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Southwestern Sugar & Molasses Co. vs.

Atlantic Gulf & Pacific Company

97 Phil 247
June 1955
On March 24, 1953, defendant-appellant Atlantic granted plaintiff-appellee Southwestern an
option period of ninety days to buy the formers barge No. 10 for the sum of P30,000. On
May 11 of the same year, Southwestern Company communicated its acceptance of the
option to Atlantic through a letter, to which the latter replied that their understanding was
that the "offer of option" is to be a cash transaction and to be effected "at the time the
lighter is available." On June 25, Atlantic advised the Southwestern Company that since
there is still further work for it, the barge could not be turned over to the latter company.
On June 27, 1953, the Southwestern Company filed this action to compel Atlantic to sell the
barge in line with the option, depositing with the court a check covering the sum of P30,000,
but said check was later withdrawn with the approval of the court. On June 29, the Atlantic
withdrew its "offer of option" with due notices to Southwestern Company stating that the
option was granted merely as a favor. The Atlantic contended that the option to sell it made
to Southwestern Company is null and void because said option to sell is not supported by
any consideration.
The trial court granted herein plaintiff-appellee Southwestern Companys action for specific
performance and ordered herein defendant-appellant Atlantic to pay damages equivalent to
6 per centum per annum on the sum of P30,000 from the date of the filing of the complaint.
Is Atlantic liable for specific performance and to pay damages in favor of Southwestern
The Supreme Court reversed the trial courts decision applying Article 1479 of the new Civil
Code. The Court reiterated that "an accepted unilateral promise" can only have a binding
effect if supported by a consideration, which means that the option can still be withdrawn,
even if accepted, if said option is not supported by any consideration. The option that
Atlantic had provided was without consideration, hence, can be withdrawn notwithstanding
Southwestern Companys acceptance of said option.
American jurisprudence hold that an offer, once accepted, cannot be withdrawn, regardless
of whether it is supported or not by a consideration, but the specific provisions of Article
1479 commands otherwise. While under the "offer of option" in question appellant Atlantic
has assumed a clear obligation to sell its barge to appellee Southwestern Company and the

option has been exercised in accordance with its terms, and there appears to be no valid or
justifiable reason for the former to withdraw its offer, the Court cannot adopt a different
attitude because the law on the matter is clear.

Atkins Kroll & Co. vs. Cu Hian Tek

102 Phil 984
January 1958
On September 13, 1951, petitioner Atkins Kroll & Co. (Atkins) sent a letter to respondent B.
Cu Hian Tek (Hian Tek) offering (a) 400 cartons of Luneta brand Sardines in Tomato Sauce
48 / 15-oz. Ovals at $8.25 per carton, (b) 300 cartons of Luneta brand Sardines Natural 48/15
oz. talls at $6.25 per carton, and (c) 300 cartons of Luneta brand Sardines in Tomato Sauce
100/5-oz. talls at $7.48 per carton, with all of the offers subject to reply by September 23,
1951. Hian Tek unconditionally accepted the said offer through a letter delivered on
September 21, 1951, but Atkins failed to deliver the commodities due to the shortage of
catch of sardines by the packers in California.
Hian Tek, therefore, filed an action for damages in the CFI of Manila which granted the same
in his favor. Upon Atkins appeal, the Court of Appeals affirmed said decision but reduced
the damages to P3,240.15 representing unrealized profits. Atkins herein contends that there
was no such contract of sale but only an option to buy, which was not enforceable for lack
of consideration because it is provided under the 2nd paragraph of Article 1479 of the New
Civil Code that "an accepted unilatateral promise to buy or to sell a determinate thing for a
price certain is binding upon the promisor if the promise is supported by a consideration
distinct from the price. Atkins also insisted that the offer was a mere offer of option,
because the "firm offer" was a continuing offer to sell until September 23.
Was there a contract of sale between the parties or only a unilateral promise to buy?
The Supreme Court held that there was a contract of sale between the parties. Petitioners
argument assumed that only a unilateral promise arose when the respondent accepted the
offer, which is incorrect because a bilateral contract to sell and to buy was created upon
respondents acceptance.
Had B. Cua Hian Tek backed out after accepting, by refusing to get the sardines and / or to
pay for their price, he could also be sued. But his letter-reply to Atkins indicated that he
accepted "the firm offer for the sale" and that "the undersigned buyer has immediately filed
an application for import license. After accepting the promise and before he exercises his
option, the holder of the option is not bound to buy. In this case at bar, however, upon

respondents acceptance of herein petitioner's offer, a bilateral promise to sell and to buy
ensued, and the respondent had immediately assumed the obligations of a purchaser.

