September 1974, Mayfair sent another letter to Carmelo purporting to express interest in acquiring not only the leased premises but the entire building and other improvements if the price is reasonable. However, both Carmelo and Equatorial questioned the authenticity of the second letter. Four years later, on 30 July 1978, Carmelo sold its entire CM. Recto Avenue land and building, which included the leased premises housing the ‘Maxim’ and ‘Miramar’ theatres, to Equatorial by virtue of a Deed of Absolute Sale, for the total sum of P1,300,000.In September 1978, Mayfair instituted the action for specific pe r fo rmance and annu lmen t o f t he s a l e o f t he l e a sed p r emi se s t o Equatorial. In its Answer, Carmelo alleged as special and affirmative defense that it had informed Mayfair of its desire to sell the entire CM. Recto Avenue property and offered the same to Mayfair, but the latter answered that it was interested only in buying the areas under lease, which was impossible since

the property was not a condominium; and that the option to purchase invoked by Mayfair is null and void for lack o f cons ide ra t i on . Equa to r i a l , i n i t s Answer , p l e aded a s spec i a l and affirmative defense that the option is void for lack of consideration and is unenforceable by reason of its impossibility of performance because the leased premises could not be sold separately from the other portions o f t he l and and bu i l d ing . I t coun t e r c l a imed fo r c ance l l a t i on o f t he con t r ac t s o f l e a se , and fo r i nc r ea se o f r en t a l s i n v i ew o f a l l eged supervening extraordinary devaluation of the currency. Equatorial likewise cross-claimed against codefendant Carmelo for indemnification in respect of Mayfair’s claims. After assessing the evidence, the court rendered decision dismissing the complaint with costs against Mayfair; ordering Mayfair to pay Carmelo & Bauermann P40,000.00 by way of a t t o rneys ’ f ee s on i t s coun t e r c l a im ; and o rde r i ng Mayfa i r t o pay Equatorial Realty P35,000.00 per month as reasonable compensation for the use of areas not covered by the contracts of lease from 31 July 1979until Mayfair vacates said areas plus legal interest from 31 July 1978;P70,000.00 per month as reasonable compensation for the use of the premises covered by the contracts of lease dated (1 June 1967 from 1June 1987 until Mayfair vacates the premises plus legal interest from 1June 1987; P55,000.00 per month as reasonable compensation for the use of the premises covered by the contract of lease dated 31 March1969 from 30 March 1989 until Mayfair vacates the premises plus legal interest from 30 March 1989; and P40,000.00 as attorney’s fees; and dismissing Equatorial’s crossclaim against Carmelo & Bauermann. The trial court adjudged the identically worded paragraph 8 found in both l e a se con t r ac t s t o be an op t i on c l ause wh ich howeve r c anno t be deemed to be binding on Carmelo because of lack of distinct consideration therefor. Mayfair taking exception to the decision of the trial court, appealed tothe Court of Appeals. The appellate court reversed the trial court and rendered judgment reversing and setting aside the appealed Decision;

directing Mayfair to pay and return to Equatorial the amount of P11,300,000.00 within 15 days from notice of this Decision, and ordering Equatorial to accept such payment; directing Equatorial, upon payment of the sum of P11,300,000, to execute the deeds and documents necessary for the issuance and transfer of ownership to Mayfair of the lot registered under TCT 17350, 118612, 60936, and52571; and should Mayfair be unable to pay the amount as adjudged, declaring the Deed of Absolute Sale between Carmelo and

Equatorial as valid and binding upon an the parties. Hence, the petition for review. The Supreme Court denied the petition for review of the decision of the Court of Appeals (23 June 1992, in CA-GR CV 32918), declaring the Deed of Absolute Sale between Equatorial and Carmelo as deemed rescinded; ordering Carmelo to return to Equatorial the purchase price; directing Equatorial to execute the deeds and documents necessary to return ownership to Carmelo of the disputed lots; and ordering Carmelo to allow Mayfair to buy the lots for P11,300,000.

Issue on irregularities in Court of Appeals passed upon so as not to preempt the administrative proceedings related thereto

It was raised that the Court of Appeals violated its own internal rules in the assignment of appealed cases when it allowed the same Division XII, particularly Justice Manuel Herrera, to resolve all the motions in the “Completion Process” and to still resolve the merits of the case in the “Decision Stage.” This was related to letter complaint written by the counsel for Equatorial on 20 September 1992 to the Supreme Court alleging certain irregularities and infractions committed by certain lawyers, and Justices of the Court of Appeals and of the Supreme Court in connection with case CA-GR CV 32918 (GR 106063). This partakes of t he na tu r e o f an admin i s t r a t i ve compla in t f o r m i sconduc t , aga in s t member s o f t he j ud i c i a ry . Whi l e t he l e t t e r - compla in t a ro se a s an incident in said case, the disposition thereof should be separate and independent from case GR 106063. It would be correct, prudent and consistent course of action not to pre-empt the administrative p roceed ings t o be unde r t aken r e spec t i ng t he s a id i r r egu l a r i t i e s . A discussion of such in the present case would entail a finding on the merits as to the real nature of the questioned procedures and the true intentions and motives of the players therein.

Paragraph 8 of lease contracts provides for a right of first refusal, and is not an option clause nor an option contract

The contractual stipulation (Paragraph 8) provides for a right of first refusal in favor of Mayfair. It is not an option clause or an option contact. It is a contract of a right of first refusal. The true nature of the paragraph 8 is ascertained to be that of a contractual grant of the right of first refusal to Mayfair.

Option contract; Validity based on a separate and distinct consideration

As early as 1916, in the case of Beaumont vs. Prieto, unequivocal was our characterization of an option contract as one necessarily invoking the choice granted to another for a distinct and separate consideration as to whether or not to purchase a determinate thing at a predetermined fixed price. T he deed of option or option clause in a con t r ac t , i n o rde r t o be va l i d and en fo rceab l e , mus t , among o the r things, indicate the definite price at which the person granting the option, is willing to sell.

Option contract, according to Bouvier Law Dictionary

Bouvier, in his Law Dictionary (edition of 1897) defines an option as a con t r ac t , “ a con t r ac t by v i r t ue o f wh ich A , i n cons ide ra t i on o f t he

payment of a certain sum to B, acquires the privilege of buying from, or selling to B, certain securities or properties within a limited time at a specified price. (Story vs Salamon, 71 N.Y. 420.)”

Option contract, according to “Words and Phrases”

An agreement in writing to give a person the option to purchase lands within a given time at a named price is neither a sale nor an agreement to sell. It is simply a contract by which the owner of property agrees with another person that he shall have the right to buy his property at a fixed price within a certain time. He does not sell his land, he does not then agree to sell it; but he does sell something; that is, the right or privilege to buy at the election or option of the other party. The second party gets in praesenti, not lands, nor an agreement that he shall have lands, but he does get something of value, that is, the right to call for and receive lands if he elects The owner parts with his right to sell his lands, except to the second party, for a limited period The second party receives thisright, or, rather, from his point of view, he receives the right to elect to buy. (Vol. 6, page 5001, of the work ‘Words and Phrases, ‘citing the case of Ide vs. Leiser [24 Pac., 695; 10 Mont., 5; 24 Am. St. Rep., 17]).

Cases involving option contracts

In Tuason vs. de Asis (107 PHIL 131 [1960]), it was held that the lessee loses his right to buy the leased property for a named price per square meter upon failure to make the purchase within the time specified. In Mendoza vs. Comple (15 SCRA 162), the Court freed the landowner from he r p romi se t o s e l l he r l and i f t he p ro spec t i ve buye r cou ld r a i s e P4,500.00 in 3 weeks because such option was not supported by a distinct consideration. In the same vein, in Sanchez vs. Rigos (45 SCRA368 [1972]), the Court also invalidated an instrument entitled, “Optionto Purchase” a parcel of land for the sum of P1,510.00 because of lack of consideration. And as an exception to the doctrine enumerated in the two preceding cases, in Vda de Quirino vs. Palarca (29 SCRA 1 [1969]), it was ruled that the option to buy the leased premises for P12,000.00 as stipulated in the lease contract, is not without consideration for in reciprocal contracts, like lease, the obligation or promise of each party isthe consideration for that of the other. In all these cases, the sellingprice of the object thereof is always predetermined and specified in the option clause in the contract or in the separate deed of option. Ang Yu Asuncion case:

Perfection of a contract of sale

In sales, the contract is perfected when a person, called the seller, obligates himself, for a price certain, to deliver and to transfer ownership of a thing or right to another, called the buyer, over which the l a t t e r ag ree s . Ar t i c l e 1458 o f t he C iv i l Code p rov ide s t ha t “By t he contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the o the r t o pay t he r e fo r a p r i c e c e r t a i n i n money o r i t s equ iva l en t . A contract of sale may be absolute or conditional.”

Contract to sell is conditional; Effect of breach of condition

When the sale is not absolute but conditional, such as in a “Contract to Sell” where invariably the ownership of the thing sold is retained until the fulfillment of a positive suspensive condition (normally, the full payment of the purchase price), the breach of the condition will prevent the obligation to convey title from acquiring an obligatory force.

Uncond i t i ona l mu tua l p romi se t o buy and s e l l ob l i ga to ry on t he parties

An unconditional mutual promise to buy and sell, as long as the object is made de t e rmina t e and t he p r i c e i s f i xed , c an be ob l i ga to ry on t he parties, and compliance therewith may accordingly be exacted.

Perfected contract of option

An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with a valuable consideration distinct a n d s e p a r a t e f r o m t h e p r i c e , i s w h a t m a y p r o p e r l y b e t e r m e d a perfected contract of option. This contract is legally binding, and in sales, it conforms with the second paragraph of Article 1479 of the Civil Code, which provides that “An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissory if the promise is supported by a consideration distinct from the price.(1451a)”

Option not the contract of sale itself

The option is not the contract of sale itself. The optionee has the right, but not the obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted before a breach of the option, a bilateral promise to sell and to buy ensues and both parties are then reciprocally bound to comply with their respective undertakings.

Offer

A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is merely an offer. Public advertisements or solicitations and the like are ordinarily construed as mere invitations to make offers or only as proposals. These relations, until a contract is perfected, are not considered binding commitments. Thus, at any time prior to the pe r f ec t i on o f t he con t r ac t , e i t he r nego t i a t i ng pa r t y may s t op t he negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270).

Offer with a period; Effects of withdrawal

(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right to withdrawal the offer before its acceptance, or, if an acceptance has been made, before t he o f f e ro r ’ s coming t o know o f such f ac t , by commun ica t i ng t ha t withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a un i l a t e r a l p romi se t o s e l l unde r Ar t . 1479 , mod i fy ing t he p r ev ious decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank of Parañaque, Inc., vs. Remolado, 135SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim under Article 19 of the Civil Code which ordains that “every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith.”

(2) If the period has a separate consideration, a contract of “option” is deemed perfected, and it would be a breach of that contract to withdraw the offer during the agreed period. The option, however, is an independent contract by itself, and it is to be distinguished from the projected main agreement (subject matter of the option) which is obviously yet to be concluded. If, in fact, the optioner-offeror withdraws the offer before its acceptance (exercise of the option) by the optionee-offeree, the latter may not sue for specific performance on the proposed contract (”object” of the option) since it has failed to reach its own stage of perfection. The optioner-

offeror, however, renders himself liable for damages for breach of the option. In these cases, care should be taken of the real nature of the consideration given, for if, in fact, it has been intended to be part of the consideration fo r t he ma in con t r ac t w i th a r i gh t o f w i thd rawa l on t he pa r t o f t he op t i onee , t he ma in con t r ac t cou ld be deemed pe r f ec t ed ; a s im i l a r instance would be an “earnest money” in a contract of sale that can evidence its perfection (Art. 1482, Civil Code).

Requirement for separate consideration has no applicability as paragraph 8 is not an option contract but a right of first refusal

No option to purchase in contemplation of the second paragraph of Article 1479 of the Civil Code, has been granted to Mayfair under the said lease contracts. Paragraph 8 grants the right of first refusal to Mayfair and is not an option contract. The requirement of a separate consideration for the option, thus, has no applicability in the case. There is nothing in paragraph “8″of the contracts which would bring them into t he amb i t o f t he u sua l o f f e r o r op t i on r equ i r i ng an i ndependen t consideration.

Option and Right of First Refusal distinguished

An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price. It is a separate and distinct contract from that which the parties may enter into upon the consummation of the option. It must be supported by consideration. In t he i n s t an t c a se , t he r i gh t o f f i r s t r e fu sa l i s an i n t eg ra l pa r t o f t he contracts of lease. The consideration is built into the reciprocal obligations of the parties.

Righ t o f F i r s t Re fusa l i nu t i l e i f gove rned by Ar t i c l e 1324 on withdrawal of the offer on Article 1479 on promise to buy and sell

To rule that a contractual stipulation such as that found in paragraph 8of the contracts is governed by Article 1324 on withdrawal of the offeron Article 1479 on promise to buy and sell would render ineffectual or “inutile” the provisions on right of first refusal so commonly inserted in leases of real estate nowadays. Paragraph 8 was incorporated into the contracts of lease for the benefit of Mayfair which wanted to be assured t ha t i t sha l l be g iven t he f i r s t c r ack o r t he f i r s t op t i on t o buy t he property at the price which Carmelo is willing to accept.

Consideration in an agreement of right of first refusal: Consideration for lease

It is not correct to say that there is no consideration in an agreement of right of first refusal. The stipulation is part and parcel of the entire contract of lease. The consideration for the lease includes the consideration for the right of first refusal.

Consideration in an agreement of right of first refusal: Consideration is obligation or promise (reciprocal contract)

Mayfair is in effect stating that it consents to lease the premises and to pay t he p r i c e ag reed upon p rov ided t he l e s so r a l so consen t s t ha t , should it sell the leased property, then, Mayfair shall be given the right to match the offered purchase price and to buy the property at that price. As stated in Vda. De Quirino vs. Palarca, in reciprocal contract, the obligation or promise of each party is the consideration for that of the other.

Difference to Ang Yu Asuncion case: Equatorial Realty and Carmelo acted in bad faith

Carmelo and Equatorial Realty acted in bad faith to render Paragraph 8“inutile.” What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that Mayfair will have the right of first refusal in theevent Carmelo sells the leased premises. It is

undisputed that Carmelo d id r e cogn i ze t h i s r i gh t o f Mayfa i r , f o r i t i n fo rmed t he l a t t e r o f i t s intention to sell the said property in 1974. There was an exchange of letters evidencing the offer and counter-offers made by both parties. Carmelo, however, did not pursue the exercise to its logical end. While it initially recognized Mayfair’s right of first refusal, Carmelo violated such r i gh t when w i thou t a f fo rd ing i t s nego t i a t i ons w i th Mayfa i r t he fu l l process to ripen to at least an interface of a definite offer and a possible corresponding acceptance within the “30-day exclusive option” time granted Mayfair, Carmelo abandoned negotiations, kept a low profile for some time, and then sold, without prior notice to Mayfair, the entire Claro M. Recto property to Equatorial.

Rescission lies when the purchase is in bad faith

Equatorial (being aware of the lease contracts because its lawyers had, prior to the sale, studied the said contracts) is a buyer in bad faith, and thus renders the sale to it of the property in question rescissible. Guzman, Bocaling & Co. vs. Bonnevie case

Rescission as remedy

Rescission is a remedy granted by law to the contracting parties and even to third persons, to secure reparation for damages caused to them by a contract, even if this should be valid, by means of the restoration of things to their condition at the moment prior to the celebration of said contract. It is a relief allowed for the protection of one of the contracting parties and even third persons from all injury and damage the contract may cause , o r t o p ro t ec t some i ncompa t i b l e and p r e f e r en t i a l r i gh t created by the contract. Rescission implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone that justifies its invalidation for reasons of equity.

Purchaser not considered a third party

It is true that the acquisition by a third person of the property subject of the contract is an obstacle to the action for its rescission where it is shown that such third person is in lawful possession of the subject of the contract and that he did not act in bad faith. However, this rule is not applicable in the case before us because the petitoner is not considered a third party in relation to the Contract of Sale nor may its possession of the subject property be regarded as acquired lawfully and in good faith.

Purchaser in good faith defined

A pu rchase r i n good f a i t h and fo r va lue who buys t he p rope r ty o f another without notice that some other person has a right to or interest in such property and pays a full and fair price for the same at the time of such purchase or before he has notice of the claim or interest of some other person in the property. Good faith connotes an honest intention to abstain from taking unconscientious advantage of another. Tested by these principles, the petitioner cannot tenably claim to be a buyer in good f a i t h a s i t had no t i c e o f t he l e a se o f t he p rope r ty and such knowledge should have cautioned it to look deeper into the agreement to determine if it involved stipulations that would prejudice its own interests.

Purchaser required to know term of lease contract when buying property under lease

Hav ing known tha t t he p rope r ty i t was buy ing was unde r l e a se , i t b ehooved i t a s a p ruden t pe r son t o have r equ i r ed t he owne r o f t he property or the broker to show to it the Contract of Lease in which the right of first refusal is contained.

Indivisibility of the property

Common sense and f a i rne s s d i c t a t e t ha t i n s t e ad o f nu l l i f y ing t he agreement on the basis that the entire property is indivisible property, t he s t i pu l a t i on shou ld be g iven e f f ec t by i nc lud ing t he i nd iv i s i b l e appurtenances in the sale of the dominant portion under the right of first refusal. A valid and legal contract where the ascendant or the more important of the two parties is the landowner should be given effect, if possible, instead of being nullified on a selfish pretext posited by the owner. Following the arguments of petitioners and the participation of the owner in the attempt to strip Mayfair of its rights; the right of first refusal should include not only the property specified in the contracts but also the appurtenant portions sold to Equatorial which are claimed by petitioners to be indivisible.

Boundaries of the property sold

Mayfa i r i s au tho r i zed t o exe rc i s e i t s r i gh t o f f i r s t r e fu sa l unde r t he contract to include the entirety of the indivisible property. The boundaries of the property sold should be the boundaries of the offer under the right of first refusal.

Doctrine in Ang Yu Asuncion deemed modified

As to the remedy to enforce Mayfair’s right, the Court disagrees to a certain extent with the concluding part of the dissenting opinion of Justice Vitug. The doctrine enunciated in Ang Yu Asuncion vs. Court of Appeals should be modified, it not amplified under the peculiar facts of the present case.

Multiplicity of suits frowned upon by Court; Relief: (1) Contract between Equatorial and Carmelo rescinded, (2) Price fixed

The Supreme Court has always been against multiplicity of suits where all remedies according to the facts and the law can be included. Since Mayfair has a right of first refusal, it can exercise the right only if the fraudulent sale is first set aside or rescinded. All of these matters are now before us and so there should be no piecemeal determination of this case and leave festering sores to deteriorate into endless litigation. Since Carmelo sold the property for P11,300,000 to Equatorial, the price at which Mayfair could have purchased the property is, therefore, fixed. The damages which Mayfair suffered are in terms of actual injury and lost opportunities. The fairest solution would be to allow Mayfair to exercise its right of first refusal at the price which it was entitled to accept or reject which is P11,300,000. To follow an alternative solution that Carmelo and Mayfair may resume negotiations for the sale to the latter of the disputed property would be unjust and unkind to Mayfair because it is once more compelled to litigate to enforce its right.

Present case covered by law on contracts, not merely by codal provisions on human relations

Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that there was nothing to execute because a contract over the right of first refusal belongs to a class of preparatory juridical relations governed not by the law on contracts but by the codal provisions on human relations. This may apply if the contract is limited to the buying and selling of the real property. However, the obligation of Carmelo to f i r s t o f f e r t he p rope r ty t o Mayfa i r i s embod ied i n a con t r ac t . I t i s Paragraph 8 on the right of first refusal which created the obligation. It should be enforced according to the law on contracts instead of the panoramic and indefinite rule on human relations. The latter remedy encourages multiplicity of suits. There is something to execute and that is for Carmelo to comply with its obligation to the property under the right of the first refusal according to the

terms at which they should have been offered then to Mayfair, at the price when that offer should have been made. Also, Mayfair has to accept the offer. This juridical relation is not amorphous nor is it merely preparatory. Paragraphs 8 of the two leases can be executed according to their terms.

No interest due

Carmelo and Equatorial cannot avail of considerations based on equity which might warrant the grant of interests. The vendor received as payment from the vendee what, at the time, was a full and fair price for the property. It has used the P11,300,000.00 all these years earning income or interest from the amount. Equatorial, on the other hand, has received rents and otherwise profited from the use of the property t u rned ove r t o i t by Ca rme lo . I n f a c t , du r i ng a l l t he yea r s t ha t t h i s controversy was being litigated, Mayfair paid rentals regularly to the buyer who had an inferior right to purchase the property. Mayfair is under no obligation to pay any interests arising from this judgment to either Carmelo or Equatorial.

