ATENEO DE MANILA LAW SCHOOL Rockwell Center Makati

ATENEO DE MANILA LAW SCHOOL Rockwell Center, Makati City LAW on SALES REVIEW By: CESAR L. VILLANUEVA, B. S. C. , C. P. A. , LL. B. , LL. M. , FAICD, D. J. S.

GENERAL PRINCIPLES DEFINITION (Art. 1458) PARTIES OBLIGATIONS (1) TO TRANSFER OWNERSHIP SELLER SALE CONSENT “Meeting of Minds” BUYER 2 Real Obligations SUBJECT MATTER (2) TO DELIVER POSSESION Real Obligation (3) TO PAY PRICE

ESSENTIAL CHARACTERISTICS OF SALE: NOMINATE vs. Innominate PRINCIPAL vs. Accessory vs. CONSENSUAL vs. Solemn vs. BILATERAL/ RECIPROCAL vs. Unilateral ONEROUS vs. Gratuitious COMMUTATIVE vs. TITLE 3 vs. Aleatory “Mode” Prefaratory Real

SALES versus DONATION CONSENSUAL SOLEMN (i. e. , 4 th Requisite of “Form” for validity) ONEROUS/ COMMUTATIVE ESSENCE: 4 GRATUITOUS (i. e. , “Pure Liberality” as consideration) BOTH INVOLVE THE TRANSFER OF OWNERSHIP/POSSESSION OF SUBJECT MATTER

SALES versus BARTER: BARTER IS SALE, BUT WITH THE PRICE BEING REPLACED WITH AN OBLIGATION TO TRANSFER OWNERSHIP/POSSESSION OF ANOTHER SUBJECT MATTER THEREFORE: BARTER GOVERNED BY LAW ON SALES BUT: NOT COVERED BY STATUTE OF FRAUDS 5

SALES versus DACION EN PAGO: Ø DACION IS PROCESS OF EXTINGUISHMENT EXISTING OBLIGATION (CONTRACTS) OF PRE- (a) There must be delivery of subject matter in lieu of an pre-existing obligation; (b) There must be difference between prestation due and what is give in substitute; (c) There must be a clear “meeting of minds” that the pre-existing obligation is extinguished by reason of the prestation substituted. Lo v KJS Eco. Formwork System Phil. , Inc. , 413 SCRA 182 (2003) Ø DACION NOVATES THE ORIGINAL CONTRACTUAL RELATIONS INTO A FULLY EXECUTED SALE ESSENTIALLY: DACION GOVERNED BY LAW ON SALES 6

SALES vs. CONTRACT FOR PIECE-OF-WORK: K for Piece-of-Work: Service is the Subject Matter Service “Ineluctably, whether the contract be one of sale or one for a Piece of Work, a transfer of ownership is involved and a party necessarily walks away with an object. ” Commission of Internal Revenue v. Court of Appeals, 271 SCRA 605 (1997) Although there is the primary obligation to pay fee (or price), the main motivation is the “reputation, skill, mastery” of contractor. Engineering & Machinery Corp. v. Court of Appeals, 252 SCRA 156 (1996) BUT: 7 THERE CAN BE NO CONTRACT FOR PIECE-OF-WORK FOR PAST SERVICE RESULTING IN THE CREATION OF THE OBJECT (ALWAYS A SALE)

SALES vs. AGENCY TO SELL/BUY REPRESENTATIVE AGENCY FIDUCIARY Ø Ø Essentially revocable Fruits and of principal NOT PERSONNALY LIABLE FOR THE OBLIGATION CREATED BY THE SALE CONTRACT AGENT NOT OBLIGED TO PAY THE PRICE DOES NOT ASSUME THE RISKS OF OWNERSHIP TO THE OBJECT OF SALE 8

SALES vs. AGENCY TO SELL/BUY Cont’d THEREFORE: “AGENT” is deemed to be Seller/Buyer when contracted to assume Risks and Obligations contrary to his representative/ fiduciary role: (a) HE ASSUMES OBLIGATION TO PAY THE PRICE RISKS OF LOSS (b) SUBJECT MATTER INSURABLE INTEREST MAINTENANCE 9

SALE versus LEASE: LEASE ESSENTIALLY INVOLVES THE TEMPORARY ENJOYMENT OF POSSESSION OF THE SUBJECT MATTER FEW INSTANCES: 10 TREATED AS SALE ON INSTALLMENTS WHEN LEASE STRUCTURED IN SUCH A WAY AS TO AVOID APPLICATION OF THE RECTO LAW

PARTIES TO A SALE (The Essential Element of CONSENT) GENERAL RULE: All Parties Having Capacity to Contract EXCEPTIONS: Can Be Valid Parties To a Sale (a) Minors, Demented, Deaf-Mutes – Sale is Voidable - Purchase of Necessaries - Emancipation (b) Spouses (Art. 1490) - Sales to Third Parties – Sale by One Spouse Void - Sales to Each Other – Void Except: When marriage governed by Complete Separation of Property Regime Ø By Pre-nuptials Ø By Judicial decree 11

OTHER RELATIVE DISQUALIFICATIONS (Art. 1491) Guardian Agent Wards Principal Except: When granted express power to buy principal’s property Administrator/ Executor Estate under administration Public Officers Government property under their jurisdiction Judges/Justices/ Court Officers Property falling in their jurisdiction Lawyers Client’s property in litigation BUT NOT: Purchase of Inheritance Rights Except: Contingency fee arrangement 12

SUBJECT MATTER (OBLIGATION to Transfer Ownership and Deliver Possession) POSSIBLE THING vs. Impossible things LICIT vs. Illicit vs. Non-Determinable GENERICS 1. 2. DETERMINATE 3. DETERMINABLE RATIONALE: Transfer of Ownership/Possession of the Subject Matter is the ESSENCE of SALE Ø Obligation should therefore not be illusory Ø To comply with the “Obligatory Force” principle in Contract Law 13

PRICE & OTHER CONSIDERATION (The Obligation to Pay) vs. FALSE 1. REAL/TRUE (Reformation) SIMULATED vs. (Void) 2. “Money or its Equivalent” vs. PURE vs. NOMINAL VALUABLE CONSIDERATION LIBERALITY CONSIDERATION CERTAIN ASCERTAINABLE 3. . MANNER OF PAYMENT 4 RATIONALE: 14 vs. UNASCERTAINABLE § Must comply with “Obligatory Force” principle in Contract Law § Must meet Onerous characteristics of SALE and Commutative