Sanchez vs Rigos
45 SCRA 368 G.R. No. L-25494
June 14, 1972
On April 3, 1961, plaintiff Nicolas Sanchez and defendant Severina Rigos executed aninstrument entitled Option to Purchase, whereby Rigos agreed, promised _and
committed to sell to Sanchez at the sum P1,510.00 a parcel of land situated in San Jose,
Nueva Ecija, described in TCT No. NT-12528, within two (2) years from said date with the
understanding that said option shall be deemed terminated and elapsed, if Sanchez shall
fail to exercise his right to buy the property within the stipulated period. Inasmuch as
several tenders of payment of the sum of PI,510.00, made by Sanchez within said period,
were rejected by Mrs. Rigos, on March 12, 1963, the former deposited said amount with the
CFI of Nueva Ecija and commenced against the latter the present action, for specific
performance and damages.
After the filing of defendants answer admitting some allegations of the complaint,
denying other allegations thereof, and alleging, as special defense, that the contract
between the parties is a unilateral promise to sell, and the same being unsupported by any
valuable consideration, by force of the New Civil Code, is null and void on February 11,
1964, both parties, assisted by their respective counsel, jointly moved for a judgment on the
pleadings. Accordingly, on February 28, 1964, the lower court rendered judgment for
anchez, ordering Mrs. Rigos to accept the sum judicially consigned by him and to execute,
in his favor, the requisite deed of conveyance. Mrs. Rigos was, likewise, sentenced to pay
P200.00, as attorneys fees, and other costs. Hence, this appeal by Mrs. Rigos.
Whether or not Rigos should accept the payment and execute the deed of conveyance.
Yes. Article 1479 of the Civil Code provides that 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 promisor if the promise is
supported by a consideration distinct from the price.
An option is unilateral- a promise to sell at the price fixed whenever the offeree should
decide to exercise his option within the specified time. After accepting the promise and
before he exercises his option, the holder of the option is not bound to buy. He is free either
to buy or not to buy later. In this case, however, upon accepting herein petitioners offer a
bilateral promise to sell and to buy ensued, and the respondent ipso facto assumed the
obligation of a purchaser. He did not just get the right subsequently to buy or not to buy. It
was not a mere option then; it was a bilateral contract of sale.

If the option is given without a consideration, it is a mere offer of a contract of sale, which
is not binding until accepted. If, however, acceptance is made before a withdrawal, it
constitutes a binding contract of sale, even though the option was not supported by a
sufficient consideration. Since there may be no valid contract without a cause or
consideration, the promisor is not bound by his promise and may, accordingly, withdraw it.
Pending notice of its withdrawal, his accepted promise partakes, however, of the nature or
an offer to sell which, if accepted, results in a perfected contract of sale.
Spouses Natino vs. IAC
Facts: On 12 October 1970, petitioners executed a real estate mortgage in favor of
respondent bank. Petitioners failed to pay the loan on due date. The bank applied for the
extrajudicial foreclosure of the mortgage. At the foreclosure sale, the respondent bank was
the highest and winning bidder. A certificate of sale was executed in its favor by the sheriff
and the same was registered with the Office of the Register of Deeds. The certificate of sale
expressly provided that the redemption period shall be two years from the registration
No redemption was made by petitioners within the two-year period and the sheriff issued a
Final Deed of Sale.
Issue: WON the petitioners were given an extension of the period of redemption.
Ruling: We find the petition to be devoid of merit. The attempts to redeem the property
were done after the expiration of the redemption period and that no extension of that
period was granted to petitioners.
Even if the President and Manager of the bank is to be understood to have promised to
allow the petitioners to buy the property at any time they have the money, the Bank was not
bound by the promise not only because it was not approved or ratified by the Board of
Directors but also because, and more decisively, it was a promise unsupported by a
consideration distinct from the re-purchase price.
The second paragraph of Article 1479 of the Civil Code expressly provides:
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is
binding upon the promissory if the promise is supported by a consideration distinct from the
WHEREFORE, the instant petition is DISMISSED, with costs against the Petitioners.
Serra vs .CA
Facts: Petitioner is the owner of a 374 square meter parcel of land located at Quezon St.,
Masbate, Masbate. Sometime in 1975, respondent bank, in its desire to put up a branch in
Masbate, Masbate, negotiated with petitioner for the purchase of the then unregistered
property. A contract of LEASE WITH OPTION TO BUY was instead forged by the parties. The
foregoing agreement was subscribed before Notary Public Romeo F. Natividad. Pursuant to
said contract, a building and other improvements were constructed on the land which