Aznar vs. Yapdiangco [G.R. No. L-18536. March 31, 1965.]

Facts: In May 1959, Teodoro Santos advertised in two metropolitan papers the sale of his Ford Fairlane 500. In the afternoon of 28 May1959, a certain L. De Dios, claiming to be a nephew of Vicente Marella, went to the Santos residence to answer the ad. However, Teodoro was out during this call and only the latter’s son, Irineo received and talked with De Dios. The latter told the young Santos that he had come inbehalf of his uncle, Marella, who was interested to buy the advertised car. On being informed of the above, Teodoro instructed his son to see Marella the following day at his given address: 1642 Crisostomo Street, Sampaloc, Manila. And so, in the morning of 29 May 1959, Irineo went to s a id add re s s . A t t h i s mee t i ng , Mare l l a ag reed t o buy t he ca r f o r P14,700.00 on the understanding that the price would be paid only after the car had been registered in his name. Irineo then fetched his father who, together with De Dios, went to the office of a certain Atty. Jose Padolina where the deed of sale for the car was executed in Marella’s favor. The parties to the contract thereafter proceeded to the Motor Vehicles’ Office in Quezon City where the registration of the car in Marella’s name was effected. Up to that stage of the transaction, the purchase price had not been paid. From the Motor Vehicles Office, Teodoro returned to his house. He gave the registration papers and acopy of the deed of sale to his son and instructed him not to part

with them until Marella shall have given the full payment for the car. Irineo and De Dios then proceeded to 1642 Crisostomo Street, Sampaloc in Man i l a whe re t he fo rmer demanded fo r t he paymen t f rom Mare l l a . Marella said that the amount he had on hand then was short by someP2,000.00 and begged off to be allowed to secure the shortage from a sister supposedly living somewhere in Azcarraga Street, also in Manila. Thereafter, he ordered De Dios to go to the said sister and suggested t ha t I r i neo t o go w i th h im . A t t he s ame t ime , he r eques t ed fo r t he registration papers and the deed of sale from Ireneo on the pretext that he would like to show them to his lawyers. Trusting the good faith of Marella, Ireneo handed over the same to the latter and thereupon, in the company of De Dios and another unidentified person, proceeded to the alleged house of Marella’s sister. At a place in Azcarraga, Irineo and De Dios alighted from the car and entered a house, while their unidentified companion remained in the car. Once inside, De Dios asked Irineo to wait at the sala while he went inside a room. That was the last that Ireneo saw of him. For, after a considerable length of time waiting in vain for De Dios to return, Ireneo went down to discover that neither the car nor their unidentified companion was there anymore. Going back to the house, he inquired from a woman he saw for De Dios and he was told that no such name lived or was even known therein.

Whereupon, Ireneo rushed to 1642 Crisostomo to see Marella. He found the house closed and Marella gone. Finally, he reported the matter to his father who p rompt ly adv i s ed t he po l i c e au tho r i t i e s . Tha t ve ry s ame day , Mare l l a was ab l e t o s e l l t he c a r i n ques t i on t o Jo se B . Azna r , f o r P15,000.00. Aznar acquired the said car from Marella in good faith, for a valuable consideration and without notice of the defect appertaining to the vendor’s title. While the car was thus in the possession of Aznar and while he was attending to its registration in his name, agents of the Philippine Constabulary seized and confiscated the same inconsequence of the report to them by Teodoro that the

said car was unlawfully taken from him. Aznar filed a complaint for replevin before the CFI Quezon City (Branch IV) aga in s t Cap t a in Ra fae l Yapd i angco , t he head o f t he Ph i l i pp ine Constabulary unit which seized the car. Claiming ownership of the vehicle, he prayed for its delivery to him. In the course of the litigation, however, Teodoro Santos moved and was allowed to intervene by the lower court. At the end of the trial, the lower court rendered a decision awarding the disputed motor vehicle to Santos. From the decision, Aznar appealed. The Supreme Court dismissed the appeal and affirmed the decision of the lower court in full; with costs against Aznar.

Article 559 of the Civil Code; Santos entitled to recovery of personal property

San tos had been un l awfu l l y dep r ived o f h i s pe r sona l p rope r ty by Marella, from whom Aznar traces his right. Consequently, although Aznar acquired the car in good faith and for a valuable consideration from Marella, the said decision concluded, still Santos was entitled to its recovery on the mandate of Article 559 of the New Civil Code which provides:” The possession of movable property acquired in good faith is equivalent to title. Nevertheless, one who has lost any movable or has been unlawfully deprived thereof, may recover it from the person in possession of the same. If the possessor of a movable lost or of which the owner has been unlawfully deprived, has acquired it in good faith ata public sale, the owner cannot obtain its return without reimbursing the price paid therefor.” Under Article 559, the rule is to the effect that if the owner has lost the thing, or if he has been unlawfully deprived of it, he has a right to recover it, not only from the finder, thief or robber, but also from the third person who may have acquired it in good faith from such finder, thief or robber.

Seller’s title, voidable at least, essential in Article 1506; Article 559 applies

Article 1506 provides:” Where the seller of goods has a voidable title thereto, but his title has not been voided at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith, for value, and without notice of the seller’s defect of title.” Under the provision, it is essential that the seller should have a voidable title atleast. It is very clearly inapplicable where the seller had no title at all.

Ownership or title acquired only by tradition or delivery; Article 712 of the Civil Code

Under Article 712 of the Civil Code, “ownership and other real rights over property are acquired and transmitted by law, by donation, by testate and intestate succession, and in consequence of certain contracts, by tradition.” As interpreted by this Court in a host of cases, by this provision, ownership is not transferred by contract merely but by tradition or delivery. Contracts only constitute titles or rights to the transfer or acquisition of ownership, while delivery or tradition is the mode of accomplishing the same. (Gonzales vs. Rojas, 16 Phil. 51;Ocejo, Perez and Co. vs. International Bank, 37 Phil. 631; Fidelity and Depos i t Co . v s . Wi l son , 8 Ph i l . 51 ; Kuenz l e & S tre i f f v s . Wacke & Chandler,

14 Phil. 610; Easton vs. Diaz & Co., 32 Phil. 180). For the legal acquisition and transfer of ownership and other property rights, the thing transferred must be delivered, inasmuch as, according to settled jurisprudence the tradition of the thing is a necessary and indispensable requisite in the acquisition of said ownership by virtue of a contract.(Walter Easton vs. E. Diaz & Co. & the Provincial Sheriff of Albay, supra.)So l ong a s p rope r ty i s no t de l i ve r ed , t he owne r sh ip ove r i t i s no t transferred by contract merely but by delivery. Contracts only constitute titles or rights to the transfer or acquisition of ownership, while delivery or tradition is the method of accomplishing the same, the title and the method of acquiring it being different in our law.” (Gonzales vs. Rojas,16 Phil. 51) In the present case, the car was never delivered to the vendee by the vendor as to complete or consummate the transfer of ownership by virtue of the contract. It should be recalled that while t he r e was i ndeed a con t r ac t o f s a l e be tween V icen t e Mare l l a and Teodoro Santos, the former, as vendee, took possession of the subject matter thereof by stealing the same while it was in the custody of the latter’s son.

Delivery of key not delivery contemplated by Article 712; Intent must be present

There is no adequate evidence on record as to whether Irineo Santos voluntarily delivered the key to the car to the unidentified person who went with him and L. De Dios to the place in Azcarraga where a sister of Marella allegedly lived. But even if Irineo Santos did, it was not the delivery contemplated by Article 712 of the Civil Code. For then, it would be indisputable that he turned it over to the unidentified companion only so that he may drive Irineo Santos and De Dios to the said place in Azcarraga and not vest the title to the said vehicle to him as agent of Vicente Marella. Article 712 above contemplates that the act be coupled with the intent of delivering the thing. (10 Manresa 132)

Article 559 establishes exception to the general rule or irrevindicability

Article 559 establishes two exceptions to the general rule of irrevindicability to wit: when the owner (1) has lost the thing, or (2) has been unlawfully deprived thereof. In these cases, the possessor cannot r e t a i n t he t h ing a s aga in s t t he owne r , who may r ecove r i t w i t hou t paying any indemnity, except when the possessor acquired it in a public sale. (Del Rosario vs. Lucena, 8 Phil. 535; Varela vs. Finnick, 9 Phil. 482;Vare la v s . Matute , 9 Ph i l . 479 ; Arenas v s . Raymundo , 19 Ph i l . 46 . Tolentino, id., Vol II, p. 261.)

Cruz vs. Pahati on Article 559

In the case of Cruz vs. Pahati, et al., 52 OG 3053, the Court ruled that “Under Article 559 of the new Civil Code, a Person illegally deprived of any movable may recover it from the person in possession of the same and the only defense the latter may have is if he has acquired it in good faith at a public sale, in which case, the owner cannot obtain its return without reimbursing the price paid therefor. In the present case, plaintiff has been illegally deprived of his car through the ingenious scheme of defendant B to enable the latter to dispose of it as if he were the owner thereof. Plaintiff, therefore, can still recover possession of the car even if it is in the possession of a third party who had acquired it in good faith from defendant B. The maxim that “no man can transfer to another a better title than he has himself’ obtains in the civil as well as in the common law.” (U.S. vs. Sootelo, 28 Phil. 147)

Common law principle yields to statutory provision

The right of the owner to recover personal property acquired in good faith by another, is based on his being dispossessed without his consent. The common law principle that where one of two innocent persons must suffer by a fraud perpetrated by another, the law imposes the loss upon the party who, by his misplaced confidence, has enabled the fraud to be committed, cannot be applied in a case which is covered by an express provision of the new Civil Code, specifically Article 559. Between a common law principle and a statutory provision, the latter must prevail in this jurisdiction. (Cruz vs. Pahati, supra).

G. Sale distinguished from other contracts

Donation Sale

Gratuitous Formal Contract Governed by law on donation

Onerous Consensual contract Governed by law on sale

Barter Sale

Consideration: giving of a thing

Governed by law on sales; species of the genus sales

If consideration consists, partly in money and partly by thing – look at manifest intention

If intention is not clear; value of thing is more than amount of money – barter

Consideration; giving of money as payment

Governed by law on sales; species of the genus sales

If consideration consists, partly in money and partly by thing – look at manifest intention

If intention is clear; value of thing is equal or less than amount of money – sale

Contract for piece of work Sale

Goods are to be manufactured specially for a customer upon special order and not for the general market

Essence is service Jurisprudence

1. Timing Test under Art. 1467; whether the thing transferred would have never existed but for the order

2. Habituality test of manufacturer engages in activity with need to employ extraordinary skills and equipment (Celestino v. CIR)

3. Nature of the object test each product’s nature of execution differs from the other; products are not ordinary

Contract for delivery of an article which the vendor in the ordinary course of business manufacture or procures for general market (whether on hand or not)

Essence is object

products of manufacturer (EEI v. CIR)

Agency to sell Sale

Agent not obliged to pay for price, merely obliged to deliver price received from buyer

Principal remains owner even if object delivered to agent

Agent assumes no risk/ liability as long as within the authority given

May be revoked unilaterally because fiduciary and even if revoked without ground

Agent not allowed to profit Personal contract; rescission is not

available

Buyer pays for the price of object

Buyer becomes owner of thing; in agency

Seller warrants

Not unilaterally revocable

Seller receives profit Real contract

Dation in payment Sale

Pre-existing credit Obligations are extinguished Debtor’s consideration; extinguishment

of the debt

Creditor’s consideration: acquisition of the object offered in lieu of the original credit

Less freedom in determining the price

Payment is received by the debtor before the contract is perfected

No pre-existing credit Obligations are created Consideration of seller price

Consideration of buyer – acquisition of the object

Greater freedom in determining the price

Buyer still has to pay the price

Lease Sale

Use of thing is for a specified period only with an obligation to return

Consideration is rent Lessor need not be owner

Obligation to absolutely transfer ownership of thing

Consideration is price Seller needs to be owner of thing to

transfer ownership

Celestino Co v. Collector of Internal Revenue [G.R. No. L-8506. August31, 1956.]

Facts: Celestino Co & Company is a duly registered general co partnership doing business under the trade name of

“Oriental Sash Factory”. From 1946 to 1951 it paid percentage taxes of 7% on the gross receipts of its sash, door and

window factory, in accordance with section 186 of the National Revenue Code imposing taxes on sales of manufactured articles. However in 1952 it began to claim liability only to the contractor’s 3% tax (instead of 7%) under section 191 of the

same Code; and having failed to convince the Bureau of Internal Revenue, it brought the matter to the Court of Tax Appeals, where it also failed. Hence, the appeal. The Supreme Court affirmed the appealed decision.

Business name and income militates against claim as ordinary contractor

The company has taken all the trouble and expense of registering a special trade name for its sash business and has ordered company stationery carrying the bold print “Oriental Sash Factory (Celestino Co &Company, Prop.) 926 Raon St. Quiapo, Manila, Tel. No. 33076,Manufacturers of all kinds of doors, windows, sashes, furnitures, etc. used season-dried and kiln-dried lumber, of the best quality workmanship.” It is unlikely that these act were made solely for the pu rpose o f supp ly ing t he needs fo r doo r s , w indows and s a sh o f i t s special and limited customers. Further, the Company has chosen for its tradename and has offered itself to the public as a “Factory”, which means i t i s ou t t o do bus ine s s , i n i t s chosen l i ne s on a b ig s ca l e . Moreover, as shown from the investigation of the Company’s books of accounts (for transactions covering the period of 1 January 1952 to 30September 1952), it sold sash, doors and windows worth P188,754.69. It will be difficult to believe that such amount that ran to six figures was derived entirely from its few customers who made special orders. Thus, Celestino Co & Company habitually makes sash, windows and doors, as it has represented in its stationery and advertisements to the public, and it has admitted by the appellant itself that the company “manufactures.”

Construction work contractors defined

Construction work contractors are those who alter or repair buildings, structures, streets, highways, sewers, street railways, railroads, logging roads, electric, steam or water plants telegraph and telephone plants and lines, electric lines or power lines, and includes any other work for the construction, altering or repairing for which machinery driven by mechanical power is used. (Payton vs. City of Anadardo 64 P. 2d 878,880, 179 Okl. 68).

Nature of business does not fall in any of the occupation that maybe classified as contractor within the purview of Section 191 of the National Internal Revenue Code

Even if it were to believe that the company does not manufacture ready-made sash, doors and windows for the public and that it makes these articles only upon special order of its customers, that does not make it a contractor within the purview of section 191 of the National Internal Revenue Code. There are no less than fifty occupations enumerated in t he s a id s ec t i on o f t he Na t i ona l I n t e rna l Revenue Code sub j ec t t o percentage tax, not one under which the business enterprise of petitioner could appropriately fall. It would require a stretch of the law to make the business of manufacturing sash, doors and windows upon special order of customers fall under the category of ‘road, building, navigation, artesian well, water works and other construction work contractors.

Percentage tax imposed under Section 191 of the Tax Code a tax on sales of service, while tax imposed by Section 186 a tax on original sales of articles

The percentage tax imposed in section 191 of the Tax Code is generally a tax on the sales of services, in contradiction with the tax imposed in section 186 of the same Code which is a tax on the original sales of articles by the manufacturer, producer or importer. (Formilleza’s Commentaries and Jurisprudence on the National

Internal Revenue Code, Vol II, p. 744). The fact that the articles sold are manufactured by the seller does not exchange the contract from the purview of section 186 of the National Internal Revenue Code as a sale of articles.

Cus tom spec i f i c a t i ons r equ i r ed by cus tomer does no t a l t e r character of business, the company does not become an employee or servant of the customer

Nobody will say that when a sawmill cuts lumber in accordance with the peculiar specifications of a customer, sizes not previously held in stock for sale to the public, it thereby becomes an employee or servant of the customer, not the seller of lumber. The same consideration applies to this sash manufacturer. The Sash Factory does nothing more than sell the goods that it mass-produces or habitually makes; sash, panels, mouldings, frames, cutting them to such sizes and combining them in such forms as its customers may desire.

Installation of window panels not construction work in common parlance

Petitioner’s idea of being a contractor doing construction jobs is untenable. Nobody would regard the doing of two window panels as construction work in common parlance.

Contract of sale distinguished from a contract for a piece of work

Article 1467 of the New Civil Code provides that “a contract for the delivery at a certain price of an article which the vendor in the ordinary course of his business manufactures or procures for the general market, whether the same is on hand at the time or not, is a contract of sale, but if the goods are to be manufactured specially for the customer and upon his special order, and not for the general market, it is contract for a piece of work.” In the present case, it is apparent that the Factory did not merely sell its services to Teodoro & Co. because it also sold the materials. When it sold materials ordinarily manufactured by it (sash, panels, mouldings), although in such form or combination as suited the fancy of the purchaser, such new form does not divest the Factory of its character as manufacturer. Neither does it take the transaction out of the category of sales under Article 1467 because although the Factory does not, in the ordinary course of its business, manufacture and keep on s t ock doo r s o f t he k ind so ld t o Teodoro , i t cou ld s t ock and /o r probably had in stock the sash, mouldings and panels it used therefor.

Con t r ac t f o r a p i ece o f work i n Fac to ry happens i f t he u se o f ex t r ao rd ina ry o r add i t i ona l equ ipmen t i s r equ i r ed o r i f i t i nvo lve s services not generally performed by it

When the Factory accepts a job that requires the use of extraordinary or additional equipment, or involves services not generally performed by it, it thereby contracts for a piece of work, i.e. filling special orders within the meaning of Article 1467. In the present case, however, the orders exhibited were not shown to be special. They were merely orders for work, regular work.

Transfers under Section 186 of the Tax Code

If all the work of appellant is only to fill orders previously made, such o rde r s shou ld no t be c a l l ed spec i a l work , bu t r egu l a r work ; and supposing for the moment that the transactions were not sales, they were neither lease of services nor contract jobs by a contractor. Still, as the doors and windows had been admittedly “manufactured” by the Sash Fac to ry , such t r ansac t i ons cou ld be , and shou ld be t axed a s “transfers” thereof under section 186 of the National Revenue Code.

Engineering and Machinery Corp. v. CA [G.R. No. 52267. January 24,1996.]

Facts: Pursuant to the contract dated 10 September 1962 between the Engineering and Machinery Corporation (the Corporation) and Almeda, the former undertook to fabricate, furnish and install the air-conditioning system in the latter’s building along Buendia Avenue, Makati inconsideration of P12,000.00. The Corporation was to furnish the materials, labor, tools and all services required in order to so fabricate and i n s t a l l s a i d sy s t em. The sy s t em was comple t ed i n 1963 and accepted by Almeda, who paid in full the contract price. On 2 September1965, Almeda sold the building to the National Investment and Development Corporation (NIDC). The latter took possession of the building but on account of NIDC’s noncompliance with the terms and cond i t i ons o f t he deed o f s a l e , A lmeda was ab l e t o s ecu re j ud i c i a l rescission thereof. The ownership of the building having been decreed back to Almeda, he re-acquired possession sometime in 1971. It was then that he learned from some NIDC employees of the defects of theair-conditioning system of the building. Acting on this information, Almeda commissioned Engineer David R. Sapico to render a technical evaluation of the system in relation to the contract with the Corporation. I n h i s r epo r t , Sap i co enumera t ed t he de f ec t s o f t he sy s t em and concluded that it was “not capable of maintaining the desired room temperature of 76ºF 2ºF.”On the basis of this report,

Almeda filed on 8 May 1971 an action for damages against the Corporation with the then CFI Rizal (Civil Case14712). The complaint alleged that the air-conditioning system installed by the Corporation did not comply with the agreed plans and specifications, hence, Almeda prayed for the amount of P210,000.00representing the rectification cost, P100,000.00 as damages andP15,000.00 as attorney’s fees. The Corporation moved to dismissed the case, alleging prescription, but which was denied by the Court. Thereafter, Almeda filed an ex-parte motion for preliminary attachment on the strength of the Corporation’s own statement to the effect that it had sold its business and was no longer doing business in Manila. The trial court granted the motion and, upon Almeda’s posting of a bond of P50,000.00, ordered the issuance of a writ of attachment.

In due course, and on 15 April 1974, the trial court rendered a decision, which ordered the Corporation to pay Almeda the amount needed to rectify the faults and deficiencies of the air-conditioning system installed by the Corporation in Almeda’s building, plus damages, attorney’s fees and costs). Petitioner appealed to the Court of Appeals, which affirmed on 28 November 1978 the decision of the trial court. Hence, it instituted a petition for review on certiorari under Rule 45 of the Rules of Court. The Sup reme Cour t den i ed t he pe t i t i on and a f f i rmed t he dec i s i on assailed; without costs.

