Category Archives: law on sales

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Contract of Sale

What is a contract of sale?

According to Art. 1458 of the New Civil Code, it is defined as:

Article 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.

*It is an agreement between two parties whereby one, who is the seller or vendor, obligates himself to deliver something to the other party who is the buyer or vendee who is bound to pay a sum of money or its equivalent.

What are the essential elements of a contract of sale?

In general, the rules governing a simple contract also apply to a contract of sale. The following must be present:

  1. Consent or meeting of the minds wherein 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 thereof. This is when the seller agrees to deliver the thing subject of the contract and the buyer, the price thereof. The essence of this is that the parties agree to the terms of the contract which will bind them.
  1. Object or subject matter or the determinate thing, as what the law referred to which the seller is bound to deliver and the buyer is bound to receive upon payment of its sum.
  1. Cause or consideration or the price certain in money or its equivalent which does not include goods or merchandise although they have their own value in money. Its equivalent may mean any goods given as the token of payment and where these are assessed and evaluated as its price equivalent. The price however must not be fictitious or else it would be void.

What are the characteristics of a contract of sale?

Consensual because it can be perfected by the mere giving of consent and meeting of the minds of the parties;

Bilateral because both of the parties are bound to fulfil correlative obligations such as the seller is to deliver the thing which is the subject of the contract and the buyer, to pay the price;

Onerous because the thing sold is conveyed in exchange for the purchase price and the price is in consideration of the thing sold;

Nominate because it is given a name in the Civil Code

Principal because it does not require the existence of another contract for it to be valid and existing.

What are the types of Sales Agreement?

  1. Absolute Sale- one wherein there is no condition whatever and imposes upon the vendor the obligation to deliver the real estate, subject matter of the agreement to the vendee who upon the receipt of the property hands over and pays the purchase price that has been previously agreed upon with the vendor.

  • The Deed of Absolute Sale where both parties agree on and accept the real estate to be or being conveyed and price therefore that the vendee should pay for it. This transaction is the most common where the title of the real estate, subject sale, is free from and clear of any alien or encumbrance whatever. No other condition is necessary except the actual delivery and transfer of the property to the vendee without delay. The deed will then be registered to the proper Registry of Deeds as required by the Torrens Registration Law.

  • Sale in Exchange or Barter where the real properties is subject to the transaction is deeded in exchange of and for another real property that is acceptable to the vendor without any additional monetary consideration. It is essential in the transaction that the title of both properties in the exchange is valid and unencumbered or free from any liens or encumbrances of any nature.

  1. Conditional Sale-This is an agreement to sell or buy real estate with certain conditions that must be accomplished by either or both the parties so as to extinguish and or create ownership over the subject property. This is merely an executory contract in contemplation of the law and the right of ownership is withheld for the meantime. In other words, the certificate of title of the real property is not turned over to the vendee until and after certain conditions have been accomplished by either or both the parties. Then it becomes an executed contract.

It may be:

  • Sale on installments- commonly adopted for the sale of lots in a land subdivision or units in a condominium or townhouse project. Its principal feature is that the purchase price is fixed at a certain amount that shall be paid in equal monthly or yearly installments for a period of five or ten years.
  • Contract to Sell- This is similar to sale on installments except that the period allowed for the final payment of the purchase price is much shorter in duration.
  • Pacto de Retro- The sale in which the vendor is granted the right to repurchase the property sold on a certain date fixed in the Contract. This is done by returning to the vendee the entire purchase price including the expenses for the preparation of the contract and the necessary and useful expenses on the property sold. This is termed as conventional redemption under Article 1691 of the New Civil Code.

There are other forms of Conditional Sale where ownership and possession of subject property are transferred to the vendee upon execution of the contract such as:

  1. Sale with mortgage- A portion of the purchase price is initially paid by the vendee and the vendor delivers possession and ownership of subject property tot eh vendor who, thereafter, execute a Deed of Mortgage on the same property in favor of the vendor to guarantee payment in full of the balance of the purchase price.
  1. Sale with assumption of mortgage- The Vendor pays in cash a portion of subject property to the vendee who assumes the payment of the existing mortgage on the property that represents the balance of the purchase price.
  1. Dacion en Pago- This is an agreement where the encumbered property of the vendor is sold by the latter to his creditor or mortgagee as vendee to satisfy or in payment of his existing loan and other charges.

What is the difference between a contract to sell and a conditional sale?

  1. Transfer of title– In a contract to sell, the title does not automatically pass to the buyer upon payment of the price, a contract of absolute sale still has to be entered into by the parties.

In a conditional sale, the sale will be deemed fulfilled upon the happening of the condition which may or may not occur. If the condition do not happen then the contract of sale will be abated.

  1. Sale of property to a third person– In a contract to sell, a third person not an immediate party to the contract cannot be considered a buyer in good faith despite payment of the price and the prospective buyer cannot recover the property. This in effect will cause defect in the title of the buyer.