housed the branch office of RCBC in Masbate, Masbate. Within three years from the signing
of the contract, petitioner complied with his part of the agreement by having the property
registered and placed under the TORRENS SYSTEM, for which Original Certificate of Title No.
0-232 was issued by the Register of Deeds of the Province of Masbate.
Petitioner alleges that as soon as he had the property registered, he kept on pursuing the
manager of the branch to effect the sale of the lot as per their agreement. It was not until
September 4, 1984, however, when the respondent bank decided to exercise its option and
informed petitioner, through a letter, of its intention to buy the property at the agreed price
of not greater than P210.00 per square meter or a total of P78,430.00. But much to the
surprise of the respondent, petitioner replied that he is no longer selling the property.
Issue: WON the contract lease with option to buy is valid.
Ruling: YES. The contract lease with option to buy is valid , effective and enforceable, the
price being certain and that there was consideration distinct from the price to support the
option given to lessee.
Article 1324 of the Civil Code provides that when an offeror has allowed the offeree a certain
period to accept, the offer maybe withdrawn at anytime before acceptance by
communicating such withdrawal, except when the option is founded upon consideration, as
something paid or promised. On the other hand, Article 1479 of the Code provides that an
accepted unilateral promise to buy and sell a determinate thing for a price certain is binding
upon the promisor if the promise is supported by a consideration distinct from the price.
In a unilateral promise to sell, where the debtor fails to withdraw the promise before the
acceptance by the creditor, the transaction becomes a bilateral contract to sell and to buy,
because upon acceptance by the creditor of the offer to sell by the debtor, there is already a
meeting of the minds of the parties as to the thing which is determinate and the price which
is certain. In which case, the parties may then reciprocally demand performance.
Jurisprudence has taught us that an optional contract is a privilege existing only in one party
the buyer. For a separate consideration paid, he is given the right to decide to purchase
or not, a certain merchandise or property, at any time within the agreed period, at a fixed
price. This being his prerogative, he may not be compelled to exercise the option to buy
before the time
In the present case, the consideration is even more onerous on the part of the lessee since it
entails transferring of the building and/or improvements on the property to petitioner,
should respondent bank fail to exercise its option within the period stipulated. The bugging
question then is whether the price "not greater than TWO HUNDRED PESOS" is certain or
A price is considered certain if it is so with reference to another thing certain or when the
determination thereof is left to the judgment of a specified person or persons. And
generally, gross inadequacy of price does not affect a contract of sale.

Contracts are to be construed according to the sense and meaning of the terms which the
parties themselves have used. In the present dispute, there is evidence to show that the
intention of the parties is to peg the price at P210 per square meter.
Moreover, by his subsequent acts of having the land titled under the Torrens System, and in
pursuing the bank manager to effect the sale immediately, means that he understood
perfectly the terms of the contract. He even had the same property mortgaged to the
respondent bank sometime in 1979, without the slightest hint of wanting to abandon his
offer to sell the property at the agreed price of P210 per square meter.


G.R. No. 106063
November 21, 1996
- Petitioners are Carmelo & Bauermann, Inc (owner/seller/lessor) Equatorial Realty
Development, Inc (buyer)
- Respondent is Mayfair Theater, Inc (lessee)
- Carmelo owned a parcel of land with two 2-storey buildings (covered by 4 land titles)
at Recto
- In 1967, 2 portions of the property (covered by 2 titles) was leased to Mayfair for 20
- In 1978, Carmelo sold the entire Recto property to Equatorial for P11,300,000
- Mayfair petitioned for annulment of the sale on the ground that it was violative of
Paragraph 8 of the Contract of lease between respondent and Carmelo, which reads:
That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30days exclusive option to purchase the same.
- The Trial court ruled in favor of herein petitioners on the ground that Paragraph 8
was interpreted as an option contract
- Mayfair appealed and the CA reversed the decision of the Trial court saying that
Paragraph 8 should be interpreted as a right of first refusal and not an option
1. Whether Paragraph 8 constitutes an option contract clause or a right of first refusal
2. WON sale of property to Equatorial is valid
SC ruled in favor of Mayfair ordering recission of the deed of sale and granting him right of
first refusal to buy the property at P11,300,000. The issues were held as follows:
1. RIGHT OF FIRST REFUSAL. The SC agreed with the CAs ruling that Paragraph 8
cannot constitute an option clause (covered in Article 1324 & 1479 of the Civil Code)
for the lack of definite purchasing price in the agreement. Furthermore, the SC ruled
that the stipulation in question was created to manifest a reciprocal obligation to