The Court’s power to review

The Supreme Court reviews only errors of law in petitions for review on certiorari under Rule 45. It is not the function of this Court to re-examine the findings of fact of the appellate court unless said findings are not supported by the evidence on record or the judgment is based on a misapprehension of facts. The Court has consistently held that the factual findings of the trial court, as well as the Court of Appeals, are final and

conclusive and may not be reviewed on appeal. Among the exceptional circumstances where a reassessment of facts found by the lower courts is allowed are when the conclusion is a finding grounded entirely on speculation, surmises or conjectures; when the inference made is manifestly absurd, mistaken or impossible; when there is grave abuse of discretion in the appreciation of facts; when the judgment is premised on a misapprehension of facts; when the findings went beyond the issues of

the case and the same are contrary to the admissions of both appellant and appellee. After a careful study of the case at bench, we find none of the above grounds present to justify the re-evaluation of the findings of fact made by the courts below.

Contract of a piece of work defined

Article 1713 of the Civil Code defines a contract for a piece of work as “by the contract for a piece of work the contractor binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation. The contractor may either employ only his labor or skill, or also furnish the material.”

Contract for a piece of work distinguished from a contract of sale

A contract for a piece of work, labor and materials may be distinguished from a contract of sale by the inquiry as to whether the thing transferred is one not in existence and which would never have existed but for the order of the person desiring it . In such case, the contract is one for a piece of work, not a sale. On the other hand, if the thing subject of the contract would have existed and been the subject of a sale to some other person even if the order had not been given, then the contract is one of sale.“A contract for the delivery at a certain price of an article which the vendor in the ordinary course of his business manufactures or procures for the general market whether the same is on hand at the time or not isa contract of sale, but if the goods are to be manufactured specially for t he cus tomer and upon h i s spec i a l o rde r , and no t f o r t he gene ra l market, it is a contract for a piece of work (Art. 1467, Civil Code). The mere fact alone that certain articles are made upon previous orders of customers will not argue against the imposition of the sales tax if such articles are ordinarily manufactured by the

taxpayer for sale to the public.” (Celestino Co. vs. Collector, 99 Phil. 8411).To Tolentino, the distinction between the two contracts depends on the intention of the parties. Thus, if the parties intended that at some future date an object has to be delivered, without considering the work or labor of the party bound to deliver, the contract is one of sale. But if one of the parties accepts the undertaking on the basis of some plan, taking into account the work he will employ personally or through another, there is a contract for a piece of work.

Contract in question is one for a piece of work

The con t r ac t i n ques t i on i s one fo r a p i ece o f work . I t i s no t t he Corporation’s line of business to manufacture air-conditioning systems to be sold “off-the-shelf.” Its business and particular field of expertise is the fabrication and installation of such systems as ordered by customers and in accordance with the particular plans and specifications provided by the customers. Naturally, the price or compensation for the system manufactured and installed will depend greatly on the particular plans and specifications agreed upon with the customers.

Obligations of a contractor for a piece of work

The ob l i ga t i ons o f a con t r ac to r f o r a p i ece o f work a r e s e t f o r t h i n Articles 1714 and 1715 of the Civil Code. Article 1714 provides that “if the contractor agrees to produce the work from material furnished by him, he shall deliver the thing produced to the employer and transfer domin ion ove r t he t h ing . Th i s con t r ac t sha l l be gove rned by t he following articles as well as by the pertinent provisions on warranty of title and

against hidden defects and the payment of price in a contract of sale.” Article 1715 provides that “the contractor shall execute the work in such a manner that it has the qualities agreed upon and has no defects which destroy or lessen its value or fitness for its ordinary or stipulated use. Should the work be not of such quality, the employer may require that the contractor remove the defect or execute another work. If the contractor fails or refuses to comply with this obligation, the employer may have the defect removed or another work executed, at the contractor’s cost.”

Provisions on warranty against hidden defects

The provisions on warranty against hidden defects, referred to in Article1714, are found in Articles 1561 and 1566. Article 1561 provides that “the vendor shall be responsible for warranty against the hidden defects which the thing sold may have, should they render it unfit for the use for which it is intended, or should they diminish its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it; but said vendor sha l l no t be answerab l e fo r pa t en t de f ec t s o r t hose wh ich may be visible, or for those which are not visible if the vendee is an expert who, by reason of his trade or profession, should have known them.” Article1566 provides that “the vendor is responsible to the vendee for any hidden faults or defects in the thing sold, even though he was not aware thereof,” and provides further that the provision “shall not apply if the contrary has been stipulated, and the vendor was not aware of the hidden faults or defects in the thing sold.”

Remedy against violation of the warranty against hidden defects

The remedy against violations of the warranty against hidden defects is either to withdraw from the contract (rehibitory action) or to demand a proportionate reduction of the price (accion quanti minoris), with damages in either case.

Prescriptive period as specified in express warranty, or in the absence of which, 4 years; Prescriptive period of 6 months for rehibitory action is applicable only in implied warranties

Whi l e i t i s t r ue t ha t Ar t i c l e 1571 o f t he C iv i l Code p rov ide s fo r a prescriptive period of six months for a rehibitory action, a cursory reading of the ten preceding articles to which it refers will reveal thatsaid rule may be applied only in case of implied warranties; and where there is an express warranty in the contract, the prescriptive period is the one specified in the express warranty, and in the absence of such period, the general rule on rescission of contract, which is four years(Article 1389, Civil Code) shall apply. (Villostas v. CA)

Original complaint is one for arising from breach of a written contact and not a suit to enforce warranty against hidden defects; Article 1715 in relation to Article 1144 apply, prescription in 10 years; Action not prescribed

The lower courts opined and so held that the failure of the defendant to follow the contract specifications and said omissions and deviations having resulted in the operational ineffectiveness of the system installed makes the defendant liable to the plaintiff in the amount necessary to r e c t i f y t o pu t t he a i r cond i t i on ing sy s t em in i t s p rope r ope ra t i ona l condition to make it serve the purpose for which the plaintiff entered into the contract with

the defendant. Thus, having concluded that the original complaint is one for damages arising from breach of a written contract, and not a suit to enforce warranties against hidden defects, the governing law therefore is Article 1715. However, inasmuch as this provision does not contain a specific prescriptive period, the general law on prescription, which is Article 1144 of the Civil Code, will apply. Said p rov i s i on s t a t e s , i n t e r a l i a , t ha t a c t i ons “upon a wr i t t en con t r ac t ” prescribe in 10 years. Since the governing contract was executed on 10September 1962 and the complaint was filed on 8 May 1971, it is clear that the action has not prescribed.

Acceptance of the work by the employer does not relieve the contractor of liability for any defect in the work

The mere fact that Almeda accepted the work does not, ipso facto, relieve the Corporation from liability for deviations from and violations of the written contract, as

the law gives him 10 years within which to file an action based on breach thereof. As held by the Court of Appeals, “as the breach of contract consisted in appellant’s omission to install the equipment [sic], parts and accessories not in accordance with the plan and specifications provided for in the contract and the deviations made in putting into the air-conditioning system parts and accessories not in accordance with the contract specifications, it is evident that the defect in the installation was not apparent at the time of the delivery and acceptance of the work, considering further that Almeda is not an expert to recognize the same. From the very nature of things, it is impossible to determine by the simple inspection of air conditioning system installed in an 8-floor building whether it has been furnished and installed as per agreed specifications.”

H. Contract of Sale/Contract to Sell

Contract of sale Contract to sell

Absolute Real Obligation –Obligation to give Title passes to the buyer upon delivery

Non-payment of the price is a negative resolutory condition

Remedies available; 1) specific performance 2) rescission 3) damages

Conditional Personal obligation – obligation to do Ownership reserved in the seller and will

pass to the buyer only upon full payment of the price

Full payment is a positive suspensive condition, the failure of which is not a breach but prevents the obligation of the vendor to convey title to arise.

Sps. Torrecampo v. Alindogan, Sr., et al.,

In Sps. Torrecampo v. Alindogan, Sr., et al., G.R. No. 156405, February 28, 2007, the parties entered into a “Contract to Buy and Sell” and that the balance shall be paid upon the issuance of the title. The question is whether, the contract is a contract of sale of contract to sell.

Held: It is a contract to sell.

The SC had one again had the occasion to distinguish the two contracts and said that, in a contract of sale, the title to the property passes to the vendee upon the delivery of the thing sold; in a contract to sell, ownership is, by agreement, reserved in the vendor and is not to pass to the vendee until full payment of the purchase price. Otherwise stated, in a contract of sale, the vendor loses ownership over the property and cannot recover it until and unless the contract is resolved or rescinded; whereas, in a contract to sell, title is retained by the vendor until full payment of the price. In the latter contract, payment of the price is a positive suspensive condition, failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from becoming effective. (Salazar v. CA, G.R. No. 118203, July 5, 1996, 258 SCRA 317).

Indeed, the true agreement between the parties is a contract to sell. Not only did the

parties denominate their contract as “Contract to Buy and Sell”, but also specified therein that the balance of the purchase price is to be paid upon the issuance of a certificate of title indicates that ownership of the subject property did not pass to the buyers.

In Ursal v. Court of Appeals, et al., G.R. No. 142411, October 14, 2005, 473 SCRA 52; Chua v. CA, 401 SCRA 54 (2003), it was held, thus:

“Indeed, in contracts to sell the obligation of the seller to sell becomes demandable only upon the happening of the suspensive condition, that is, the full payment of the purchase price by the buyer. It is only upon the existence of the contract of sale that the seller becomes obligated to transfer the ownership of the thing sold to the buyer. Prior to the existence of the contract of sale, the seller is not obligated to transfer the ownership to the buyer, even if there is a contract to sell between them.”

II. PARTIES TO A CONTRACT OF SALE

NOTE: GENERAL RULE - All persons who are authorized in this Code to obligate themselves may enter into a contract of sale.

1. MINORS, INSANE AND DEMENTED PERSONS, AND DEAF-MUTES 1.Contracts are voidable, subject to annulment or ratification 2. Also includes:

- State of drunkenness - Hypnotic spell - Where necessaries are those sold and delivered to a minor or other person without capacity to act, he must pay a reasonable price therefore.

2. SPOUSES - A spouse may, without the consent of the other spouse, enter into sales transactions in the regular pursuit of their profession, vocation, or trade. Art. 1490. The husband and the wife cannot sell property to each other, except:

(1) When a separation of property was agreed upon in the marriage settlements; or (2) When there has been a judicial separation or property under Article 191.

NOTE: Prohibition likewise applies to common-law spouses

3. OTHERS - TRUST RELATIONSHIPS 1. Art. 1491 Two groups of parties prohibited from acquiring by purchase certain properties:

a. Guardian/Agent/Executors and Administrators i.Direct or indirectii.May be ratified since only private wrong is involved

b. Public Officers and employees/Officers of the Court i.Cannot be ratified since public wrong is involved ii.Requisites for the prohibition to apply to attorneys:

1. existence of attorney client relationship; 2. property is the subject matter in litigation3.while in litigation (from filing of complaint to final judgment)

NOTE: Exception to the prohibition against attorneys:1. contingent fee arrangement where the amount of legal fees is based on a value

of property involved in litigation

A. Capacity of parties - Arts. 1489-1492 In order to be capacitated to enter into a contract of sale, one must be 18 years old When minors buy, the contract is generally voidable, exception: object is necessaries

Art. 1489. All persons who are authorized in this Code to obligate themselves, may enter into a contract of sale, saving the modifications contained in the following articles.Where necessaries are those sold and delivered to a minor or other person without capacity to act, he must pay a reasonable price therefor. Necessaries are those referred to in Article 290. (1457a)

Art. 1490. The husband and the wife cannot sell property to each other, except:(1) When a separation of property was agreed upon in the marriage settlements;

or(2) When there has been a judicial separation or property under Article 191.

(1458a)

Art. 1491. The following persons cannot acquire by purchase, even at a public or judicial auction, either in person or through the mediation of another:

(1) The guardian, the property of the person or persons who may be under his guardianship;(2) Agents, the property whose administration or sale may have been entrusted to them, unless the consent of the principal has been given; (3) Executors and administrators, the property of the estate under administration;(4) Public officers and employees, the property of the State or of any subdivision thereof, or of any government-owned or controlled corporation, or institution, the administration of which has been intrusted to them; this provision shall apply to judges and government experts who, in any manner whatsoever, take part in the sale; (5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice, the property and rights in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring by assignment and shall apply to lawyers, with respect to the property and rights which may be the object of any litigation in which they may take part by virtue of their profession. (6) Any others specially disqualified by law. (1459a)

Art. 1492. The prohibitions in the two preceding articles are applicable to sales in legal redemption, compromises and renunciations. (n)

B. Absolute incapacity - Arts. 1327, 1397, 1399

Art. 1327. The following cannot give consent to a contract:(1) Unemancipated minors;(2) Insane or demented persons, and deaf-mutes who do not know how to write. (1263a)

Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract. (1302a)

Art. 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. (1304)

C. Relative incapacity: Married Persons Generally a sale of one spouse to another is void Exceptions:-

- When separation of property was agreed upon- There has been a judicial separation of property

D. Special disqualifications - Arts. 1491-1492

1. Guardian - as to the property of person under his guardianship2. Agents - as to the property under his administration/entrusted to him3. Executors/administrators - property of the estate under administration4. Public officers/employees - as to property of the state or any of its subdivision5. Officers/employees of the court - as to property/rights in litigation under its

jurisdiction6. Others - specially disqualified by law.

Applies to sales, legal redemption, compromises and renunciations.

Art. 1491. The following persons cannot acquire by purchase, even at a public or judicial auction, either in person or through the mediation of another:

(1) The guardian, the property of the person or persons who may be under his guardianship;

(2) Agents, the property whose administration or sale may have been entrusted to them, unless the consent of the principal has been given;

(3) Executors and administrators, the property of the estate under administration;

(4) Public officers and employees, the property of the State or of any subdivision thereof, or of any government-owned or controlled corporation, or institution, the administration of which has been intrusted to them; this provision shall apply to judges and government experts who, in any manner whatsoever, take part in the sale;

(5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice, the property and rights in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring by assignment and shall

apply to lawyers, with respect to the property and rights which may be the object of any litigation in which they may take part by virtue of their profession.

(6) Any others specially disqualified by law. (1459a)

Art. 1492. The prohibitions in the two preceding articles are applicable to sales in legal redemption, compromises and renunciations.

III. SUBJECT MATTER

A. Requisites of a valid subject matter - Arts. 1459-1465 Must be licit (lawful, w/in the commerce of man) - Art. 1459 Rights can also be sold (ex. Usufructuary right) Must be determinate (not required to be specific at the time of perfection of the contract) -

Art 1460

Art. 1459. The thing must be licit and the vendor must have a right to transfer the ownership thereof at the time it is delivered.

Art. 1460. A thing is determinate when it is particularly designated or physical segregated from all other of the same class.

The requisite that a thing be determinate is satisfied if at the time the contract is entered into, the thing is capable of being made determinate without the necessity of a new or further agreement between the parties.

Art. 1461. Things having a potential existence may be the object of the contract of sale.

The efficacy of the sale of a mere hope or expectancy is deemed subject to the condition that the thing will come into existence.

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

Art. 1462. The goods which form the subject of a contract of sale may be either existing goods, owned or possessed by the seller, or goods to be manufactured, raised, or acquired by the seller after the perfection of the contract of sale, in this Title called "future goods."

There may be a contract of sale of goods, whose acquisition by the seller depends upon a contingency which may or may not happen. (n)

Art. 1463. The sole owner of a thing may sell an undivided interest therein.

Art. 1464. In the case of fungible goods, there may be a sale of an undivided share of a specific mass, though the seller purports to sell and the buyer to buy a definite number, weight or measure of the goods in the mass, and though the number, weight or measure of the goods in the mass is undetermined. By such a sale the buyer becomes owner in common of such a share of the mass as the number, weight or measure bought bears to the number, weight or measure of the mass. If the mass contains less than the number, weight or measure bought, the buyer becomes the owner of the whole mass and the seller is bound to make good the deficiency from goods of the same kind and quality, unless a contrary intent appears.

Art. 1465. Things subject to a resolutory condition may be the object of the contract of sale.

B. Particular kinds Things subject to resolutory condition may be the object of sale. (Art. 1465) It can be things with a potential existence (Art. 1461)

Emptio Rai Sperati - sale of an expected thing

Emptio Spei - sale of the hope itself Sale of vain hope or expectancy – NO CHANCE; VOID; NOT ALEATORY (there

is an element of chance); ex. Sale of a losing sweepstake ticket May be future or existing (Art 1462)

Future - to be manufactured (piano), raised (young of animals), acquired afterperfection of the contract (land), things whose acquisition depends uponcontingency which may or may not happen (car to be given if I pass the bar)

IV. OBLIGATIONS OF THE SELLER TO TRANSFER OWNERSHIP

A. Sale by a person not the owner at time of delivery - Arts. 1462, 1505, 1459 Seller must have the right transfer ownership at the time the object is delivered -Art. 1459

- nemo dat quad non habet (nobody can dispose of that which does not belong to him)

Future goods can be the object of sale. (Art. 1462)- to be manufactured (piano), raised (young of animals), acquired after perfection of

thecontract (land), things whose acquisition depends upon contingency which may or maynot happen (car to be given if I pass the bar)

The buyer acquires no better title to the goods than the seller who is not the owner or does not have the authority to sell (Art. 1505)

Exceptions: (Art. 1505)1. When the owner by his conduct precluded from denying the seller’s authority2. Purchase made in merchant’s store/fairs3. Sale under statutory power of sale by order of a court of competent jurisdiction - public auction4. Ownership has been duly recorded in accordance with law - Sale of large cattle, land

registration, sale of vessels

B. Sale by a person having a voidable title - Arts. 1506, 559 A voidable contract is valid until voided. A buyer in good faith & for value acquires a good title to the goods bought The possession of movable property acquired in good faith is equivalent to a title.

Nevertheless, one who has lost any movable or has been unlawfully deprived thereof may recover it from the person in possession of the same. (Art. 559)

Art. 1506. Where the seller of goods has a voidable title thereto, but his title has not been avoided at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in good faith, for value, and without notice of the seller's defect of title.

V. PRICE

A. Meaning of price - Arts. 1469-1474It must be certain - shall be sufficient (it can be referred to another thing certain/judgment of

specified person) - Art. 1469

Art. 1469. In order that the price may be considered certain, it shall be sufficient that it be so with reference to another thing certain, or that the determination thereof be left to the judgment of a special person or persons.

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

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

Where such third person or persons are prevented from fixing the price or terms by fault of the seller or the buyer, the party not in fault may have such remedies against the party in fault as are allowed the seller or the buyer, as the case may be. (1447a)

Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as it may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract. (n)

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

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

Art. 1473. The fixing of the price can never be left to the discretion of one of the contracting parties. However, if the price fixed by one of the parties is accepted by the other, the sale is perfected. (1449a)

Art. 1474. Where the price cannot be determined in accordance with the preceding articles, or in any other manner, the contract is inefficacious. However, if the thing or any part thereof has been delivered to and appropriated by the buyer he must pay a reasonable price therefor. What is a reasonable price is a question of fact dependent on the circumstances of each particular case.

I. REQUISITES:

1. Real a. when at the perfection of the contract of sale, there is every intention on the buyer to

pay the price, and every expectation on the part of the seller to receive such price as the value of the subject matter he obligates himself to deliver

2. In money or its equivalent a. consideration for a valid contract of sale can be the price and other valuable

consideration; at the very least, a true contract of sale must have price as part of its consideration

3. Certain or ascertainable a. certain: expressed and agreed in terms of specific pesos and/or centavos b. ascertainable:

i. by third personsii. by the courts – in cases where the third person fixes the price in bad faith or by mistakeiii. by reference to a definite day, particular exchange or market iv. by reference to another thing certain v. but never by one party to the contract

4. Jurisprudence: Manner of payment must be agreed upon (Marnelego v. BancoFilipino Savings and Mortgage Bank)

EFFECT WHERE PRICE IS SIMULATED 1. The act may be shown to have been in reality a donation, or some other act or contract 2. If not and neither party had any intention whatsoever that the amount will be paid (absolutely

simulated): the sale is void 3. If there is a real price but what is stated in the contract is not the one intended to be paid (only

relatively simulated): the contract of sale is valid but subject to reformation

Art. 1474. Where the price cannot be determined in accordance with the preceding articles, or in any other manner, the contract is inefficacious. However, if the thing or any part thereof has been delivered to and appropriated by the buyer he must pay a reasonable price

therefore. What is a reasonable price is a question of fact dependent on the circumstances of each particular case.