In a conditional sale, upon the happening of the suspensive condition, the title of the seller or ownership to the thing sold will automatically transfer to the buyer and will bar the seller to transfer it to any other person. In this case, the first buyer may seek reconveyance of the property since the second buyer will be deemed a buyer in bad faith and will have a defect in his title

References:

De Leon, H. (2010). Comments and Cases on Sales. Quezon City: Rex Printing Company, Inc.

Leabres V. Court of Appeals, 146 SCRA 158, 1986

The New Civil Code of the Philippines

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Parties to a Contract of Sale

Who has the capacity to capacity to buy or to sell?

In general all persons who may enter into a simple contract may also enter into a contract of sale. All persons either natural or juridical is given the legal capacity to buy and sell. However there are those given by law an absolute and relative incapacity to enter into a contract of sale.

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)

*This provision of the New Civil Code mentioned about necessaries which is defined in Art. 194 of the Family Code as everything indispensable for sustenance, dwelling, clothing, medical, attendance, education, and transportation.

Kinds of Incapacity:

  1. Absolute incapacity
  2. Relative incapacity
  3. Specific incapacity

 

 Who are those with absolute incapacity according to the law?

Those that are considered absolutely incapable of entering into a contract of sale are those that cannot bind themselves because of reasons for example like age, defect intellect and mental capacity.

Article 1327: The following cannot give consent to a contract:

  • Unemancipated minors

*Those which have not yet reached the age of majority which is 18 years old.

  • Insane or demented persons and
  • Deaf-mutes who do not know how to write

Article 1328: Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable.

*Lucid interval is the period wherein the person suffering from mental illness is restored to his normal intellectual capacity, intelligence, judgment and reason.

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

  • One of the parties is incapable of giving consent (want of capacity)
  • Consent is vitiated by mistake, violence, intimidation, undue influence or fraud (vitiated consent)

These contracts are binding, unless they are annulled by a proper court action. They are susceptible of ratification.

Who are those with relative incapacity according to the law?

Those that are considered relatively incapable of entering into a contract of sale are in relation only to certain persons and classes of property.

Articles 1490: Husband and wife cannot sell property to each other, except

  1. When separation of property was agreed upon in marriage settlements
  1. When there has been judicial separation of property under Art 191

*This is to prevent commission of fraud or prejudice to third persons, the other taking undue influence over the other and to avoid indirect donations. However the husband and wife cannot sell property to each other except when a separation of property was agreed upon in the marriage settlements and where there has been a judicial separation of property as provided by law.

 Who are those with specific incapacity according to the law?

Those that are considered specifically incapable of entering into a contract of sale are in relation only to their occupation and relation to other persons due to public policy, public order, public morals and so forth.

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:

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

*The relationship of the guardian and ward is so intimate that the influence is so great which might cause highly suspicious and fraudulent contract of sale. This influence is assumed to last while the guardian is still functioning in its capacity, the property is still under his control and accounts have finally been settled.

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

*This incapacity rests on the principle that the agent and principal rest on one juridical person. The agent stands on fiduciary relationship with his principal. He is prohibited to buy the property he is supposed to sell unless the principal consented thereto.

  • Executors and administrators, the property of the estate under administration;

*The prohibition applies to properties under the administration of the executor and administrator. Executors do not administer the hereditary rights of any heir and thus not part of the property administered by them.

  • 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;

*This prohibition applies to properties belonging to the State or any subdivision thereof or any government-owned or controlled corporations or institutions and those administered by these public officials.

  • 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.

*The prohibition applies to properties subject of litigation to the persons disqualified by virtue of this provision. It applies during the pendency of litigation involving the property. Such as when the property is subject to the judicial action of the judge or a lawyer, who by virtue of his profession, takes part on the purchase of the property.

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

*These are for example, aliens who cannot purchase agricultural lands prohibited by the Constitution, an officer managing an execution sale cannot purchase the subject property as prohibited by the Rules of Court or an unpaid seller who prohibited in buying the goods in the resale of the same at a public or private sale as barred by the New Civil Code of the Philippines.

References:

De Leon, H. (2010). Comments and Cases on Sales. Quezon City: Rex Printing Company, Inc.

Jurado, D. (1999). Civil Law Reviewer. Quezon City: Rex Printing Company, Inc.

The New Civil Code of the Philippines

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Subject Matter

What can be the objects of a contract of sale?

1. Things which should be determinate as well as licit or lawful so as not to be contrary to public law, morals, public order, good customs and so forth. It must also be within the commerce of men or susceptible of appropriation and transmissible from one person to the other.

  • The thing must be determinate; specifically separated and particularly designated; determinable
  • The thing must be licit-must not be contrary to law, morals, good customs, public order or public policy; not outside the commerce of men and not impossible
  • The vendor must have the right to transfer ownership thereof, at the time it is delivered since delivery transfers ownership
  • The thing or object of sale may be presently existing or it may exist in the future provide in the latter case it has potential existence
  • The sole owner of the thing may sell an undivided interest therein.

