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Example Sale of Hope: Sale of a lotto ticket, PCSO

CIVIL LAW REVIEW II will have the obligation to pay you only if you got all
the 4 or 6 numbers which are drawn
Sales, Lease, Agency, Partnership, Trust and Credit
Another Example Transactions
of Aleatory: Insurance
Atty. Crisostomo Uribe
6. Nominate (1458)

Classification of Contract of Sale


SALES 1. As to Nature of Subject Matter
a. Movable
b. Immovable
Articles / Laws to Remember: 1458, 1467, 1477
transfer of ownership, 1505, 559 who can transfer Q: Why there is a need to determine?
xxx, 1504, 1544, 1484 Recto Law, R.A. 6552, A: Because some concepts will apply if the object
1602, 1606, 1620, 1623, Redemption xxx is movable or some laws will apply if the object is
immovable.
Q: A obliged himself to deliver a certain thing
to B. Upon delivery, B would pay a sum of Examples: Under the Statute of Frauds, you have
money to A. Is that a contract of sale? to determine if the object if movable or immovable
A: Not necessarily. Even if there is an obligation to in order that statute of frauds will apply. The Recto
deliver, if there is no obligation to transfer law will apply if the object is movable. The Maceda
ownership, it will not be a contract of sale. It may law will apply if the object is realty. Article 1544 or
be a contact of lease. Double Sale will require you to determine the
nature of the subject matter.
Memorize: Art. 1458
2. As to Nature
Note: Sale is a contract, so the general principles a. Thing
in oblicon are applicable to sale but note that there b. Right
are provisions which are contrary.
Q: Why there is a need to determine?
Characteristics of Contract of Sale (COS) A: Relevant in the mode of delivery
1. Consensual (1475) – COS is consensual, it is
perfected by mere meeting of the minds of the
parties as to the object and price.
Note: There is 1 special law which requires a Distinctions
particular form for the validity of a contract of sale – 1. Deed of Absolute Sale (DAS) vs. Conditional
in that sale, it can be said that kind of sale is a Sale (CS) vs. Contract to Sell (CTS)
formal contract → Cattle Registration Decree. In a 2. Dation in Payment (DIP) vs. COS
sale of large cattle, the law provides that the 3. Contract for a Piece of Work (CPW) vs. COS
contract of sale of large cattle must be: in a public 4. Barter vs. COS
instrument, registered and a certificate of title 5. Agency to Sell (ATS) vs. COS
should be obtained in order for the sale to be valid.
But otherwise, the other contracts are perfected by Deed of Absolute Sale (DAS) vs. Conditional
mere consent or mere meeting of the minds. Sale (CS) vs. Contract to Sell (CTS)
DAS – seller does not reserve his title over the
2. Principal – sale is a principal contract, it can thing sold and thus, upon delivery of the thing,
stand on its own. It does not depend on other ownership passes regardless of whether or not the
contracts for its existence and validity. buyer has paid.

3. Bilateral (1458) – necessarily in a COS, both CS - condition/s are imposed by the seller before
parties will be obligated. It is not possible that only ownership will pass. Normally, the condition is the
1 party is obligated because a contract of sale is full payment of the price. In CS, ownership
essentially onerous. automatically passes to the buyer from the moment
the condition happens. There is no need for
4. Onerous (1350) – COS is essentially onerous. another contract to be entered into.
Otherwise, it may be another contract or any other
act like it may be a donation if there is no BE: Receipt was issued by A to B. The receipt’s
compensation for the transfer of ownership to the tenor “Date of the receipt xxx Received from B
other party. the sum of P75,000.00 as partial payment for
the car xxx the balance to be paid at the end of
5. Commutative (2010) – meaning there is the month xxx”. Contract to Sell?
equivalency in the value of the prestation to be SA: No. It does not pertain to a CTS because in a
performed by both parties. Normally, the thing sold CTS ownership is reserved by the seller despite
would be equal to the price paid by the other party delivery to the buyer. The buyer does not acquire
(buyer). ownership. This is an Absolute Sale.

Exception: a contract of sale which is an aleatory Q: In a CTS, upon the happening of the
contract like sale of hope. In sale of hope, the condition/s imposed by the seller, would
obligation of 1 party will arise upon the happening ownership automatically pass to buyer?
of a certain event or condition. A: No. While a CTS is considered a special kind of
conditional sale, it is a peculiar kind of sale

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because despite the happening of the condition
and actual delivery, the buyer does not Barter vs. COS
automatically acquire ownership. In CTS, if Q: A obliged himself to deliver a determinate
condition/s happen, the right of the buyer is to car with a market value of P250,000.00. B
compel the seller to execute a final deed of sale. obliged himself to deliver his watch and
So ownership does not automatically pass. P150,000.00 in cash. What kind of contract?
A: First, you have to consider the intention of the
Dation in Payment (DIP) vs. COS parties. They may want this transaction to be
DIP (1245) – whereby property is alienated to the considered as a sale or barter and that will prevail.
creditor. It is provided that the law on sales shall But if the intention of the parties is not clear from
govern such transaction. It is specifically provided their agreement then the nature of the contract will
that the pre-existing obligation must be in money. If depend on the value of the watch. If the value of
not in money and there is DIP, it will not be the watch is greater than P150,000 then this is
governed by the law on sales but by the law on barter. If the value of the watch is equal or less
novation because practically there is a change in than P150,000 then this is sale. The value of the
the object of the contract. car is irrelevant. What is only relevant is the value
of the thing (watch) in relation to the cash to be
Example 1: If A owes B P100,000.00 instead of given by one of the parties.
paying P100,000, he offers B and B accepts the
car of A as an equivalent performance → this is Agency to Sell (ATS) vs. COS
DIP and will be governed by the law on sales. BE: A gave B the exclusive right to sell his
maong pants (he has his own brand of maong
Example 2: If the pre-existing obligation is to pants) in Isabela. It was stipulated in the
deliver a specific horse but instead of delivering the contract that B has to pay the price of maong
horse, the debtor told his creditor and the creditor within 30 days from delivery to B. It was
accepted, that he will instead deliver his car → it is stipulated that B will receive 20% commission
still DIP but it will not fall on 1245 but on novation (discount) on sale. The maong pants were
because there is a change in the object of the delivered to B. However, before B could sell the
obligation which would extinguish the obligation. goods, the store was burned without fault of
anyone. Can B be compelled to pay the price?
Note: A guide to distinguish one concept from From the wordings of the problem you may have
another is to know the nature, requisites and an idea that this is an agency to sell. If this is an
effects. ATS, the fact that the agent has not yet sold the
maong pants when they were burned will not result
1. As to Nature in a liability on his part, there being no negligence
DIP – a special form of payment on his part because with the delivery of the thing
COS - it is a contract from the principal to the agent, ownership does not
pass. Under the principle in the Civil Code – res
2. As to Requisites perit domino – it will be the seller (owner) who will
DIP – with a pre-existing obligation bear the loss. But if this transaction is sale then
COS – not a requirement with the delivery of the maong pants to B,
ownership passed to B because he did not reserve
3. As to Effect ownership over the pants despite the fact that the
DIP – to extinguish the obligation either wholly or other party has not paid the price. So when the
partially. pants were burned, it would now be B as the owner
COS – obligation will arise instead of being who will bear the loss.
extinguished.
SA: This is exactly the case of Quiroga vs.
Contract for a Piece of Work (CPW) vs. COS Parsons. Article 1466 – in construing a contract
BE: A team if basketball players went to a store containing provisions characteristics of both a COS
to buy shoes and out of the 10 members, 5 of and ATS, you have to go into the essential clauses
them were able to choose the shoes. They of the whole instrument. In this problem, one of the
agreed to pay the price upon delivery. The clauses “B has to pay the price within 30 days”.
other 4 members were able to choose but the That would make the contract COS and not ATS
shoes were not available at that time but they because in 30 days from delivery, whether or not B
are normally manufactured. The last member has already sold those pants to other persons, he
could not find shoes that could fit his 16 inches is already obliged to pay a price. That is not an
feet and therefore he has to order for such kind ATS. Being a COS, therefore, after having been
of shoes. What transactions were entered into delivered, ownership passed to the buyer and
by these players? hence under res perit domino rule, the buyer bears
SA: 1467 → the first 2 transactions involving a total the loss and therefore he can be compelled to pay
of 9 players would be considered a COS because the price.
the shoes which they ordered are being
manufactured or procured in the ordinary course of Essential Elements of a Contract of Sale
business for the general market. However, the last 1. Consent of the Contracting Parties
transaction which will be manufactured only 2. Object or Subject Matter – which is a
because of the special order of the player and is determinate thing or right
not ordinarily manufactured for the general market Note: Service cannot be the subject matter of sale.
will be considered a CPW which is known as the 3. Cause or Consideration – as far as seller is
Massachusetts rule. concerned, it is the price in money or the
Massachusetts rule – rule in determining whether equivalent of the payment of the price.
the contract is a COS or a CPW.