STAGES IN LIFE OF SALE NEGOTIATION Covers the period from the time the prospective contracting parties indicate interest in the contract up to the time immediate before the contract is perfected. PERFECTION Takes place upon the concurrence of the essential elements of the Sale which are: üthe meeting of the minds of the parties üas to the object of the contract üupon the price. CONSUMMATION It begins when the parties perform their respective undertaking under the perfected contract of sale, culminating in the extinguishments thereof. Jovan Land, Inc. v. CA, 268 SCRA 160 (1997) San Miguel Properties Philippines, Inc. v. Huang, 336 SCRA 737 (2000) 15

POLICITACION STAGE v Invitations to make Offers (“Proposals”) v OFFERS v ACCEPTANCES v AGENCY TO SELL/TO BUY v OPTION CONTRACTS v RIGHTS OF FIRST REFUSAL v AGREEMENTS TO ENTER INTO SERIES OF SALES v MUTUAL PROMISES TO BUY AND SELL (Contracts to Sell of the First Type) 16

RULES ON OFFERS: 1. Offer is at the complete will of Offeror, who may destroy it at will prior to acceptance 2. Will “disappear” or lapse upon the happening of the condition or period placed upon it 3. When floated unconditionally, will be extinguished through the passage of reasonable time 4. Cannot be accepted partially or even substantially Ø Counter-offer extinguishes original Offer 5. Legal effect of acceptance is taken only from point of view of Offeror Ø Offeror may still extinguish Offer at any time before he has knowledge of Acceptance 6. 17 Only a “certain” Offer when met by an “Absolute” Acceptance will give rise to a valid SALE.

“CERTAIN” OFFER (a) CONTAINS A CLEAR PROMISE TO SELL/TO BUY (b) COVERS A SUBJECT MATTER THAT IS: Ø Ø Ø Possible thing Licit Determinate or Determinable (c) COVERS A PRICE OR CONSIDERATION Ø Ø 18 Real Valuable Certain or Ascertainable With Manner of Payment/Performance agreed upon

“ABSOLUTE” ACCEPTANCE (a) NO CONDITION OR AMENDMENT OF THE TERMS OF THE OFFER (b) MAY CLARIFY (c) BUT NEVER TOUCH ON THE TERMS/COVERAGE OF SUBJECT MATTER AND TERMS/COVERAGE OF PRICE 19

OPTION CONTRACT: ACCEPTANCE of OFFER to give on Option to Buy/to Sell SUBJECT MATTER: Option or Privilege to Sell/ Purchase: AN OBJECT: AT A PRICE: - Possible - Real - Licit - Determinate/ Determinable CONSIDERATION: 20 - Valuable - Certain/ Ascertainable Anything separate and distinct from Price

Ang Yu Asuncion v. Court of Appeals 238 SCRA 602 (1994) 1. If no separate consideration, Option Contract void, but may constitute certain Offer which can be withdrawn by Offeror, but if accepted before withdrawal would give rise to a valid Sale (Sanchez v. Rigos doctrine) 2. If withdrawal of option/offer whimsical or arbitrary, could give rise to damage claim under Art. 19 of Civil Code 3. When there is separate consideration, an Option Contract deemed perfected: (a) If exercised within option period, gives rise to Sale, which can be enforced by specific performance 21

Ang Yu Asuncion v. Court of Appeals cont’d (b) Would be a breach of the Option Contract, for Offeror to withdraw the offer during the agreed period, but withdrawal destroys nevertheless the Option (c) But if, however, Optioner-Offeror withdraws Offer even during option period before its acceptance (i. e. , exercise): Optionee-Offeree may not sue for specific performance on the Sale since it has failed to reach its own perfection stage Optioner-Offeror, however, renders himself liable for damages for breach of option 22

RIGHT OF FIRST REFUSAL ESSENCE: CONDITION: OFFEROR BOUNDS HIMSELF TO FIRST OFFER SUBJECT MATTER TO OFFEREE FOR SALE IN THE EVENT OFFEROR EVER DECIDES TO SELL IT Possible thing SUBJECT MATTER Licit Determinate/Determinable PRICE: THAT WILL THEN (HAPPENING OF CONDITION) BE AGREED UPON 23

DOCTRINES ON RIGHTS OF FIRST REFUSAL Ang Yu Asuncion v. Court of Appeals • Generally, RFRs would be “none” contracts, for lack of cause or consideration, or failure to agree the valid Price for the expectant contract • Merely “innovative juridical relation” Ø RFR • Cannot be enforced by specific performance Ø Not being a Contract, it lacks essence of “consensuality, ” “obligatory force” or “mutuality” • Breach allows recovery of damage based on Art. 19 principle of “Abuse of right” 24

DOCTRINES ON RFR cont’d Equatorial Realty Dev. , Inc. v. Mayfair Theater 264 SCRA 483 (1996) 25 • When RFR attached to a valid principal contract (e. g. Lease), its enforcement takes its vitality from the obligatory force of the principal contract • Such RFR, when breached may be enforced, at the Price at which Subject Matter sold to Third Party • The Third-Party Buyer’s purchase may be rescinded under accion pauliana, i. e. , entered into in breach and in fraud of Optionee’s contractual right

DOCTRINES ON RFR cont’d Parañaque Kings Enterprises v. CA 268 SCRA 727 (1997) • RFR is complied with by first offering the Subject Matter to the Optionee and negotiating for a Sale Ø There is no obligation to reach a sale, obligation is to negotiate in good faith • Only when negotiations do not ripen into a Sale, can Subject Matter be offered to Third-Party Buyer, but at same price and terms asked of the Optionee • Otherwise, must re-offer under new terms to Optionee 26

AGREEMENTS TO ENTER INTO FUTURE SALE OR SERIES OF SALES: ESSENCE: Obligations “to do” To enter into a Contract of Sale (1) DISTRIBUTION/ SUPPLY AGREEMENT Ø An Agreement to enter into a series of Contracts of Sale - National Grains Authority v. IAC, 171 SCRA 131 (1989) - Johannes Schuback v. Court of Appeals, 227 SCRA 719 (1993) (2) MUTUAL PROMISES TO BUY AND TO SELL (CONTRACTS TO SELL) 27