2. Rights which can even be personal or not intransmissible. However there are objects which is by law prohibited to be sold such as those that involves transmissible rights like right to vote, right to public office and services

What are the goods which may be the objects of sale?

  1. Existing goods or those owned or already possessed by the seller
  2. Future goods or those which are still to be manufactured, raised or acquired. No contract may be entered into upon future inheritance except in cases expressly authorized by law.

Contract to Sell; Absolute Sale; Conditional Sale

1. What is a contract to sell?

A contract to sell is a kind of sale whereby payment of the contract price is made at some future date and that ownership of the property shall be retained by the owner until full payment thereof is made. It is a bilateral contract whereby the prospective seller binds himself to sell a thing to a prospective buyer upon the fulfillment of the payment of the price. The transfer of title to the buyer will only happen not by the fact of payment but by entering into another contract which is the contract of absolute sale. The prospective buyer reserves the ownership to the object which is the subject matter of the sale.

2. What is an absolute sale?

An absolute sale is defined as an agreement without any stipulated conditions to be complied by either the seller or buyer. It is where there are no other conditions which need to be fulfilled before the ownership of the thing sold be transferred. Mere delivery of the thing already passes the title to the buyer. The payment of the purchase price is not essential to transfer ownership, so long as the property has already been delivered. Non-payment would only give the seller the right to demand for the sum.

3. What is a conditional sale?

A conditional sale is a bilateral contract whereby the element of consent is present although conditioned upon the happening of a contingent event which may or may not occur. If the suspensive condition is fulfilled, the contract of sale is thereby perfected, such that if there had already been previous delivery of the property subject of the sale to the buyer, ownership thereto automatically transfers to the buyer by operation of law without any further act having to be performed by the seller.

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Obligations of the Parties

What are the Obligations of the vendor?

1)         To transfer the ownership of the thing sold to the buyer

2)         To deliver the thing

3)         To warrant the thing sold

 

What are the Obligations of the vendee?

1.) To accept delivery;

2.) To pay the price of the thing; and

3.) To bear the expenses for the execution and registration and putting the goods in a deliverable state, if such is the stipulation.

In an ordinary contract for the sale of goods, the buyer has no right to pay the price in installments. Neither can he be required to make partial payments. The buyer is also obliged to pay interest for the period between delivery of the subject matter of the sale and the purchase price or in case the subject property produce fruits or income and in cases of default from the buyer, from the time of judicial or extra-judicial demand for payment of the price.

 

What are the rules on transfer of ownership?

General rule:

  • Only the owner of the property can pass ownership to it.
  • But the seller is not required to have ownership at the time of the perfection of the sale. It is sufficient that he has ownership at the time of the thing sold I delivered because it is delivery that transfers ownership.
  • Where goods are sold by a person who is not the owner thereof and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller’s authority.

Exceptions:

  • Where the owner by his conduct is precluded from denying the seller’s authority or estopped
  • Where the sale is made under the provisions of any factor’s acts, recording laws or any provision of the law enabling the apparent owner of goods to dispose of them as if he was the true owner thereof such as sale by an agent
  • Where the sale is made under a statutory power of sale or under the order of the court of competent jurisdiction
  • Where the purchase is made in a merchant’s store, fairs or markets
  • 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 defects.

 

What are the obligations regarding delivery of the thing?

The ownership of the thing sold is transferred to the vendee upon the actual or constructive delivery thereof. The thing sold shall be understood as delivered when it is placed in the control and possession of the vendee.

 

What are the kinds of delivery?

The law on sales admits four kinds of delivery/ tradition (tradicio):

  1. Real Tradition- from hand to hand by certain material or possessory acts by the vendee done in the presence with the consent of the vendor
  2. Legal or Constructive- when the delivery is not actual but represented by other signs or acts indicative of delivery
  • Legal- sale made through a public instrument
  • Symbolic- delivery of keys to the place when goods are stored
  • Traditio longa manu
  • Traditio brevi manu
  • Traditio constitutum possessorium
  1. Quasi tradition- which is used to indicate the transfer of rights or incorporeal property and may be defined as the exercise of the right by the grantee with the acquiescence of the vendor or the placing of the title of the ownership in the possession of the vendee.
  2. Tradition by operation of law- which covers all other cases not already enumerated and in which the delivery is effected solely by virtue of an express provision of the law

Where the parties have stipulated that ownership in the things shall not pass until full purchase price is paid.

 

What are the rules on delivery in cases of sale of real estate?