B. Requisites for a valid price The price must not be fictitious and not simulated else sale is VOID (Art. 1471) Price cannot be left to the discretion of one of the contracting parties (Art. 1473)

Exception: if the other party agreed/accepted, the sale is perfected.

C. How price is determined If no specific amount has been agreed upon, the price is still considered certain:

If it can be reference to another thing certain (Art. 1469) If the price is left to the judgment of specified persons (Art. 1469) Court may fixed the price if third persons acted in bad faith (Art. 1469) In case of securities, grain, liquids & other things, that there be an amount certain

inthe exchange/market on a definite day (Art. 1472)

D. Inadequacy of price - Arts. 1355, 1470 Gross inadequacy of the price does not affect the contract of sale, it remains valid evenif

the price is very low (Art. 1470) lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue

influence (Art. 1355)

EFFECT OF GROSS INADEQUACY OF PRICE NOTE: Mere inadequacy of the price does not affect the validity of the sale, except (1)

When there is fraud, mistake, or undue influence indicative of a defect in consent is present, (2)When it shows that the parties really intended a donation or some other act or contract.

E. When no price agreed - Art. 1474 If the price cannot be determined, the sale is VOID. If the thing or any part of it has been delivered & appropriated by the buyer, he must pay a reasonable

amount

F. Manner of payment must be agreed upon

Deemed to be an essential requisite because it is part of the presentation of the contract

Integral part of concept of price If there is failure to meet minds as regards term of payment: CASH BASIS Must be certain or at least ascertainable Effect is absent: NO CONTRACT SITUATION

G. Earnest money vs. option money - art. 1482 Earnest money is part of the price and a proof of the perfection of the contract (Art.1482) In Oesmer, et al. v. Paraiso Dev. Corp., G.R.No. 157493, February 5, 2007, the SC had the

occasion to distinguish earnest money from option money. It said that earnest money and option money are not the same but distinguished thus:

Earnest Money part of the purchase price given only where there is already a sale when earnest money is given, thebuyer is bound to pay the balance

Option Money the money given as a distinct consideration for an option contract

applies to a sale not yet perfected while when the would-be buyer gives option money, he is not required to buy,

but may even forfeit it depending on the terms of the option

VI. FORMATION OF CONTRACT OF SALE

A. Preparatory - Art. 1479

Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price. (1451a)

1. Offer - Art. 1475 The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer. (Art. 1319)

Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (1262a)

Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price.

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

2. Option Contract - Arts. 1479, 1324If the promise to buy or sell is supported by a consideration distinct from the

price - option contract (Art 1479, 2nd par)

Art. 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised. (n)

3. Right of First RefusalThe right of a person or company to purchase something before the offering is

made available to others.

4. Mutual Promise to Buy and Sell - Art. 1479-Mutual Promise - a promise to buy and sell; bilateral reciprocal contract (1st par) -Accepted Unilateral Promise - only one makes the promise, the other accepts it (2nd

par)

I. 3 STAGES IN LIFE OF A CONTRACT OF SALE 1. Policitacion/Negotiation Stage - offer is floated, acceptance is floated but they do not

meet; the time when parties indicate their interest but no concurrence of offer and acceptance.

2. Perfection - concurrence of all requisites; meeting of the minds. 3. Consummation - parties perform their respective undertakings

II. Policitation

Rules:1. Offer is floated – prior to acceptance maybe withdrawn at will by offeror2. Offer floated with a period – without acceptance, extinguished when period has ended

and maybe withdrawn at will be offeror; right to withdraw must not be arbitrary otherwise; liable to damage under Art. 19, 20, 21 of Civil Code

3. Offer floated with condition – extinguished by happening/non-happening of condition4. Offer floated without period/ without condition – continues to be valid depending upon

circumstances of time, place and person5. Offer is floated and there is counter-offer – original offer is destroyed, there is a new

offer; cannot go back to original offer6. Offer is floated – no authority of offeror to modify offer7. Offer accepted absolutely – proceed to perfected stage

III. OPTION CONTRACT - a contract granting an exclusive right in one person, for which he has paid a separate consideration, to buy a certain object within an agreed period

1. no presumption of consideration, needs to be proven 2. characteristics of Option Contract:

a. not the contract of sale by itself, separate and distinc b. nominatec. principal; but can be attached to other principal contracts d. onerouse.commutativef.unilateral –ver sus contract of sale which is bilateral

San Miguel Philippines v Cojuangco consideration in an option contract may be anythingof value, unlike in sale where it must

be price certainin money

3. how exercised: notice of acceptance should be communicated to offeror without actual payment as long as thereis delivery of payment in consummationstage

4. SITUATIONS IN AN OPTION CONTRACT:a. with separate consideration

i. option contract is validii. offeror can not withdraw offer until after expiry period iii. subject to rescission, damages but not to specific performance because this is

not an obligation to giveb. without separate consideration

i. OLD RULE - offer is still valid, but option contract is void and not subject to rescission, damages

ii. NEW RULE: Right of first refusal recognized

Option contract Right of first refusal Principal contract; stand on its own Needs separate consideration Subject matter and price must be valid

Not conditional Not subject to specific performance

Accessory; can not stand on its own Does not need separate consideration There must be subject matter but price

not important Conditional Subject to specific

IV. RIGHT OF FIRST REFUSAL:

1. creates a promise to enter into a contract of sale and it has no separate consideration, not subject to specific performance because there is no contractual relationship here and it is not an obligation to give (not a real contract)

2. New doctrine: may be subject to specific performance.

Equatorial realty Dev’t Inc. v Mayfair Theater, the right of first refusal is only subject to specific performance insofar as it is attached to a valid written principal contract (e.g. lease). RFR becomes one of the considerations in the contract.

3. Effect of new doctrine: turned the world of policitacion upside down because while valid option contract is not subject to specific performance, right of first refusal which does not even have a separate consideration may be subject to specific performance

4. Recognizes recovery of damage based on abuse of rights doctrine

B. Perfection - Arts. 1475, 1319, 1325, 1326 Perfected by consent/meeting of the minds (Art. 1475)

Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. (Art. 1319)

Acceptance made by letter or telegram does not bind the offerer except fromthe time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (Art. 1319)

When the auctioneer announces its perfection by the fall of the hammer in case of sale by auction (Art. 1476)

Art. 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. (n)

Art. 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears. (n)

C. Formalities of the Contract - Art. 1403 (d) (e)In WRITING, for agreements for the sale of goods, chattels or things in action, at a price not less

than five hundred pesos

VII. TRANSFER OF OWNERSHIP

A. Manner of Transfer - Arts. 1477, 1496-1501 Delivery transfers ownership - either actual or constructive (Art. 1477) Actual - the thing sold is placed under the control & possession of the buyer (Art.

1497) Legal or constructive

B. When delivery does not transfer title Generally, ownership is transferred upon delivery of the thingException: stipulation that ownership shall not pass until full payment of the price (Art.1478)

C. Kinds of delivery 1. Tradition Longa Manu (delivery by mere consent/agreement) - Art 14992. Tradition brevi manu (possession of the object before sale) - Art 14993. Tradition constitutum possessorium (possession as owner changed) - Art 15004. Legal formalities - sale through a public instrument = delivery of the thing (Art.1498 1st

par & 1501)5. Tradition Simbolica - delivery of the key of the place where the movable sold is being kept (Art 1498

2nd par)6. Quasi-tradition - placing title of ownership in the possession of the buyer (Art. 1501)

D. Double Sales - Art. 1544

Double Sale - a thing is sold to two or more personsRule: a. For personal property - possessor in good faithb. For real property:

1. Registrant in good faith - registration is the operative act that gives validity to transfer or creates a lien on the land

2. Possession in good faith3. Person with the oldest title in good faith

General Rule: FIRST IN TIME, PRIORITY IN RIGHTWhen does it apply: when not all requisites embodied in 1544 concur.

I. REQUISITES FOR DOUBLE SALES TO EXIST: (VOCS) 1. Two or more sales transactions must constitute valid sales; 2. Two or more sales transactions must pertain to the same object or subject matter; 3. Two or more buyers at odds over the rightful ownership of the subject matter must each

represent conflicting interests; and4. Two or more buyers must each have bought from the very same seller.

Consolidated Rural Bank (Cagayan Valley_ vs. CA [Jan. 17, 2005]

If not all the elements are present for Art.1544 to apply, the principle of prior tempore, potiorjure or simply “he who is first in time is preferred in right” should apply. Undisputably, he is a purchaser in good faith because at the time he bought the real property, there was still no sale to as a second vendee.

II. RULES ACCORDING TO 1544: 1. MOVABLE

a. Owner is first to posses in good faith2. IMMOVABLE

a. First to register in good faithb. No inscription, first to possess in good faith c. No inscription and no possession in good faith – Person who presents oldest title in

good faith d. Good Faith - one who buys property without notice that another person has a right or

interest in such property; one who has paid price before notice that another has claim or interest

III. LIS PENDENS – notice that subject matter is in litigation

IV. ADVERSE CLAIM – notice that somebody is claiming better right

V. POSSESSION - Both actual or constructive

VI. REGISTRATION: any entry made in the books of the registry, including both registration in its ordinary and strict sense, and cancellation, annotation, and even marginal notes. It is the entry made in the registry which records solemnly and permanently the right of ownership and other real rights.

1. registered under Torrens system 1544 applies2. not registered under the Torrens system 1544 still applies

Jurisprudenceif 2nd sale is a judicial sale (by way of levy on execution), buyer merely steps into the

shoes of the judgment debtor. Outside of such situation – must apply to conflicting sales over the same unregistered parcel of land

If sale 1 occurs when land is not yet registered and sale 2 is done when land is already registered – apply FIRST IN TIME, PRIORITY INRIGHT

Gabriel v. Mabanta, et al. [2003]Good faith must concur with registration. Tobe entitled to priority, the second

purchaser must not only establish prior recording of his deed, but must have acted in good faith.

CONDITION 1. Effect of Non-Fulfillment of Condition The other party may

a. refuse to proceed with the contractb. proceed with the contract, waiving the performance of the condition If the condition is in the nature of a promise that it should happen, the non-performance

of such condition may be treated by the other party as breach of warranty.

2. Effect if buyer has already sold the goods General Rule: The unpaid seller’s right to lien or stoppage in transitu remains even if buyer has sold the goods Exception: o When the seller has given consent thereto, or o When the buyer is a purchaser in good faith for value of a negotiable document of title.

E. Property Registration Decree1. Requisites for registration of deed of sale in good faith2. Accompanied by vendors duplicate certificate of title, payment of capital gains tax, and

documentary tax registration fees

VIII. RISK OF LOSS

A. General rule - Arts. 1263, 1189 Loss - when it perishes, or goes out of commerce, or disappears in such a way that its

existence is unknown or it cannot be recovered.

if the thing is lost without the fault of the debtor, the obligation shall be extinguished (Art 1189 [1]) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages (Art 1189 [2]) The loss or destruction of a generic thing does not extinguish the obligation. (Art1263)

B. When loss occurred before perfection - seller bears it because there was no contract, for there was no cause or consideration. Being the owner, the seller bears the loss.

C. When loss occurred at time of perfection - Arts. 1493 and 1494 When loss occurred at time of perfection - contract is without any effect (Art 1493) In case of partial loss ² withdrawal or fulfilment of the contract as to the remaining part Loss of specific goods ² cancellation (avoidance) or specific performance as to the remainder of the

remaining goods (if sale is divisible) (Art 1494)

D. When loss occurred after perfection but before delivery The risk of loss remains with the seller until ownership is transferred. (Art 1504)

E. When ownership is transferred - Art. 1504

When ownership has been transferred to the buyer, buyer bears the risk whether actual delivery has been made or not.

ROMAN vs. GRIMALT

Facts: In between the 13th to the 23d of June, 1904, petitioner Pedro Roman, the owner, and respondent Andres Grimalt, the purchaser, verbally agreed upon the sale of the schooner Santa Marina. In his letter on June 23, Grimalt agreed to buy the vessel and offered to pay in three installments of P500 each on July 15, September 15, and November 15, provided the title papers to the vessel were in proper form. The title of the vessel, however, was in the name of one Paulina Giron and not in the name of Roman as the alleged owner. Roman promised to perfect his title to the vessel, but failed so the papers he presented did not show that he was the owner of the vessel. On June 25, 1904, the vessel sank in the Manila harbor during a severe storm, even before Roman was able to produce for Grimalt the proper papers showing that the former was in fact the owner of the vessel in question and not Paulina Giron. As a result, Grimalt refused to pay the purchase price when Roman made a demand on June 30, 1904.

On July 2, 1904, Roman filed this complaint in the CFI of Manila, which found

that the parties had not arrived at a definite understanding, and later dismissed said complaint.

Issue: Who should bear the risk of loss?

Ruling: The Supreme Court affirmed the decision of the lower court and declared Roman as the one who should bear the risk of lost because there was no actual contract of sale. If no contract of sale was actually executed by the parties, the loss of the vessel must be borne by its owner and not by a party who only intended to purchase it and who was unable to do so on account of failure on the part of the owner to show proper title to the vessel and thus enable them to draw up the contract of sale. Grimalt was under no obligation to pay the price of the vessel, the purchase of which had not been concluded. The conversations between the parties and the letter Grimalt had written to Roman did not establish a contract sufficient in itself to create reciprocal rights between the parties.

IX. DOCUMENTS OF TITLE

A. Definition - Art. 1636

Document of Title - any bill of lading, dock warrant, “quedan”, or warehouse receipt or order for the delivery of goods as proof of the possession or control of the goods authorizing or purporting to authorize the possessor of the document to transfer or receive the goods in such document by indorsement or delivery, goods represented by such document.

- A document of title is symbol of the goods covered by it, serving as evidence of

a. Transfer of title;b. Transfer of possession; and c. A contract between the parties who are bound by its terms.

- So far as concerns the transfer of property between the parties, their intention would be effectual without the document, but where third parties’ rights are involved, the form of the document (negotiable or non-negotiable) becomes important.

B. Purpose of documents of title To authorize or purporting to authorize the possessor of the document to transfer or receive the goods

by indorsement or delivery

C. Negotiable documents of title

A document stating that the goods referred therein will be delivered to the bearer or to the order of the person named in such document (Art 1507)

Documents of title may be negotiated by: Mere delivery (deliverable to bearer) Indorsement + delivery

NEGOTIABLE DOCUMENTS OF TITLE See Article 1636 1. Not creation of law but by merchants to allow them to deal with merchandise without having

to physically carry them around 2. Pertains to specific type of movables only:GOODS

a. Documents of title serve two (2) functions: i. evidence of existence and possession of goods described therein ii. medium by which seller is able to transfer possession of goods

3. A document of title which states that the goods referred to therein will be delivered to the bearer, or to the order of any person named in such document

4. Negotiable by delivery or indorsement

TYPES 1. NEGOTIABLE a. deliver to bearer (negotiation by mere delivery) b.deliver to specific person or his order (negotiation by endorsement + delivery)

i. even if face of instrument says NON- NEGOTIABLE, it is still NEGOTIABLE; limiting words does not destroy negotiability

ii. If order instrument and no endorsement was made – equivalent to assignment

2. NON-NEGOTIABLE EFFECTS OF UNAUTHORIZED NEGOTIATION The validity of the negotiation of a negotiable document is not impaired by the

fact that negotiation was done in breach of duty or that the owner of the document was deprived of the same by loss, theft, accident, fraud, mistake if the person to whom the document is delivered is in good faith and without notice of the said irregularities.

Important Considerations 1. Negotiatio gives better right than assignment 2. Assignee takes document with defects of the assignor 3. Obligation of bailee – bailee is immediately bound to the document

Warranties on Negotiation1. the document is genuine2. he has legal right to negotiate or transfer it3. he has knowledge of no fact which would impair the validity or worth of the document

4. he has right to transfer title to goods and goods are merchantable/fit

Rules of Levy/Garnishment of Goods Covered by Documents of Title

1. NON NEGOTIABLE: a. Notification is operative act to transfer title/possession of goods in favor assignee b. Before notification – can still be garnished

2. NEGOTIABLE:

a. Can not be levied or garnished when documents are already with purchaser in good faith, unless:

b. Document is first surrenderedc. Document is pounded by courtd. Negotiation is enjoined

NEGOTIATION ASSIGNMENT transferor/holder acquires

title to goods bailee has direct obligation to holder as

if directly dealt with him

acquires title to goods against transferor

acquires right to notify bailee so that he acquires obligation of bailee to hold goods for him

D. N on-negotiable documents of title

those by the terms of which the goods covered are deliverable to a specified person (Art.1511).

E. W arranties of seller of documents of title - Art. 1516

Art. 1516. A person who for value negotiates or transfers a document of title by indorsement or delivery, including one who assigns for value a claim secured by a document of title unless contrary intention appears, warrants:

1. That the document is genuine;

2. That he has a legal right to negotiate or transfer it;

3. That he has knowledge of no fact which would impair the validity or worth of the document; and

4. That he has a right to transfer the title to the goods and that the goods are merchantable or fit for a particular purpose, whenever such warranties would have been implied if the contract of the parties had been to transfer without a document of title the goods represented thereby.

A person negotiating or transferring a document could be held liable as when the document was a forgery, or he had stolen it, or he had knowledge that the document was invalid for want of consideration, or that the goods had been damaged.

F. R ules on levy/garnishment of goods - Arts. 1514, 1519, 1520

NON NEGOTIABLE: a. Notification is operative act to transfer title/possession of goods in favor

assignee b. Before notification – can still be garnished

NEGOTIABLE: a. Cannot be levied or garnished when documents are already with purchaser in good

faith, unless: b. Document is first surrendered

c. Document is pounded by courtd. Negotiation is enjoined

Art. 1514. A person to whom a document of title has been transferred, but not negotiated, acquires thereby, as against the transferor, the title to the goods, subject to the terms of any agreement with the transferor.

If the document is non-negotiable, such person also acquires the right to notify the bailee who issued the document of the transfer thereof, and thereby to acquire the direct obligation of such bailee to hold possession of the goods for him according to the terms of the document.

Prior to the notification to such bailee by the transferor or transferee of a non-negotiable document of title, the title of the transferee to the goods and the right to acquire the obligation of such bailee may be defeated by the levy of an attachment of execution upon the goods by a creditor of the transferor, or by a notification to such bailee by the transferor or a subsequent purchaser from the transfer of a subsequent sale of the goods by the transferor. (n)

Art. 1519. If goods are delivered to a bailee by the owner or by a person whose act in conveying the title to them to a purchaser in good faith for value would bind the owner and a negotiable document of title is issued for them they cannot thereafter, while in possession of such bailee, be attached by garnishment or otherwise or be levied under an execution unless the document be first surrendered to the bailee or its negotiation enjoined. The bailee shall in no case be compelled to deliver up the actual possession of the goods until the document is surrendered to him or impounded by the court. (n)

Art. 1520. A creditor whose debtor is the owner of a negotiable document of title shall be entitled to such aid from courts of appropriate jurisdiction by injunction and otherwise in attaching such document or in satisfying the claim by means thereof as is allowed at law or in equity in regard to property which cannot readily be attached or levied upon by ordinary legal process. (n)

IX. REMEDIES OF AN UNPAID SELLER

A. Definition of unpaid seller - Art. 1525

The whole of the price has not been paid or tendered Dishonor of a negotiable instrument/bill of exchange

Art. 1525. The seller of goods is deemed to be an unpaid seller within the meaning of this Title:

(1) When the whole of the price has not been paid or tendered;(2) When a bill of exchange or other negotiable instrument has been received as conditional payment, and the condition on which it was received has been broken by reason of the dishonor of the instrument, the insolvency of the buyer, or otherwise.