MUTUAL PROMISES TO BUY AND SELL (CONTRACTS TO SELL) 1. AGREEMENTS TO ENTER INTO CONTRACT OF SALE UPON HAPPENING OF THE CONDITIONS Ø Essentially, contains Obligations “to do”: to enter into a Sale 2. CONDITIONAL CONTRACT OF SALE WHERE THE BILATERAL OBLIGATIONS TO BUY AND SELL HAVE BEEN AGREED UPON, BUT SUBJECT TO SUSPENSIVE CONDITION Ø 28 Condition usually is the full payment of the price

PERFECTION STAGE • PERFECTION HAPPENS WHEN A “CERTAIN OFFER” HAS BEEN MET BY AN “ABSOLUTE ACCEPTANCE” • THE ONLY POINT IN TIME TO DETERMINE THE VALIDITY OR INVALIDITY OF A CONTRACT OF SALE Ø “Birth” sets the essence of the Sale • ESTABLISHES THE CONTRACTUAL PRINCIPLES OF: 29 Ø CONSENSUALITY Ø MUTUALITY OR OBLIGATORY FORCE Ø RELATIVITY

FORM OF SALE GENERALLY: None, because Sale is consensual contract FOR ENFORCEABILITY: STATUTE OF FRAUDS 1. Sale which by its terms is not to be performed within one (1) year. 2. Sale of Movables, at least P 500 3. Sale of Immovables, at any price Ø 30 Must be in writing signed by the “party sought to be bound”

FORM OF SALE cont’d Ø Memo must contain Description of: (a) SUBJECT MATTER Possible thing Licit Determinate/ Determinable (b) PRICE real valuable certain/ascertainable manner of payment provided (c) SIGNED BY THE PARTY SOUGHT TO BE CHARGED Exception: Electronic Document Ø OR PARTIALLY EXECUTED (Estoppel) Ø OR WAIVER OF ADDUCEMENT OF ORAL EVIDENCE AT 31 TRIAL

FORM OF SALE cont’d What Constitutes “Partial Execution”? Subject Matter (a) Performance Must Touch Upon Price Cannot Cover “Other Consideration” (b) Must Involve/Compromise “Party Sought to be Charged” 32

FORMS THAT VOID CONTRACT OF SALE: SALE OF REALTY THROUGH AGENT: 1. Ø AGENT’S AUTHORITY MUST BE IN WRITING OTHERWISE: Ø SALE VOID: - EVEN IF DEED OF SALE IN WRITING and/or NOTARIZED - EVEN IF THERE HAS BEEN PARTIAL/ FULL PAYMENT - EVEN IF THERE HAS BEEN DELIVERY OF SUBJECT MATTER - EVEN IF SALE REGISTERED 33

SALES OF IMMOVABLES 1. PRIVATE DOCUMENT NEEDED BETWEEN PARTIES TO BE ENFORCEABLE EXCEPT: PARTIAL EXECUTION/WAIVER 2. MUST BE IN A PUBLIC INSTRUMENT -TO BIND THE PUBLIC -TO BE REGISTRABLE WITH REGISTRY OF DEEDS 3. FOR REAL ESTATE, MUST BE REGISTERED TO BE VALID AND BINDING AGAINST THE WORD - Authority of Agent must be in writing – VOID - Bound by actual possession situation, otherwise not in good faith 34

CONSUMMATION STAGE (3) REMEDIES (1) PERFORMANCE v DELIVERY OF SUBJECT MATTER v PAYMENT OF PRICE (2) RISK OF LOSS (5) EXTINGUISHMENT SPECIFIC PERFORMANCE v CONVENTIONAL REDEMPTION (SALE v RESCISSION A RETRO) v EQUITABLE v DOUBLE SALES RULE MORTGAGES v SUBDIVISION LOTS & v LEGAL v CONDO UNITS RULES REDEMPTION v RECTO LAW (4) CONDITIONS AND v MACEDA LAW WARRANTIES v v EFFECTS OF CONDITIONS v EXPRESS WARRANTIES v IMPLIED WARRANTIES 35

OBLIGATIONS OF SELLER 1. TO PRESERVE THING WITH DILIGENCE OF A GOOD FATHER OF A FAMILY 2. TO DELIVER THE SUBJECT MATTER 3. To DELIVER FRUITS, ACCESSORIES AND ACCESSIONS 4. To COMPLY WITH WARRANTIES OBLIGATIONS OF BUYER 1. TO PAY THE PRICE 2. TO ACCEPT DELIVERY OF SUBJECT MATTER 36

DELIVERY OF SUBJECT MATTER TRADITION AS THE MODE TO TRANSFER OWNERSHIP - Actual or Physical Delivery - Constructive Delivery MAGIC OF TRADITION Fulfillment of the Primary Obligation of the Seller Transfer Ownership/ Possession to the Buyer 37

DOCTRINES ON CONSTRUCTIVE DELIVERY EXECUTION OF PUBLIC INSTRUMENT - No Contrary Stipulation/ Intention - Seller Must Have “Control” - Passage of Reasonable Time EXCEPTION: WHEN BUYER TAKES THE RISK Ø Produces the Same “Magic” of Actual Delivery

CONSTRUCTIVE DELIVERY CONSTITUTUM POSSESORIUM TRADITIO BREVI MANU TRADITIO LONGA MANU OR SYMBOLIC DELVERY Public Instrument DELIVERY FOR INTANGIBLES Transfer/Negotiation of the “Title” Evidences the Intangible Enjoyment of Rights and Privileges with the consent of the Seller DELIVERY THROUGH CARRIER - FAS - FOB - CIF DOCUMENTS TO TITLE 39

RULES ON DOUBLE SALES UNDER ART. 1544 FOR MOVABLES: 1. Ø Ø Ø First to Possess, in good faith Oldest Title, in good faith Then: “First in time, priority in rights” FOR IMMOVABLES: 2. 40 Ø First to Register, in good faith Ø First to Possess, in good faith Ø Oldest Title, in good faith Ø Then: “First in time, priority in rights”