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CONSENT OF THE CONTRACTING PARTIES 1. Juridical Capacity – it is the fitness to be the
A. No consent of one or both of the parties subject of legal relations. If a party to a sale has no
→ the contract is void. Under the law on sales, it is juridical capacity, the contract is void. Note that all
a fictitious contract where the signature of one of natural living persons have juridical capacity. Even
the parties was forged. Normally, the seller’s if he is a 1 day old baby, he has juridical capacity.
signature is forged. If the signature of the seller is The baby can be the subject of donation. Even if
forged, that would be a fictitious contract. The he is conceived, he has provisional personality.
alleged seller will not have participation in the
execution of the contract. But another kind of Example: One example of a party to a sale without
contract recognized in the Civil Code is a simulated juridical capacity would be a corporation not
contract. registered with the SEC. The contract entered by
this corporation is a void contract because one of
Simulated – parties to this contract actually would the parties has no juridical capacity to enter into
have participation. They would voluntarily sign in that contract.
the deed of sale. However, they do not intend to be
bound at all or they may intend to be bound to 2. Capacity to Act – it is the power to do acts with
another contract but they executed a deed of sale. legal effects. If the incapacity only pertains to
Thus, the law would ratify these contracts capacity to act, the contract would normally be
considering there is a simulated sale. voidable. Without capacity to act or there are
restrictions with one’s capacity to act such as
Kinds of Simulated Contracts minority, insanity, deaf mute and does not know
1. Absolutely Simulated – they do not intend to be how to write and civil interdiction.
bound at all.
Q: Why would they enter into this kind of sale? Note: Under R.A. 6809 (December 1989) there is
A: (a) To defraud creditors. The debtor would sell no more creature known as “unemancipated
his remaining assets to make it appear that he has minor”. Before 1989, the age of majority was 21.
no more assets which may be reached by his
creditors. C. If both parties are incapacitated
(b) Applicants for residency abroad would → not only voidable but unenforceable.
normally be required to present certificate of title Q: What if one of the parties in a COS is a
over parcels of land so that the applicant will minor and the minor actively misrepresented as
appear to have assets. Therefore, hindi mag TNT to his age?
yung applicant. These applicants would normally A: The SC said that the minor will be bound to such
ask his brother or sister or friends na kunwari that contract under the principle of estoppel. Active
land would be sold to them. They will have the misrepresentation, can be seen from the deed
property registered in their name. They will present itself. In a deed of sale, normally after the name,
the title to the Embassy. But actually the parties do the words “of age” were stated. If the minor signed
not intend to be bound. Take note that this may be that contract, he will be bound. If no statement in
a root of a valid title as far as 3rd persons are the deed of sale as to his age, in one case, the fact
concerned. These 3rd persons who relied on the he misrepresented to the notary public when he
transfer certificate of title in the name of the seller appeared before the notary public for the
even if that seller is not the owner because the sale notarization of the document and he was asked by
is simulated may acquire ownership. the notary public as to his age and he again
misrepresented, he will be bound to such contract.
2. Relatively Simulated – sale where they actually
intended another contract which normally would be Atty. Uribe’s Comment: Estoppel is not a good
a donation. ground because the minor is not aware.
Q: Why would they execute a deed of sale
instead of executing a deed of donation? Sale of Necessaries
A: (a) To minimize tax liabilities. Donor’s tax is In sale of necessaries such as food, clothing and
higher than capital gains tax or final income tax medicine to a minor, the minor has to pay a
and documentary stamp tax. reasonable price. This contract is not voidable. The
(b) To circumvent the provisions on legitimes sale of necessaries will bind the minor and he will
and collation under succession. This may be be compelled to pay not really the contract price
questioned if you can prove that there was no but only to reasonable price.
consideration.
Relative Incapacity (Articles 1490 and 1491)
B. If consent was given 1. Sale between spouses – it is void except:
→ If consent was given, it does not necessarily a. The spouses executed a marriage
mean that the COS is valid. The consent may be settlement and in the marriage settlement
given by an incapacitated person or one with they agreed for a complete separation of
capacity to give consent. If given by an property regime. Then they can sell to
incapacitated person, consider the nature of the each other.
incapacity. It may be: b. If no marriage settlement, they may have
a. Absolute Incapacity – the party cannot obtained judicial declaration of separation
give consent to any and all contracts. of property. After that, they can sell to
b. Relative Incapacity – the party is each other.
prohibited from entering sometimes with
specific persons and sometimes over 2. Those mentioned in Article 1491
specific things. a. A guardian cannot buy the property of the
ward. The guardian is not actually
Kind of Capacity prohibited from entering into any and all

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contracts. It is just that he cannot be the E. If the party gave such consent in the name of
buyer of a property of his ward. another without authority of that person or no
b. An agent cannot buy without the consent authority of law
of the principal a property which he was → unenforceable. Take note may be authorized by
supposed to sell or administer. the person or by law.
c. The executors and administrators of the Example of authorized by law: notary public has
estate cannot buy a property which is part the right to sell in pledge because he has the
of the estate. authority to sell under the law.
d. Public officers, judges, their staff, clerk of
court, stenographers and lawyers are OBJECT OR SUBJECT MATTER
prohibited from buying those properties The requisites in sale as to thing would almost be
which are the subject of litigation during the same as the requisites of contracts in general.
the pendency of the case. 1. The thing must be within the commerce of men
Examples: sale of a navigable river is void, sale of
Q: What is the status of the contracts under a cadaver is void but donation of a cadaver is
1491? allowed, sale of human organs is void, things which
A: Prof. Tolentino – voidable are not appropriated like air is void but if
Justice Vitug & Prof. Baviera – void appropriated it can be the object of a valid sale.
Prof. Pineda & Prof. de Leon – the first 3
are voidable and the last 3 are void. 2. The thing must be licit – not contrary to law
The better answer is void because these persons Examples: sale of prohibited drugs or shabu is
are prohibited from entering into these contracts. void, sale of marijuana is void, sale of wild flowers
Under Article 1409, if the contract is prohibited, it is or wild animals is void
void.
3. Must be determinate
Discussion of Prof. De Leon’s Answer Q: Sale of a car without agreement as to the
The first 3 are voidable because these contracts features for P1M. On the other hand, another
may be the subject of ratification. If you will read transaction would be a sale of Mitsubishi
his discussion, he based his discussion in the case Lancer, 2007, GSL and color black for P1M. Are
of Rubias vs. Batiller wherein the guardian bought these 2 transactions, valid sale?
the property of his ward. So the contract is voidable Both would pertain to generic thing. Under the law,
because if the ward becomes of age, he can enter a thing is considered determinate only when it is
a COS over the thing to his guardian and that sale particularly designated or physically segregated
would be a valid sale. (Pls. read the full text of Prof. from all others of the same class. Both transactions
De Leon’s comment) pertain to generic so both transactions are void?
Atty. Uribe: It is correct that it is a valid sale. But A: No. The first transaction is void. The second
does that mean that the sale ratified the 1st transaction is valid because Article 1460 requires
contract? I disagree because ratification under the that the requirement of the law that a thing should
Civil Code has the effect of cleansing the contract be determinate would be sufficiently complied with
from all its defects from the very beginning as if the if the thing which is the object of the sale is capable
contract was entered into during the first of being made determinate without a need of a
agreement that the agreement was valid from the new or further agreement.
very start. In fact, the SC said in Rubias vs.
Batiller “ratification” (quote and quote), because Example: Sale of 1 gallon Minola pure coconut oil.
the effect of the second contract will not retroact to Though generic, it is valid under Article 1460.
the first contract. It will only be valid from the time
the second contract was entered into. After all, RULES AS TO OBJECT OF COS
there is no ratification in that sense under the Civil Q: A obliged himself to deliver and transfer
Code. Thus, since it does not retroact to the first, ownership over the palay that will be harvested
the second contract is void. Otherwise, if voidable from a specific parcel of rice land in May 2008.
then it can be ratified. The defect on the first What if by May 2008, no palay was harvested?
contract would have been cleansed with the a. What is the status of the sale?
execution of the second contract. b. May the seller “A” be held liable for
damages for failure to comply with his
2. Aliens are prohibited from acquiring by purchase obligation?
private lands – Take note “acquiring” which means A:
buying not selling. They can sell. a. Always consider that in a COS there are only
Exceptions / when aliens can buy: 3 requisites. As long as these 3 were complied,
a. Former natural born Filipino citizen. Under there is a valid sale. In fact, by express provision of
the Constitution they are allowed to buy law, sale of things having potential existence
small land which they can use for (emptio rei sperati) is valid.
residential purpose. b. Not necessarily because there are excuses to
b. Another way of acquiring is by succession non-performance such as pestilence, typhoon,
but this is not a sale flood and therefore his failure to comply is an
excuse. But if the reason of the seller is because of
D. Even if consent was given by one with his negligence, he cannot find support under Art.
capacity to give consent but if the consent is 1174.
vitiated
→ voidable. FIVUM Sale of Hope (Emptio Spei)
Example: Sale of a lotto ticket

Page 4 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Q: Assuming the sale of a lotto ticket happened Exceptions:
the day after it was drawn, what is the status of 1. Intransmissible by Nature – Examples: right as
the sale? a legitimate child cannot be sold. Any contract
A: It will depend whether the ticket is a winning or where the personal qualifications has been
losing ticket. What the law provides is that the sale considered .
of a vain hope is a void sale. If the ticket is a 2. Intransmissible because of Stipulation –
winning ticket, it is not a vain hope hence, it is a Example: The parties stipulated in a lease contract
valid sale. that the right to sublease cannot be transferred if it
is prohibited by the lessor.
Q: Why would a person sell a winning ticket? 3. Intransmissible because of Law – Example: In
A: He may need the money immediately. Parang partnership, the right in specific partnership
discounted yung ticket. Nanalo ng P1M, ibebenta property without all the partners making the
nya ng P990,000 because he needs the money assignment cannot be validly assigned.
immediately.
Q: Sale of a right, also perfected by mere
Q: Sale of a land to B with a right to repurchase consent?
within 1 year which A delivered. On the 3rd A: Yes. To bind 3rd persons, it must be in a public
month, B sold the land to C. However, on the 9th instrument. Recorded in the Registry of Property.
month, A offered to repurchase the land.
(a) What is the status of the sale between A CAUSE OR PRICE CERTAIN IN MONEY OR ITS
and C? EQUIVALENT
(b) Who will have a better right over the land?
(Sale with a right to repurchase) Q: A deed of sale was entered into by A and B.
The price agreed upon was 1M yen.
A: (a) Be guided by the fact that a COS is a (a) May that be a valid sale?
consensual contract. The mere meeting of the (b) Can the seller compel the buyer
minds as to the object and the price, then there is a to pay in yen?
valid and perfected sale. Hence, this is a valid sale A: (a) Yes, it is valid. Basis is Article 1458
even if the object of the sale is a sale with a right to because the only requirement of the law is “in
repurchase. Article 1465 provides that things money”. Even Japanese yen is in money. The law
subject to a resolutory condition may be the object states that it may not even be in money, it may be
of a COS. “equivalent” like promissory notes whether or not
Atty. Uribe: Mas tamang sabihin – since the negotiable or letters of credit.
ownership thereof is subject to a resolutory (b) If the contract was entered into today,
condition. Hindi naman yung thing is the subject of yes it is valid because of R.A. 8183 which repealed
resolutory condition, it is the ownership over the R.A. 529 in 1996. If COS was entered before R.A.
thing. 8183, the seller cannot compel even though the
If A exercises the right to repurchase and such contract is valid. The payment has to be made in
would be a valid exercise of such right then the Philippine money.
ownership of B would be extinguished. The Consider the date of the sale. If parties failed to
exercise of the right is considered a resolutory stipulate as to which currency, it has to be in
condition as to the ownership of B. The fact that Philippine currency.
the object of the sale is subject to a repurchase will
not affect the validity of the sale. Q: Can there be a valid payment in P10,000 - P1
(b) As a rule, it would be A as a seller a retro coins?
because he has the right to repurchase assuming A: Yes.
his repurchase is valid. C may have a better right if
he can claim that he is an innocent purchaser for Q: Can you compel the seller to accept?
value. Example: maybe the right to repurchase was A: No. Under the Philippine law, P1 will have legal
not annotated at the back of the title of the land tender power only up to P1,000. He may accept
and he has no actual knowledge. If that is the but he cannot be compelled.
case, C may have a better right.
Note: P1, P5, P10 up to P1,000
SALE OF RIGHT / ASSIGNMENT OF RIGHT less than P1 up to P100
Assignment of right is not necessarily a sale. If
there is a valuable consideration for the Price Must be Certain
assignment, it is a sale. If there is no valuable Q: Sale of shares of stocks but there was no
consideration, it may be a donation or dacion en date as to the value of the share, valid?
pago. A: The value of the shares as to what date is
material because the value of the shares changes
Examples of right: credit, shares of stock almost everyday depending on the shares. Shares
of companies who are active in trading would
Requisite of a right → the only requirement is that change every now and then. In fact, even if the
the right must not be intransmissible date as to the value of the shares has been fixed
but the time was not considered, maybe the
Q: Why or when a right would not be opening or the closing in a particular exchange
transmissible? would affect the validity of the sale. For example, in
A: If it is intransmissible by nature or by stipulation the opening, the value of the share is P50 but in
or by provision of law. the closing it is P39. So again, it has to be certain.