In Articles 1525 to 1535 the term "seller" includes an agent of the seller to whom the bill of lading has been indorsed, or a consignor or agent who has himself paid, or is directly responsible for the price, or any other person who is in the position of a seller. (n)

B. Remedies of unpaid seller (Art. 1526)

Possessory lien (in the nature of a pledge) - seller is the preferred creditor as to the thing sold- Goods sold without any stipulation- Goods sold on credit, but term of credit has expired- The buyer becomes insolvent

Right of stoppage in transit (Art 1530)- If the seller has parted with the possession of the goods AND the buyer becomes insolvent

(need not be judicially declared)- Exercised by any person unpaid vendor/seller- What goods are in transit/not - Art 1531- Buyer unjustifiably refuses to receive goods - still in transit- How right is exercised? - actual possession, giving notice of claim (inpossession/principal) - Art 1532

Right of resale- This right exists on perishable goods, express stipulation & unreasonable default

Right to rescind the sale- An unpaid seller who has stopped the goods in transit has the right to rescind sale and resume

ownership in the goods- This applies in cases where there has been:

Express stipulation/reservation Unreasonable default

- Notice must be given to the buyer (essential) before rescission- Replevin suit - implied rescission of the sale

GENERAL RULE: Any man may not take law in his own hands, must seek remedy through courts

EXCEPTION: − DOCTRINE OF SELF HELP

− SPECIAL REMEDIES Requisites: 1. Subject matter – goods 2. Seller is unpaid – not completely paidor received negotiable instrument under a

condition and condition hasbeen breached by reason of dishonor 3. Physical possession is with seller

The following are the special remedies of unpaid seller 1. possessory lien 2. stoppage in transitu3. special right of re-sale 4. special right to rescind

NOTE: Hierarchical Application - only when unpaid seller has exercised possessory lien or stoppage in transitu can the seller proceed with his other special rights of resale or to rescind.

I. Possessory Lien 1. Seller not bound to deliver if buyer has not paid him the price2. Right to retain; cannot be availed when seller does not have custody 3. Exercisable only in following circumstances: a. goods sold without stipulation as to creditb.goods sold on credit but term of credit has expired c. buyer becomes insolventd. When part of goods delivered, may still exercise right on goods undelivered

Instances when possessory lien lost: 1. seller delivers goods to carrier for transmission to buyer without reserving ownership

in goods or right to possess them2. buyer or his agent lawfully obtains possession of goods 3. waiver 4. loses lien when he parts with goods (still has stoppage in transitu) 5. notice by seller to buyer not essential

II. Stoppage In Transitu

− Goods are in transit − Requisites when goods are in transit

1. From the time goods are delivered to carrier for purpose of transmission to buyer 2. Goods rejected by buyer and carrier continues to possess them

When goods no longer in transit 1. Reached point of destination 2. Before reaching destination, buyer obtains delivery of the goods 3. Goods are supposed to have been delivered to buyer but carrier refused 4. Shown by seller that buyer is insolvent (failure to pay when debts become due )

How is right exercised 1. Obtain actual possession of goods 2. Give notice of claim to carrier / bailee in possession thereof 3. Notice by seller to buyer is not required; notice to carrier is essential

III. Special Right to Resell the Goods 1. goods are perishable

2. stipulated the right of resale in case buyer defaults in payment3. buyer in default for unreasonable time4. notice by seller to buyer not essential why special? there are things which seller cannot

do in ordinary sale: 1. ownership is with buyer but seller can sell goods 2. title accorded to buyer is destroyed even without court intervention

IV. Special Right to Rescind 1. Expressly stipulated 2. Buyer is in default for unreasonable time

3. Notice needed to be given by seller to buyer why special? – ownership of goods already with buyer but seller may still rescind; ownership is destroyed even without court intervention but inordinary sale, need to go to court to destroy transfer of ownership

X. PERFORMANCE OF CONTRACT

A. Delivery of thing sold

NOTE: Stage where parties both comply with their obligation. Nature of diligence required: diligence of a good father of the family unless other requirement is stipulated

Consequence: Seller will be guilty of breach if thing is lost through his fault

Delivery of the Thing - Transfer ownership (tradicion) covers a twin obligations of the seller which are:

1. to transfer the ownership; and2. to deliver a determinate thing

PNB vs. Ling, 69 Phil. 611 Delivery of the thing together with the payment of the price, marks the

consummation of the contract of sale

Norkis Distributor, Inc. vs. CA 195 SCRA 694 The act of delivery must be coupled with the intention of delivering the thing and

putting the buyer under control

Addison vs. Felix, 38 Phil. 404 The execution of a public instrument is equivalent to delivery. But to be

effective, it is necessary that the vendor have such control over the thing sold that, at the moment of sale, its material delivery could have been made

Different kinds of delivery: 1. Actual or real- when thing sold is placed in the control and possession of the

buyer 2. Legal or Constructive- can take several forms and may be any manner signifying an

agreement that the possession is transferred from the vendor to the vendee

Different forms of Constructive Delivery - Constructive delivery has same legal effect as actual or physical delivery

Ten Forty Realty vs. Cruz, 10 Sept. 2003 Gives rise only to a prima facie presumption of delivery which is destroyed when

actual delivery is not effected because of a legal impediment

1. Traditio Longa Manu Delivery of thing by mere agreement; when SELLER points to the property without need

of actually delivering

2. Traditio Brevi Manu - Before contract of sale, the would be buyerwas already in possession of the would besubject matter of sale (ex: as lessee)

3. Symbolic delivery − As to movables – ex: delivery of the keys to a car

4. Constitutum possessarium −

When at the time of the perfection of the contract of sale, seller had possession of the subject matter in the concept of owner and pursuant to the contract, seller continues to hold physical possession no longer in the concept of an owner but as a lessee or any other form of possession other than in the concept of owner.

5. Quasi-tradition − Delivery of rights, credits or incorporeal property, made by:

a.Placing titles of ownership in the hands of the buyer b.Allowing buyer to make use of rights

6. Tradition by operation of law

1. Sale of Movables - Arts. 1522, 1537, 1480

Art 1522

When the quantity of the goods sold is LESS than that agreed upon- Buyer may REJECT- OR buyer may accept what has been delivered at the contract rate When the quantity of the goods sold is MORE than that agreement- Buyer my reject ALL- Buyer may accept the goods agreed upon and reject the excess

- If he gets all, he must pay for them at the contract rate. When buyer exercise ownership over the goods - implied acceptance When the goods is MIXED with goods of different description- Accept the goods that are in accordance with the contract- AND reject the rest

Art 1537 Seller is bound to deliver the thing sold - including its accessions (fruits) &accessories Fruits - to the buyer from the day the contract was perfected. It is the duty of the seller to PRESERVE the goods sold

Art 1480 – RISK OF LOSS Object is lost before the perfection of the contract - seller bears the risk After delivery of the object to the buyer - buyer bears the loss Object is lost after perfection but before delivery - buyer bears the lost (since

thebuyer gets the benefits during the intervening period, he must also shoulder the loss) - EXCEPTION to res perit domino

B. Sale of Immovables - Arts. 1539-1543

Sale of Real Estate by Unit

-If the property cannot be delivered as stated in the contract, the buyer may opt to:

Reduce the price in proportion to the actual size of the property, OR rescission of the contract (provided that the lacking size be not 1/10 of thearea stated)

Applicable not only to size/area but may refer also to quality (inferior)Art 1543 action for rescission prescribes in 6 months from date of delivery

If greater in area/size, buyer may accept only that stated in the contract. If buyer accepts all, he must pay at the contract rate for the entire area accepted.

Sale by Lump Sum (a cuerpo cierto) - Art 1542 No decrease/increase of the price although there be greater or less area or number than that

stated in the contract. What is important is the delivery of all the land included in the boundaries:- If this is done, area is immaterial- If this is not done, reduction in price or rescission is the remedy

C. I nspections and Acceptance Presumption: buyer ascertained the area & quality of the real estate before the

contract was perfected. (Teron v. Villanueva Viuda de Riosa, 56 Phil. 667)

D. Payment of price

XI. WARRANTIESA statement or representation made by the seller contemporaneously and as a part

of the contract of sale, having reference to the character, quality, or title of the goods, and by which he promises or undertakes to insure that certain facts are or shall be as he then represents

A. Express warranties

Any affirmation or promise by the seller to induce the buyer to buy the thing sold If made by the seller as his opinion - not considered a warranty EXCEPT if made as an

expert & it was relied upon by the buyer - Art 1546

Dealer’s talk - little exaggeration is allowed Simplex commendation non obligator caveat emptor

B. Implied warranties - Art. 1547 Warranty against eviction - on the part of the seller, that he has a right to sell the thing at

the time ownership is to pass- Natural element of the contract of sale even in the absence of stipulation- Waivable and maybe renounced by the buyer

Warranty against hidden defects Actions based on implied warranties prescribe in 10 years

C. Effects of warranties The seller shall answer for the eviction. - Art 1548 Buyer need not appeal from decision so that the seller becomes liable for eviction. - Art

1549 Seller is liable for non-payment of taxes not known to the buyer. - Art 1551 Judgment debtor is responsible for eviction in judicial sales - Art 1552 Any stipulation exempting the seller from eviction is VOID if acted in bad faith. - Art 1553 In case of eviction, buyer has the right to demand from the seller to return/give the following: Art 1555

- Value of the thing sold- Income or fruits- Cost of the suit- Expenses of the contract if buyer has paid them- Damages & interests

In case of partial eviction: rescission or enforcement of warranty - Art 1556 Warranty cannot be enforced until final judgment where the buyer loses the thingacquired. - Art 1557 It is necessary to summon the seller in the suit for the eviction of the buyer. - Art1558

D. Effects of waivers Seller to pay only the value which the thing sold in case of eviction where the buyer

renounced his right to warranty against eviction. - Art. 1554 Seller is not liable when the buyer waived the warranty against eviction with

fullknowledge of its risk & assumed consequences. - Art 1554

E. Buyer’s options in case of breach of warranty - Art. 1599 Accept or keep the goods AND set up against the seller the breach of warranty Accept or keep the goods AND maintain an action for damages for breach of warranty against the seller Refuse to accept the goods AND maintain an action for damages for breach of warranty against the seller Rescind the contract of sale AND refuse to receive the goods (if received, return them and recover the

price which have been paid)

Note: These options are exclusive, when a remedy has been granted in any one of these, no other remedy can thereafter be granted.

Rescission is possible even fulfilment was chosen if the latter becomes impossible.(Art 1191 2nd par).Rescission requires NOTICE

.XII. BREACH OFCONTRACT

A. Remedies of the Seller - Arts. 1636, 1594

Art. 1636. In the preceding articles in this Title governing the sale of goods, unless the context or subject matter otherwise requires:

(1) "Document of title to goods" includes any bill of lading, dock warrant, "quedan," or warehouse receipt or order for the delivery of goods, or any other document used in the ordinary course of business in the sale or transfer of goods, as proof of the possession or control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer or receive, either by endorsement or by delivery, goods represented by such document.

"Goods"includes all chattels personal but not things in action or money of legal tender in the Philippines. The term includes growing fruits or crops.

"Order" relating to documents of title means an order by endorsement on the documents.

"Quality of goods" includes their state or condition. "Specific goods" means goods identified and agreed upon at the time a contract of

sale is made. An antecedent or pre-existing claim, whether for money or not, constitutes

"value" where goods or documents of title are taken either in satisfaction thereof or as security therefor.

(2) A person is insolvent within the meaning of this Title who either has ceased to pay his debts in the ordinary course of business or cannot pay his debts as they become due, whether insolvency proceedings have been commenced or not.

(3) Goods are in a "deliverable state" within the meaning of this Title when they are in such a state that the buyer would, under the contract, be bound to take delivery of them. (n)

Art. 1594. Actions for breach of the contract of sale of goods shall be governed particularly by the provisions of this Chapter, and as to matters not specifically provided for herein, by other applicable provisions of this Title. (n)

1. Sale of Movables

Rule if buyer refuses to pay (Art 1595) Seller may maintain an action for the price (specific performance) - ownership of the

goods sold has passed to the buyer Seller may maintain an action for the price (specific performance) - ownership has not yet passed to the

buyer but the price is payable on a certain day Holds the goods as a bailee for the buyer & bring an action for the price

Rule if buyer refuses to accept and pay (Art 1596) Seller may bring an action for damages for non-acceptance (damage is estimated loss directly & naturally

resulting in the course of events due to the breach)

Rule of buyer repudiates or manifested his inability to perform his obligations or committed breach (Art 1597)

Rescission if goods has not yet been delivered Rescission requires NOTICE to the buyer of such option

Sale of ImmovablesRemedy: Rescission IF there is a reasonable ground to fear LOSS of the property & the

price (Art 1591)

B. Recto Law: Sale of Movables on Installment - Arts. 1484-1486 Sale of Movables/ Personal Property

Art. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;(2) Cancel the sale, should the vendee's failure to pay cover two or more

installments;(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted,

should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. (1454-A-a)

Remedies of the Seller 1. Exact fulfillment of the obligation should the buyer fail to pay any installment. 2. Cancel the sale, should the buyer’s failure to pay cover two or more installments;3. Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the buyer’s failure to pay cover two or more installments.

Article 1484 of the Civil Code provides for the remedies of a seller in contracts of sale of personal property by installments, and incorporates the provisions of Act No. 4122, known as the Installment Sales Law or the Recto Law, which then amended Article 1454 of the Civil Code of 1889.

RATIONALE The object of Recto Law was to remedy the abuses committed in connection with the foreclosure of chattel mortgages and was meant to prevent mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment.

Under Article 1484 of the New Civil Code: In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise REMEDIES stated above.

The remedies have been recognized as alternative, not cumulative, in that the exercise of one would also bar the exercise of the others. They cannot also be pursued simultaneously. If the seller should foreclose on the mortgage constituted on the thing sold, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.

The provisions of Recto Law are applicable to financing transactions derived or arising from sales of movables on installments, even if theunderlying contract at issue is a loan because the promissory note has been assigned ornegotiated by the original seller.

NOTE: In Filinvest vs. CA Filinvest was held not liable for the defect only by virtue of the waiver of

warranty against defect stipulated in the contract.BUT:

If not for the waiver, Filinvest though a financing institution, is not immune from any recourse by the private respondents. The fact that the rock crusher was purchased from Rizal Consolidated Corporation in the name and with the funds of the Filinvest proves beyond doubt that the ownership thereof was effectively transferred to it. It is precisely this ownership which enabled the petitioner to enter into the "Contract of Lease of Machinery and Equipment".

The device contract of lease with option to buy is at times resorted to as a means to circumvent Article 1484, particularly paragraph (3) thereof. Through the set-up, the vendor, by retaining ownership over the property in the guise of being the lessor, retains,

likewise, the right to repossess the same, without going through the process of foreclosure, in the event the vendee-lessee defaults in the payment of the installments. There arises therefore no need to constitute a chattel mortgage over the movable sold. More important, the vendor, after repossessing the property and, in effect, canceling the contract of sale, gets to keep all the installments-cum-rentals already paid.

It is thus for these reasons that Article 1485 of the new Civil Code provides that:

Article 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived the lessee of possession or employment of the thing.

Caveat emptor or “buyer beware”

Common sense dictates that a buyer inspects a product before purchasing it and does not return it for defects discovered later on, particularly if the return of the product is not covered by or stipulated in a contract or warranty.

Art. 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing. (1454-A-a)

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

Remedy of the Seller: Specific performance should the buyer fail to pay Rescission/cancel the sale if buyer fails to pay two or more installments Foreclose the chattel mortgage if constituted if buyer fails to pay two or more

installments

Lease of Personal Property with option to buy = sale of personal property on installments (Art1485)

General Rule in case of rescission: mutual restitution (Art 1486)Exception: by express stipulation and such is not unconscionable

1. Sale of Immovables

a. PD 957, sec. 23, 24

Section 23. Non-Forfeiture of Payments. No installment payment made by a buyer in a subdivision or condominium project for the lot or unit he contracted to buy shall be forfeited in favor of the owner or developer when the buyer, after due notice to the owner or developer, desists from further payment due to the failure of the owner or developer to develop the subdivision or condominium project according to the approved plans and within the time limit for complying with the same. Such buyer may, at his option, be reimbursed the total amount paid including amortization interests but excluding delinquency interests, with interest thereon at the legal rate.

Section 24. Failure to pay installments. The rights of the buyer in the event of this failure to pay the installments due for reasons other than the failure of the owner or developer to develop the project shall be governed by Republic Act No. 6552.

Where the transaction or contract was entered into prior to the effectivity of Republic Act No. 6552 on August 26, 1972, the defaulting buyer shall be entitled to the corresponding refund based on the installments paid after the effectivity of the law in the absence of any provision in the contract to the contrary.

b. Maceda Law (RA 6552): Sale of Immovables on Installment

Remedy of the Seller: Rescission/Cancellation of contract if buyer fails to pay within the grace period- Grace Periods:

60 days if installments made is less than two years One month for every year of installments made

- Cancellation shall take effect after30 days from notice to the buyer and payment of the CSV; it must be made in a public instrument

1. applies to COS and CTS and Financing 2. Coverage: REAL ESTATE – defined space vs. CONDO – not defined space (w/

common areas)3. Excluded:

a. Industrialb. Commercialc. Sale to tenants under agrarian laws

Rights Granted to Buyers: Buyer paid at least 2 years installment 1. Pay without interest the balance within grace period of 1 month for every year of

installment payment 2. Grace to be exercised once every 5 years 3. When no payment - cancelled; buyer entitled to 50% of what he has paid + if after 5 years

of installments, 5% for every year but not to exceed 90% of total payments made4. Cancellation to be effected 30 days from notice and upon payment of cash surrender

value Buyer paid less than 2 years installment

1.1st Grace period is 60 days from date installment became due 2.2nd grace period of 30 days from notice of cancellation/demand for rescission

- buyer can still pay within the 30 day period - with interest - No payment after 30 day period, can cancel.

Purpose of law - Protect buyers in installments against oppressive conditions

Notice needed - waiver thereof if oppressive

Applies to contracts even before law was enacted Stipulation to contrary is void

Other rights: Sell rights to another

Reinstate contract by updating during grace period and before actual cancellation Deed of Sale to be done by notarial act To pay in advance any installment or the full balance of price anytime without interest Have full payment annotated in certificate of title

C. Remedies of the B uyer

1. Sale of MovableRule when seller has broken a contract to deliver specific/ascertained goods

(Art1598) Specific performance with no right of retention on the part of the seller- this requires a court order on application of the buyer

2. Sale of Immovables (Maceda Law - RA 6552)

Rights of the buyer in case he defaults in the payment of succeeding installments: To pay without additional interest within a grace period earned and before cancellation of the contract- Grace Periods:

60 days if installments made is less than two years One month for every year of installments made

If contract is cancelled, seller shall refund the cash surrender value of thepayments made- CASH SURRENDER VALUE= 50% of the total payments made &additional 5% every year but

not to exceed 90% of the total payments made- Cancellation shall take effect after30 days from notice to the buyer and payment of the CSV; it must be

made in a public instrument Sell his rights or assign the same to another person Pay in advance any installment or the full unpaid balance of the purchase price any time without interest

XIII. EXTINGUISHMENT OF SALE

A. Causes - Arts. 1600, 1231- S ame as those which extinguishes all other obligations Novation - substitution or change of an obligation by another Compensation - those who are debtors & creditors of each other Merger or confusion - merger of the characters of the debtor & creditor in one &the same

person Remission or condonation - renunciation of the enforcement of the obligation, an act of

liberality Payment or performance - delivery of money or performance of an obligation Loss of the thing due - lost or destroyed w/o fault of the debtor before he incurs

delay

Art. 1600. Sales are extinguished by the same causes as all other obligations, by those stated in the preceding articles of this Title, and by conventional or legal redemption.

Causes for extinguishment of sale.1. Common

Those causes which are also the means of extinguishing all other contracts likepayment, loss of the thing, condonation, etc.(see Art.1231);

2. SpecialThose causes which are recognized by thelaw on sales (such as those covered by Arts.1484, 1532, 1539,

1540, 1542, 1556, 1560,1567, and 1591); and

3. Extra-specialThose causes which are given specialdiscussion by the Civil Code and these areconventional

redemption and legalredemption.

B. Conventional redemption - Art. 1601 (Right of redemption)

Art. 1601. Conventional redemption shall take place when the vendor reserves the right to repurchase the thing sold, with the obligation to comply with the provisions of Article 1616 and other stipulations which may have been agreed upon. (1507)

Seller reserves the right to repurchase the thing sold (pacto de retro sale) It requires express stipulation in the contract of sale In a pacto de retro sale, the inadequacy of the price cannot be considered a ground for

rescinding the contract

Conventional redemptionIt is the right which the vendor reserves to himself, to reacquire the property sold provided he returns to

the vendee the price of the sale, the expenses of the contract, any other legitimate payments made therefor and the necessary and useful expenses made on the thing sold and fulfills other stipulations which may have been agreed upon.

Subject matter of conventional redemptionBoth real and personal property may be the subject matter of pacto de retro sales or sales with right to repurchase although there are certain articles (Arts.1607, 1611, 1612, 1613, 1614, 1617, 1618) which are applicable only to immovables.