guard the interest of Mayfair in case of sale of the property: (1)to give him the option
to purchase the property or (2)to ensure that purchaser of the property shall
recognize the lease agreement earlier made. As such, Paragraph 8 is considered a
right of first refusal.
2. NO. Both Carmelo and Equatorial acted in bad faith for entering into Contract of Sale
knowing that Paragraph 8 (right of first refusal) was agreed upon in the Contract of
Lease and that Mayfair (another party) was interested in the property in question
Norkis Distributors, In.c vs. CA
Facts: Petitioner Norkis Distributors, Inc. (Norkis for brevity), is the distributor of Yamaha
motorcycles in Negros Occidental with office in Bacolod City with Avelino Labajo as its
Branch Manager. On September 20, 1979, private respondent Alberto Nepales bought from
the Norkis-Bacolod branch a brand new Yamaha Wonderbike motorcycle Model YL2DX with
Engine No. L2-329401K Frame No. NL2-0329401, Color Maroon, then displayed in the Norkis
showroom. The price of P7,500.00 was payable by means of a Letter of Guaranty from the
Development Bank of the Philippines (DBP), Kabankalan Branch, which Norkis' Branch
Manager Labajo agreed to accept. Hence, credit was extended to Nepales for the price of
the motorcycle payable by DBP upon release of his motorcycle loan. As security for the loan,
Nepales would execute a chattel mortgage on the motorcycle in favor of DBP. Branch
Manager Labajo issued Norkis Sales Invoice No. 0120 (Exh.1) showing that the contract of
sale of the motorcycle had been perfected. Nepales signed the sales invoice to signify his
conformity with the terms of the sale. In the meantime, however, the motorcycle remained
in Norkis' possession.On November 6, 1979, the motorcycle was registered in the Land
Transportation Commission in the name of Alberto Nepales.
Issue: Who should bear the loss of the motorcycle?
Ruling: NORKIS, the seller. The issuance of a sales invoice does not prove transfer of
ownership of the thing sold to the buyer. An invoice is nothing more than a detailed
statement of the nature, quantity and cost of the thing sold and has been considered not a
bill of sale. In all forms of delivery, it is necessary that the act of delivery whether
constructive or actual, be coupled with the intention of delivering the thing. The act, without
the intention, is insufficient.
When the motorcycle was registered by Norkis in the name of private respondent, Norkis
did not intend yet to transfer the title or ownership to Nepales, but only to facilitate the
execution of a chattel mortgage in favor of the DBP for the release of the buyer's
motorcycle loan. The Letter of Guarantee issued by the DBP, reveals that the execution in its
favor of a chattel mortgage over the purchased vehicle is a pre-requisite for the approval of
the buyer's loan. If Norkis would not accede to that arrangement, DBP would not approve
private respondent's loan application and, consequently, there would be no sale.
In other words, the critical factor in the different modes of effecting delivery, which gives
legal effect to the act, is the actual intention of the vendor to deliver, and its acceptance by
the vendee. Without that intention, there is no tradition.

Article 1496 of the Civil Code which provides that "in the absence of an express assumption
of risk by the buyer, the things sold remain at seller's risk until the ownership thereof is
transferred to the buyer," is applicable to this case, for there was neither an actual nor
constructive delivery of the thing sold, hence, the risk of loss should be borne by the seller,
Norkis, which was still the owner and possessor of the motorcycle when it was wrecked.
This is in accordance with the well-known doctrine of res perit domino.
Southern Motors vs. Moscoso
Facts: On June 6, 1957, plaintiff-appellee Southern Motors, Inc. sold to defendant-appellant
Angel Moscoso one Chevrolet truck, on installment basis, for P6,445.00. Upon making a
down payment, the defendant executed a promissory note for the sum of P4,915.00,
representing the unpaid balance of the purchase price), to secure the payment of which, a
chattel mortgage was constituted on the truck in favor of the plaintif.
Of said account of P4,915.00, the defendant had paid a total of P550.00, of which P110.00
was applied to the interest up to August 15, 1957, and P400.00 to the principal, thus leaving
an unpaid balance of P4,475.00. The defendant failed to pay 3 installments on the balance of
the purchase price.
On November 4, 1957, the plaintiff filed a complaint against the defendant, to recover the
unpaid balance of the promissory note. Upon plaintiff's petition, embodied in the complaint,
a writ of attachment was issued by the lower court on the properties Of the defendant.
Pursuant thereto, the said Chevrolet truck, and a house and lot belonging to defendant,
were attached by the Sheriff of San Jose, Antique, where defendant was residing on
November 25, 1957, and said truck was brought to the plaintiff's compound in Iloilo City, for
safe keeping.
Issue: WON the remedy chosen by appellee is the foreclosure of the truck or a specific
performance of the defendants obligation.
Ruling: Manifestly, the appellee had chosen the first remedy (specific performance). The
complaint is an ordinary civil action for recovery of the remaining unpaid balance due on the
promissory note. The plaintiff had not adopted the procedure or methods outlined by Sec.
14 of the Chattel Mortgage Law but those prescribed for ordinary civil actions, under the
Rules of Court.
Had appellee elected the foreclosure, it would not have instituted this case in court; it would
not have caused the chattel to be attached under Rule 59, and had it sold at public auction,
in the manner prescribed by Rule 39. That the herein appellee did not intend to foreclose the
mortgage truck, is further evinced by the fact that it had also attached the house and lot of
the appellant at San Jose, Antique.