  1. The seller is bound to deliver what is in the contract.
  2. If the sale is made with a statement of its area, at the rate of a certain price per unit of measure or number and the seller cannot deliver all the area stated in the contract, the buyer has the right to proportionately reduce the price or rescind the contract provided the lack in the area is at least 1/10 or more of the area contracted.
  3. If the sale was made with a statement of the area at the rate of a certain price for a unit of measure or number and a portion of the land delivered is of an inferior quality that that agreed upon in the contract through the land measures exactly the are upon, the buyer has the right to proportionately reduce the price or rescind the contract provided the lack in the area is at least 1/10 or more of the area contracted.
  4. If the buyer could not prove that he would not have brought the land had he known of the smaller area or its inferior quality, he may still rescind the contract even though the lack in area is less that 1/10 of the area agreed upon, or the inferior value of the property sold does not exceed 1/10 of the price agreed upon.
  5. If the sale was made with a statement of the area and at the rate of a certain price for a unit of measure or number and the land delivered was greater in area or number than that stated in the contract, the buyer may accept the area included in the contract and reject the rest. If he accepts the whole are, he must pay for the same at the contract price.
  6. If the sale is for lump sum and not at the rate of a certain sum for a unit of a measure or number, there shall be no increase or decrease in the price, although there be a greater or less area or number than that stated in the contract.
  7. When two or more real estate are sold for a single price, the rule is the same as when the real estate is sold for a lump sum. There shall be no increase or decrease in the price irrespective of any difference in the area actually delivered and the area in the contract.

The right of the buyer to a proportionate reduction if the price or rescission of the contract of sale must be exercised within 6 months from delivery date.

 

Price and Delivery

What are the rules regarding the price?

Price certain in money:

  • When the parties have fixed it
  • When it is certain with reference to another certain thing
  • When the determination of the price is left to the judgment of a specified person or persons
  1. 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 contract.
  1. If the price is simulated or pretended the sale is void but the act may be shown to have been in reality a donation or some other contract.
  1. The fixing of the price cannot be left to the will of one of the parties unless it is accepted by the other.
  1. There will be no contract of sale if the price cannot be fixed which will give no obligations to the parties.

 

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What constitutes delivery in a sale?

Delivery of the thing together with the payment of the price, marks the consummation of the contract and sale. The act of delivery must be coupled with the intention of delivering the thing and putting the buyer under control. Without the intention, the act is insufficient. Such effect is supported by this provision in the New Civil Code:

Art. 1496. The ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any of the ways specified in Articles 1497 to 1501, or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee. (n)

  1. What are the kinds of delivery?Actual or Real delivery happens when the thing sold falls under the control and possession of the buyer. This can be done through passing of the movable thing hand to hand. The law evidenced such definition by this provision:

Art. 1497. The thing sold shall be understood as delivered, when it is placed in the control and possession of the vendee. (1462a)

2. Legal or Constructive is understood as those acts which are taken as equivalent of delivery despite lack of non-physical possession of the thing itself and considered as having the same effects to that of a real or actual delivery. This kind of delivery may be affected in certain ways as laid down in following provisions:

Art. 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred.

*The mere execution of the public instrument gives the presumptive delivery of the property such as when a deed is notarized or the sale of registered land, the title is transferred. The possession of the documents also means possession of the whole property.

With regard to movable property, its delivery may also be made by the delivery of the keys of the place or depository where it is stored or kept. (1463a)

*This type of constructive delivery is called symbolic tradition. To effect delivery, a token, object or part of the property may be given to constitute delivery of the whole. Like when even just a key is delivered, it may mean to deliver the entire house or car that the key represents.

Art. 1499. The delivery of movable property may likewise be made by the mere consent or agreement of the contracting parties, if the thing sold cannot be transferred to the possession of the vendee at the time of the sale, or if the latter already had it in his possession for any other reason. (1463a)

*The first part of this provision refer to a kind of constructive delivery called tradition longa manu (long hand delivery). This takes place by the mere consent or agreement of the parties that when the seller points or directs the buyer to the property, it may already mean that he is placing it under the buyer’s control and possession. Another type is traditio brevi manu (short hand delivery) where delivery is effected by the buyer already possessing the thing sold by virtue of another title. For example, when the buyer is possessing the property as a lessee but buys it and attains control and possession by the complete turnover to him by the seller.

Art. 1500. There may also be tradition constitutum possessorium. (n)

*This type is the opposite of tradio brevi manu since the delivery happens when the seller continues in possession of the property already sold not as the owner but in another capacity. The delivery of the buyer already takes place by mere agreement of the parties. Such as when the seller remains a tenant of the buyer.

Art. 1501. With respect to incorporeal property, the provisions of the first paragraph of article 1498 shall govern. In any other case wherein said provisions are not applicable, the placing of the titles of ownership in the possession of the vendee or the use by the vendee of his rights, with the vendor’s consent, shall be understood as a delivery. (1464)

*This type is called quadi-tradio and can only be made with respect to corporeal things. Those incorporeal things may only be delivered by execution of a public document and when this is inapplicable, by placing the titles of ownership in the possession of the vendee or by allowing the buyer to use his rights as new owner with the seller’s consent.

References

De Leon, H. (2010). Comments and Cases on Sales. Quezon City: Rex Printing Company, Inc.

Marella V. Teyes and Paterno, 12 Phil 1, 1908

New Civil Code of the Philippines

Soler V. Chelsey, 43 Phil 529, 1922

Warranties and Formalities in a Contract of Sale

What are the warranties in a contract of sale?