Nature of conventional redemption1. It is purely contractual because it is a right created, not by mandate of the law, but by virtue of an

express contract.2. It is an accidental stipulation and, therefore,its nullity cannot affect the sale itself since the latter might

be entered into without said stipulation.3. It is a real right when registered, because it binds third persons.4. It is potestative because it depends upon the will of the vendor.5. It is a resolutory condition because when exercised, the right of ownership acquired by the vendee is

extinguished.6. It is not an obligation but a power or privilege that the vendor has reserved for himself.7. It is reserved at the moment of the perfection of the contract for if the right to repurchase is agreed upon

afterwards, there is only a promise to sell which produces different rights and effects and is governed by Art.1479.8. The person entitled to exercise the right of redemption necessarily is the owner of the property sold

and not any third party. The right may be exercised also by any person in whom the right may have been transferred

.9. It gives rise to reciprocal obligation that of returning the price of sale and other expenses, on the part of the vendor (Art.1616); and that of delivering the property and executing a deed of sale therefor, on the part of the vendee.

Option to buy and right of repurchase The right of repurchase is not a right granted the vendor by the vendee in a subsequent instrument, but a right

reserved by the vendor in the same instrument of sale as one of the stipulations of the contract. Once the instrument of absolute sale is executed, the vendor no longer reserves the right to repurchase, and any

right thereafter granted the vendor by the vendee in a separate instrument cannot be a right of repurchase, but some other right like the option to buy.

Accordingly, a deed of absolute sale and an option to buy together, cannot be considered as evidencing a contract of sale with pacto de retro. Such option does not evidence a right to repurchase, the extension of the period for the exercise of which (option) does not fall under No. 3 of Art. 1602.

Similarly, an agreement to repurchase becomes a promise to sell when made after an absolute sale because where the sale is made without such an agreement ,the purchaser acquires the things old absolutely, and if he afterwards grants the seller the right to repurchase, it is a new contract entered into by the purchaser, as absolute owner already of the object.

R ight to redeem and right of repurchaseThe right to redeem becomes functus officio on the date of its expiry, and its exercise after the period

isnot really one of redemption but a repurchase

Distinction must be made because redemption is by force of law; the purchaser at public auction is bound to accept redemption. Repurchase, however, of foreclosed property, after redemption period, imposes no such obligation. After expiry, the purchaser may or may not re-sell the property but no law will compel him to do so. And, he is not bound by the bid price; itis entirely within his discretion to set a higher price, for after all, the property already belongs to him as owner.

C. Equitable mortgage - Arts. 1602-1604 - Property is used as a security for the payment of the price (sale a retro)

1. Price is inadequate2. Seller remains in possession as lessee3. Extension of the period of redemption or granting a new period is executed in another

instrument4. Buyer retains for himself a part of the purchase price5. Seller binds himself to pay the taxes on the thing sold6. Real intention of the parties to the contract is that the transaction shall secure the payment of a debt or

the performance of an obligation

In case of doubt and those which purports to be an absolute sale, such contract is presumed to be an equitable mortgage (Art 1603 & 1604)

Cachola vs. CA, 208 SCRA 496 One which lacks the proper formalities, form of words, or other requisites

prescribed by law for a mortgage, but shows the intention of the parties to make the property subject of the contract as security for a debt and contains nothing impossible contrary to law.

1. A contract with right to repurchase is deemed to be an equitable mortgage if the following requisites concur (IPERTI):

a. price of sale with right to repurchase is unusually inadequateb. seller remains in possession as lessee or otherwise c. upon or after expiration of right to repurchase, another instrument extending the

period of redemption or granting new period is executed d. buyer retains for himself a part of the purchase price e. seller binds himself to pay taxes on thing sold f. real intention of parties is to secure the payment of a debt or performance of

other obligation

NOTE: In case of doubt – in determining whether it is an equitable mortgage or a sale a retro, the sale shall be construed as an equitable mortgage.

2. What to Look for in Determining Nature of Contract a. language of the contractb. conduct of parties – to reveal real intent

3. Remedy available to vendor: ask for reformation of contract 4. Rationale behind provision on Equitable Mortgage:

a. Circumvention of usury lawb. Circumvention of prohibition against pactum commissorium – creditor cannot

appropriate the things given by way of pledge or mortgage; remedy here is foreclosure. The real intention of parties is that the pretended purchase price is moneyloaned and to secure payment of the loan, sale with pacto de retro is drawn up

D. Distinguish from option to buy - Art. 1602

In an option to buy, contract of sale is not yet perfected while Art 1602 purports a situation where the contract is consummated but divests of the real intention of the parties.

Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price; (5) When the vendor binds himself to pay the taxes on the thing sold; (6) In any other case where it may be fairly inferred that the real intention of the

parties is that the transaction shall secure the payment of a debt or the performance of any other obligation.

In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury laws. (n)

Period of redemption - Art. 1606

Art. 1606. The right referred to in Article 1601, in the absence of an express agreement, shall last four years from the date of the contract.

Should there be an agreement, the period cannot exceed ten years.However, the vendor may still exercise the right to repurchase within thirty days from

the time final judgment was rendered in a civil action on the basis that the contract was a true sale with right to repurchase. (1508a)

In the absence of express agreement => 4 years from date of contract Cannot exceed 10 years if an agreement was made but can be extended for another10 years maximum Seller can still redeem w/in 30 days from final judgment

Period of Redemption a. No period agreed upon – 4 years from date of contract

b. Period agreed upon – should not exceed 10 years; if it exceeded, valid only for the first 10 years.

c. When period to redeem has expired and there has been a previous suit on the nature of the contract – seller still has 30 days from final judgment on the basis that contract was a sale with pacto de retro:

d. Rationale: no redemption due to erroneous belief that it is equitable mortgage which can be extinguished by paying the loan.

e. This refers to cases involving a transaction where one of the parties contests or denies that the true agreement is one of sale with the right to repurchase; not to cases where the transaction is conclusively a pacto de retro sale.

f. Example: Where a buyer a retro honestly believed that he entered merely into an equitable mortgage, not a pacto de retro transaction, and because of such belief he had not redeemed within the proper period.

NOTE: When period has expired and seller allowed the period of redemption to expire – seller is at faultfor not having exercised his rights so should not be granted a new period

Paez vs. Magno Tender of payment is SUFFICIENT to compel redemption, but is not in itself a

payment that relieves the vendor from his liability to pay the redemption price.

E. Exercise of the right to redeem - Art. 1616

Art. 1616. The vendor cannot avail himself of the right of repurchase without returning to the vendee the price of the sale, and in addition:

(1) The expenses of the contract, and any other legitimate payments made by reason of the sale;

(2) The necessary and useful expenses made on the thing sold. (1518)

Seller is required to give the buyer the following if redemption is made: The price Expenses of the contract Other legitimate payments made by reason of the sale Necessary expenses made on the thing sold Useful expenses on the thing sold

Obligation of vendor a retro in case of redemptionHe must return to the vendee a retro:

1. PriceThe law speaks of ³price of the sale and not the value of the thing. It is lawful, however, for the parties

to agree that the price to be returned will be more or less than the original sum paid by the vendee.2. Expenses of contract and other legitimate expenses

If the expenses for the execution and registration of the sale were paid by the vendee, the same shall be reimbursed by the vendor. But they need not be paid at the very time of the exercise of the right since they are unknown amounts. They may be paid later. The same is true of necessary and useful expenses.

Necessary expensesThey are the expenses incurred for the preservation of the thing or those which seek to prevent the

waste, deterioration or loss of the thing. The necessary expenses which must be repaid to the vendee are not those which are ordinary and simple expenses of preservation because these expenses are incident to the enjoyment of the thing and should be borne by the vendee.

Useful expensesThey are those which increase the value of the thing or create improvements thereon. Useful expenses

are refunded to the vendee a retro because he is considered a possessor in good faith. The vendor a retro is given no option to require the vendee a retro to remove the useful improvements on the land subject of the sale a retro, unlike that granted the owner of a land under Articles 546 and 547 of the CC. The vendor a retro must pay for the useful improvements introduced by the vendee a retro; otherwise, the latter may retain possession of the land until reimbursement is made.

Offer to redeem and tender of payment generally required The mere declaration of the vendor of his intention to exercise the right of repurchase is not sufficient

to preserve the right of redemption. The law requires that the offer must be a bona fide one and accompanied by an actual and simultaneous tender of payment or consignation of the full amount agreed upon for repurchase. Neither is it necessary to tender payment of the repurchase price if the vendee has already flatly refused to reconvey. If the tender is made after the period of repurchase has expired, its acceptance would amount only to a promise to sell on the part of the vendee because the right of repurchase having expired, there was no more right that could have been preserved.

Consignation of price generally not required It is not a legal requisite for the vendor to make a consignation or judicial deposit of the price if the

offer or tender is refused. He is not a debtor. He ha a right, not an obligation, to repurchase. It is enough that a sincere and genuine tender of payment is made and refused, although consignation may serve to provide additional security for the vendor and to indicate the veracity of his desire to exercise the right of repurchase. Where the right of the vendor a retro to repurchase had been judicially declared to exist, the effect of the judgment is to definitely fix the relation of the vendor a retro and the vendee a retro, as that of debtor and creditor, respectively, in the amount and within the period fixed in the judgment. Should the vendee(creditor) refuse to accept the amount of the redemption price offered, the vendor (debtor) must deposit it in court.

In case of absence of the vendee a retroThe right of redemption may still be exercised as a vendor who decides to redeem a property sold

with pacto de retro, in a sense, stands as the debtor and the vendee as the creditor of the purchase price.

F. Legal redemption - Art. 1619 - created by law

1. Only applies to contracts of sale.

2. The right to be subrogated upon the same terms and conditions stipulated in the contract, in the place of one who acquires the thing by (1) purchase OR(2) by dation in payment OR (3) by other transaction whereby ownership is transmitted by onerous title.

3. Types of Legal Redemption:a. among co-heirsi. any of the heirs sell his hereditary rights to stranger before partition ii. any of the co-heirs may be subrogated to the rights of the purchaser by

redeeming said hereditary right: reimburse buyer of the price of the saleiii. co-heirs has 1 month from receipt of notice in writing b. among co-ownersi. any or all of co-owners sells their shares to 3rd personii. any co-owner may exercise right of redemption by paying reasonable price of

property to the buyeriii. if 2 or more co-owners desire to exercise right of redemption, they may only

do so in proportion to the share they respectively have in thing owned in common

c. among adjoining ownersi. rural land

a. where piece of rural land has an area not exceeding 1 hectare, adjoining owner has right to redeem unless grantee does not own a rural land

b. if two or more adjacent lot owners desire to exercise right to redeem, owner of adjoining lot with smaller area shall be preferred

c. if two or more adjacent lit owners desire to exercise right to redeem and both have same lot area, one who first requested shall be granted

ii. urban land a. when piece of land is small and cannot be used for any practical

purpose and bought merely for speculation, owner of adjoining land can redeem

b. 2 or more owners of adjoining lot desire to exercise right to redeem, owner whose intended use is best justified shall be preferred.

d. sale of credit in litigationi. when a credit or other incorporeal right in litigation is sold, debtor shall have a

right to extinguish it by reimbursing the assignee for the price the latter paid therefor plus judicial costs, interest

ii. debtor may exercise right within 30 days from the date assignee demands payment from him

4. Other Instances When Right of Legal Redemption is Granted a. Redemption of homesteadsb. Public Land Actc. Land acquired under free patent homestead subject to repurchase by wife, legal heirs

within 5 years from date of conveyance granted by law, need not be stipulated

5. Redemption in tax sales a. in case of tax delinquency/failure to pay tax assessments, property is foreclosed

b. delinquent payer has 1 year from date of sale to redeem by paying to the revenue District Officer the amount of tax delinquencies, and interest or purchase price.

6. Redemption by judgment debtor - 1 year from date of registration of certificate of sale to redeem by paying purchaser at public auction with interest

7. Redemption in extrajudicial foreclosure - 1 year from date of sale and registration

8. Redemption in judicial foreclosure of mortgage - no right to redeem is granted to debtor mortgagor except when mortgagee is bank of a banking institution 90 days after finality of judgment

9. When Period of Redemption Begins to Run - Right of legal pre-emption of redemption shall be exercised within 30 days from

notice by the seller

10. How exercised - tender of payment is not necessary; offer to redeem is enough. a. There is no prescribed form for an offer to redeem to be properly effected. Hence, it

can either be through a formal tender with consignation of the redemption price within the prescribed period. What is paramount is the availment of the fixed and definite period within which to exercise the right of legal redemption.

b. deeds of sale are not to be recorded in Register of Deeds unless accompanied by affidavit of seller that he has given notice to all possible redemptioners

NOTE: Written notice under Art. 1623 is mandatory for the right of redemption to commence (PSC vs.Sps. Valencia, 19 Aug. 2003). Thus, the General Rule is that actual knowledge notwithstanding, written notice is still required Except when actual knowledge is acquired by co-heirs living in same land with purchaser, or co-owner was middleman in sale to 3rdparty.

Etcuban vs. CA, et. al. 148 SCRA 507 – Art. 1623- does not prescribe any distinctive method for notifying the redemptioner

Art. 1619. Legal redemption is the right to be subrogated, upon the same terms and conditions stipulated in the contract, in the place of one who acquires a thing by purchase or dation in payment, or by any other transaction whereby ownership is transmitted by onerous title. (1521a)

Right to be subrogated in the place of one who acquires a thing by purchase, dation in payment or by any other transaction whereby ownership is transferred by onerous title

Can be effected against movable or immovable property Can be exercised within one month from notice in writing of the vendor/prospective vendor Legal redemption is granted by law to:

- Co-owners of the thing sold (Art 1620)

Art. 1620. A co-owner of a thing may exercise the right of redemption in case the shares of all the other co-owners or of any of them, are sold to a third person. If the price of the alienation is grossly excessive, the redemptioner shall pay only a reasonable one.

Should two or more co-owners desire to exercise the right of redemption, they may only do so in proportion to the share they may respectively have in the thing owned in common. (1522a)

- Adjacent owner of rural property (Art 1621)

Art. 1621. The owners of adjoining lands shall also have the right of redemption when a piece of rural land, the area of which does not exceed one hectare, is alienated, unless the grantee does not own any rural land.

This right is not applicable to adjacent lands which are separated by brooks, drains, ravines, roads and other apparent servitudes for the benefit of other estates.

If two or more adjoining owners desire to exercise the right of redemption at the same time, the owner of the adjoining land of smaller area shall be preferred; and should both lands have the same area, the one who first requested the redemption. (1523a)

- Adjacent owner of urban property (Art 1622)Art. 1622. Whenever a piece of urban land which is so small and so situated that

a major portion thereof cannot be used for any practical purpose within a reasonable time, having been bought merely for speculation, is about to be re-sold, the owner of any adjoining land has a right of pre-emption at a reasonable price.

If the re-sale has been perfected, the owner of the adjoining land shall have a right of redemption, also at a reasonable price.

When two or more owners of adjoining lands wish to exercise the right ofpre-emption or redemption, the owner whose intended use of the land in question appears best justified shall be preferred. (n)

- Co-owners are preferred over adjacent owners (Art 1623 par 2)

Art. 1623. The right of legal pre-emption or redemption shall not be exercised except within thirty days from the notice in writing by the prospective vendor, or by the vendor, as the case may be. The deed of sale shall not be recorded in the Registry of Property, unless accompanied by an affidavit of the vendor that he has given written notice thereof to all possible redemptioners.

The right of redemption of co-owners excludes that of adjoining owners. (1524a)

G. Age redemption - Art. 1619

Art. 1619. Legal redemption is the right to be subrogated, upon the same terms and conditions stipulated in the contract, in the place of one who acquires a thing by purchase or dation in payment, or by any other transaction whereby ownership is transmitted by onerous title. (1521a)

The right applies to both movable and immovable property.

Transfer of ownership by onerous titleSubrogation transfers to the person subrogated the rights pertaining to

another. Legal redemption may take place not only in purchase or dation in payment but in any other transfer of ownership by onerous title. However, it cannot take place in barter and in the transmission of property by hereditary title. The right is also not available where there is only a mortgage or lease.

Dation in payment or dacion en pagoIt is the transmission of the ownership of a thing by the debtor to the creditor

as the accepted equivalent of the performance of an obligation. Here, the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt.

Nature of dation in payment The undertaking partakes in one sense of the nature of sale. As such the

essential elements of a contract of sale, namely, consent, object certain, and cause or consideration must be present. What actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale, while the debt is considered as the purchase price.

Basis and nature of right of legal redemption

The nature of conventional and legal rights of redemption is identical, except from the voluntary agreement of the parties, legal redemption proceeds from law. The concept of legal redemption may be converted into one of conventional redemption.

Example:Where there was voluntary agreement of the parties, consisting of

extensions of the redemption period granted at the request of the vendors followed by commitment by them to pay the redemption price at a fixed date, it was held that the concept of legal redemption is converted by the parties into one of conventional redemption such that it generated binding contracts when approved by the vendee. In such case, the period of redemption is that agreed upon by the parties.

XV. The Law on Sale of Subdivision and Condominium (PD 957)

PRESIDENTIAL DECREE No. 957 July 12, 1976

REGULATING THE SALE OF SUBDIVISION LOTS AND

CONDOMINIUMS, PROVIDING PENALTIES FOR VIOLATIONS

THEREOF

Title ITITLE AND DEFINITIONS

Section 1. Title. This Decree shall be known as THE SUBDIVISION AND CONDOMINIUM BUYERS' PROTECTIVE DECREE.

Section 2. Definition of Terms When used in this Decree, the following terms shall, unless the context otherwise indicates, have the following respective meanings:

(a) Person. "Person" shall mean a natural or a juridical person. A juridical person refers to a business firm whether a corporation, partnership, cooperative or associations or a single proprietorship.

(b) Sale or sell. "Sale" or "sell" shall include every disposition, or attempt to dispose, for a valuable consideration, of a subdivision lot, including the building and other

improvements thereof, if any, in a subdivision project or a condominium unit in a condominium project. "Sale" and "sell" shall also include a contract to sell, a contract of purchase and sale, an exchange, an attempt to sell, an option of sale or purchase, a solicitation of a sale, or an offer to sell, directly or by an agent, or by a circular, letter, advertisement or otherwise.

A privilege given to a member of a cooperative, corporation, partnership, or any association and/or the issuance of a certificate or receipt evidencing or giving the right of participation in, or right to, any land in consideration of payment of the membership fee or dues, shall be deemed a sale within the meaning of this definition.

(c) Buy and purchase. The "buy" and "purchase" shall include any contract to buy, purchase, or otherwise acquire for a valuable consideration a subdivision lot, including the building and other improvements, if any, in a subdivision project

or a condominium unit in a condominium project.

(d) Subdivision project. "Subdivision project" shall mean a tract or a parcel of land registered under Act No. 496 which is partitioned primarily for residential purposes into individual lots with or without improvements thereon, and offered to the public for sale, in cash or in installment terms. It shall include all residential, commercial, industrial and recreational areas as well as open spaces and other community and public areas in the project.

(e) Subdivision lot. "Subdivision lot" shall mean any of the lots, whether residential, commercial, industrial, or recreational, in a subdivision project.

(f) Complex subdivision plan. "Complex subdivision plan" shall mean a subdivision plan of a registered land wherein a street, passageway or open space is delineated on the plan.

(g) Condominium project. "Condominium project" shall mean the entire parcel of real property divided or to be divided primarily for residential purposes into condominium units, including all structures thereon.

(h) Condominium unit. "Condominium unit" shall mean a part of the condominium project intended for any type of independent use or ownership, including one or more rooms or spaces located in one or more floors (or part of parts of floors) in a building or buildings and

such accessories as may be appended thereto.

(i) Owner. "Owner" shall refer to the registered owner of the land subject of a subdivision or a condominium project.

(j) Developer. "Developer" shall mean the person who develops or improves the subdivision project or condominium project for and in behalf of the owner thereof.

(k) Dealer. "Dealer" shall mean any person directly engaged as principal in the business of buying, selling or exchanging real estate whether on a full-time or part-time basis.

(l) Broker. "Broker" shall mean any person who, for commission or other compensation, undertakes to sell or negotiate the sale of a real estate belonging to another.

(m) Salesman. "Salesman" shall refer to the person regularly employed by a broker to perform, for and in his behalf, any or all functions of a real estate broker.

(n) Authority. "Authority" shall mean the National Housing Authority.

Title IIREGISTRATION AND LICENSE TO

SELL

Section 3. National Housing Authority The National Housing Authority shall have exclusive jurisdiction to regulate the real estate trade and business in accordance with the provisions of this Decree.