G.R.: As a rule, rights and obligations arising from


contracts are transmissible.

Page 5 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
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Q: If you will fix the price by considering the TIME OF THE PERFECTION OF THE
tuition fee of a student per unit, would that be a CONTRACT
certain price?
A: No because different schools would have Auction Sale
different tuition fees and even in a certain school, Auction sale is perfected upon the fall of the
fees per college are different. hammer or any other customary manner. Thus,
before the fall of the hammer in an auction sale,
Q: Who can fix the price? the bidder even if he has already made a bid, he
A: (1) The best way is for the parties to agree as to can still withdraw the bid as long as he would do
the price. (2) They may agree that one of them will that before the fall of the hammer. Otherwise, (if
fix the price. after the fall of the hammer), there is already a
perfected sale.
Q: May the sale be perfected if the agreement
of the parties was for one of them to fix the Q: Can the auctioneer withdraw the goods
price? before the fall of the hammer?
A: Yes, it may be perfected only if the price fixed by A: As a rule, yes because the sale has not been
the party who was asked to fix the price was perfected at the moment unless the bidding or
accepted by the other party. If not accepted, there auction has been announced to be without reserve.
was no meeting of the minds.
Note: Before perfection, there is one contract
Note: The perfection will only be considered at the which maybe perfected. Before perfection meaning
time of the acceptance of the price fixed by the in the negotiation stage → this contract is known
other party not from the time of the first agreement as the option contract.
of the parties.
Option Contract
Q: What if a 3rd person was asked to fix the Sanchez vs. Rigos
price – A and B agreed that X will fix the price, Facts: Mrs. Rigos offered to sell her land to
may the sale be void? Sanchez for a certain price. Rigos gave Sanchez 2
A: Yes, the sale may be void if the third person years within which to decide. (Note: The optionee
does not want to fix the price or unable to fix the or promisee or offeree is not bound to purchase but
price. Hence, there was no meeting of the minds. he has the option to buy or purchase). In this case,
Sanchez has the option. Before the lapse of 2
Q: If the 3rd person fixed the price but it was too years, Sanchez told Rigos that he is buying and
high or too low or maybe there was fraud offered the price agreed upon but Rigos refused
committed by the 3rd person or he was in claiming that she was not bound by the written
connivance with one of the parties, may the option agreement because no option money
sale be void? (consideration) was given by Sanchez. According
A: No, because the remedy of the other party is to to Rigos, the option contract is void.
go to court for the court to fix the price.
Held: Since Sanchez accepted the offer and
Q: Sale of a car, the price of the car is P1, decided to buy within the period before the offer
valid? was withdrawn, a perfected COS was created even
A: Yes, it is valid. It can be a valid sale. Lesion or without option money. In this case, there was no
gross inadequacy of the price does not as a rule option contract because it was merely an option
invalidate a contract unless otherwise specified by agreement. Therefore, there was merely an offer
law. on the part of Rigos and once the offer was
Exception: when otherwise provided by law. accepted before it was withdrawn, regardless of
Example: Article 1381 – when the guardian sells whether option money was given and in this case
the property of the ward and there is lesion of more no option money was given, a perfected COS was
than 25% or more than ¼ of the value of the thing. created.
Take note that the buyer must not be the guardian
otherwise 1491 will apply → void. But if the Note: Iba pag may option money
guardian sold it to another person there being Q: 2 years within which to decide – assuming
lesion of more than ¼ like when the value of the there was option money, before the offeree
property is P100,000 was sold for P65,000, the could decide to buy, the offeror withdraw on
contract is rescissible. the 6th month.
(a) Can the offeree on the 10th month
Note: Under the law on sales, if there is gross say “I would like to buy”?
inadequacy, it may reflect vitiation of consent so (b) Can the buyer compel the seller to
the SC would normally enjoin the lower courts to sell?
be warned of the possibility of fraud in case of A: (a) No.
lesion. Lesion must be proven as a fact. It is not (b) No, an action for specific performance will
presumed. not prosper because when he said he will but there
If there is gross inadequacy, it maybe because was not more offer to be considered. Na-withdraw
actually they intended another contract and that na eh.
would make the sale a simulated sale and
therefore the sale is void. Q: If the offeree files an action for damages,
Example: The value of the property is P1M but only may that action prosper there being option
P10,000 was written in the contract because they money given?
intended it to be a donation → void. A: Yes, because with the option money, an option
contract is perfected, the offeror is bound to give
the offeree, 2 years within which to decide and

Page 6 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
failure to that he is liable not based on perfected presently, it has to be in writing to be enforceable.
COS but on perfected contract of option. The price is still irrelevant.

Option Money (OM) vs. Earnest Money (EM) If the object of the sale is movable, you have to
OM is not part of the price while EM is part of the consider not the value of the thing but the price
price and at the same time, it is a proof of the agreed upon. The value may be different from the
perfection of the contract. price. You can sell a thing worth P1,000 for P400
but the law provides for the price. If the price is at
Q: Can the parties themselves agree that there least P500 and the sale is not in writing, it will be
would be a perfected COS and then the OM unenforceable.
would be treated as part of the price? Q: Sale of a watch P450, not in writing, may it
A: The SC said that this is binding between the be unenforceable?
parties. Though it is an OM, it can be considered A: It may be unenforceable if by the terms of such
as part of the price as long as it is stipulated. agreement, the obligation therein is not to be
Without stipulation, the OM cannot be considered performed within 1 year. If they agreed that the
as partial payment because it is a consideration for watch will be delivered 2 years after and the
the option and therefore not part of the price. payment will also be made upon delivery, it would
be unenforceable.
Q: With EM, does it mean that there is already a
perfected COS? Paredes vs. Espino
A: Not necessarily. Under the law, it is only a proof Facts: Paredes was a prospective buyer. Espino
of the perfection of the sale. In fact, there may not owns a land in Palawan. Paredes is from Northern
be a perfected sale even if there was EM given, Luzon. Their negotiation was thru letters and
being merely a part of the purchase price or total telegrams. Espino sent a letter to Paredes stating
contract price. The parties may not have actually that he and his wife agreed to sell the land to
agreed as to the total price, therefore, even if they Paredes, that the deed of sale will be executed
agreed that a certain amount is part of the price, upon the arrival of Paredes in Palawan. When
they have not agreed on the total price or if they Paredes arrived, Espino said he is no longer
agreed on the total price, they have not agreed on interested in selling. Paredes filed a case to
the object of the sale. So no perfected COS. EM compel Espino to sell the land. Espino contended
goes into only 1 of the essential elements, that is that the contract is unenforceable because it is not
not the only element in COS. That is only a proof of in writing. He contended that under the statute of
the perfection of the contract. Take note, a proof frauds it is unenforceable. His contention was
does not necessarily establish a fact, it may not be sustained by the trial court.
sufficient to establish a fact.
Held: This contract is no longer covered by the
Q: With a perfected COS, does it mean it is statute of frauds because there was a letter. Article
already enforceable? 1403 provides that a note or memorandum signed
A: Not necessarily. Note that upon perfection, the by the part charged would be sufficient to take that
parties may compel the other party to perform their contract out of the operation of the statute of
respective obligations. But the perfection is subject frauds. In this case, the defendant wrote a letter
to the formalities prescribed by law for that with his signature on it. The letter took that contract
contract. Therefore, even under 1475, the out of the operation of the statute of frauds and
perfection of the contract is subject to the therefore he may be compelled to execute the final
provisions of law on the formalities of COS like the deed of sale.
statute of frauds. There may be meeting of the
minds but if it is not in the form prescribed by law, it RIGHTS AND OBLIGATIONS OF THE VENDOR
may be unenforceable. In a deed of sale (DOS), there can be
hundreds of obligations of the vendor but those
G.R.: A COS may be in any form. Article 1483 obligations would be because of the stipulation.
provides that a COS may be in writing, partly in But there are only few obligations imposed by law.
writing xxx. This provision is exactly the same as The 3 most important:
Article 1356 in contracts which provides that 1. To transfer ownership
contracts may be obligatory in whatever form they 2. To deliver
may have been entered into provided all the 3. To warrant the thing
essential requisites are present. But then again There are other obligations:
even Article 1356 just like Article 1475 would 4. Obligation to take care of the thing sold
provide for exceptions. with the diligence of a good father of a
Exceptions: The law may require a particular form family prior to delivery.
for its validity. The Cattle Registration Decree is an 5. From the time of the perfection up to the
example - where the law itself provides for a time of delivery then there would be
particular form for the validity of the sale. But the obligation to pay for the expenses for the
law may require particular form for its enforceability execution and registration of the sale and
of the sale and that would be 1403 or the statute of obligation to pay the capital gains tax
frauds. Concretely, the sale of a parcel of land if would be on the seller as a rule.
not in writing is valid but unenforceable. It is not 6. Obligation to deliver the fruits which is
void. Note that the price of the land is irrelevant if related to the obligation to deliver the thing
immovable.
OBLIGATION TO DELIVER THE FRUITS
Example: Before, the sale of a land for P300 is BE: A sold a mango plantation to B but they
valid and enforceable even if not in writing. But stipulated that delivery will be after the signing
of the deed of sale. After the expiration of the 6-

Page 7 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
month period, B demanded for the delivery. The BE: May a person sell something which does
vendor was able to deliver 1 month after the not belong to him? Would the sale be valid?
date when he was supposed to deliver the Would the buyer acquire ownership over the
mango plantation. During this period, the thing sold, if seller does not own the thing?
vendor harvested mango fruits and sold them SA: Yes. Ownership over the thing sold is not an
to X. The vendor was able to deliver only after essential requisite for the sale to be valid. But if the
the other fruits were harvested and sold to Y. seller does not own the thing, he may have a
Can B recover the mango fruits from Y during problem on his obligation to transfer ownership.
the 6th month period? The problem would be whether or not the buyer
SA: Determine first whether B is entitled to the would acquire ownership over the thing sold if the
fruits because if he is not entitled, then he cannot person who sold the thing is not the owner.
recover the fruits. Is he entitled to the fruits after 6-
month period during the 1-month period prior to Q: Who can transfer ownership by way of
delivery? Yes, in fact, under 1537, the fruits of the sales?
thing sold from the time of perfection shall pertain A: Only those who have the right to sell.
to the buyer.
Q: Who would have the right to sell and
Q: Does it mean that the fruits from the time of therefore they can transfer ownership by way
perfection shall pertain to the buyer? of sale?
A: Hindi naman. 1537 should be considered in A: First, is the owner. Even if he is not the owner,
relation to 1164. Under 1164, the fruits shall pertain he may have the right to sell because:
to the creditor only from the time the obligation to (1) He was given the authority by the
deliver the thing arises. Thus, B is entitled to the owner. Example: Agent
fruits only from the time of the expiration of the 6- (2) He may be the owner but he may
month period. Di ba may agreement sila that the have the authority of the law to sell,
mango plantation will be delivered only after 6 known as “Statutory Power to Sell”
months? Upon the arrival of this period, the (Article 1505). Examples: Notary
obligation to deliver the thing arose, therefore, B, public in pledge, liquidators, guardians
consistent with 1164 and 1537 will have the right to and receivers.
the fruits. (3) Those who have the authority of the
court. Example: Sheriff. Note: it is as
Q: Can he recover the fruits from X? if they have the authority of law
A: No. Under 1164, 2nd paragraph, the buyer or the because not even the judge can
creditor will have no real right over the fruits after validly sell something if it is not
the delivery of the thing. consistent with the law.