REQUISITES FOR ART. 1544 TO APPLY Cheng v. Genato, 300 SCRA 722 (1998) (a) The two (or more) sales transactions must constitute valid Sales; (b) The two (or more) sales transactions must pertain to exactly the same Subject Matter; (c) The two (or more) Buyers at odds over the rightful ownership of the Subject Matter must each represent conflicting interests; and (d) The two (or more) Buyers at odds over the rightful ownership of the Subject Matter must each have bought from the very same Seller Consolidated Rural Bank (Cagayan Valley), Inc. v. CA, 448 SCRA 347 (2005) 41

EFFECTS OF ART. 1544 REQUISITES v Not applicable where one of the Sales is Void v Not applicable to Contracts to Sell v Not applicable if first sale is the Subject Matter and the second sale is the redemption right to the Subject Matter 42

DOCTRINES ON ART. 1544 DOUBLE SALES RULES (a) Rules under Art. 1544 are addressed to the Second Buyer, who is mandated to do positive things if he hopes to win at all First Buyer wins by being first (first in time) and does not need the benefits of Art. 1544 Carbonell v. CA, 69 SCRA 99 (1976) Uraca v. CA, 278 SCRA 702 (1997) Consolidated Rural Bank (Cagayan Valley), Inc. v. CA, 448 SCRA 347 (2005) 43

DOCTRINES ON ART. 1544 cont’d (b) First Buyer wins by virtue of greater doctrine of “first in time, priority in rights” (c) Second Buyer must register his purchase while in good faith if he hopes to win: (d) First Buyer, who is always in good faith, when he registers ahead, wins became second buyer in hopeless (e) Even if Second Buyer was first to possess in good faith, the subsequent registration by First Buyer prevails Tañedo v. CA, 252 SCRA 80 (1996) 44

DOCTRINES ON ART. 1544 cont’d (f) Knowledge of the First Buyer of the second sale does not adversely affect First Buyer, nor does it constitute registration in favor of the Second Buyer (g) However, knowledge of the Second Buyer of the first sale, would place him not only in bad faith, but would constitute registration in favor of the First Buyer Cruz v. Cabana, 129 SCRA 656 (1984) 45

DOCTRINES ON ART. 1544 cont’d (h) It seems that Second Buyer must have paid in full the Price to gain the benefit under Art. 1544, as the Court defines the meaning of “good faith” to include having paid full value Heirs of Aguilar-Reyes v. Spouses Mijares, 410 SCRA 97 (2003) Tanongon v. Samson, 382 SCRA 130 (2002) Balatbat v. CA, 261 SCRA 128 (1996) Agricultural and Home Extension Dev. v. CA, 213 SCRA 536 (1992) 46

GLOBAL RULES ON DOUBLE SALE FOR REAL ESTATE 47 I. First to Register, in Good Faith and for Value, his Purchase of Land registered under the Torrens System wins, for registration is the “Operative Act” (Does not matter whether he is First or Second Buyer) II. For Unregistered Land, as between a conventional prior purchase, and a second purchase at public auction, the first Conventional Buyer wins, since the Buyer at public sale is bound by the provisions of the Rules of Court that says he only takes whatever is the remaining title of the judgment debtor.

GLOBAL RULES ON DOUBLE SALE cont’d III. The Rules of Double Sale under Art. 1544 shall apply, only when the requisites under Cheng v. Genato are present, as follows: 1. First to Register in good faith Ø But this can only apply to unregistered land, because Rule I applies to registered land. 2. First to Possess in good faith, or 3. Oldest Title, in good faith IV. “First in time, priority in rights” applies last 48

SALE AND DELIVERY BY NON-OWNER GENERAL RULE: Nemo Dat Quod Non Habet SPECIAL RULES: 49 1. Sale and Delivery, with subsequent acquisition of title by owner (Art. 1434), ipso jure transfers title to Buyer 2. Sale by Co-Owner 3. - particular portion 4. - whole property 3. Estoppel on the Part of the True Owner (Art. 1426)

SALE AND DELIVERY BY NON-OWNER cont’d 50 3. “Chain of Title Theory” under the Torrens System 4. Sales by Court Authority 5. Sales in Merchant Stores 6. Sales by One Having Voidable Title Prior to Annulment 7. Sale under Documents of Title

RULES FOR DETERIORATION, FRUITS AND IMPROVEMENTS Ø RULES HAVE NO APPLICATION IS SUBJECT MATTER IS MERELY DETERMINABLE (Art. 1263) ROMAN LAW DOCTRINE: Buyer bears the consequences of Deterioration, but benefits from the Fruits and Improvements Arts. 1480, 1163 -1262 Arts. 1189, 1537 and 1538 51

RULES WHEN SUBJECT MATTER LOST: BEFORE PERFECTION: Res Perit Domino 1. Roman v. Grimalt, 6 Phil. 96 (1906) 2. AT TIME OF PERFECTION: Seller (Arts. 1493 and 1494) “Sale is rendered inefficacious” 52

SUBJECT MATTER LOST: cont’d 3. AFTER PERFECTION BUT BEFORE DELIVERY Arts. 1164, 1189, and 1262( General Rule: For Goods, risk borne by Seller under Res perit domino rule Chrysler Phil. v. CA, 133 SCRA 567 (1984) Union Motor Corp v. CA, 361 SCRA 506 (2001) Loss by Fault of a Party (Arts. 1480, 1504, 1538) LOSS BY FORTUITOUS EVENT: Two Schools of Thought Arts. 1480, 1163, 1164, 1165 Arts. 1504, 1538, and 1189 53

SUBJECT MATTER LOST: cont’d 4. AFTER DELIVERY: BUYER BEARS RISK, UNDER Res Perit Domino EXCEPT: When retention of Possession by Seller for purpose of securing payment of the Purchase Price Art. 1504 Song Fo & Co. v. Oria, 33 Phil. 3 (1915) Lawyer's Coop v. Tabora, 13 SCRA 762 (1965) Lawyer's Coop v. Narciso, 55 O. G. 3313) 54

REMEDIES FOR CONTRACTS OF SALE 1. REMEDIES OF “UNPAID SELLER” OF GOODS • Possessory lien (Arts. 1526 -1529, 1503, 1535) • Stoppage in transitu (Arts. 1530 -1532, 1535, 1636[2]) • Special Right of Resale (Art. 1533) • Special Right to Rescind (Art. 1534) 55