Section 4. Registration of Projects The registered owner of a parcel of land who

wishes to convert the same into a subdivision project shall submit his subdivision plan to the Authority which shall act upon and approve the same, upon a finding that the plan complies with the Subdivision Standards' and Regulations enforceable at the time the plan is submitted. The same procedure shall be followed in the case of a plan for a condominium project except that, in addition, said Authority shall act upon and approve the plan with respect to the building or buildings included in the condominium project in accordance with the National Building Code (R.A. No. 6541).

The subdivision plan, as so approved, shall then be submitted to the Director of Lands for approval in accordance with the procedure prescribed in Section 44 of the Land Registration Act (Act No. 496, as amended by R.A. No. 440): Provided, that it case of complex subdivision plans, court approval shall no longer be required. The condominium plan as likewise so approved, shall be submitted to the Register of Deeds of the province or city in which the property lies and the same shall be acted upon subject to the conditions and in accordance with the procedure prescribed in Section 4 of the Condominium Act (R.A. No. 4726).

The owner or the real estate dealer interested in the sale of lots or units, respectively, in such subdivision project or condominium project shall register the project with the Authority by filing therewith a sworn registration statement containing the following information:

(a) Name of the owner;

(b) The location of the owner's principal business office, and if the owner is a non-resident Filipino, the name and address of his agent or representative in the Philippines is authorized to receive notice;

(c) The names and addresses of all the directors and officers of the business firm, if the owner be a corporation, association, trust, or other entity, and of all the partners, if it be a partnership;

(d) The general character of the business actually transacted or to be transacted by the owner; and

(e) A statement of the capitalization of the owner, including the authorized and outstanding amounts of its capital stock and the proportion thereof which is paid-up.

The following documents shall be attached to the registration statement:

(a) A copy of the subdivision plan or condominium plan as approved in accordance with the first and second paragraphs of this section.

(b) A copy of any circular, prospectus, brochure, advertisement, letter, or communication to be used for the public offering of the subdivision lots or condominium units;

(c) In case of a business firm, a balance sheet showing the amount and general character of its assets and liabilities and a copy of its articles of incorporation or articles of partnership or association, as the case may be, with all the amendments thereof and existing by-laws or instruments corresponding thereto.

(d) A title to the property which is free from all liens and encumbrances: Provided, however, that in case any subdivision lot or condominium unit is mortgaged, it is sufficient if the instrument of mortgage contains a stipulation that the mortgagee shall release the mortgage on any subdivision lot or condominium unit as soon as the full purchase

price for the same is paid by the buyer.

The person filing the registration statement shall pay the registration fees prescribed therefor by the Authority.

Thereupon, the Authority shall immediately cause to be published a notice of the filing of the registration statement at the expense of the applicant-owner or dealer, in two newspapers general circulation, one published in English and another in Pilipino, once a week for two consecutive weeks, reciting that a registration statement for the sale of subdivision lots or condominium units has been filed in the National Housing Authority; that the aforesaid registration statement, as well as the papers attached thereto, are open to inspection during business hours by interested parties, under such regulations as the Authority may impose; and that copies thereof shall be furnished to any party upon payment of the proper fees.

The subdivision project of the condominium project shall be deemed registered upon completion of the above publication requirement. The fact of such registration shall be evidenced by a registration certificate to be issued to the applicant-owner or dealer.

Section 5. License to sell. Such owner or dealer to whom has been issued a registration certificate shall not, however, be authorized to sell any subdivision lot or condominium unit in the registered project unless he shall have first obtained a license to sell the project within two weeks from the registration of such project.

The Authority, upon proper application therefor, shall issue to such owner or dealer of a registered project a license to sell the project if, after an examination of the registration statement filed by said owner or dealer and all the pertinent documents attached thereto, he is convinced that the owner or dealer is of good repute, that his business is financially stable, and that the proposed sale of the subdivision lots or condominium units to the public would not be fraudulent.

Section 6. Performance Bond. No license to sell subdivision lots or condominium units shall be issued by the Authority under Section 5 of this Decree unless the owner or dealer shall have filed an adequate performance bond approved by said Authority to guarantee the construction and maintenance of the roads, gutters, drainage, sewerage, water system, lighting systems, and full development of the subdivision project or the condominium project and the compliance by the owner or dealer with the applicable laws and rules and regulations.

The performance bond shall be executed in favor of the Republic of the Philippines and shall authorize the Authority to use the proceeds thereof for the purposes of its undertaking in case of forfeiture as provided in this Decree.

Section 7. Exempt transactions. A license to sell and performance bond shall not be required in any of the following transactions:

(a) Sale of a subdivision lot resulting from the partition of land among co-owners and co-heirs.

(b) Sale or transfer of a subdivision lot by the original purchaser thereof and any subsequent sale of the same lot.

(c) Sale of a subdivision lot or a condominium unit by or for the account of a mortgagee in the ordinary course of business when necessary to liquidate a bona fide debt.

Section 8. Suspension of license to sell. Upon verified complaint by a buyer of a subdivision lot or a condominium unit in any interested party, the Authority may, in its discretion, immediately suspend the owner's or dealer's license to sell pending investigation and hearing of the case as provided in Section 13 hereof.

The Authority may motu proprio suspend the license to sell if, in its opinion, any information in the registration statement

filed by the owner or dealer is or has become misleading, incorrect, inadequate or incomplete or the sale or offering for a sale of the subdivision or condominium project may work or tend to work a fraud upon prospective buyers.

The suspension order may be lifted if, after notice and hearing, the Authority is convinced that the registration statement is accurate or that any deficiency therein has been corrected or supplemented or that the sale to the public of the subdivision or condominium project will neither be fraudulent not result in fraud. It shall also be lifted upon dismissal of the complaint for lack of legal basis.

Until the final entry of an order of suspension, the suspension of the right to sell the project, though binding upon all persons notified thereof, shall be deemed confidential unless it shall appear that the order of suspension has in the meantime been violated.

Section 9. Revocation of registration certificate and license to sell. The Authority may, motu proprio or upon verified complaint filed by a buyer of a subdivision lot or condominium unit, revoke the registration of any subdivision project or condominium project and the license to sell any subdivision lot or condominium unit in said project by issuing an order to this effect, with his findings in respect thereto, if upon examination into the affairs of the owner or dealer during a hearing as provided for in Section 14 hereof, if shall appear there is satisfactory evidence that the said owner or dealer:

(a) Is insolvent; or

(b) has violated any of the provisions of this Decree or any applicable rule or regulation of the Authority, or any undertaking of his/its performance bond; or

(c) Has been or is engaged or is about to engage in fraudulent transactions; or

(d) Has made any misrepresentation in any

prospectus, brochure, circular or other literature about the subdivision project or condominium project that has been distributed to prospective buyers; or

(e) Is of bad business repute; or

(f) Does not conduct his business in accordance with law or sound business principles.

Where the owner or dealer is a partnership or corporation or an unincorporated association, it shall be sufficient cause for cancellation of its registration certificate and its license to sell, if any member of such partnership or any officer or director of such corporation or association has been guilty of any act or omission which would be cause for refusing or revoking the registration of an individual dealer, broker or salesman as provided in Section 11 hereof.

Section 10. Registers of subdivision lots and condominium units. A record of subdivision lots and condominium units shall be kept in the Authority wherein shall be entered all orders of the Authority affecting the condition or status thereof. The registers of subdivision lots and condominium units shall be open to public inspection subject to such reasonable rules as the Authority may prescribe.

Title IIIDEALERS, BROKERS AND

SALESMEN

Section 11. Registration of dealers, brokers and salesmen. No real estate dealer, broker or salesman shall engage in the business of selling subdivision lots or condominium units unless he has registered himself with the Authority in accordance with the provisions of this section.

If the Authority shall find that the applicant is of good repute and has complied with the applicable rules of the Authority, including the payment of the prescribed fee, he shall register such applicant as a dealer, broker or salesman upon filing a bond, or other security in lieu thereof, in such sum as may

be fixed by the Authority conditioned upon his faithful compliance with the provisions of this Decree: Provided, that the registration of a salesman shall cease upon the termination of his employment with a dealer or broker.

Every registration under this section shall expire on the thirty-first day of December of each year. Renewal of registration for the succeeding year shall be granted upon written application therefor made not less than thirty nor more than sixty days before the first day of the ensuing year and upon payment of the prescribed fee, without the necessity of filing further statements or information, unless specifically required by the Authority. All applications filed beyond said period shall be treated as original applications.

The names and addresses of all persons registered as dealers, brokers, or salesmen shall be recorded in a Register of Brokers, Dealers and Salesmen kept in the Authority which shall be open to public inspection.

Section 12. Revocation of registration as dealers, brokers or salesmen. Registration under the preceding section may be refused or any registration granted thereunder, revoked by the Authority if, after reasonable notice and hearing, it shall determine that such applicant or registrant:

1. Has violated any provision of this Decree or any rule or regulation made hereunder; or

2. Has made a material false statement in his application for registration; or

3. Has been guilty of a fraudulent act in connection with any sale of a subdivision lot or condominium unit; or

4. Has demonstrated his unworthiness to transact the business of dealer, broker, or salesman, as the case may be.

In case of charges against a salesman, notice thereof shall also be given the broker or dealer employing such salesman.

Pending hearing of the case, the Authority shall have the power to order the suspension of the dealer's, broker's, of salesman's registration; provided, that such order shall state the cause for the suspension.

The suspension or revocation of the registration of a dealer or broker shall carry with it all the suspension or revocation of the registrations of all his salesmen.

Title IVPROCEDURE FOR REVOCATION OF

REGISTRATION CERTIFICATE

Section 13. Hearing. In the hearing for determining the existence of any ground or grounds for the suspension and/or revocation of registration certificate and license to sell as provided in Section 8 and 9 hereof, the following shall be complied with:

(a) Notice. No such hearing shall proceed unless the respondent is furnished with a copy of the complaint against him or is notified in writing of the purpose of such hearing.

(b) Venue. The hearing may be held before the officer or officers designated by the Authority on the date and place specified in the notice.

(c) Nature of proceeding. The proceedings shall be non-litigious and summary in nature without regard to legal technicalities obtaining in courts of law. The Rules of court shall not apply in said hearing except by analogy or in a suppletory character and whenever practicable and convenient.

(d) Power incidental to the hearing. For the purpose of the hearing or other proceeding under this Decree, the officer or officers designated to hear the complaint shall have the power to administer oaths,

subpoena witnesses, conduct ocular inspections, take depositions, and require the production of any book, paper, correspondence, memorandum, or other record which are deemed relevant or material to the inquiry.

Section 14. Contempt.

(a) Direct contempt. The officer or officers designated by the Authority to hear the complaint may summarily adjudge in direct contempt any person guilty of misbehavior in the presence of or so near the said hearing officials as to obstruct or interrupt the proceedings before the same or of refusal to be sworn or to answer as a witness or to subscribe an affidavit or deposition when lawfully required to do so. The person found guilty of direct contempt under this section shall be punished by a fine not exceeding Fifty (P50.00) Pesos or imprisonment not exceeding five (5) days, or both.

(b) Indirect contempt. The officer or officers designated to hear the complaint may also adjudge any person in indirect contempt on grounds and in the manner prescribed in Rule 71 of the Revised Rules of Court.

Section 15. Decision. The case shall be decided within thirty (30) days from the time the same is submitted for decision. The Decision may order the revocation of the registration of the subdivision or condominium project, the suspension, cancellation, or revocation of the license to sell and/or forfeiture, in whole or in part, of the performance bond mentioned in Section 6 hereof. In case forfeiture of the bond is ordered, the Decision may direct the provincial or city engineer to undertake or cause the construction of roads and of other requirements for the subdivision or

condominium as stipulated in the bond, chargeable to the amount forfeited. Such decision shall be immediately executory and shall become final after the lapse of 15 days from the date of receipt of the Decision.

Section 16. Cease and Desist Order. Whenever it shall appear to the Authority that any person is engaged or about to engage in any act or practice which constitutes or will constitute a violation of the provisions of this Decree, or of any rule or regulation thereunder, it may, upon due notice and hearing as provided in Section 13 hereof, issue a cease and desist order to enjoin such act or practices.

Section 17. Registration. All contracts to sell, deeds of sale and other similar instruments relative to the sale or conveyance of the subdivision lots and condominium units, whether or not the purchase price is paid in full, shall be registered by the seller in the Office of the Register of Deeds of the province or city where the property is situated.

Whenever a subdivision plan duly approved in accordance with Section 4 hereof, together with the corresponding owner's duplicate certificate of title, is presented to the Register of Deeds for registration, the Register of Deeds shall register the same in accordance with the provisions of the Land Registration Act, as amended: Provided, however, that it there is a street, passageway or required open space delineated on a complex subdivision plan hereafter approved and as defined in this Decree, the Register of Deeds shall annotate on the new certificate of title covering the street, passageway or open space, a memorandum to the effect that except by way of donation in favor of a city or municipality, no portion of any street, passageway, or open space so delineated on the plan shall be closed or otherwise disposed of by the registered owner without the requisite approval as provided under Section 22 of this Decree.

Section 18. Mortgages. No mortgage on any unit or lot shall be made by the owner or developer without prior written approval of the Authority. Such approval shall not be granted unless it is shown that the proceeds of the mortgage loan shall be used for the development of the condominium or

subdivision project and effective measures have been provided to ensure such utilization. The loan value of each lot or unit covered by the mortgage shall be determined and the buyer thereof, if any, shall be notified before the release of the loan. The buyer may, at his option, pay his installment for the lot or unit directly to the mortgagee who shall apply the payments to the corresponding mortgage indebtedness secured by the particular lot or unit being paid for, with a view to enabling said buyer to obtain title over the lot or unit promptly after full payment thereto;

Section 19. Advertisements. Advertisements that may be made by the owner or developer through newspaper, radio, television, leaflets, circulars or any other form about the subdivision or the condominium or its operations or activities must reflect the real facts and must be presented in such manner that will not tend to mislead or deceive the public.

The owner or developer shall answerable and liable for the facilities, improvements, infrastructures or other forms of development represented or promised in brochures, advertisements and other sales propaganda disseminated by the owner or developer or his agents and the same shall form part of the sales warranties enforceable against said owner or developer, jointly and severally. Failure to comply with these warranties shall also be punishable in accordance with the penalties provided for in this Decree.

Section 20. Time of Completion. Every owner or developer shall construct and provide the facilities, improvements, infrastructures and other forms of development, including water supply and lighting facilities, which are offered and indicated in the approved subdivision or condominium plans, brochures, prospectus, printed matters, letters or in any form of advertisement, within one year from the date of the issuance of the license for the subdivision or condominium project or such other period of time as may be fixed by the Authority.

Section 21. Sales Prior to Decree. In cases of subdivision lots or condominium units sold or disposed of prior to the effectivity of

this Decree, it shall be incumbent upon the owner or developer of the subdivision or condominium project to complete compliance with his or its obligations as provided in the preceding section within two years from the date of this Decree unless otherwise extended by the Authority or unless an adequate performance bond is filed in accordance with Section 6 hereof.

Failure of the owner or developer to comply with the obligations under this and the preceding provisions shall constitute a violation punishable under Sections 38 and 39 of this Decree.

Section 22. Alteration of Plans. No owner or developer shall change or alter the roads, open spaces, infrastructures, facilities for public use and/or other form of subdivision development as contained in the approved subdivision plan and/or represented in its advertisements, without the permission of the Authority and the written conformity or consent of the duly organized homeowners association, or in the absence of the latter, by the majority of the lot buyers in the subdivision.

Section 23. Non-Forfeiture of Payments. No installment payment made by a buyer in a subdivision or condominium project for the lot or unit he contracted to buy shall be forfeited in favor of the owner or developer when the buyer, after due notice to the owner or developer, desists from further payment due to the failure of the owner or developer to develop the subdivision or condominium project according to the approved plans and within the time limit for complying with the same. Such buyer may, at his option, be reimbursed the total amount paid including amortization interests but excluding delinquency interests, with interest thereon at the legal rate.

Section 24. Failure to pay installments. The rights of the buyer in the event of this failure to pay the installments due for reasons other than the failure of the owner or developer to develop the project shall be governed by Republic Act No. 6552.

Where the transaction or contract was entered into prior to the effectivity of Republic Act No. 6552 on August 26, 1972, the defaulting buyer shall be entitled to the

corresponding refund based on the installments paid after the effectivity of the law in the absence of any provision in the contract to the contrary.

Section 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit to the buyer upon full payment of the lot or unit. No fee, except those required for the registration of the deed of sale in the Registry of Deeds, shall be collected for the issuance of such title. In the event a mortgage over the lot or unit is outstanding at the time of the issuance of the title to the buyer, the owner or developer shall redeem the mortgage or the corresponding portion thereof within six months from such issuance in order that the title over any fully paid lot or unit may be secured and delivered to the buyer in accordance herewith.

Section 26. Realty Tax. Real estate tax and assessment on a lot or unit shall de paid by the owner or developer without recourse to the buyer for as long as the title has not passed the buyer; Provided, however, that if the buyer has actually taken possession of and occupied the lot or unit, he shall be liable to the owner or developer for such tax and assessment effective the year following such taking of possession and occupancy.

Section 27. Other Charges. No owner or developer shall levy upon any lot or buyer a fee for an alleged community benefit. Fees to finance services for common comfort, security and sanitation may be collected only by a properly organized homeowners association and only with the consent of a majority of the lot or unit buyers actually residing in the subdivision or condominium project.

Section 28. Access to Public Offices in the Subdivisions. No owner or developer shall deny any person free access to any government office or public establishment located within the subdivision or which may be reached only by passing through the subdivision.

Section 29. Right of Way to Public Road. The owner or developer of a subdivision without access to any existing public road or street must secure a right of way to a public road or street and such right of way must be

developed and maintained according to the requirement of the government and authorities concerned.

Section 30. Organization of Homeowners Association. The owner or developer of a subdivision project or condominium project shall initiate the organization of a homeowners association among the buyers and residents of the projects for the purpose of promoting and protecting their mutual interest and assist in their community development.

Section 31. Donations of roads and open spaces to local government. The registered owner or developer of the subdivision or condominium project, upon completion of the development of said project may, at his option, convey by way of donation the roads and open spaces found within the project to the city or municipality wherein the project is located. Upon acceptance of the donation by the city or municipality concerned, no portion of the area donated shall thereafter be converted to any other purpose or purposes unless after hearing, the proposed conversion is approved by the Authority.

Section 32. Phases of Subdivision. For purposes of complying with the provisions of this Decree, the owner or developer may divide the development and sale of the subdivision into phases, each phase to cover not less than ten hectares. The requirement imposed by this Decree on the subdivision as a whole shall be deemed imposed on each phase.

Section 33. Nullity of waivers. Any condition, stipulation, or provision in contract of sale whereby any person waives compliance with any provision of this Decree or of any rule or regulation issued thereunder shall be void.

Section 34. Visitorial powers. This Authority, through its duly authorized representative may, at any time, make an examination into the business affairs, administration, and condition of any person, corporation, partnership, cooperative, or association engaged in the business of selling subdivision lots and condominium units. For this purpose, the official authorized so to do shall have the authority to examine under oath the directors, officers,

stockholders or members of any corporation, partnership, association, cooperative or other persons associated or connected with the business and to issue subpoena or subpoena duces tecum in relation to any investigation that may arise therefrom.

The Authority may also authorize the Provincial, City or Municipal Engineer, as the case may be, to conduct an ocular inspection of the project to determine whether the development of said project conforms to the standards and specifications prescribed by the government.

The books, papers, letters, and other documents belonging to the person or entities herein mentioned shall be open to inspection by the Authority or its duly authorized representative.

Section 35. Take-over Development. The Authority, may take over or cause the development and completion of the subdivision or condominium project at the expenses of the owner or developer, jointly and severally, in cases where the owner or developer has refused or failed to develop or complete the development of the project as provided for in this Decree.

The Authority may, after such take-over, demand, collect and receive from the buyers the installment payments due on the lots, which shall be utilized for the development of the subdivision.

Section 36. Rules and Regulations. The Authority shall issue the necessary standards, rules and regulations for the effective implementation of the provisions of this Decree. Such standards, rules and regulations shall take effect immediately after their publication three times a week for two consecutive weeks in any newspaper of general circulation.

Section 37. Deputization of law enforcement agencies. The Authority may deputize the Philippine Constabulary or any law enforcement agency in the execution of its final orders, rulings or decisions.

Section 38. Administrative Fines. The Authority may prescribe and impose fines not exceeding ten thousand pesos for violations of the provisions of this Decree or of any rule or regulation thereunder. Fines shall be payable to the Authority and enforceable through writs of execution in accordance with the provisions of the Rules of Court.