Q: What is the remedy of the buyer? Q: May a buyer acquire ownership over the
A: The remedy is to go after the seller for selling thing sold if the seller has no right to sell?
these fruits na hindi naman sya entitled. The buyer A: The answer by way of exception is yes. But the
is already entitled although again he will have no general rule here is under 1505 – the buyer
real right over the fruits until the delivery of the acquires no better title than what the seller had. If
thing to him. the seller is neither the owner nor does he have the
authority to sell, the buyer acquires no better title
OBLIGATION TO TAKE CARE OF THE THING than what the seller had. If his right is only as a
G.R.: The thing sold should be determinate lessee that is the most that can be transferred to
because if generic (1460, 2nd paragraph) then there the buyer. If he has no title then no title can be
is nothing to be taken cared of. It will become transferred to the buyer.
determinate only upon delivery. Exceptions: (When the buyer can acquire a better
Exceptions: There are sales transactions wherein title than what the seller had. Even if the seller
the vendor would not have this obligation: does not have the right to sell, the buyer may
a. Constructive delivery - brevi manu – acquire ownership over the thing sold because the
There would be no obligation on the law so provides and not because the seller was
part of the seller to take care of the able to transfer ownership to the buyer.)
thing from the time of perfection 1. By Estoppel
because at the time of perfection, the 2. Estoppel by Deed
buyer was already in possession of 3. Estoppel by Record
the thing. Maybe he borrowed the 4. Sale by an Apparent Owner
thing. Example: he borrowed the car 5. Negotiable Document of Title
and he decided to buy it – the thing 6. Purchases from a Merchant’s Store xxx
was already in his possession. 1. By Estoppel – by the principle of estoppel, a
b. “Kaliwaan” ang bentahan → upon person is precluded from denying that another
perfection may delivery na then there person has authority to sell because of his acts.
is nothing to be taken cared of. Also known as “Estoppel in Pais” which is a kind of
equitable estoppel because of the acts /
OBLIGATION TO PAY EXPENSES / TAXES representation of the owner, he may not later on
These obligations may be the subject of deny the authority of the 3rd person.
stipulation. By agreement, it would be the buyer
who will pay xxx Normally, dito hindi natutuloy ang 2. Estoppel by Deed
sale dahil hindi magkasundo kung sino BE: A and B co-owners of land sold (sale is
magbabayad ng tax. verbal) to X their land. X subsequently sold the
land to Y. Would Y be considered to have
OBLIGATION TO TRANSFER OWNERSHIP acquired ownership over the land?

Page 8 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
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SA: Under 1434 which is considered as “Estoppel registered in his name. Few years after, he sold the
by Deed” (technical estoppel) – when the seller land to the Narcisos. Obviously, he does not have
who was not the ownerat the time of the sale, the right to sell the other half. The Narcisos
acquires ownership, automatically, ownership claimed that they are buyers in good faith from an
passes to the buyer by operation of law. However, apparent owner because the entire property was in
Article 1434 requires delivery to the buyer. And the name of Maximo.
under the facts, 1434 would not apply because: Q: Did the Narcisos acquire ownership?
a) There was no showing there was A: SC Said → no, because the law requires that
payment the sale must not only be a sale by an apparent
b) No showing that there was delivery of owner but the buyer must be a buyer in good faith.
the land to X. The buyers here were in bad faith because before
It cannot be said that by operation of law, Y they bought the land, they went to the house of
likewise acquired ownership by way of estoppel by Miguel and asked him whether he would allow
deed. Maximo to sell the entire land. SC said they are in
bad faith.
3. Estoppel by Record
Jurisprudence: Sale by nephew of the owner of BE: The owner of a parcel of land covered by
the land. Since the nephew could not deliver the an OCT mortgaged the land to a creditor. The
land, the buyer sued the nephew for estafa. For the owner delivered the OCT to the creditor. The
accused to be acquitted, he asked his uncle to mortgagee forged the signature of the owner in
testify that he actually had the authority to sell. a deed of sale. He was able to register the
When the uncle testified in court, the nephew is property in his name. He sold the land to a third
acquitted. After acquittal, the buyer demanded from person who had no knowledge of the
the uncle the delivery of the land. The uncle transaction. Did the mortgagee acquire
refused, claiming that “sa totoo land, I did not ownership?
authorized my nephew”. SA: No. A forged deed is a void instrument and
Q: Case was filed against the uncle, would that cannot convey a valid title to the buyer but under
action prosper? the law the forged deed may actually be the root of
A: SC said yes because he cannot be allowed now a valid title under the “Mirror Principle” – when the
to claim that his nephew was not authorize to sell buyer bought it from the mortgagee in whose name
after he testified in court that he gave such the property was registered and relied on the TCT,
authority. then if he bought the property in good faith, he will
This is estoppel by record which is considered a be considered the owner under Article 1505 in
technical estoppel. relation to P.D. 529. He bought the land relying on
the TCT and bought the land in good faith then he
4. Sale by an Apparent Owner would have a better right than the real owner.
A. Factor’s Act
B. Recording Laws Q: When a buyer may be considered a buyer in
C. Any other provision of law enabling the apparent good faith?
owner of the goods to dispose of them as if he was A: By the mere fact that he had no knowledge at
really the owner. the time of the execution of the deed does not
necessarily mean that he is in good faith. The law
A. Factor’s Act further requires that he must have fully paid without
Factor is an old name for agent. Even if knowledge of the defect in the title of the seller. So
agent has no right to sell, a third person may if after execution he is in good faith but before
acquire ownership because he may rely on the payment he is in bad faith then he is in bad faith.
power of attorney as written.
Example: Special Power of Attorney (SPA) – agent BE: A, the owner of a parcel of land entrusted
was authorized to sell a car. However, in a verbal to his clerk the TCT of the land for safekeeping.
instruction when the SPA was delivered, the This clerk instead forged the signature in the
principal authorized the agent to sell that car to 1 of DOS with him as the buyer. Thereafter, he was
the members of a certain organization but the able to have the property registered in his
agent did not sell that car to one of the members of name. Then he sold the land to a third person.
a certain organization. Did the clerk acquire title over the land? Can
Q: Would the buyer acquire ownership? the owner of the land have the property
A: Yes. Article 1900 provides that so far as 3rd registered in his name?
persons are concerned, they only have to rely on SA: The 3rd person being in good faith, he is
the SPA as written, even if agent has no authority considered to have acquired ownership over the
or right to sell. thing sold even if the seller had no right to sell. By
way of exception because the buyer bought it from
B. Recording Laws an apparent owner. An apparent owner who
*most common question in the bar exam disposed the thing as if it was owned by him.

Mapalo vs. Mapalo 5. Negotiable Document of Title


Facts: The elder brother, Miguel Mapalo, donated If goods are covered by a negotiable
half of his land to his younger brother, Maximo document of title and it was thereafter negotiated. If
Mapalo, because the latter will get married. But the buyer bought it in good faith and for value, he
instead of the younger brother asking his elder will be protected under the law. He will acquire
brother to sign a deed of donation over that land, ownership even if the seller did not have the right
he asked his elder brother and the latter’s spouse to sell.
to sign a Deed of Sale over the entire parcel of Example: The seller may have acquired title by
land. He was able to have the entire property violence. Binugbog nya yung owner ng goods.

Page 9 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Pero kung negotiable document of title yan and
properly negotiated, lalo na kung bearer document Q: How transfer of ownership is effected?
of title, then the buyer may acquire ownership even A: Under the law, as far as things are concerned, it
if the seller has no right to sell. is effected by delivery:
(a) Actual
6. Purchases from a Merchant’s Store / Markets (b) Constructive
/ Fairs There can be no transfer of ownership without
Sun Brothers vs. Velasco delivery.
Facts: Sun Brothers was the owner of a
refrigerator. Sun Brothers was engaged in the Q: Is it correct to say that every time there is
business of selling refrigerator. Sun Brothers sold a delivery, the buyer acquires ownership upon
ref to Lopez on installment basis. As stipulated, delivery?
Sun Brothers reserved ownership until full A: Not necessarily. This is not an absolute rule.
payment. Lopez only paid P300 out of P1,500. The There are kinds of sale where despite delivery the
balance to be paid on installment. Lopez then sold buyer does not acquire ownership upon delivery:
the ref to Velasco. (1) Conditional Sale – ownership is reserved by
the seller such that despite delivery,
Q: Would Velasco acquire ownership? ownership does not pass.
A: No because Article 1505 provides that the buyer
acquired no better title than what the seller had. Q: So when would the buyer acquire
However, Velasco was the owner of a store. On ownership in conditional sale?
the next day, Velasco sold the ref to Ko Kang Chu A: Not upon delivery but upon the happening of
who paid in full. When Sun Brothers learned this the condition which is normally the full payment
transaction, it filed an action to recover the ref from of the price.
Ko Kang Chu.
(2) Sun Brothers Case
Q: Can Sun Brothers recover the ref from Ko (3) Sale on Trial / Sale on Satisfaction / Sale on
Kang Chu by reimbursing the price? Approval – upon delivery, even if there is
A: SC Said no. Article 1505 provides that the actual delivery there is no transfer of
ownership of the buyer who bought the thing from ownership at the time of delivery.
a merchant’s store and he bought it in good faith is
absolute in character. Article 559 does not apply Q: When would the buyer acquire ownership?
because Sun Brothers was not unlawfully deprived A: From the moment he signifies his acceptance
of the ref and the ref was neither lost. 559 will or approval of the thing.
apply if the owner was unlawfully deprived
(Example: the thing was lost or stolen). Under 559 Q: What if he did not signify his acceptance
he can recover by reimbursing the buyer who or approval? May he be considered to have
bought the thing in good faith. He has to reimburse. accepted and therefore ownership may be
considered to have passed to him?
BE: The painting owned by F was stolen from A: Yes. 2 Scenarios:
her and later she noticed the painting in the (a) There may be a period agreed upon by the
room of B. When asked how he acquired the parties within which the buyer would have to
painting, B said he bought it from a gallery decide. Even if he failed to signify his
auction. Can the owner F recover the painting acceptance by the mere lapse of the period,
from B? he is deemed to have accepted (impliedly
SA: The first consideration here is the nature of the accepted) hence, ownership passes to him.
gallery auction. Is it a public sale or not? Some (b) Even before the lapse of the period, he may
suggested answers of the UP Law Center would be considered to have accepted if he did an
claim that a gallery auction is not a public sale. act wherein he would be considered to have
Atty. Uribe: I can agree that some gallery auctions adopted the transaction then ownership
are private – “by invitation”. Thus, in that auction I passed to him.
would definitely agree, hindi yan public sale. Example: Even if he has 10 days within
If it is not a public sale then the owner who was which to decide but on the 2nd day, he sold
unlawfully deprived can recover that property even the car to another. Obviously, he is deemed
without reimbursement. If the auction sale is to have accepted the thing because he did
considered a public sale, he can recover as long as an act which is inconsistent with the
he is willing to reimburse the buyer of the price ownership of the seller like he donated or
paid in that sale. Article 559 is applicable because destroyed the thing.
the owner was unlawfully deprived. (c) If there is no period agreed upon, the law
says if he did not signify his acceptance he
BE: F lost her diamond ring in a hold-up. Later will be considered to have accepted after the
on, this ring was an object of a public sale of lapse of a reasonable time. Reasonable time
one pawnshop. Can F recover the ring from the will depend on the circumstances of the
buyer in that public sale? sale, purpose of the sale, nature of the thing
SA: Yes, Article 559 provides that even if the buyer sold. Example: Perishable goods.
is in good faith so long as the owner is willing to
reimburse the buyer of the price paid in that sale. Sale or Return
Q: Ownership passes upon delivery?
Note: Again in 1505, there is no right to recover as A: Yes. However, the buyer is given the right to
long as the buyer bought it in good faith from a revest the title back to the seller normally within a
merchant’s store, there can be no recovery as a certain period. Example: Clauses in subscription
matter of right.