  1. Express Warranty- any affirmation of fact or any promise by the seller relating to the thing is an express warranty if the natural tendency of such affirmation or promise is to induce the buyer to purchase the same, and if the buyer purchases the thing relying thereon.
  2. The vital question is express warranty is: whether or not a statement or affirmation accompanying as sale is a warranty depends upon whether the conditions were such that the buyer had a right to understand and did not understand that was said by the seller was meant as a warranty.
  3. Implied warranty-arises from the mere fact that a contract of sale is perfected. It does not apply to one who sells by virtue of an authority in fact or in law (sheriff sale). There are two kinds of implied warranty:
  • Warranty against eviction- An implied warranty on the part of the seller that he has a right to sell at the time when ownership is to pass and that the buyer shall from that time have and enjoy the legal and peaceful possession of the thing
  • Warranty against hidden defects-An implied warranty that the thing shall be free from any hidden defects or any change or encumbrances not declared or known to the buyer

-Hidden defects are those which are not visible to vendee who is not an expert and to a vendee who is an expert but even with the use of his trade or profession could not detect such defect.

-Requisites of hidden defects: The defect must exist at the time of the sale, must be important or serious, notice was given to the vendor within a reasonable time and within prescriptive period and no waiver was made

  1. Warranty against eviction- Eviction is the judicial process whereby the vendee by virtue of a final judgment based on a right prior to the sale or an act imputable to the vendor, is deprived of the whole or a part of the thing purchased.

In order for the vendor to be liable for his warranty, the vendor must be summoned in the suit for eviction at the instance of the vendee and there is no waiver on the part of the vendee.

 

What are the formalities of a contract of sale?

As a general rule, the form of a contract is manner of how it would be executed or manifested. A contract of sale may take any general form of a simple contract.

What does the law say about the forms of a contract of sale?

The New Civil Code has recognized the need for a certain form for a contract of sale for its validity and enforceability in this provision:

Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised. (1278a)

Art. 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract. (1279a)

*The requisites of validity referred in this provision refer to essential to perfect a simple contract as already discussed in this post (insert link for the post about what is a contract of sale).

However, the contract may be required by law to follow a certain form depending on its subject and manner of execution. The law has required that the following should be in a public instrument:

 

Art. 1358. The following must appear in a public document:

(1) 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 a governed by Articles 1403, No. 2, and 1405;

(2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains;

(3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person;

(4) The cession of actions or rights proceeding from an act appearing in a public document.

All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Articles, 1403, No. 2 and 1405. (1280a)

Likewise, the contracts of sale are also governed by the Statute of Frauds which may prohibit its enforceability and bar its ratification if not complied with. The Statue of Frauds, however only apply to executory contracts or where there are no performance yet and not to those already consummated even if partially. These rules aim to avoid injustice to the party who has not yet performed his obligation so as not to enable him to keep the benefits he received without doing his obligation. (omitted provisions done purposely for sake of discussion).

Art. 1403. The following contracts are unenforceable, unless they are ratified:

x xx

(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:

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

x xx

(d) 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;

x xx

*In summary the following must be in writing to be enforceable: sale of personal property at a price not less than P500.00, sale of real property or an interest therein, sale of property not to be performed within a year from the date thereof and “Applicable statute” requires that the contract of sale be in a certain form.

 

What is reformation of instrument?

Reformation of instrument means that there having a meeting of the minds of the parties to a contract, however, their true intention thereof is not expressed in the instruments purporting to embody the agreement by reason of fraud, accident, mistake, and inequitable conduct. This is done to reveal the true intentions of the party and only applicable to written contracts.

References

De Leon, H. (2010). Comments and Cases on Sales. Quezon City: Rex Printing Company, Inc.

The New Civil Code of the Philippines

 

 

 

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Option Money v Earnest Money

What is an option contract?

An option contract is a contract granting a privilege in one person, for which he has paid a consideration, which gives him the right to buy certain merchandise at anytime within the agreed period, at a fixed price. It is separate and distinct from the main contract itself which the parties may enter into upon the consummation of the option. An option contract should have a consideration at all times or else it would be void.

What is an option in a contract of sale?

Option is a mere promise or offer to buy or sell real estate. An option to purchase, for instance is a right of election of a prospective buyer to purchase which when exercised by him becomes a contract of sale.

What does the law say about option contract?

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)

*The second paragraph in this provision is referred to as option. This unilateral promise to sell or buy a determinate thing does not bind the promissor though accepted until a consideration distinct from the price supports this perfected contract.

Example would be when A promises to sell to B a car which B accepts. S is not bound to sell his car if there is not promise on the part of B to buy. However if the promise is supported by a consideration distinct from the price, as when B paid or promised to pay a sum of money to A for giving him the right to buy the car whenever he pleases during a certain period of time, then a perfected option contract is entered in to.

 

What is earnest money?