Section 39. Penalties. Any person who shall violate any of the provisions of this Decree and/or any rule or regulation that may be issued pursuant to this Decree shall, upon conviction, be punished by a fine of not more than twenty thousand (P20,000.00) pesos and/or imprisonment of not more than ten years: Provided, That in the case of corporations, partnership, cooperatives, or associations, the President, Manager or Administrator or the person who has charge of the administration of the business shall be criminally responsible for any violation of this Decree and/or the rules and regulations promulgated pursuant thereto.

Section 40. Liability of controlling persons. Every person who directly or indirectly controls any person liable under any provision of this Decree or of any rule or regulation issued thereunder shall be liable jointly and severally with and to the same extent as such controlled person unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.

Section 41. Other remedies. The rights and remedies provided in this Decree shall be in addition to any and all other rights and remedies that may be available under existing laws.

Section 42. Repealing clause. All laws, executive orders, rules and regulations or part thereof inconsistent with the provisions of this Decree are hereby repealed or modified accordingly.

Section 43. Effectivity. This Decree shall take effect upon its approval.

______________________________________________________________________________

XVI. The Condominium Act (RA 4726)

AN ACT TO DEFINE CONDOMINIUM, ESTABLISH REQUIREMENTS FOR ITS CREATION, AND GOVERN ITS INCIDENTS.

Sec. 1. The short title of this Act shall be "The Condominium Act".

Sec. 2. A condominium is an interest in real property consisting of separate interest in a unit in a residential, industrial or commercial building and an undivided interest in common, directly or indirectly, in the land on which it is located and in other common areas of the building. A condominium may include, in addition, a separate interest in other portions of such real property. Title to the common areas, including the land, or the appurtenant interests in such areas, may be held by a corporation specially formed for the purpose (hereinafter known as the "condominium corporation") in which the holders of separate interest shall automatically be members or shareholders, to the exclusion of others, in proportion to the appurtenant interest of their respective units in the common areas.

The real right in condominium may be ownership or any other interest in real property recognized by law, on property in the Civil Code and other pertinent laws.

Sec. 3. As used in this Act, unless the context otherwise requires:

(a) "Condominium" means a condominium as defined in the next preceding section.

(b) "Unit" means a part of the condominium project intended for any type of independent use or ownership, including one or more rooms or spaces located in one or more floors (or part or parts of floors) in a building or buildings and such accessories as may be appended thereto.

(c) "Project" means the entire parcel of real property divided or to be divided in condominiums, including all structures thereon,

(d) "Common areas" means the entire project excepting all units separately granted or held or reserved.

(e) "To divide" real property means to divide the ownership thereof or other interest therein by conveying one or more condominiums therein but less than the whole thereof.

Sec. 4. The provisions of this Act shall apply to property divided or to be divided into condominiums only if there shall be recorded in the Register of Deeds of the province or city in which the property lies and duly annotated in the corresponding certificate of title of the land, if the latter had been patented or registered under either the Land Registration or Cadastral Acts, an enabling or master deed which shall contain, among others, the following:

(a) Description of the land on which the building or buildings and improvements are or are to be located;

(b) Description of the building or buildings, stating the number of stories and basements, the number of units and their accessories, if any;

(c) Description of the common areas and facilities;

(d) A statement of the exact nature of the interest acquired or to be acquired by the purchaser in the separate units and in the common areas of the condominium project. Where title to or the appurtenant interests in the common areas is or is to be held by a condominium corporation, a statement to this effect shall be included;

(e) Statement of the purposes for which the building or buildings and each of the units are intended or restricted as to use;

(f) A certificate of the registered owner of the property, if he is other than those executing the master deed, as well as of all registered holders of any lien or encumbrance on the property, that they consent to the registration of the deed;

(g) The following plans shall be appended to the deed as integral parts thereof:

(1) A survey plan of the land included in the project, unless a survey plan of the same property had previously bee filed in said office;

(2) A diagrammatic floor plan of the building or buildings in the project, in sufficient detail to identify each unit, its relative location and approximate dimensions;

(h) Any reasonable restriction not contrary to law, morals or public policy regarding the right of any condominium owner to alienate or dispose of his condominium.

The enabling or master deed may be amended or revoked upon registration of an instrument executed by the registered owner or owners of the property and consented to by all registered holders of any lien or encumbrance on the land or building or portion thereof. The term "registered owner" shall include the registered owners of condominiums in the project. Until registration of a revocation, the provisions of this Act shall continue to apply to such property.

Sec. 5. Any transfer or conveyance of a unit or an apartment, office or store or other space therein, shall include the transfer or conveyance of the undivided interests in the common areas or, in a proper case, the membership or shareholdings in the condominium corporation: Provided, however, That where the common areas in the condominium project are owned by the owners of separate units as co-owners thereof, no condominium unit therein shall be conveyed or transferred to persons other than Filipino citizens, or corporations at least sixty percent of the capital stock of which belong to Filipino citizens, except in cases of hereditary succession. Where the common areas in a condominium project are held by a corporation, no transfer or conveyance of a unit shall be valid if the concomitant transfer of the appurtenant membership or stockholding in the corporation will cause the alien interest in such corporation to exceed the limits imposed by existing laws.

Sec. 6. Unless otherwise expressly provided in the enabling or master deed or the declaration of restrictions, the incidents of a condominium grant are as follows:

(a) The boundary of the unit granted are the interior surfaces of the perimeter walls, floors, ceilings, windows and doors thereof. The following are not part of the unit bearing walls, columns, floors, roofs, foundations and other common structural elements of the building; lobbies, stairways, hallways, and other areas of common use, elevator equipment and shafts, central heating, central refrigeration and central air-conditioning equipment, reservoirs, tanks, pumps and other central services and facilities, pipes, ducts, flues, chutes, conduits, wires and other utility installations, wherever located, except the outlets thereof when located within the unit.

(b) There shall pass with the unit, as an appurtenance thereof, an exclusive easement for the use of the air space encompassed by the boundaries of the unit as it exists at any particular time and as the unit may lawfully be altered or reconstructed from time to time. Such easement shall be automatically terminated in any air space upon destruction of the unit as to render it untenantable.

(c) Unless otherwise, provided, the common areas are held in common by the holders of units, in equal shares, one for each unit.

(d) A non-exclusive easement for ingress, egress and support through the common areas is appurtenant to each unit and the common areas are subject to such easements.

(e) Each condominium owner shall have the exclusive right to paint, repaint, tile, wax, paper or otherwise refinish and decorate the inner surfaces of the walls, ceilings, floors, windows and doors bounding his own unit.

(f) Each condominium owner shall have the exclusive right to mortgage, pledge or encumber his condominium and to have the same appraised independently of the other condominiums but any obligation incurred by such condominium owner is personal to him.

(g) Each condominium owner has also the absolute right to sell or dispose of his condominium unless the master deed contains a requirement that the property be first offered to the condominium owners within a reasonable period of time before the same is offered to outside parties;

Sec. 7. Except as provided in the following section, the common areas shall remain undivided, and there shall be no judicial partition thereof.

Sec. 8. Where several persons own condominiums in a condominium project, an action may be brought by one or more such persons for partition thereof by sale of the entire project, as if the owners of all of the condominiums in such project were co-owners of the entire project in the same proportion as their interests in the common areas: Provided, however, That a partition shall be made only upon a showing:

(a) That three years after damage or destruction to the project which renders material part thereof unit for its use prior thereto, the project has not been rebuilt or repaired substantially to its state prior to its damage or destruction, or

(b) That damage or destruction to the project has rendered one-half or more of the units therein untenantable and that condominium owners holding in aggregate more than thirty percent interest in the common areas are opposed to repair or restoration of the project; or

(c) That the project has been in existence in excess of fifty years, that it is obsolete and uneconomic, and that condominium owners holding in aggregate more than fifty percent interest in the common areas are opposed to repair or restoration or remodeling or modernizing of the project; or

(d) That the project or a material part thereof has been condemned or expropriated and that the project is no longer viable, or that the condominium owners holding in aggregate more than seventy percent interest in the common areas are opposed to continuation of the condominium regime after expropriation or condemnation of a material portion thereof; or

(e) That the conditions for such partition by sale set forth in the declaration of restrictions, duly registered in accordance with the terms of this Act, have been met.

Sec. 9. The owner of a project shall, prior to the conveyance of any condominium therein, register a declaration of restrictions relating to such project, which restrictions shall constitute a lien upon each condominium in the project, and shall insure to and bind all condominium owners in the project. Such liens, unless otherwise provided, may be enforced by any condominium owner in the project or by the management body of such project. The Register of Deeds shall enter and annotate the declaration of restrictions upon the certificate of title covering the land included within the project, if the land is patented or registered under the Land Registration or Cadastral Acts.

The declaration of restrictions shall provide for the management of the project by anyone of the following management bodies: a condominium corporation, an association of the condominium owners, a board of governors elected by condominium owners, or a management agent elected by the owners or by the board named in the declaration. It shall also provide for voting majorities quorums, notices, meeting date, and other rules governing such body or bodies.

Such declaration of restrictions, among other things, may also provide:

(a) As to any such management body;

(1) For the powers thereof, including power to enforce the provisions of the declarations of restrictions;

(2) For maintenance of insurance policies, insuring condominium owners against loss by fire, casualty, liability, workmen's compensation and other insurable risks, and for bonding of the members of any management body;

(3) Provisions for maintenance, utility, gardening and other services benefiting the common areas, for the employment of personnel necessary for the operation of the

building, and legal, accounting and other professional and technical services;

(4) For purchase of materials, supplies and the like needed by the common areas;

(5) For payment of taxes and special assessments which would be a lien upon the entire project or common areas, and for discharge of any lien or encumbrance levied against the entire project or the common areas;

(6) For reconstruction of any portion or portions of any damage to or destruction of the project;

(7) The manner for delegation of its powers;

(8) For entry by its officers and agents into any unit when necessary in connection with the maintenance or construction for which such body is responsible;

(9) For a power of attorney to the management body to sell the entire project for the benefit of all of the owners thereof when partition of the project may be authorized under Section 8 of this Act, which said power shall be binding upon all of the condominium owners regardless of whether they assume the obligations of the restrictions or not.

(b) The manner and procedure for amending such restrictions: Provided, That the vote of not less than a majority in interest of the owners is obtained.

(c) For independent audit of the accounts of the management body;

(d) For reasonable assessments to meet authorized expenditures, each condominium unit to be assessed separately for its share of such expenses in proportion (unless otherwise provided) to its owners fractional interest in any common areas;

(e) For the subordination of the liens securing such assessments to other liens either generally or specifically described;

(f) For conditions, other than those provided for in Sections eight and thirteen of this Act, upon which partition of the project and dissolution of the condominium corporation

may be made. Such right to partition or dissolution may be conditioned upon failure of the condominium owners to rebuild within a certain period or upon specified inadequacy of insurance proceeds, or upon specified percentage of damage to the building, or upon a decision of an arbitrator, or upon any other reasonable condition.

Sec. 10. Whenever the common areas in a condominium project are held by a condominium corporation, such corporation shall constitute the management body of the project. The corporate purposes of such a corporation shall be limited to the holding of the common areas, either in ownership or any other interest in real property recognized by law, to the management of the project, and to such other purposes as may be necessary, incidental or convenient to the accomplishment of said purposes. The articles of incorporation or by-laws of the corporation shall not contain any provision contrary to or inconsistent with the provisions of this Act, the enabling or master deed, or the declaration of restrictions of the project. Membership in a condominium corporation, regardless of whether it is a stock or non-stock corporation, shall not be transferable separately from the condominium unit of which it is an appurtenance. When a member or stockholder ceases to own a unit in the project in which the condominium corporation owns or holds the common areas, he shall automatically cease to be a member or stockholder of the condominium corporation.

Sec. 11. The term of a condominium corporation shall be co-terminus with the duration of the condominium project, the provisions of the Corporation Law to the contrary notwithstanding.

Sec. 12. In case of involuntary dissolution of a condominium corporation for any of the causes provided by law, the common areas owned or held by the corporation shall, by way of liquidation, be transferred pro-indiviso and in proportion to their interest in the corporation to the members or stockholders thereof, subject to the superior rights of the corporation creditors. Such transfer or conveyance shall be deemed to be a full liquidation of the interest of such members or stockholders in the corporation.

After such transfer or conveyance, the provisions of this Act governing undivided co-ownership of, or undivided interest in, the common areas in condominium projects shall fully apply.

Sec. 13. Until the enabling or the master deed of the project in which the condominium corporation owns or holds the common area is revoked, the corporation shall not be voluntarily dissolved through an action for dissolution under Rule 104 of the Rules of Court except upon a showing:

(a) That three years after damage or destruction to the project in which the corporation owns or holds the common areas, which damage or destruction renders a material part thereof unfit for its use prior thereto, the project has not been rebuilt or repaired substantially to its state prior to its damage or destruction; or

(b) That damage or destruction to the project has rendered one-half or more of the units therein untenantable and that more than thirty percent of the members of the corporation, if non-stock, or the shareholders representing more than thirty percent of the capital stock entitled to vote, if a stock corporation, are opposed to the repair or reconstruction of the project, or

(c) That the project has been in existence in excess of fifty years, that it is obsolete and uneconomical, and that more than fifty percent of the members of the corporation, if non-stock, or the stockholders representing more than fifty percent of the capital stock entitled to vote, if a stock corporation, are opposed to the repair or restoration or remodeling or modernizing of the project; or

(d) That the project or a material part thereof has been condemned or expropriated and that the project is no longer viable, or that the members holding in aggregate more than seventy percent interest in the corporation, if non-stock, or the stockholders representing more than seventy percent of the capital stock entitled to vote, if a stock corporation, are opposed to the continuation of the condominium regime after expropriation or condemnation of a material portion thereof; or

(e) That the conditions for such a dissolution set forth in the declaration of restrictions of the project in which the corporation owns of holds the common areas, have been met.

Sec. 14. The condominium corporation may also be dissolved by the affirmative vote of all the stockholders or members thereof at a general or special meeting duly called for the purpose: Provided, That all the requirements of Section sixty-two of the Corporation Law are complied with.

Sec. 15. Unless otherwise provided for in the declaration of restrictions upon voluntary dissolution of a condominium corporation in accordance with the provisions of Sections thirteen and fourteen of this Act, the corporation shall be deemed to hold a power of attorney from all the members or stockholders to sell and dispose of their separate interests in the project and liquidation of the corporation shall be effected by a sale of the entire project as if the corporation owned the whole thereof, subject to the rights of the corporate and of individual condominium creditors.

Sec. 16. A condominium corporation shall not, during its existence, sell, exchange, lease or otherwise dispose of the common areas owned or held by it in the condominium project unless authorized by the affirmative vote of all the stockholders or members.

Sec. 17. Any provision of the Corporation Law to the contrary notwithstanding, the by-laws of a condominium corporation shall provide that a stockholder or member shall not be entitled to demand payment of his shares or interest in those cases where such right is granted under the Corporation Law unless he consents to sell his separate interest in the project to the corporation or to any purchaser of the corporation's choice who shall also buy from the corporation the dissenting member or stockholder's interest. In case of disagreement as to price, the procedure set forth in the appropriate provision of the Corporation Law for valuation of shares shall be followed. The corporation shall have two years within which to pay for the shares or furnish a purchaser of its choice from the time of award. All expenses incurred in the liquidation of the interest of the dissenting

member or stockholder shall be borne by him.

Sec. 18. Upon registration of an instrument conveying a condominium, the Register of Deeds shall, upon payment of the proper fees, enter and annotate the conveyance on the certificate of title covering the land included within the project and the transferee shall be entitled to the issuance of a "condominium owner's" copy of the pertinent portion of such certificate of title. Said "condominium owner's" copy need not reproduce the ownership status or series of transactions in force or annotated with respect to other condominiums in the project. A copy of the description of the land, a brief description of the condominium conveyed, name and personal circumstances of the condominium owner would be sufficient for purposes of the "condominium owner's" copy of the certificate of title. No conveyance of condominiums or part thereof, subsequent to the original conveyance thereof from the owner of the project, shall be registered unless accompanied by a certificate of the management body of the project that such conveyance is in accordance with the provisions of the declaration of restrictions of such project.

In cases of condominium projects registered under the provisions of the Spanish Mortgage Law or Act 3344, as amended, the registration of the deed of conveyance of a condominium shall be sufficient if the Register of Deeds shall keep the original or signed copy thereof, together with the certificate of the management body of the project, and return a copy of the deed of conveyance to the condominium owner duly acknowledge and stamped by the Register of Deeds in the same manner as in the case of registration of conveyances of real property under said laws.

Sec. 19. Where the enabling or master deed provides that the land included within a condominium project are to be owned in common by the condominium owners therein, the Register of Deeds may, at the request of all the condominium owners and upon surrender of all their "condominium owner's" copies, cancel the certificates of title of the property and issue a new one in the name of said condominium owners as pro-indiviso co-owners thereof.

Sec. 20. An assessment upon any condominium made in accordance with a duly registered declaration of restrictions shall be an obligation of the owner thereof at the time the assessment is made. The amount of any such assessment plus any other charges thereon, such as interest, costs (including attorney's fees) and penalties, as such may be provided for in the declaration of restrictions, shall be and become a lien upon the condominium assessed when the management body causes a notice of assessment to be registered with the Register of Deeds of the city or province where such condominium project is located. The notice shall state the amount of such assessment and such other charges thereon a may be authorized by the declaration of restrictions, a description of the condominium, unit against which same has been assessed, and the name of the registered owner thereof. Such notice shall be signed by an authorized representative of the management body or as otherwise provided in the declaration of restrictions. Upon payment of said assessment and charges or other satisfaction thereof, the management body shall cause to be registered a release of the lien.

Such lien shall be superior to all other liens registered subsequent to the registration of said notice of assessment except real property tax liens and except that the declaration of restrictions may provide for the subordination thereof to any other liens and encumbrances.

Such liens may be enforced in the same manner provided for by law for the judicial or extra-judicial foreclosure of mortgages of real property. Unless otherwise provided for in the declaration of restrictions, the management body shall have power to bid at foreclosure sale. The condominium owner shall have the same right of redemption as in

cases of judicial or extra-judicial foreclosure of mortgages.

Sec. 21. No labor performed or services or materials furnished with the consent of or at the request of a condominium owner or his agent or his contractor or subcontractor, shall be the basis of a lien against the condominium of any other condominium owner, unless such other owners have expressly consented to or requested the performance of such labor or furnishing of such materials or services. Such express consent shall be deemed to have been given by the owner of any condominium in the case of emergency repairs of his condominium unit. Labor performed or services or materials furnished for the common areas, if duly authorized by the management body provided for in a declaration of restrictions governing the property, shall be deemed to be performed or furnished with the express consent of each condominium owner. The owner of any condominium may remove his condominium from a lien against two or more condominiums or any part thereof by payment to the holder of the lien of the fraction of the total sum secured by such lien which is attributable to his condominium unit.

Sec. 22. Unless otherwise provided for by the declaration of restrictions, the management body, provided for herein, may acquire and hold, for the benefit of the condominium owners, tangible and intangible personal property and may dispose of the same by sale or otherwise; and the beneficial interest in such personal property shall be owned by the condominium owners in the same proportion as their respective interests in the common areas. A transfer of a condominium shall transfer to the transferee ownership of the

transferor's beneficial interest in such personal property.

Sec. 23. Where, in an action for partition of a condominium project or for the dissolution of condominium corporation on the ground that the project or a material part thereof has been condemned or expropriated, the Court finds that the conditions provided for in this Act or in the declaration of restrictions have not been met, the Court may decree a reorganization of the project, declaring which portion or portions of the project shall continue as a condominium project, the owners thereof, and the respective rights of said remaining owners and the just compensation, if any, that a condominium owner may be entitled to due to deprivation of his property. Upon receipt of a copy of the decree, the Register of Deeds shall enter and annotate the same on the pertinent certificate of title.

Sec. 24. Any deed, declaration or plan for a condominium project shall be liberally construed to facilitate the operation of the project, and its provisions shall be presumed to be independent and severable.

Sec. 25. Whenever real property has been divided into condominiums, each condominium separately owned shall be separately assessed, for purposes of real property taxation and other tax purposes to the owners thereof and the tax on each such condominium shall constitute a lien solely thereon.

Sec. 26. All Acts or parts of Acts in conflict or inconsistent with this Act are hereby amended insofar as condominium and its incidents are concerned.

Sec. 27. This Act shall take effect upon its approval.

EXCLUDE: Electronic Commerce Act, Public Land Law, Retail Trade and Liberalization Act, Bulk Sales Law