Page 10 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
magazine which says that you can return within 30 will bear the loss. Note that either buyer or seller
days without payment. may be at fault.

BE: A car was sold for P150,000. P75,000 paid Example 1: The buyer and the seller may have
upon the execution of DOS. The balance agreed that the goods are to be obtained by the
payable on a monthly basis. P75,000 was paid. buyer at the warehouse of the seller on a specific
The car was delivered to the buyer. However, date. On the date agreed upon, the seller
before he could pay the balance, the car was demanded the buyer to get the goods. Despite
destroyed due to a fortuitous event or was such, the buyer failed to get the goods. On the next
burned xxx Can he still be compelled to pay the day, the warehouse was destroyed due to
balance? fortuitous event.
SA: Yes. Upon the delivery of the car to the buyer, Q: Who is the owner at that time?
there being no retention of ownership by the seller. A: The seller but there was delay on the part of the
(Note: Wala sa facts na na-retain ng seller and buyer hence under 1504 it is the buyer who will
ownership). Therefore, ownership passed to the bear the loss.
buyer. Under the principle of res perit domino –
Article 1504 – the owner bears the loss and hence Example 2: The seller himself maybe the one at
it can be compelled to pay the price. fault. Thus, he is in delay in delivering the goods to
the buyer.
G.R.: Res perit domino – 1504. Q: Why would this be an exception to the res
Note: Determination of when ownership passed is perit domino rule?
important because if at the time of the loss, the A: Ang premise dito, the ownership has already
buyer is not yet the owner, as a rule, the buyer will passed to the buyer but the goods are still with the
not bear the loss like in sale on approval and he seller. Can this happen? Yes, because of
has 10 days within which to decide and the thing constructive delivery. If there was constructive
was lost through a fortuitous event within the 10- delivery, ownership passes to the buyer but
day period without fault on his part, the seller will physical possession is still with the seller. They
bear the loss. may have agreed this time that the seller will be the
Exceptions: one to deliver the goods to the buyer at a certain
1. Lawyers’ Cooperative vs. Tabora date. When the date arrived, despite demand from
Facts: This pertains to a sale of American the buyer, there was no delivery on the part of the
Jurisprudence to Atty. Tabora. It was a sale on seller. Even if the goods are destroyed the next
installment basis. Upon delivery or on the day the day due to fortuitous event, take note ang owner
books were delivered to the office of Atty. Tabora, ay ang buyer na but who will bear the loss? The
the entire block where Atty. Tabora’s office was seller because he was in delay in delivering the
located (in Naga City) was burned. The office goods.
including the books was burned. Atty. Tabora
refused to pay the balance. Lawyers’ Cooperative
filed a case. Two defenses were raised by Atty. DOUBLE SALE (ARTICLE 1544)
Tabora: (1) Res perit domino – there was a BE: F sold a registered parcel of land to R who
stipulation in the contract that Lawyers’ did not register the sale. Thereafter, F sold the
Cooperative will retain ownership over the books very same parcel of land to C who registered
until full payment. When the books were lost, no and obtained a new TCT in his name. Who
full payment so Atty. Tabora was not yet the owner. would have a better right?
Hence, Lawyers’ Cooperative should bear the loss. SA: Atty. Uribe: I fully agree with the UP Law
Q: Is this argument correct? Center’s answer. It depends on whether or not C
A: SC Said no. Although there was a stipulation registered the sale in good faith. Registration is
that Lawyers’ Cooperative retains ownership over only one of the requirements good faith is equally
the books until full payment, there was another an important requirement.
stipulation in the contract which states that the risk
of loss shall pertain to the buyer from the time the Note: In 1544 (double sale), as to which rule
books are delivered whatever may be the cause of applies will depend on the thing sold if movable or
the loss. immovable.
So with that stipulation, that is one of the
exceptions. Q: If the thing is sold twice, who would have
the better right?
2. Title was reserved by the seller only to A: If movable, the buyer who first took possession
secure the payment of the price by the buyer in good faith will have the better right. If
Q: But even assuming that there was such no immovable, the buyer, who first registered in good
stipulation under the contract, would Atty. faith, will have the better right. If there was no
Tabora have to bear the loss? registration, it will be the first who took possession
A: Yes because it would fall into the other in good faith. If no possession in good faith, the
exceptions under 1504 that when the title was buyer who has the oldest title in good faith.
reserved by the seller only to secure the payment Even the 1st buyer is required to be in good faith.
of the price by the buyer, then by law, risk of loss Obviously, the first buyer would have the oldest
will already be with the buyer. This title of the seller title. Yung good faith ditto obviously would not
is known as “Security Title” and therefore by law pertain to absence of knowledge of the 2nd sale
xxx the buyer will bear the loss. kasi syempre 1st buyer sya. He is nonetheless
required to have bought the thing in good faith.
3. Delay in the Delivery Good faith means that he had no knowledge of the
When there is delay in the delivery due to defect of the title of the seller.
the fault of one of the parties, whoever was at fault

Page 11 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Warning: Please be careful when you recite – you
register the sale not the land. Q: How would you know that the land is
registered under the Torrens System?
BE: If a thing is sold to 2 or more persons, what A: Pag may OCT or TCT na. Pero kung ibang
would be the effect of: documents lang like tax declaration, it is not
(a) The first buyer who registered the sale considered registered.
with knowledge of the 2nd sale.
(b) The second buyer who first registered the Q: But C registered the sale, does it mean that
sale with knowledge of the prior sale. it is registered under the Torrens System?
Who would have a better right? A: No because there are also systems of
SA: (a) In the first scenario – the first buyer who registration of sale of land in which the lands are
registered the sale with knowledge of the second still considered as unregistered lands. Sa ibang
sale would that make him a registrant in bad libro. Hindi libro under the Torrens System.
faith? No. Yung knowledge would pertain to the
knowledge of the prior sale in order for him to be a Q: If 1544 will not apply, who has the better
bad faith registrant. Eh una naman syang buyer eh right?
so even if he registered, it would not make him a A: B because there was delivery to him which was
bad faith registrant. actual delivery and hence under the general rules
(b) In the second scenario – the buyer there is on delivery, ownership passes to the buyer and
in bad faith. He has knowledge of the prior sale. when ownership have passed to the buyer, when
Hence, he has no right. the property was sold in an execution sale, ano
makukuha ng buyer sa execution sale? Wala.
Q: If a person bought a thing without He merely steps into the shoes of the judgment
knowledge of the prior sale, does that mean he debtor at the time of the sale then he did not
is a registrant in good faith? acquire ownership by virtue of that sale.
A: Not necessarily because from the sale he may
have acquired knowledge prior to the registration. OBLIGATION TO DELIVER THE OBJECT OF
What is required by law is not being a buyer in THE SALE
good faith but a registrant in good faith. Pwedeng Determine the subject matter if it is a thing
at the time of the sale xxx the buyer had no or a right because there are different modes of
knowledge na nagkabentahan na pala nung una delivery as to thing and as to right.
but after 2 months nung magpaparegister na, the
buyer had the knowledge of the prior sale and Things
therefore he will be a registrant in bad faith. Kinds of delivery of things as a consequence of
sale known as “tradition” – under the law:
Bautista vs. Sioson 1. Actual Delivery / Material Delivery / Physical
Facts: The owner A sold a registered land to B who Delivery / Real Delivery – the thing is in the
did not register and neither did B take physical possession and control of the vendee. Take note
possession because after the sale they executed a “control”. Take note “to the vendee”.
lease agreement in which B was now the lessor. A Q: What if the thing was delivered to a 3rd
continued to be in possession of the land. After the person?
sale and the contract of lease, A sold the land to C, A: Jurisprudence – SC said → yes, there maybe
this time C took physical possession. actual delivery if the third person has authority to
Can he do that? Yes. Kasi lessee sya eh, hence, receive from the vendee. Thus, making him an
he can transfer possession to the 2nd buyer. agent of the vendee and that would still be actual
Who between B and C would have a better delivery.
right? (C did not also register the sale)
SC Said that B would have a better right because Note: Philippine law does not only require actual
when he executed a lease agreement with A, he is delivery – constructive delivery may result in
in contemplation of law in possession which is legal transfer of ownership.
possession over the thing and thus making him a
possessor in good faith. Kay C, physical 2. Constructive – by the execution of a public
possession nga pero pangalawang possession instrument if the contrary intention does not appear
lang. Yung legal possession was with B. on the document. By the mere execution of the
public instrument that is equivalent to delivery.
Note: This decision was criticized because some Hence, ownership passes to the buyer.
authors said that it should be actual possession but
the SC said that legal possession would suffice. Kuenzle & Streiff vs. Macke & Chandler
Facts: The original owner here Stanley and
Carumba vs. CA Griffindor (parang Harry Potter ) and the property
Facts: Sale of land to B who took physical involved here are fixtures of a saloon. Macke and
possession but did not register. He is the first Chandler are judgment creditor of Stanley and
buyer. However, the seller (A) is a judgment debtor Griffindor. Because of a judgment in favor of
in one case to a certain creditor named C. The land Macke and Chandler, the sheriff levied upon these
became the subject of an execution sale. The properties which was still in the possession of
buyer became C who registered the sale. Stanley and Griffindor. The properties under
execution were questioned by Kuenzle and Streiff.
Q: Who would have a better right between C Kuenzle and Streiff claimed that these things were
and B (C had no knowledge of the sale)? sold to them prior to the levy. If they claimed that
A: SC Said → B because this land was not the properties were sold to them, the properties
registered under the Torrens System. 1544 would should be in their possession. Take note that
not apply to unregistered lands. Stanley and Griffindor were still in possession of