As the plaintiff has chosen to exact the fulfillment of the defendant's obligation, the former
may enforce execution of the judgment rendered in its favor on the personal and real
property of the latter not exempt from execution sufficient to satisfy the judgment. That
part of the judgment against the properties of the defendant except the mortgaged truck
and discharging the writ of attachment on his other properties is erroneous.
We perceive nothing unlawful or irregular in appellee's act of attaching the mortgaged truck
itself. Since herein appellee has chosen to exact the fulfillment of the appellant's obligation,
it may enforce execution of the judgment that may be favorably rendered hereon, on all
personal and real properties of the latter not exempt from execution sufficient to satisfy
such judgment. It should be noted that a house and lot at San Jose, Antique were also
attached. No one can successfully contest that the attachment was merely an incident to an
ordinary civil action. (Sections 1 & 11, Rule 59; Sec. 16, Rule 39).
The mortgage creditor may recover judgment on the mortgage debt and cause an execution
on the mortgaged property and may cause an attachment to be issued and levied on such
property, upon beginning his civil action
Pascual & Leonila Torres vs. Universal Motors
Facts: Spouses Torres executed a real estate mortgage on two parcel of land to secure the
payment of the indebtedness of PDP Transit, Inc. for the purchase of five (5) Mercedes Benz
trucks from Universal Motors Corp.
Separate deeds of chattel mortgages on the Mercedez Benz units were also executed by
PDP Transit in favor of UMC
PDP Transit Inc. was able to pay a sum of P92,964.91, leaving balance of P68,641.69
including interest due as of February 8, 1965
On March 19, 1965, Universal Motors Corporation filed a complaint against PDP Transit, and
it was able to repossess all the units sold, including the five (5) units guaranteed by the
subject real estate mortgage, and to foreclose all the chattel mortgages constituted
thereon, resulting in the sale of the trucks at public auction.
Spouses Lorenzo Pascual and Leonila Torres filed an action in the CFI Quezon City for the
cancellation of the mortgage. A judgment was rendered in their favor.
UMC contends (on appeal) that what Article 1484 withholds from the vendor is the right to
recover any deficiency from the purchaser after the foreclosure of the chattel mortgage and
not a recourse to the additional security put up by a third party to guarantee the purchaser's
performance of his obligation
Issue: WON UMC correct in its contentions?
Ruling: NO. if the guarantor should be compelled to pay the balance of the purchase price,
the guarantor will in turn be entitled to recover what she has paid from the debtor vendee

(Art. 2066, Civil Code); so that ultimately, it will be the vendee who will be made to bear the
payment of the balance of the price, despite the earlier foreclosure of the chattel mortgage
given by him.
Thus, the protection given by Article 1484 would be indirectly subverted, and public policy
Filinvest Credit vs. CA
Facts: Spouses Tan sells gravel produced from crushed rocks used for construction
purposes. Wanting to increase production, they asked Mr. Ruben Mercurio to look for a
more efficient rock crusher and were referred to Rizal Consolidated Corporation which then
had for sale one such machinery.
After inspection of said machinery, couple decided to buy the same and applied for financial
assistance from Filinvest Credit Corporation on the conditions that:
that the machinery be purchased in the petitioner's name;
that it be leased (with option to purchase upon the termination of the lease period) to the
private respondents; and
that the private respondents execute a real estate mortgage in favor of the petitioner as
security for the amount advanced by the latter.
A contract of lease of machinery (with option to purchase) was entered into by the parties
stipulating that at the end of the two-year period, the machine would be owned by the
spouses. The latter executed a real estate mortgage over two parcels of land issued in favor
Filinvest and issues check for P150,550.00, as initial rental (or guaranty deposit), and twentyfour (24) postdated checks corresponding to the 24 monthly rentals.
Three months after the delivery of the machinery, the couple claiming that they had only
tested the machine that month, sent a letter-complaint to the Filinvest, alleging that
contrary to the 20 to 40 tons per hour capacity of the machine as stated in the lease
contract, the machine could only process 5 tons of rocks and stones per hour and refused to
As a consequence of the non-payment of the rentals on the rock crusher as they fell due
despite the repeated written demands, Filinvest extrajudicially foreclosed the real estate
To thwart the impending auction of their properties, Spouses Jose Sy Bang and Iluminada
Tan filed before the RTC (QC) a complaint against Filinvest, asked for the rescission of the
contract of lease, annullment of the real estate mortgage. A judgment was rendered in their