An earnest money is something of value to show that the buyer was really in earnest, and given to the seller to bind the bargain. It is a partial payment or a part of the purchase price and may prove to show the perfection of a contract.

What does the law say about earnest money?

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

*This payment function as the consideration to be paid by the buyer and is given to show interest in the sale. In law, it is considered a part of the purchase price and give rise to a consummated contract of sale.

 

What is the difference between option money and earnest money?

In paying earnest money it forms part of the purchase price, given when there is already a perfected sale, and the buyer must pay the balance.

While an option money is distinct and separate from the purchase price of the principal contract, may apply to a sale not yet perfected and the buyer is not bound to buy despite payment of option money. However an option money can become an option money so long as the parties agree to it.

References:

De Leon, H. (2010). Comments and Cases on Sales. Quezon City: Rex Printing Company, Inc.

The New Civil Code of the Philippines

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Maceda Law

What is the Maceda Law? (R.A. 6552)

R.A. 6552 or “An Act to Provide Protection to Buyers of Real Estate on Installment Payments” is also known as the Maceda Law. It governs the sale or financing of real estate on instalment payments. It is for the purpose of public policy to protect buyers of real estate on installment payments against onerous and oppressive conditions.

Where does the Maceda Law apply?

Section 3. In all transactions or contracts involving the sale or financing of real estate on installment payments, including residential condominium apartments but excluding industrial lots, commercial buildings and sales to tenants under Republic Act Numbered Thirty-eight hundred forty-four, as amended by Republic Act Numbered Sixty-three hundred eighty-nine, x x x

*This would apply to transactions or contracts involving the sale OR financing of real estate on instalment payments, including residential condominium apartments; and buyer defaults in payment of succeeding instalments.

What re the rights of the buyer under the Maceda Law?

  1. If buyer has paid at least two (2) years of installments

Section. 3 x x x where the buyer has paid at least two years of installments, the buyer is entitled to the following rights in case he defaults in the payment of succeeding installments:

(a) To pay, without additional interest, the unpaid installments due within the total grace period earned by him which is hereby fixed at the rate of one month grace period for every one year of installment payments made: Provided, That this right shall be exercised by the buyer only once in every five years of the life of the contract and its extensions, if any.

(b) If the contract is canceled, the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to fifty per cent of the total payments made, and, after five years of installments, an additional five per cent every year but not to exceed ninety per cent of the total payments made: Provided, That the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to the buyer.

Section 6. The buyer shall have the right to pay in advance any installment or the full unpaid balance of the purchase price any time without interest and to have such full payment of the purchase price annotated in the certificate of title covering the property.

*The buyer must pay, without additional interest, the unpaid instalments due within the total grace period earned by him. There shall be one (1) month grace period for every one (1) year of instalment payments made. Note that this right shall be exercised by the buyer ONLY once in every 5 years of the life of the contract and its extensions.

In actual cancellation can only take place after 30 days from receipt by the buyer of the notice of cancellation OR demand for rescission by a notarial act AND upon full payment of the cash surrender value to the buyer. Note that the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to 50% of the total payments made. After five (5) years of instalments, there shall be an additional 5% every year but not to exceed 90% of the total payments made

The buyer shall have the right to sell his rights or assign the same to another person OR to reinstate the contract by updating the account during the grace period and before actual cancellation of the contract. The buyer shall have the right to pay in advance any instalment or the full unpaid balance of the purchase price any time without interest and to have such full payment of the purchase price annotated in the certificate of title covering the property.

  1. If buyer has paid less than two (2) years of instalments 

Section 4. In case where less than two years of installments were paid, the seller shall give the buyer a grace period of not less than sixty days from the date the installment became due.

If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act.

Section 5. Under Section 3 and 4, the buyer shall have the right to sell his rights or assign the same to another person or to reinstate the contract by updating the account during the grace period and before actual cancellation of the contract. The deed of sale or assignment shall be done by notarial act.

*The seller shall give the buyer a grace period of NOT less than 60 days from the date the instalment became due. If the buyer fails to pay the instalments due at the expiration of the grace period, the seller may cancel the contract after 30 days from receipt by the buyer of the notice of cancellation or the demand for rescission of contract by a notarial act. The buyer shall have the right to sell his rights or assign the same to another person OR to reinstate the contract by updating the account during the grace period and before actual cancellation of the contract.

The buyer shall have the right to pay in advance any instalment or the full unpaid balance of the purchase price any time without interest and to have such full payment of the purchase price annotated in the certificate of title covering the property.

 

Reference:

REPUBLIC ACT No. 6552- An Act to Provide Protection to Buyers of Real Estate on Installment Payments. (Rep. Act No. 6552)

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Double Sale

What is a double sale?

A double sale is the selling of the same property by the same seller to different buyers with conflicting rights.The following instances must be concurring: there are two or more transactions must constitute valid sales, they must pertain exactly to the same object or subject matter, they must be bought from the same or immediate seller and two or more buyers who are at odds over the rightful ownership of the subject matter must represent conflicting interests.