2. RECTO LAW: SALES OF MOVABLES ON INSTALLMENTS (a) Meaning of “Installment Sale” Levy v. Gervacio, 69 Phil. 52 (1939) (b) Contracts to Sell Movables Not Covered Visayan Sawmill Co. , Inc. v. CA, 219 SCRA 378 (1993) (c) Nature of Remedies of Unpaid Seller ü Remedies under Art. 1484 are not cumulative, but alternative and exclusive. Borbon II v. Servicewide Specialists, Inc. , 258 SCRA 634 (1996) ü Seeking a writ of replevin consistent with all three remedies Universal Motors Corp. v. Dy Hian Tat, 28 SCRA 161 (1969) 56

RECTO LAW: cont’d (d) REMEDY OF SPECIFIC PERFORMANCE: No bar to full recovery Tajanglangit v. Southern Motors, 101 Phil. 606 (1957) Even when it is mortgaged property that is sold on execution. Southern Motors v. Moscoso, 2 SCRA 168 (1961) Even with replevin and recovery of the subject property, the action may still be for specific performance. Industrial Finance Corp. v. Ramirez, 77 SCRA 152 (1977) 57

RECTO LAW: cont’d NATURE OF REMEDY OF RESCISSION (e) • Inherent “Barring” Effect of Rescission • Surrender of mortgaged property not equivalent to rescission. Vda. de Quiambao v. Manila Motors Co. , Inc. , 3 SCRA 444 (1961) • Stipulation on non-return of payments is valid provided not unconscionable. Delta Motor Sales Corp. v. Niu Kim Duan, 213 SCRA 259 (1992) 58

RECTO LAW: cont’d (f) REMEDY OF FORECLOSURE (i) Third Party Mortgage Ridad v. Filipinas Investment, 120 SCRA 246 (1983) (ii) Assignor-Assignee; Financing Transactions Zayas v. Luneta Motors, 117 SCRA 726 (1982) When seller assigns his credit to another, the assignee is likewise bound by the terms of the Recto Law. Borbon II v. Servicewide Specialists, Inc. , 258 SCRA 634 (1996). 59

RECTO LAW: cont’d (iii) H-V “Barring” Effects of Foreclosure on the chattel mortgage prevents further action on the supporting real estate mortgage. Cruz v. Filipinas Investment & Finance Corp. , 23 SCRA 791 (1968) Borbon II v. Servicewide Specialists, Inc. , 258 SCRA 634 (1996) (iv) Amounts Barred from Recovery Macondray & Co. v. Eustaquio, 64 Phil. 446 (1937) (v) Perverse Buyer Filipinas Investment & Finance Corp. v. Ridad, 30 SCRA 564 (1969) 60

RECTO LAW: cont’d PURPORTED LEASE WITH OPTION TO BUY: (g) “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. ” (Art. 1485) When purported Lessor takes possession of subject movable, it is treated legally as a foreclosure and the barring effects applicable to foreclosure remedy, not rescission, are given application. Vda. de Jose v. Barrueco, 67 Phil. 191 (1939) Filinvest Credit Corp. v. CA, 178 SCRA 188 (1989) U. S. Commercial v. Halili, 93 Phil. 271 (1953) H. E. Heacock v. Bantal Manufacturing, 66 Phil. 245 (1938) Manila Gas Corp. v. Calupita, 66 Phil. 747 (19 38) Vda. de Jose v. Barrueco, 67 Phil. 191 (1939) 61

3. MACEDA LAW: SALES OF RESIDENTIAL REALTY ON INSTALLMENTS (R. A. 6552) (a) “Role” of Maceda Law Lagandaon v. CA, 290 SCRA 463 (1998) (b) Transactions Covered The formal requirements of rescission under the Maceda Law apply even to contracts entered into prior to its effectivity. Siska Dev. Corp. v. Office of the President, 231 SCRA 674 (1994) BUT SEE: People’s Ind’l and Comm. Corp. v. CA, 281 SCRA 206 (1997) 62

MACEDA LAW cont’d The Maceda Law makes no distinctions between “option” and “sale” which under P. D. 957 also includes “an exchange or attempt to sell, an option of sale or purchase, a solicitation of a sale or an offer to sell directly. ” Realty Exchange Venture Corp. v. Sendino, 233 SCRA 665 (1994) Curiously: No application to Contract to Sell “because said law presupposes the existence of a valid and effective contract to sell a condominium. ” Mortel v. KASSCO, Inc. , 348 SCRA 391, 398 (2000) 63

MACEDA LAW cont’d Pursuant to Art. 1253 of Civil Code, in a contract involving installments with interest chargeable against the remaining balance of the obligation, it is the duty of the creditor-seller to inform the debtor-buyer of the interest that falls due and that is applying the installment payments to cover said interest. Otherwise, the creditor cannot apply the payments to the interest and then hold the debtor in default for non-payment of installments on the principal. Rapanut v. CA, 246 SCRA 323 (1995) (c) How Cancellation of Contract Can Be Effected: Active Realty & Dev. Corp. v. Daroya, 382 SCRA 152 (2002) 64

MACEDA LAW cont’d OTHER RIGHTS GRANTED TO BUYER (a) To sell/assign his rights to another person (b) To reinstate contract by updating account during grace period, cancellation of contract before actual (c) To pay in advance installments or in full unpaid balance of Price any time without interest and have same annotated in title Any stipulation in any contract entered into contrary to the provisions of the Law, shall be null and void. (Art. 7) 65

4. OTHER REMEDIES ON SALE OF REAL ESTATE (a) ANTICIPATORY BREACH (ART. 1591) (b) RESCISSION ON SALE ON NON- RESIDENTIAL REALTY ON INSTALLMENTS (Arts. 1191 and 1592) (c) SEC. 23 AND 24, PRES. DECREE 957 66

CONTRACTS TO SELL Versus CONDITIONAL CONTRACTS OF SALE ü Art. 1458 Defines a Sale to covered both “Absolute and Conditional” ü Both Contracts are usually bound by same condition: Full payment of the Price ü Both Contracts are consensual, onerous, commutative, and cover bilateral obligations 67

K TO SELL VS. K OF SALE cont’d ü Power to Rescind is inherently Judicial ü Rescission requires a positive act ü Non-fulfillment of Condition ipso jure destroys contract ü Substantial Breach Relevant to Contract of Sale, Irrelevant to Contracts to Sell 68