On appeal, the petitioner (Filinvest) reasserts that the cause of action should be directed
against Rizal Consolidated Corporation, the original owner-seller of the subject rock crusher,
or Gemini Motors Sales which served as a conduit facilitator of the purchase of the said
The petitioner argues that it is a financing institution engaged in quasi-banking activities,
primarily the lending of money to entrepreneurs such as the private respondents and the
general public, but certainly not the leasing or selling of heavy machineries like the subject
rock crusher. The petitioner denies being the seller of the rock crusher and only admits
having financed its acquisition by the private respondents. Further, the petitioner absolves
itself of any liability arising out of the lease contract it signed with the private respondents
due to the waiver of warranty made by the latter.
Issue: WON Filinvest is immuned from liability arising from the defect of the machinery?
Ruling: YES. The spouses has independently inspected and verified the leased property and
has selected and received the same from the Dealer of his own choosing in good order and
excellent running and operating condition and on the basis of such verification, etc. the
LESSEE has agreed to enter into this Contract.
One of the stipulations in the contract they entered into with the petitioner is an express
waiver of warranties in favor of the latter. By so signing the agreement, the private
respondents absolved the petitioner from any liability arising from any defect or deficiency
of the machinery they bought.
Layug v IAC: Mojica
DOCTRINE: Even in residential properties, RA 6552 recognizes and reaffirms the vendors
right to cancel the contract to sell upon breach and non-payment of the stipulated
instalments. The one who fails to pay the rest of the instalments as agreed upon is left only
to a right to a refund of the cash surrender value of the payments on the property
equivalent to 50% of the total payments already made.
1) Gabuya brought a suit against Layug for annulment of the contract and for recovery of
damages because Layug failed to pay the rest of the instalments for the purchase of 12 lots
in Iligan City (agreed to cost P120,000 payable in three yearly instalments). Layug only paid
the first 2 installments (P80,000) and failed to pay the last instalment of P40,000.
2) The TC ruled in favour of Gabuya. This was affirmed by the CA.
3) Layug is relying on the stipulation in the contract a) granting him, as vendee, a 30days
grace period within which to pay any yearly instalment not paid within the time fixed
therefor, and b) declaring him liable, in the event of his failure to pay within the grace
period, for interest at the legal rate. He argues that the stipulation indicates that
rescission was not envisioned as a remedy against a failure to pay instalments and that such