Page 12 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
the goods physically. Hence, there was no actual the buyer because ownership will pass upon
delivery. full payment.
Held: In order that ownership would pass, it has to (2) Even if DOS does not provide for such
be in a public instrument if that would be by stipulation, the seller may have obtained a
constructive delivery. bill of lading which provides that the goods
are deliverable to the seller himself or the
Note: The execution of a public instrument may be agent of the seller.
equivalent to actual delivery if the contrary intention
does not appear on the DOS. Kasi pwedeng Rights
notarized but it is clear in the contract that Kinds of Delivery of Incorporeal Property /
ownership will not pass until full payment of the Quasi – Tradition:
price then that is not equivalent to delivery. The 1. Execution of Public Instrument
intention is clear.
2. Placing the Title of Ownership in the Possession
Kinds of Constructive Delivery of Vendee – a right would normally be covered by
1. Delivery of the Keys – of the place where the a certificate.
goods are located like a warehouse. Example: delivery of the certificate of shares of
Prof. De Leon: this also called as symbolic stocks.
delivery.
3. Use by the Vendee of His Rights with the
2. By Mere Consent or Agreement of the Parties – Vendor’s Consent
if at the time of the sale, possession to the goods Example: Sale of shares of stocks → the vendee
cannot be transferred to the buyer. There must be may not always have the right to exercise his rights
a reason why it cannot be transferred at the time of under the shares of stocks. Concretely, if there is a
the sale. This is also known as tradition longa stockholders’ meeting, the books of the corporation
manu. will be closed for 30 days before the meeting.
Example 1: The thing was the subject matter of a Thus, if the sale occurred when the books are
lease with a 3rd person until the expiration of the already closed, no one will be recognized except
lease, the thing cannot be delivered. those registered owners. So if you are the buyer of
those stocks, you can only use your right with the
Example 2: The thing was the subject matter of consent of the vendor.
commodatum. As a rule, period of commodatum
has to be respected. RULES ON SALE AS TO QUANTITY / QUALITY
OF THE THING SOLD
3. Brevi Manu – this is a kind of constructive Q: In a sale involving 1,000 pairs of shoes with
delivery because the buyer was already in a specific design as agreed upon. The seller
possession of the thing sold at the time of the delivered 1,200 pairs of shoes instead of only
perfection of the sale so he will continue to be in 1,000. Can the buyer reject everything?
possession after the sale, no longer as a lessee A: No. He has the right to reject only the excess.
but this time as the owner. So dati lessee lang sya Reject the 200 but he can be compelled to accept
that is why he was in possession or maybe the 1,000.
depositary lang sya or maybe he was the agent at
the time prior to the sale. Q: What if instead of 1,000, 800 was only
delivered?
4. Constitutum Possessorium – the seller will A: The buyer cannot be compelled to receive 800
continue to be in the possession of the thing after because partial performance is non-performance.
the sale but no longer as an owner but in another You cannot compel the creditor to accept partial
capacity like lessee. fulfillment as a rule because (1) it can be a subject
of a stipulation that there can be partial delivery.
Bautista vs. Sioson Other Exceptions:
Because a lease agreement was entered into by (2) When obligation pertains to obligation which
the buyer and seller after the sale then the buyer is partly liquidated and partly unliquidated. The
became the lessor and the seller became lessee. debtor can compel the creditor to accept the
Therefore, the lessee would continue with the portion which was already liquidated.
possession no longer as an owner. (3) When the obligation is subject to different
terms and conditions.
Q: What if pursuant to their agreement the
seller delivered the goods to a common carrier. Q: The shoes per pair is P1,000. The seller only
Upon delivery of the goods to a common delivered 800 pairs out of 1,000 pairs. The
carrier, would that result in transfer of buyer accepted. It turned out that the seller can
ownership immediately? (This is important no longer deliver the balance (200 pairs). How
because in case the goods were destroyed much can the buyer be compelled to pay? 800 x
even due to a fortuitous event while in transit, P1,000?
who will bear the loss?) A: Not necessarily. You have to make a distinction
A: If delivery to a common carrier is delivery to the as to whether the buyer was aware that the seller
buyer, then ownership passes to the buyer upon could no longer deliver the balance or when he
delivery to the common carrier. That is the general accepted, he was not aware. If he was aware that
rule. the seller could no longer deliver the balance then
Exceptions: he can be compelled to pay at the contract rate so
(1) If stipulated in the DOS that despite delivery 800 x P1,000 = P800,000. If he had no knowledge,
to common carrier ownership will not pass to he can be compelled to pay only the fair value. Fair
value siguro non P700 each instead of P1,000.

Page 13 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Example: Sale of rice field, it turned out
Q: The obligation to deliver 1,000 cavans of about 20% of the land is swamp, so hindi
Milagrosa rice. Instead of delivering 1,000 pwede taniman. Hence, proportional
cavans of Milagrosa, the seller delivered 1,100 reduction is possible if he still would want
cavans of both Milagrosa and Burmese rice. the land or rescission would be a remedy
May the buyer reject everything? because the area of inferior quality is more
A: Yes, if the goods are indivisible. Meaning each than 10% of the total land area unless he
sack of rice, Milagrosa and Burmese rice were can prove that he would not have bought the
mixed. However, if it is clear that per sack it is land had he known a portion of the land is of
Milagrosa rice and the 100 sacks, it is clear that inferior quality.
those are Burmese rice that would not be
considered as indivisible. He can be compelled to PLACE OF DELIVERY
accept 1,000 sacks Milagrosa and he has the right Read 1524, 1525 and 1198
to reject 100 sacks Burmese rice. The seller delivered the goods to the place of
business of the buyer. If the buyer refuses to
SALE OF REALTY receive the goods, the buyer will be considered in
Q: Sale of a parcel of land. Price agreed upon is delay and therefore will be liable to the seller
P1M. More or less 100 sqm. The actual area because of unjust refusal.
delivered by the seller was only 95 sqm. What Q: May the buyer be considered in delay for his
are the remedies of the buyer? refusal to accept if there is no place stipulated
A: (1) Specific performance – would be a remedy if in the contract?
the seller is still in the position to deliver the A: It depends on the kind of thing. Determine if it is
balance. Siguro yung katabing lupa sa seller din, determinate or generic. If the thing is determinate,
hence, he can afford to give additional 5 sqm. the law provides that it will be the place where the
(2) Q: If specific performance is not possible, is thing is located at the time of the perfection of the
proportional reduction a remedy? contract.
A: It depends on whether the sale is considered as
a sale with a statement of an area of a rate of a Q: What if the object of the sale is a generic
certain measure or if it is a lump sum sale. thing?
(a) If lump sum – even if the area delivered is A: Seller’s place of business or residence.
less than the area stated in the DOS, there
is no right to demand for the proportional Note: If there is no stipulation when to be
reduction of the price. Q: Pero pag delivered, the seller cannot be compelled to
sumobra – 120 sqm na deliver, can the deliver.
seller demand for the increase of the
price? A: If lump sum sale, no. Q: What if at the time of the perfection of sale,
(b) If the sale was based at a rate of a certain though the thing is determinate, it was on
price per unit of measure like it was so clear board a ship while in transit. Where will be the
in the contract that the land is being sold at place of delivery?
P10,000 per sqm so P10,000 per sqm x 100 A: Depending on the shipping arrangement agreed
= P1M, the remedy of proportional reduction upon by the parties.
of the price or accion quanti minoris is
applicable. F.O.B. – Free on Board
(3) Q: Under the facts, 95 sqm was delivered, C.I.F. – Cost, Insurance, Freight
would rescission be a remedy?
A: As a rule no because rescission would only be F.O.B. and C.I.F are rules of presumption which
a remedy if the area lacking is more than 10% of would have to give way to the real intention of the
that area agreed upon. So kung 100 sqm, dapat 11 parties. So after all, the F.O.B. or C.I.F.
sqm or 15 sqm ang kulang, so out of 100 kung 85 arrangements do not really determine the place of
lang ang na-deliver, then rescission is a matter of delivery, they only make rules of presumption.
right.
So in a C.I.F. arrangement, it is only presumed that
Q: But kung 95 lang ang na-deliver meaning the the place of delivery is the port of origin.
area lacking is less than 10%, may rescission
be a remedy? In a F.O.B. destination, it is only presumed that the
A: Yes, by way of exception point of destination is the place of delivery.
(a) If the buyer can prove that he would not
have bought the thing or land hand he Q: What really determines the place of
known that is less than 100 sqm. It is a delivery?
matter of proof. A: SC said this indication as to the intention of the
parties as to the place of delivery is the manner
This is consistent with a characteristic of rescission and place of payment. If there is an agreement as
under 1191, that in order for rescission to prosper – to where and how the price is to be paid that would
the breach must be a fundamental breach. Kung be the place considered for purposes of delivery
kulang lang ng 5sqm / 10 sqm at malaki yung area, and therefore for transfer of ownership.
there can be no rescission as a matter of right.
Concretely, in one case which was C.I.F.
(b) The other one is even if the entire area was arrangement – it was stipulated that the seller can
delivered as stated, proportional reduction / demand the payment of the price upon the arrival
rescission may be a remedy if a part of the of the goods at the port of destination.
land delivered is of inferior quality than that (Supposedly, in C.I.F. arrangement, the place of
stipulated by the parties. delivery is the port of origin). SC said the place of

Page 14 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
delivery because of the stipulation is the port of Example: These 10 sacks of fertilizer would result
destination. It is where the payment is to be made. in 200 cavans of rice.