What is the remedy to a double sale according to law?

The New Civil Code has provided for the instance which will constitute a double sale and the manner on how it would be resolved:

Art. 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first taken possession thereof in good faith, if it should be movable property.

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith. (1473)

*This provision lays down the rules of preference to who shall be given priority in a double sale. When it involves a personal property, the first possessor in good faith shall be preferred. If it involves a real property, the first registrant in good faith and if there is nothing to show this fact then the first possessor in good faith shall follow and if still cannot be determined then the person with oldest title in good faith shall be given precedence.

References

De Leon, H. (2010). Comments and Cases on Sales. Quezon City: Rex Printing Company, Inc.

New Civil Code of the Philippines

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Breach of a Contract of Sale

What are the remedies of the seller for breach of contract of sale according to the law?

When the seller is prejudiced due to the breach of contract by the buyer, the following provisions of the law shall govern:

  1. Action for payment of the price

Art. 1595. Where, under a contract of sale, the ownership of the goods has passed to the buyer and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract of sale, the seller may maintain an action against him for the price of the goods.

*The seller may maintain an action for payment of the price when the ownership of the goods sold already passed to the buyer and he fails to pay in a wrongful manner attributable to him.

Where, under a contract of sale, the price is payable on a certain day, irrespective of delivery or of transfer of title and the buyer wrongfully neglects or refuses to pay such price, the seller may maintain an action for the price although the ownership in the goods has not passed. But it shall be a defense to such an action that the seller at any time before the judgment in such action has manifested an inability to perform the contract of sale on his part or an intention not to perform it.

*The seller may also demand payment when he likewise fails to pay and neglects wrongfully the date certain for its payments, irrespective of delivery and the transfer of title to the buyer.

Although the ownership in the goods has not passed, if they cannot readily be resold for a reasonable price, and if the provisions of article 1596, fourth paragraph, are not applicable, the seller may offer to deliver the goods to the buyer, and, if the buyer refuses to receive them, may notify the buyer that the goods are thereafter held by the seller as bailee for the buyer. Thereafter the seller may treat the goods as the buyer’s and may maintain an action for the price. (n)

*The seller may ask for payment of the price if the goods cannot be resold for a reasonable price and the buyer refuses to accept them even before the ownership to goods has passed.

  1. Action for damages for non-acceptance of the goods

Art. 1596. Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an action against him for damages for nonacceptance.

The measure of damages is the estimated loss directly and naturally resulting in the ordinary course of events from the buyer’s breach of contract.

Where there is an available market for the goods in question, the measure of damages is, in the absence of special circumstances showing proximate damage of a different amount, the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted, or, if no time was fixed for acceptance, then at the time of the refusal to accept.

If, while labor or expense of material amount is necessary on the part of the seller to enable him to fulfill his obligations under the contract of sale, the buyer repudiates the contract or notifies the seller to proceed no further therewith, the buyer shall be liable to the seller for labor performed or expenses made before receiving notice of the buyer’s repudiation or countermand. The profit the seller would have made if the contract or the sale had been fully performed shall be considered in awarding the damages. (n)

*The seller may demand for damages when the buyer fails to accept the goods without lawful case and fails to pay the price agreed upon. He may also demand damages when the ownership has not yet passed and the seller cannot recover the price of the goods. He also has an action for damages when the goods are not yet identified at the time of the contract. The damages may be measured by the labor performed and expenses incurred for the materials or the profit that would have been realized have it not for the non-acceptance of the buyer.

  1. Action for rescission

Art. 1597. Where the goods have not been delivered to the buyer, and the buyer has repudiated the contract of sale, or has manifested his inability to perform his obligations thereunder, or has committed a breach thereof, the seller may totally rescind the contract of sale by giving notice of his election so to do to the buyer. (n)

*The remedy afforded by this provision is applicable in the sale of goods which have not yet been delivered to the buyer and the buyer repudiated the contract of sale, manifested his inability to perform his obligations or there is mere breach of the provisions of the contract of sale. The notice of rescission must be given by the seller. The breach must not be slight or casual but must be substantial enough to defeat the very essence of the contract.

What are the remedies of the buyer for breach of contract of sale according to the law?

When the buyer is prejudiced due to the breach of contract by the seller, the following provisions of the law shall govern:

  1. Action for specific performance

Art. 1598. Where the seller has broken a contract to deliver specific or ascertained goods, a court may, on the application of the buyer, direct that the contract shall be performed specifically, without giving the seller the option of retaining the goods on payment of damages. The judgment or decree may be unconditional, or upon such terms and conditions as to damages, payment of the price and otherwise, as the court may deem just. (n)

* The buyer may, without giving the seller the option to retain the goods on payment of damages, may ask for specific performance. However there may be instances in a court decision the judgment maybe unconditional, or upon such terms and conditions as to the payment of damages, payment of the price and otherwise, the court may order whatever it may deem just.