failure was not a ground for abrogating the contract but merely generated liability for
interest at legal rate
Whether or not Gabuya had the right to rescind the contract and should this happen,
whether Layug should be entitled to get back the ENTIRE amount he already paid?
Yes Gabuya could rescind the contract. No, Layug should not be entitled to the entire
amount he already paid.
The SC: The grace period clause should be read conjointly with the stipulation on rescission,
and in such a manner as to give full effect. The patent and logical import of both provisions,
taken together, is that when the vendee fails to pay any instalment on its due date, he
becomes entitled to a grace period of 30 days to cure default by paying the amount of the
instalment plus interest, but that if he should still fail to pay within the grace period, then
rescission of the contract takes place.
Layug cannot be permitted to claim that all his payments should be credited to him in their
entirety without regard whatever to the damages his default might have caused to Gabuya.
R.A. 6552 governs sales of real estate on installments. It recognizes the vendor's right to
cancel such contracts upon failure of the vendee to comply with the terms of the sale, but
imposes, chiefly for the latter's protection, certain conditions thereon. We have had
occasion to rule that "even in residential properties the Act" recognizes and reaffirms the
vendor's right to cancel the contract to sell upon breach and nonpayment of the stipulated
installments. ..."
The law provides inter alia that "in all transactions or contracts involving the sale or
financing of real estate on installment payments, including residential condominium
apartments, ..., 15 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
[Grace Period]
(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 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;
[Refund of "Cash Surrender Value"]
(b) If the contract is cancelled, the seller shall refund to the buyer the cash
surrender value of the payments on the property equivalent to fifty percent 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.
In the case at bar, Layug had paid two (2) annual installments of P40,000.00 each. He is
deemed therefore, in the words of the law, to have "paid at least two years of installments."
He therefore had a grace period of "one month .. for every year of installment payments
made," or two (2) months (corresponding to the two years of installments paid) within
which to pay the final installment. He has thus been left only with the right to a refund of the
"cash surrender value of the payments on the property equivalent to fifty percent of the
total payments made," or P40,000.00 (i.e., of the total payments of P80,000.00). Such
refund will be the operative act to make effective the cancellation of the contract by
Gabuya, conformably with the terms of the law.
Ridad vs. Filipinas Investment [G.R. No. L-39806. January 27, 1983.]
Facts: On 14 April 1964, Luis and Lourdes Ridad purchased from the Supreme Sales and
Development Corporation 2 brand new Ford Consul Sedans complete with accessories, for
P26,887 payable in 24 monthly installments. To secure payment thereof, the Ridads
executed on the same date a promissory note covering the purchase price and a deed of
chattel mortgage not only on the 2 vehicles purchased but also on another car (Chevrolet)
and their franchise or certificate of public convenience granted by the defunct Public Service
Commission for the operation of a taxi fleet. Then, with the conformity of the Ridads, the
vendor assigned its rights, title and interest to the promissory note and chattel mortgage to
Filipinas Investment and Finance Corporation. Due to the failure of the Ridads to pay their
monthly installments as per promissory note, the corporation foreclosed the chattel
mortgage extrajudicially, and at the public auction sale of the 2 Ford Consul cars, of which
the Ridads were not notified, the corporation was the highest bidder and purchaser.
Another auction sale was held on 16 November 1965, involving the remaining properties
subject of the deed of chattel mortgage since the Ridads obligation was not fully satisfied
by the sale of the aforesaid vehicles, and at the public auction sale, the franchise of the
Ridads to operate 5 units of taxicab service was sold for P8,000 to the highest bidder, the
corporation, which subsequently sold and conveyed the same to Jose D. Sebastian, who
then filed with the Public Service Commission an application for approval of said sale in his
On 21 February 1966, plaintiffs filed an action for annulment of contract before the CFI Rizal
(Branch I, Civil Case 9140) with Filipinas Investment and Finance Corporation, Jose D.
Sebastian and Sheriff Jose San Agustin, as party-defendants. By agreement of the parties,
the case was submitted for decision in the lower court on the basis of the documentary
evidence adduced by the parties during the pre-trial conference.
Thereafter, the lower court rendered judgment declaring the chattel mortgage null and void
insofar as the taxicab franchise and the used Chevrolet car of the plaintiffs are concerned,
that the public auction conducted concerning said franchise to be of no legal effect, that the
certificate of sale issued by the sheriff concerning the franchise is cancelled and set aside,
and that the assignment made by Filipinas Investment in favor of Sebastian was declared
void and of no legal effect. Appeal was filed with the Court of Appeals but was

subsequently certified to the Supreme Court pursuant to Section 3 of Rule 50 of the Rules of
Court, there being no issue of fact involved in the appeal. The Supreme Court affirmed the
judgment appealed from, with costs against Filipinas Investment, et. al.
1. Article 1484 of the Civil Code
Article 1484 of the Civil Code provides that In a contract of sale of personal property the
price of which is payable in installments, the vendor may exercise any of the following
remedies: (1) Exact fulfilment of the obligation, should the vendee fail to pay; (2) Cancel the
sale, should the vendees failure to pay cover two or more installments; (3) Foreclose the
chattel mortgage on the thing sold, if one has been constituted, should the vendees failure
to pay cover two or more installments. In this case, he shall have no further action against
the purchaser to recover any unpaid balance of the price. Any agreement to the contrary
shall be void.
2. Remedies of vendor alternative, not cumulative; If vendor elects tight to foreclose
mortgage, law prohibits him from bringing further action to recover balance of debt Under
Article 1484 of the Civil Code, the vendor of personal property the purchase price of which is
payable in installments, has the right, should the vendee default in the payment of two or
more of the agreed installments, to exact fulfillment by the purchaser of the obligation, or
to cancel the sale, or to foreclose the mortgage on the purchased personal property, if one
was constituted. Whichever right the vendor elects, he cannot avail of the other, these
remedies being alternative, not cumulative. Furthermore, if the vendor avails himself of the
right to foreclose his mortgage, the law prohibits him from further bringing an action
against the vendee for the purpose of recovering whatever balance of the debt secured not
satisfied by the foreclosure sale. The precise purpose of the law is to prevent mortgagees
from seizing the mortgaged property, buying it at foreclosure sale for a low price and then
bringing suit against the mortgagor for a deficiency judgment, otherwise, the mortgagorbuyer would find himself without the property and still owing practically the full amount of
his original indebtedness.
3. FIFC barred from further action as to payment of unpaid balance
FIFC elected to foreclose its mortgage upon default by the plaintiffs in the payment of the
agreed installments. Having chosen to foreclose the chattel mortgage, and bought the
purchased vehicles at the public auction as the highest bidder, it submitted itself to the
consequences of the law as specifically mentioned, by which it is deemed to have renounced
any and all rights which it might otherwise have under the promissory note and the chattel
mortgage as well as the payment of the unpaid balance.
4. Vendors right to foreclose chattel mortgage only of the thing sold; not other mortgages;
Levy Hermanos case applies The chattel mortgage in question is a nullity insofar as the
taxicab franchise and the used Chevrolet car of the Ridads are concerned, under the
authority of the ruling in the case of Levy Hermanos, Inc. vs. Pacific Commercial Co., et al., 71
Phil. 587, the facts of which are similar to those in the present case. There, the same
situation occurred wherein the vendees offered as security for the payment of the purchase
price not only the motor vehicles which were bought on installment, but also a residential
lot and a house of strong materials. This Court sustained the pronouncement made by the
lower court on the nullity of the mortgage in so far as it included the house and lot of the