Q: What was the purpose of fixing the delivery The statement of the seller’s opinion is not as a
arrangement as a C.I.F. but the place of delivery rule considered an express warranty.
is the port of destination? Example: “This is the best piña cloth” → it may turn
A: SC said the C.I.F. arrangement may have been out that there are better piña cloth.
agreed upon only to fix the price. Example: They
fixed the price for P2M that would include the As long as the seller is not an expert on that field,
freight, insurance or cost but still the place of that would be treated merely as an opinion and
delivery is the port of destination. there can be no liability for breach of an express
warranty.
In another case, F.O.B. destination so
based on the presumption the place of delivery will BE: “A” sold a land to B for P1M in Antipolo. As
be the port of destination xxx the seller would have agreed upon P100,000 will be paid upon the
to bear all the expenses for the delivery of the signing of the DOS. The balance will be paid
goods up to the port of destination. However, it was within 30 days from the time the occupants
stipulated in the contract that the seller may (squatters) of the land are evicted. It was so
demand for the payment of the price by mere stipulated that if within 6 months, the squatters
presentation of the bill of lading (BOL). have not yet been evicted, the seller should
return the P100,000. Another stipulation states
Q: Where do you get the BOL? – within the 6-month period, the value of the
A: At the port of origin. Hence, even in the port of land doubled. Despite the filing of an eviction
origin he can already present the BOL to the buyer suit by the seller and the lapse of the 6-month
and hence compel the buyer to pay the goods. period, the squatters were still occupying the
Again SC ruled in that stipulation, the place of land. The seller offers to return the P100,000 to
delivery is the port of origin. And the purpose of the the buyer. The buyer refused to accept the
F.O.B. arrangement, it was only agreed upon in P100,000 and told the seller “never mind even if
order to fix the price meaning that the seller will still the squatters are still there. I will still buy the
have to bear the expenses for the transportation of land”. So the buyer offered to pay the balance
the goods up to the destination although the buyer P900,000 and demanded that a DOS be
can already be compelled to pay the price even at executed by the seller. The seller refused to
the port of origin. accept the P900,000. What he did is to file an
action to rescind the contract. Would the action
So consider always the manner and place prosper?
of payment which is determinative as to the place SA: 2 answers:
of delivery. (1) If the answer is based on rescission, the
action will not prosper because rescission may only
Read 1582 be invoked by the aggrieved party. The seller is not
an aggrieved party.
Obligations which cannot be Waived: (2) However, under 1645 if the obligation is
1. Obligation to transfer subject to the happening of a certain condition,
2. Obligation to deliver Atty. Uribe: Actually, here the performance of the
obligation is subject to the happening of the
Obligation which can be Waived: condition.
1. Obligation to warrant the thing If the condition did not happen, the buyer would
have 3 options:
Kinds of Warranties under the Law: (a) Not to proceed with the contract, which is
1. Express rescission.
2. Implied (b) He may waive the condition (eviction of the
squatters) and proceed with the sale → this was
1. Express – any affirmation of fact or any promise the remedy chosen by the buyer in this case.
by the seller relating to the thing, the natural (c) He can treat the non-happening of the condition
tendency is to induce to purchase the thing. as a breach of warranty and claim damages.
Requisites:
(a) There is an affirmation of fact Obviously, the buyer chose option (b) and
(b) The fact must pertain to the thing either to therefore the seller cannot rescind the contract.
the quality, character or title of the thing
2. Implied –
Any other matter may not be considered as an Prof. De Leon: because of this implied warranty, it
express warranty. cannot be said that Philippine law does not adopt
caveat emptor “buyer beware”. (Faye’s Caveat :
The use of the words / terminologies is not Please check the book of Prof. De Leon regarding
conclusive as to whether or not there is an express this statement. Thanks )
warranty.
Example: “I guaranty / warranty you that you will be Even if there is no stipulation as to these
happy if you buy this car at P100,000”→ this does warranties, the law itself would provide for these
not result in an express warranty warranties and hence if there are hidden defects
he would have remedies under the law or even if
Again, if the affirmation of fact pertains to the he was deprived of the thing he bought he would
quality of the thing, it is an express warranty. have a remedy against the seller. Hence, it is not
correct to say that Philippine law has adopted

Page 15 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
caveat emptor. But there are certain instances (2.2) Based on an act after the sale but
when there would be no such implied warranty imputable to the vendor.
against hidden defects. There may be warranty as
to title or against eviction but there is no warranty Concretely, the reason for the deprivation maybe
against hidden defects under certain because of non – payment of real property taxes
circumstances. by the seller and not the buyer.
Example: If land was sold in an execution sale
Warranty Against Eviction / Title because of the failure of the seller to pay real
Q: If the seller was able to transfer ownership property taxes → this can be the basis of liability
to the buyer may the seller nonetheless be held for breach of warranty.
liable for breach of warranty against eviction?
A: Yes. These are 2 different obligations: the Based on an Act after the Sale but Imputable to
obligation to transfer ownership and the obligation the Vendor
to warrant the thing. Example: There was a first sale to A and then a 2nd
sale to B. Under the law on double sale, B have a
Example: This warranty against eviction would better right if this is a sale involving immovable, if
include the warranty that the buyer from the he was the first one who registered the sale in
moment of the sale have and enjoy the legal and good faith.
peaceful possession over the thing sold.
The first buyer even if he was in possession maybe
He may be deprived of the thing by a 3rd person evicted from such property by the 2nd buyer
even if he would not lose ownership. because the 2nd buyer would have a better right.
Q: When would this happen? This is based on an act of the vendor after the sale
A: Maybe the 3rd person has a better right to the or after the 1st sale hence, there can be a liability
possession of the thing. Maybe there was a lease for breach of warranty against eviction.
agreement entered into which has to be respected
by the buyer. Q: If during the sale a 3rd person was already
Note: A contract of lease may last for 99 years. occupying the land by way of adverse
possession so in an open, continuous xxx for 7
Q: If there is a claim or a 3rd person claims a years under the color of title. But after the sale,
right over the thing bought, does it mean that the buyer did nothing. And hence, the
the seller will already be liable for breach of occupants claiming a right or ownership was
warranty against eviction? able to complete the prescriptive period of a
A: No because there are requisites which must be minimum of 10 years. Thus, if a 3rd person
complied with. would be able to deprive this buyer of
ownership over the thing because of
Requisites: acquisitive prescription, can the buyer hold the
1. There has to be final judgment depriving him of vendor liable for breach of warranty?
such thing either wholly or partially. In other words, A: No because it was his fault that the 3rd person
a case was filed by a 3rd person against the buyer was able to complete the period for acquisitive
which resulted in a favorable decision as to the prescription. Had he done something to interrupt
plaintiff resulting in the deprivation of the property the running of the prescriptive period then he would
by the buyer. not have been deprived of the ownership of the
thing.
Note: For the seller to be liable, he must have
been notified of this case against the buyer. In fact, 3. There should be no valid waiver
he should be impleaded as a co-defendant in the
action because: 4. The action to hold the vendor liable should be
(a) The seller should have an opportunity to filed within the period prescribed by law.
defend his title.
(b) The seller would normally have the Q: If indeed the seller can be held liable for
knowledge of the defenses as to the breach of warranty against eviction, what will
property which is sold. If there is one be the extent of liability of the vendor?
person who can mediate the claim of the A: The vendor can be held liable for the value of
plaintiff between the seller and the buyer the thing at the time of the eviction, income or
normally it would be the seller. fruits, cost of suit, expenses of the contract and
damages and interest.
Q: If there is a decision in favor of the plaintiff
(3rd person) against the buyer in the trial court, Damages may only be claimed if the seller is a
is it required that the buyer should appeal in seller in bad faith. As long as he sold the thing in
order for him to be able to hold the seller good faith, he cannot be held liable for damages
liable? regardless of whether there was a waiver or not. In
A: No because the party who should appeal if he is fact, if there is a waiver but the vendor is in bad
interested should be the seller. If he does not want faith, the waiver is void and hence he can be held
to be held liable, he should appeal the case up to liable for everything under the law. If there was no
the SC. If the decision becomes final, he may be waiver and the vendor is in bad faith, again he will
held liable for breach of warranty. not only be liable for expenses xxx but also for
damages, cost of suit xxx everything!
2. Deprivation must be either:
(2.1) Based on a 3rd person’s prior right over Q: If the seller was aware of the defect of his
the thing prior to the sale or title at the time of the sale, hence, he is a seller
in bad faith?

Page 16 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
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A: Not necessarily. He may be aware but he loss was the defect itself, the liability is greater than
informed the buyer of such defect in the title and if the cause of the loss was a fortuitous event or
hence he cannot be considered bad faith vendor. fault of the buyer.
Even if he did not inform the buyer but if the buyer
was already aware of the defect. If there would be a problem here as to the extent of
the liability of the vendor, he should first consider
Q: Why would a buyer buy a thing if the title of the cause of the loss, maybe it was lost due to the
the seller has defect? defect itself or lost through fortuitous event or lost
A: Maybe because the buyer needs the thing for through the fault of the vendee. After that, he
his business. should determine whether the vendor was aware of
If I am the vendor and I know there is a defect in the defects or he was not aware. Again, if he was
my title, I will ask the vendee to execute a waiver. aware, damages may be recovered. If he was not
Q: Thus, if there is such a waiver and assuming aware, he may not be held liable for damages
the vendor acted in good faith, can the vendor unless he can only be held liable for interest.
be held liable for breach of warranty?
A: It depends on the kind of waiver. If the defect was the cause of the loss, the vendor
(a) If waiver consiente – the buyer executed a would be liable for the return of the price, not only
waiver without knowledge of the defect in the price less value but also to refund the
the title of the seller. Also, the vendor does expenses and damages because the vendor was
not know of the defect. The only liability of aware of the defects.
the vendor for breach of warranty against
eviction is the value of the thing at the time If the vendor was not aware of the defects, he
of eviction. cannot be held liable for damages but he would
(b) If the waiver is intentionada – when the only be held liable for the price.
vendee executed the waiver with
knowledge in the defect of the title of the Q: The price may be higher or lower than the
seller, hence, he knew of the possibility of value of the thing?
being evicted and nonetheless bought the A: Yes. It does not matter. It may be higher or
thing the vendee cannot hold the vendor lower. The thing may depreciate or appreciate or
liable. maybe the thing was sold at a price less than the
value and therefore at the time of the loss, the
WARRANTY AGAINST HIDDEN DEFECTS value is still greater than the price but he is only
Requisites: obliged to return the price.
1. The defect must exist at the time of the sale. If
the defect started after the sale there can be no If the cause of the loss of the thing was a fortuitous
such liability. event, he can only be held liable for the price less
value.
2. The defect must be hidden. If the defect is Example: If price is P100,000 and the value at the
patent and the buyer nonetheless bought the thing time of the loss is P80,000. He can be held liable
then he can no longer hold the seller liable. for P20,000 (P100,000 - 80,000 = P20,000)
If the seller is not aware of the hidden defects, he
can be held liable. If he was aware, his liability will Q: How would defect be proven if the thing was
be greater because that makes him a bad faith lost or destroyed due to fortuitous event?
seller. A: It is a matter of proof. The proof may have been
obtained already prior to loss. Pwedeng pina –
Q: Even if there is such a hidden defect, is it examine na nya sa expert so meron na syang
possible that the vendee cannot hold the evidence of the defects prior to the loss.
vendor liable despite the fact that there was
hidden defect even if he was not informed If the cause of the loss was fortuitous event or
because maybe the seller was not aware? fault of the vendee and the buyer was not
A: Yes, he may not be able to hold the seller liable aware of the defects, is it possible that the
if he is an expert on the thing. He is expected to vendor may not be liable even for a single
know the defect. centavo?
A: Yes, in this scenario because he only had the
3. The defect must result in the thing being unfit for obligation to return the price less value at the time
the purpose of the buyer or at least it diminish the of the loss. If it happens that the value is greater
fitness of the thing such that the buyer would not than the price, the vendor has no liability even
have bought it at the price had he known of such there is hidden defect.
defect.
ANY CHARGE OR NON – APPARENT
Q: If the thing which has a hidden defect was ENCUMBRANCE NOT DECLARED OR KNOWN
lost or destroyed, can the vendee hold the TO THE BUYER
vendor liable for this breach of warranty? Does Q: Would there be an encumbrance over an
it matter if the loss was due to a fortuitous immovable which is a form of easement or
event or maybe the loss was due to the fault of servitude?
the buyer himself, nonetheless, can he hold the A: An example of this is a road right of way.
vendor liable?
A: Yes. The vendee can hold the vendor liable for Q: If the buyer bought the land which turned
breach of warranty against hidden defects even if out to have a road right of way in favor of a 3rd
the thing was lost due to fortuitous event or due to person, can he claim breach of warranty
the fault of the vendee himself because of the against any charge or non – apparent
hidden defects. But of course, if the cause of the encumbrance?