K TO SELL VS. K OF SALE cont’d 1. In Contract to Sell Ownership if Reserved by Seller, while in a Contract to Sell ownership transfers to Buyer upon delivery. Ergo: K to Sell must have express reservation of ownership • To execute a formal Deed of Sale • Only receipt of payment evidences sale • Seller retained original titles 69

K TO SELL VS. K OF SALE cont’d 2. “Rescission” of Contract to Sell is a matter of right upon non-happening of the condition Ergo: K to Sell must have express right to rescind the contract upon default of the Buyer ü A written notice of “cancellation” must be served upon Buyer even when Contract to Sell UP v. Delos Angeles, 35 SCRA 103 (1970) 70

CONDITIONS versus WARRANTIES Power Commercial and Industrial Corp. v. CA 274 SCRA 597 (1997) (a) Condition goes into root of existence of obligation, whereas warranty goes into performance of such obligation, and in fact may constitute an obligation itself; (b) Condition must be expressly stipulated by parties, while warranty may form part of the obligation or contract by provision of law, without previous agreement; and (c) Condition may attach itself either to the Obligations of Seller, while warranty, express or implied, relates to the Subject Matter itself or to the obligations of Seller as to Subject Matter of the sale. 71

CONDITIONS AND WARRANTIES cont’d Failure to comply with condition imposed upon perfection of the contract results in failure of a contract, while the failure to comply with a condition imposed on the performance of an obligation only gives the other party the option either to refuse to proceed with sale or waive the condition. Laforteza v. Machuca, 333 SCRA 643 (2000) In a “Sale with Assumption of Mortgage, ” the assumption of mortgage is a condition to the seller’s consent so that without approval by the mortgagee, no sale is perfected. In such case, the seller remains the owner and mortgagor of the property and retains the right to redeem the foreclosed property. Ramos v. CA, 279 SCRA 118 (1997) 72

CONDITIONS AND WARRANTIES cont’d EXPRESS WARRANTIES (Art. 1546) A. (a) Must be an affirmation of fact or any promise by the seller relating to Subject Matter of the sale; (b) The natural tendency of such affirmation or promise is to induce Buyer to purchase thing; and (c) Buyer purchases the thing relying on such affirmation or promise thereon. The law allows considerable latitude to seller’s statements, or dealer’s talk; and experience teaches that it is exceedingly risky to accept it at its face value. Ramos v. CA, 279 SCRA 118 (1997) 73

CONDITIONS AND WARRANTIES cont’d IMPLIED WARRANTIES (Art. 1547) B. 1. SELLER HAS RIGHT TO SELL 2. WARRANTY AGAINST EVICTION Seller must be summoned in the suit for eviction at the instance of the buyer (Art. 1558), and be made a codefendant (Art. 1559); or made a third-party defendant. Escaler v. CA, 138 SCRA 1 (1985) Canizares Tiana v. Torrejos, 21 Phil. 127 (1911) J. M. Tuazon v. CA, 94 SCRA 413 (1979) 74

CONDITIONS AND WARRANTIES cont’d WARRANTY AGAINST NON-APPARENT SERVITUDES 3. WARRANTY AGAINST HIDDEN DEFECTS 4. The stipulation in a contract of lease with option to purchase (which it treated as a sale of movable on installments) that the buyer-lessee "absolutely releases the lessor from any liability whatsoever as to any and all matters in relation to warranty in accordance with the provisions hereinafter stipulated, " was held as an express waiver of warranty against hidden defect. Filinvest Credit Corp. v. CA, 178 SCRA 188 (1989) 75

CONDITIONS AND WARRANTIES cont’d Nutrimix Feeds Corp. v. CA 441 SCRA 357 (2004) A hidden defect is one which is unknown or could not have been known to the buyer. Under the law, the requisites to recover on account of hidden defects are as follows: a. b. c. d. e. Defect must be hidden; Must exist at the time the sale was made; Must ordinarily have been excluded from the contract; Defect, must be important (render the thing unfit or considerably decreases fitness); Action must be instituted within statute of limitations. The remedy against violation of warranty against hidden defects is either to withdraw from the contract (accion redhibitoria) or to demand a proportionate reduction of the price (accion quanti minoris), with damages in either case. 76 Investments & Dev. , Inc. v. CA, 162 SCRA 636 [1988]

CONDITIONS AND WARRANTIES cont’d 5. REDHIBITORY DEFECTS OF ANIMALS a. Sale of a Team b. Animals Sold at Fairs or Public Auction c. Sale of Animals with Contagious Diseases d. Sale of Unfit Animals IMPLIED WARRANTIES IN THE SALE OF GOODS 6. a. Warranty as to Fitness or Quality b. Sale of Goods by Sample 7. ADDITIONAL WARRANTIES FOR CONSUMER PRODUCTS (Arts. 68, Consumer Act of the Philippines, R. A. 7394). 77

CONDITIONS AND WARRANTIES cont’d EFFECTS OF WARRANTIES C. EFFECTS OF WAIVERS D. G. BUYER'S OPTIONS IN CASE OF BREACH OF WARRANTY 78

EXTINGUISHMENT OF SALE EXTINGUISHED BY SAME MODES APPLICABLE TO ALL CONTRACTS Arts. 1231, 1600 “REDEMPTION” IS A MODE OF EXTINGUISHMENT UNIQUE TO SALES: Ø CONVENTIONAL REDEMPTION: SALE WITH RIGHT TO REPURCHASE Ø LEGAL REDEMPTION 79

CONVENTIONAL REDEMPTION (SALE WITH A RIGHT TO REPURCHASE) NATURE OF RIGHT TO REPURCHASE: ü Reserved by Seller at the point of Perfection. Art. 1601 Villarica v. CA, 26 SCRA 189 (1968) ü Even though found in a separate instrument Torres v. CA, 216 SCRA 287 (1992) Claravall v. CA, 190 SCRA 439 (1990) 80

CONVENTIONAL REDEMPTION cont’d ü Its Validity is Tied to the Validity of the Contract of Sale to which appended. Nool v. Court of Appeals, 276 SCRA 149 (1997) ü When Sale Covered by Deed, Right a retro may be proved by parol evidence. Mactan Cebu Int’l Airport Authority v. Court of Appeals, 263 SCRA 736 (1996) 81