vendees, holding that under the law, should the vendor choose to foreclose the mortgage,
he has to content himself with the proceeds of the sale at the public auction of the chattels
which were sold on installment and mortgaged to him, and having chosen the remedy of
foreclosure, he cannot nor should he be allowed to insist on the sale of the house and lot of
the vendees, for to do so would be equivalent to obtaining a writ of execution against them
concerning other properties which are separate and distinct from those which were sold on
installment. This would indeed be contrary to public policy and the very spirit and purpose of
the law, limiting the vendors right to foreclose the chattel mortgage only on the thing sold.
5. Cruz vs. FIFC; Additional mortgaged cancelled as it indirectly subverts protection given by
Article 1484 In the case of Cruz v. Filipinas Investment & Finance Corporation, 23 SCRA 791,
the Court ruled that the vendor of personal property sold on the installment basis is
precluded, after foreclosing the chattel mortgage on the thing sold, from having a recourse
against the additional security put up by a third party to guarantee the purchasers
performance of his obligation on the theory that to sustain the same would overlook the
fact that if the guarantor should be compelled to pay the balance of the purchase price, said
guarantor will in turn be entitled to recover what he has paid from the debtor-vendee, and
ultimately it will be the latter who will be made to bear the payment of the balance of the
price, despite the earlier foreclosure of the chattel mortgage given by him, thereby indirectly
subverting the protection given the latter. Consequently, the additional mortgage was
ordered cancelled.
6. Ruling in Cruz vs. FIFC reiterated in Pascual vs. United Motors; Vendor precluded from
further extrajudicial foreclose of additional security The ruling in Cruz vs. FIFC was reiterated
in the case of Pascual v. Universal Motors Corporation, 61 SCRA 121. If the vendor under such
circumstance is prohibited from having a recourse against the additional security for reasons
therein stated, there is no ground why such vendor should not likewise be precluded from
further extrajudicially foreclosing the additional security put up by the vendees themselves,
it being tantamount to a further action that would violate Article 1484 of the Civil Code, for
there is actually no difference between an additional security put up by the vendee himself
and such security put up by a third party insofar as how the burden would ultimately fall on
the vendee himself is concerned.
7. Southern Motors vs. Moscoso does not apply as remedy availed of if that case is the
fulfilment of the obligation and not the foreclosure of the chattel mortgage The ruling in
Southern Motors, Inc. v. Moscoso, 2 SCRA 168 that in sales on installments, where the
action instituted is for specific performance and the mortgaged property is subsequently
attached and sold, the sale thereof does not amount to a foreclosure of the mortgage,
hence, the seller-creditor is entitled to a deficiency judgment does not fortify the stand of
the appellants for that case is entirely different from the present case. In that case, the
vendor has availed of the first remedy provided by Article 1484 of the Civil Code, i.e., to exact
fulfillment of the obligation; whereas in the present case, the remedy availed of was
foreclosure of the chattel mortgage.
8. Issue on the validity of auction sale superfluous The disposition of the Court renders
superfluous a determination of the other issue raised by the parties as to the validity of the
auction sale, insofar as the Ridads franchise is concerned, which sale had been admittedly

held without any notice to them.