  1. Action for rescission or damages for breach of warranty

Art. 1599. Where there is a breach of warranty by the seller, the buyer may, at his election:

(1) Accept or keep the goods and set up against the seller, the breach of warranty by way of recoupment in diminution or extinction of the price;

(2) Accept or keep the goods and maintain an action against the seller for damages for the breach of warranty;

(3) Refuse to accept the goods, and maintain an action against the seller for damages for the breach of warranty;

(4) Rescind the contract of sale and refuse to receive the goods or if the goods have already been received, return them or offer to return them to the seller and recover the price or any part thereof which has been paid. 

When the buyer has claimed and been granted a remedy in anyone of these ways, no other remedy can thereafter be granted, without prejudice to the provisions of the second paragraph of Article 1191.

Where the goods have been delivered to the buyer, he cannot rescind the sale if he knew of the breach of warranty when he accepted the goods without protest, or if he fails to notify the seller within a reasonable time of the election to rescind, or if he fails to return or to offer to return the goods to the seller in substantially as good condition as they were in at the time the ownership was transferred to the buyer. But if deterioration or injury of the goods is due to the breach or warranty, such deterioration or injury shall not prevent the buyer from returning or offering to return the goods to the seller and rescinding the sale.

Where the buyer is entitled to rescind the sale and elects to do so, he shall cease to be liable for the price upon returning or offering to return the goods. If the price or any part thereof has already been paid, the seller shall be liable to repay so much thereof as has been paid, concurrently with the return of the goods, or immediately after an offer to return the goods in exchange for repayment of the price.

Where the buyer is entitled to rescind the sale and elects to do so, if the seller refuses to accept an offer of the buyer to return the goods, the buyer shall thereafter be deemed to hold the goods as bailee for the seller, but subject to a lien to secure payment of any portion of the price which has been paid, and with the remedies for the enforcement of such lien allowed to an unpaid seller by Article 1526.

(5) In the case of breach of warranty of quality, such loss, in the absence of special circumstances showing proximate damage of a greater amount, is the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered to the warranty. (n)

* In case of recoupment, the buyer may accept the goods and set up the seller’s breach to reduce or extinguish the price. He may accept or not the goods and in both cases, maintain an action for damages for breach of warranty. In rescission, he may do such if there is refusal to receive the goods; or if goods have already been received, return them and recover what was paid or any part of it concurrently with return or immediately after it.

These remedies are alternative, without prejudice to paragraph 2 of Art. 1191 (that a party may still seek rescission after choosing specific performance if the latter is impossible). Buyer cannot rescind if he is knowledgeable of the breach and still accepted the goods without protest, or fails within reasonable time to notify the seller of his election to rescind, or fails to return or offer to return the goods in substantially as good condition as it was. If seller refuses to accept an offer to return the goods and the buyer elected rescission, buyer shall be deemed to hold the goods as bailee for the seller subject to lien to secure payment of any portion of the price which has been paid. There is loss, in case of breach of warranty of quality, when there was a difference between value of the goods at the time of delivery and value they would have had if they had answered to the warranty.

What are the remedies of the seller in case of default in payment of price?

  1. Anticipatory breach- The seller has reasonable grounds to believe that the property sold will be lost so he may rescind the sale
  2. Failure of the buyer to pay the purchase price-In the sale of immovable property even though it may have been stipulated that rescission will only take place upon failure to pay the price, he may still demand payment until the judicial or extrajudicial rescission of the contract.

What are the remedies of the buyer in case of disturbance in the property and in condominium projects?

  1. Suspension of payment-If the buyer gets disturbed in the possession and ownership or has a reasonable grounds to fear such disturbance of the property, by a vindicatory action or a foreclosure of mortgage, the buyer may suspend payment until the disturbance is removed by the seller or seller gives security for the return of the price in proper case unless otherwise stipulated.
  2. Subdivision and condominium projects-PD 957 provides that when the owner or developer of the condominium project fails to develop it according to the approved plan and within the time limit for complying with the same, the buyer who pays in installment may desist from paying further provided he gives due notice to the seller. The law also allows the buyer to be reimbursed of all the amount paid.

What is Equitable Mortgage?

Pacto de retro is presumed to be Equitable Mortgage when:

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.

What are the effects when the thing sold is lost?

  1. Loss before perfection of the contract- Contract is void
  2. Loss at the time of perfection of contract of sale-Contract is Void
  3. If thing is partially lost-the vendee may choose between withdrawing from the contract and demanding the remaining part, paying its price in proportion to the total sum agreed upon
  4. Loss after perfection of the contract of sale
  • After delivery to buyer- buyer bears the loss
  • Before delivery to the buyer

-Non fungible/ fungible thing without consideration as to its weight, number or measure- buyer bears the loss

-fungible thing for a price fixed in accordance with its weight, number or measure-seller bears the loss

 

References

De Leon, H. (2010). Comments and Cases on Sales. Quezon City: Rex Printing Company, Inc.

New Civil Code of the Philippines