RIGHT A RETRO versus OPTION CONTRACT (A) Not separate contract, but must be part of main Contract of Sale (B) Right to Redeem does not need separate consideration (B) Option requires consider-ation separate and distinct of the Price in order to be valid (C) Maximum Period for (C) Period of Option may be exercise of Right of redemption cannot exceed 10 years (D) Right of repurchase requires in addition the tender of the amount mandated, including consignation when tender not possible 82 (A) Generally principal contract, but may be appended in another contract valid beyond 10 years (D) Option may be exercised by mere notice to Offeror

SALIENT MATTERS ON RIGHT OF REDEMPTION PERIOD OF REDEMPTION: (a) ü When no Period agreed upon: 4 years ü When Period agreed upon: cannot exceed 10 years ü When Period of “Non-Redemption” Stipulated Anchuel v. IAC, 147 SCRA 434 (1987) Tayao v. Dulay, 13 SCRA 758 (1965) 83

SALIENT MATTERS ON RIGHT OF REDEMPTION cont’d ü Pendency of Action Tolls Redemption Period Ong Chua v. Carr, 53 Phil. 975 (1929) ü Non-Payment of Price Does Not Affect Running of Redemption Period Catangcatang v. Legayada, 84 SCRA 51 (1978) 84

SALIENT MATTERS cont’d HOW REDEMPTION EFFECTED: (b) Only tender of payment is sufficient. Legaspi v. CA, 142 SCRA 82 (1986) Consignation is not required after tender is refused. Mariano v. CA, 222 SCRA 736 (1993) But when tender not possible, consignation should be made. Catangcatang v. Legayada, 84 SCRA 51 (1978) 85

SALIENT MATTERS cont’d Simply by Filing Judicial Action Lee Chuy Realty Corp. v. CA, 250 SCRA 596 (1995) Seller returning to Buyer: § Price of the sale § Expenses of contract, and any other legitimate payments made by reason of the sale § Necessary and useful expenses made on the thing sold ART. 1616 86

SALIENT MATTERS cont’d When Redemption Not Made, Buyer a retro automatically acquires full ownership. Oviedo v. Garcia, 40 SCRA 17 (1971) HOWEVER: In real property, consolidation shall not be recorded in the Registry of Property without a judicial order, after the seller has been duly heard. Article 1607 If Seller proves the transaction a sale a retro, he is given a period of 30 days from finality of judgment to repurchase. Solid Homes v. CA, 275 SCRA 267 (1997). 87

EQUITABLE MORTGAGE DEFINITION AND ELEMENTS (a) The contract entered into is denominated as a Sale (absolute or a retro); and (b) Real intention was to secure an existing debt by way mortgage Molina v. CA, 398 SCRA 97 (2003) 88

EQUITABLE MORTGAGE cont’d RATIONALE OF EQUITABLE MORTGAGE PRINCIPLE Prevent circumvention of law on usury and rule against pactum commissorium, i. e. against a creditor appropriating the mortgage property. To end unjust or oppressive transactions or violations in connection with a sale or property. Spouses Miseña v. Rongavilla, 303 SCRA 749 (1999). Matanguihan v. CA, 275 SCRA 380 (1997) Lao v. CA, 275 SCRA 237 (1997) 89

RULINGS ON EQUITABLE MORTGAGE Badges of Equitable Mortgage in Art. 1602 Apply both to sale a retro and to a contract purporting to be an absolute sale. Tuazon v. CA, 341 SCRA 707 (2000) Zamora v. CA, 260 SCRA 10 (1996) Parol evidence is competent and admissible in support of allegation of equitable mortgage arrangement. Mariano v. CA, 220 SCRA 716 (1993) 90

Pactum Commissorium principle does not apply: (a) When security for a debt is also money in time deposit form of Consing v. CA, 177 SCRA 14 (1989) (b) To an agreement between Lender and Borrower which provides that in the event Borrower fails to comply with the new terms of payment, the agreement shall automatically operate to be an instrument of dacion en pago without need of executing any document to such an effect. Solid Homes, Inc. v. CA, 275 SCRA 267 (1997) 91

RULINGS ON EM CONTRA: cont’d P/N stipulation that upon makers’ failure to pay interests, ownership of property would automatically be transferred to Payee and the covering deed of sale would be registered, is in substance a pactum commissorium in violation of Art. 2088. A. Francisco Realty v. CA, 298 SCRA 349 (1998) A pactum commisorium sale is void, registration and obtaining of new title by apparent buyer would also be void. A. Francisco Realty v. CA, 298 SCRA 349 (1998) 92

REMEDIES UNDER EQUITABLE MORTGAGE SITUATIONS Apparent seller can seek reformation of instrument (Art. 1605). An action for consolidation of ownership (in case presented as sale a retro) would be void, and proper remedy of mortgagee-buyer is to file appropriate foreclosure of the mortgage in equity. Briones-Vasquez vs. CA, 450 SCRA 644 (2005). 93

REMEDIES IN EM cont’d Additional 30 -day Period of Redemption is allowed under Art. 1606, in event courts should find the sale was not equitable mortgage, provided: (a) Honest belief that it was equitable mortgage supported by convincing evidence, such as badges under Art. 1602, or consignation during trial of the amount of the alleged loan Abilla v. Gobonseng, 374 SCRA 51 (2002) Vda. de Macoy v. CA, 206 SCRA 244 (1992) 94

LEGAL REDEMPTION DEFINITION AND RATIONALE: Privilege created by law for reasons of public policy. For benefit and convenience of the redemptioner, to afford him a way out of what might be a disagreeable or inconvenient association into which he has been thrust. Intended to minimize co-ownership. Fernandez v. Tarun, 391 SCRA 653 (2002) Basa v. Aguilar, 117 SCRA 128 (1982) 95

LEGAL REDEMPTION cont’d PERIOD OF LEGAL REDEMPTION BEGINS: 30 DAYS FROM WRITTEN NOTICE Written notice must cover perfected sale Art. 1623 Spouses Doromal v. CA, 66 SCRA 575 (1975) Notice must be given by seller; and that notice given by buyer or even by the Register of Deeds are not sufficient. Francisco v. Boiser, 332 SCRA 305 (2000) Butte v. Manuel Uy and Sons, Inc. , 4 SCRA 526 (1962) Salatandol v. Retes, 162 SCRA 568 (1988) 96

LEGAL REDEMPTION cont’d Seller furnishing of the copies of deeds of sale to co-owner would be sufficient. Distrito v. CA, 197 SCRA 606 (1991) Conejero v. CA, 16 SCRA 775 (1966) Badillo v. Ferrer, 152 SCRA 407 (1987) Notice to minors may validly be served upon parents even when not judicially appointed since beneficial to the children. Badillo v. Ferrer, 152 SCRA 407 (1987). 97

LEGAL REDEMPTION cont’d Deemed complied when co-owners signed Deed of Extrajudicial Partition embodying disposition of part of the property owned in common. Fernandez v. Tarun, 391 SCRA 653 (2002) Filing of ejectment suit or collection of rentals against a co-owner dispenses with need for written notice. Alonzo v. IAC, 150 SCRA 259 (1987) 98

INSTANCES OF LEGAL REDEMPTION (a) Among Co-heirs (Art. 1088) A co-heir cannot exercise the right of redemption alone. De Guzman v. CA, 148 SCRA 75 (1987) No legal redemption for sale of the property of the estate. Plan v. IAC, 135 SCRA 270 (1985) Written notice to other co-owners deemed inutile by fact that ebuyers took possession of property in full view of other co-owners. Pilapil v. CA, 250 SCRA 560 (1995) Notice given by city treasurer will not suffice. Verdad v. CA, 256 SCRA 593 (1996) 99

INSTANCES OF LEGAL REDEMPTION cont’d (b) Among Co-owners (Art. 1620) Right of legal redemption arises only when shares of other owners are sold to a “third person, ” and not to another co-owner Fernandez v. Tarun, 391 SCRA 653 (2002) Registration of the sale does not estop a co-owner Cabrera v. Villanueva, 160 SCRA 627 (1988) Notice required to be given to co-owners must be in writing; and redemption by co-owner redounds to the benefit of all other co-owners. Mariano v. CA, 222 SCRA 736 (1993) 100

INSTANCES OF LEGAL REDEMPTION cont’d No written notice required to co-owner who acted as active intermediary in the consummation of the sale. Distrito v. CA, 197 SCRA 606 (1991) Redemption by co-owner, even when he uses his own fund, inures to the benefit of all the other co-owners. Annie Tan v. CA, 172 SCRA 660 (1989) 101

INSTANCES OF LEGAL REDEMPTION cont’d (c) Among Adjoining Owners (Art. 1621 -1622) Redemption covers only “resale” and does not cover exchanges or barter of properties De Santos v. City of Manila, 45 SCRA 409 (1972) Requisite of “speculation” dropped. Legaspi v. CA, 69 SCRA 360 (1976) Does not apply if one adjacent lot is not also rural land Primary Structures Corp. v. Valencia, 409 SCRA 371 (2003) 102

INSTANCES OF LEGAL REDEMPTION cont’d (d) Sale of Credit in Litigation (Art. 1634) - 30 days (e) Redemption of Homesteads (Sec. 119, C. A. 141) The right to repurchase is granted by law and need not be provided for in the deed of sale. Berin v. CA, 194 SCRA 508 (1991). 103

INSTANCES OF LEGAL REDEMPTION cont’d Under the free patent or homestead provisions of the Public Land Act a period of five (5) years from the date of conveyance is provided, the five-year period to be reckoned from the date of the sale and not from the date of registration in the office of the Register of Deeds. Lee Chuy Realty Corp. v. CA, 250 SCRA 596 (1995) For purposes of reckoning the 5 -year period to exercise right of repurchase, the date of conveyance is construed to refer to date of execution of the deed transferring the ownership of the land to the buyer. Mata v. CA, 318 SCRA 416 (1999). 104

INSTANCES OF LEGAL REDEMPTION cont’d (f) Redemption in Tax Sales (Sec. 215, NIRC of 1997) (g) Redemption by judgment debtor (Sec. 27, Rule 39, Rules of Civil Procedure) Period of redemption shall be “at any time within one (1) year from the date of registration of the certificate of sale, ” so that the period is now to be understood as composed of 365 days, unlike the 360 days under the old provisions of the Rules of Court which referred to 12 -month redemption period. Ysmael v. CA, 318 SCRA 215 (1999) 105

INSTANCES OF LEGAL REDEMPTION cont’d (h) Redemption in Extrajudicial Foreclosure One (1) year from registration in the Registry of Deeds on Mortgage (Sec. 6, Act 3135). (i) Redemption in judicial foreclosure of mortgage (Sec. 47, General Banking Law of 2000, R. A. 8791). A stipulation to render the right to redeem defeasible by an option to buy on the part of the creditor Soriano v. Bautista, 6 SCRA 946 (1962) 106

INSTANCES OF LEGAL REDEMPTION cont’d No right to redeem from a judicial foreclosure sale, except those granted by banks or banking institutions GSIS v. CFI, 175 SCRA 19 (1989). The one-year redemption period in case of foreclosure of real estate mortgage is not interrupted by filing of action assailing validity of mortgage, so that at the expiration thereof, mortgagee who acquires property at the foreclosure sale can proceed to have title consolidated in his name and a writ of possession issued in his favor. Union Bank of the Philippines v. CA, 359 SCRA 480 (2001) Vaca v. CA, 234 SCRA 146 (1994) 107

INSTANCES OF LEGAL REDEMPTION cont’d (j) Redemption in Foreclosure by Rural Banks Land mortgaged to rural bank under R. A. 720, may be redeemed within two (2) years from date of foreclosure or from registration of sheriff's certificate of sale. If mortgagor fails to exercise such right, heirs may still repurchase within 5 years from expiration of 2 -year redemption period pursuant to Sec. 119 of Public Land Act (C. A. 141). Rural Bank of Davao City v. CA, 217 SCRA 554 (1993) Heirs of Felicidad Canque v. CA, 275 SCRA 741 (1997) 108

INSTANCES OF LEGAL REDEMPTION cont’d (k) Legal Right to Redeem under Agrarian Reform Code Sec. 12 of R. A. 3844, grants agricultural lessee right to redeem within 180 days from notice in writing and at a reasonable price and consideration Quiño v. CA, 291 SCRA 249 (1998) Redemption right of tenant does not begin to run without written notice Springsun Management Systems Corp. v. Camerino, 449 SCRA 65 (2005) 109

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