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A: Of course there are requisites: In order for the seller may be held liable:
(1) The encumbrance or easement or burden or 1. The buyer has to inform the seller of the
the road right of way has to be non – particular purpose for which the thing is to
apparent. be use and
Q: May a road be non-apparent? 2. The seller manifested that the thing would
A: Yes, like in rural areas. In rural areas, yung be fit for the purpose and the buyer relied
road right of way mga putik lang yan and on such representation of the seller.
normally the road will only be used by the person
having this right during harvest period. Harvest Note: If the thing is sold under the trade name
period is once every 6 or 3 months. In the there can be no warranty of fitness for a particular
meantime, during the 3 or 6 – month period, puro purpose.
cogon yan and hence the road maybe non –
apparent. WARRANTY OF MERCHANTABILITY
It pertains to the fact that it is fit for the general
If it is apparent, no liability. purpose. If the thing was sold by description or by
sample, it is considered that there is such a thing
Q: If the encumbrance is non – apparent does as warranty of merchantability.
that necessarily mean that the vendor can be
held liable? SALE OF ANIMALS WITH DEFECTS – RULES:
A: No because the encumbrance may be known to 1. The defect is a redhibitory defect – it is such kind
the buyer. This liability would arise only if the of defect that even by examination of expert it
encumbrance is not known to the buyer. cannot be discovered.

Q: If he was not aware of this encumbrance and Q: If one of the animals has redhibitory defect,
the encumbrance is non – apparent, vendor will can the buyer rescind the entire contract
now be liable? pertaining to all the animals?
A: Not yet because the encumbrance may be A: G.R.: No. He can only rescind the contract
registered or annotated at the back of the title – pertaining to the animal with redhibitory defect. He
negligence of the vendee so he cannot hold the cannot rescind the entire contract pertaining to all
vendor liable. animals.
Exception: If he can prove that he would not have
Q: If there is an encumbrance, what are the bought the others had he known the defect of one
remedies of the buyer? then he can rescind the entire contract.
A: (a) He can seek for the reduction of the price.
Q: Who has the burden of proof that he would
Q: Can he rescind the contract? not have bought the others had he known of
A: (b) Yes but the law requires that the action for the defect of one?
rescission must be filed within 1 year from the date A: Normally, it would be the buyer. But the law
of the contract. If after 1 year, no more rescission. under certain circumstances would provide for this
presumption that it is presumed that he would have
(c) If he became aware more than a year, he bought the others had he known of the defect of
may file an action for damages, But the law one.
requires that the action for damages has to be filed Examples: He bought the animals in teams or in
within 1 year also but from the time of the pairs then the presumption arises.
discovery of encumbrance. If he filed it for - Love birds (Ang mga love birds, kapag
example, after 2 years from discovery – no namatay yung isa later on mamatay din
recovery of damages. yung isa. Minsan nga mgsuicide pa sya
pag mag isa na lang sya. Iuuntog nya ulo
WARRANTY OF QUALITY nya sa cage nya. )
Prof. Deleon, Prof. Vitug, Prof. Baviera: there is - Sledge dogs (Sa mga countries na may
another warranty which is WARRANTY OF nyebe “snow” may mga sledge dogs.
QUALITY which includes: Kailangan pag binili ang mga dogs, team
(1) Warranty of Fitness sila. May leader pa nga sila eh at
(2) Warranty of Merchantability sumusunod sila sa leader nila )

To some authors the warranty of quality is Q: If the animal which was bought, died of a
considered under the warranty of hidden defects. disease within 10 days, the disease existing at
Atty. Uribe: I cannot agree that the warranty of the time of the sale, may he still have a remedy
quality is in the warranty of hidden defects. I agree under the law?
with Prof. De Leon, Prof. Vitug and Prof, Baviera A: Yes, if the disease turned out to be a contagious
that there is a warranty of quality. disease. In fact, under the law, the sale is void. If
he has already paid, he can recover what he paid
WARRANTY OF FITNESS FOR A PARTICULAR because the sale is void.
PURPOSE
The thing bought may not actually have any defect If the disease us not contagious, under the law he
and for 1 million buyers it would be fit for their would only have a remedy if the animal died within
purpose. However, it may not be fit for the purpose 3 days.
of 1 buyer and if all the requisites for this warranty
are present, then he may hold the seller liable for Instances whether there would be no warranty
breach of warranty of fitness for a particular against hidden defects and therefore caveat
purpose although there is no hidden defect but it is emptor may be invoked:
not fit for the purpose of the buyer.

Page 18 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
1. Sale which is an “as is where is” sale which A: It will depend on the reason of the rejection. If
means as it is found, where it is found xxx bahala there is a just cause for the rejection, then the
ka sa buhay mo if you want to buy the thing and seller will have to bear the loss because there will
you cannot later on claim that there were hidden be no transfer of ownership and he cannot be
defects. (Faye: pls. research the complete meaning compelled to pay the price. However, if the reason
of “as is where is” sale. Atty. Uribe will ask the for the rejection is unjustified, ownership passes to
meaning. ) the buyer by operation of law then he will have to
bear the loss under the res perit domino rule.
Q: Can there be a claim of breach of warranty
against eviction? 2. Obligation to pay the price
A: Yes because the seller would have or would still Q: When?
warrant the title over the goods. A: (1) As stipulated
(2) If there is no stipulation, it would be at
2. Sale of 2nd hand items the time and place of delivery.
3. Sale of animals in fairs
4. Sale in public auction Q: If the delivery was made a year ago but the
payment of the price was made today, would
Note: There would still be warranty against the buyer be liable for the interest from the time
eviction. of delivery up to the time of payment?
Note: Rules on warranty also apply to judicial sale. A: G.R. No. Exceptions:
(1) Stipulation – the vendor may only agree
Q: In sale by authority of law or in execution for the payment of the price for a certain
sale, can there be breach of warranty against time only because there will be interest.
eviction?
A: Yes. The judgment debtor and not the sheriff (2) Even if there is no stipulation – if the thing
shall be liable. delivered produces fruits or income.
Example 1: The object of sale is a rice land.
The law would specifically exempt certain persons Isang taon na sa buyer yung rice land ibig
from liability for breach of warranty like sheriff, sabihin he harvested twice already. The buyer
auctioneer, mortgagee, pledge and other persons should be liable to pay interest.
who sell by virtues of an authority of law like notary Example 2: Apartment unit. Kumita na yung
public because they are not really selling for buyer sa rentals.
themselves, they are selling on behalf of another
person. (3) Even if no fruits, he may be liable for
interest if he is in delay. This delay would
RIGHTS AND OBLIGATIONS OF THE VENDEE start from the time there is judicial or
1. Obligation to accept the thing delivered. extrajudicial demand.
2. Obligation to pay the price (if warranted,
with interest) A COS is a bilateral contract resulting in reciprocal
obligations under 1169 from the moment one of the
1. Obligation to accept the thing delivered parties in reciprocal obligation performed his
obligation and the other party has not even without
Q: If the buyer received the goods delivered, demand, the other party would be in delay and
does it mean that he already accepted? therefore liable for interest and damages.
A: No because receiving is preliminary to
accepting. In fact, this is consistent to the right But in this provision, in order for the buyer to be
provided by law to the buyer which is the right of considered in delay there must be judicial or
inspection or the right of examination. Thereafter, extrajudicial demand. This article should be
he may reject the goods if defective. construed to mean that there was a period fixed for
the payment of the price. Nakalagay sa agreement
Q: When will he be considered to have “today ang sale, after 1 year payment”. Upon the
accepted? expiration of the 1 year period, there has to be
A: (1) When he intimated his acceptance to judicial or extrajudicial demand which is different
the seller. from 1169 when the SC interpreted to mean that
(2) Even if he did not intimate his the obligation is already due and demandable at
acceptance or rejection, he will be deemed to have the time of the perfection of the contract. Hence, no
accepted if he did an act which is inconsistent with need for demand anymore.
the ownership of the seller. Again, if he pledged
the thing to another that is an act of ownership or if Right to Inspect or Examine
he sold or donated the thing. This right may not be present in all COS because
(3) If he did not do anything by mere lapse you can waive the right of inspection. Upon
of a reasonable time, he will be deemed to have delivery and receiving the goods, if you agree that
accepted the thing. What is reasonable time would you are deemed to have accepted – no more right
depend on the circumstances surrounding the sale. to inspect.

Q: What if after an examination or before the In C.O.D. arrangement, the delivery will not be
examination, the buyer refused to accept and made until payment has already been made by the
informed the seller but the goods are already in buyer so in that scenario, he has to pay first even
his place? What if the goods were lost or before delivery. This is a sale transaction where
destroyed in the possession of the buyer even the buyer would have no right of examination prior
due to fortuitous event, who will bear the loss? to acceptance.
Example

Page 19 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
The arrangement between a mining 7 years - 55% 9 years – 65%
company and NAPOCOR in the sale of coal. 10 years – 70%
NAPOCOR will have no right to inspect preliminary Every year thereafter, additional 5%.
to acceptance, they will always accept. But after
acceptance, that there would be examination of the Q: What if it is 20 years – 100%?
quality of the coal not for the purpose of rejecting A: No. Upto 90% only. So if 15 years or 16 years,
but for the purpose of fixing the price. So this is not still it is 90%.
a right of examination prior to acceptance. This is
only an examination for fixing the price. Q: Would the amount recoverable be bigger?
A: Yes. 90% depends on the total amount paid.
MACEDA LAW 90% pa din pero malaki ang base.
BE: What is the Maceda Law? Give its essential
features. BE: Ayce bought a condo unit for 10M. 3M
A: R.A. 6552 “Realty Installment Buyer Protection downpayment. The balance of 7M payable in 60
Act”. equal monthly payments. Ayce religiously paid
Realty – object of the sale is realty (not real until the 46th installment. On the 49th
estate). Specifically, residential unit and not installment, she offered to update her account.
commercial or industrial. The seller Gerard said “I have already cancelled
the sale”. Is this cancellation valid?
Q: How about a condominium unit? A: No. Under the Maceda Law, if you have paid a
A: It is covered by the Maceda Law as long as it is minimum of 2 years, you are entitled to 30 days for
residential in character. every year of payment. Under the facts, she has
paid 3 years. Hence, she is entitled to 90 days
Q: Sale on credit, does it mean that the sale will grace period. Nung nag default sya nung 47th,
be covered by the Maceda Law? magstart pa lang yung grace period. On the 48th
A: No. There is such a sale on credit which is on a installment – she was only 30 days in default. 49th
straight term basis. installment – 60 days in default. She was very
much within the 90-day grace period when she
Example 1 decided to update her account.
1M – down payment of 500,000 today and the
balance to be paid at the end of the year → not Q: What if the installment period is for 15 years.
covered by Maceda Law The buyer defaulted on the 3rd year. Under the
law, she is entitled to a minimum grace period
Example 2 of 60 days. Thereafter, she was able to update.
300,000 today, the balance of 700,000 to be paid But on the 5th year, she defaulted again. How
on 10 equal monthly installments → covered by the many days is her grace period?
Maceda Law A: None. The default must be once for every 5-year
lifetime of the contract.
All the provisions under the Maceda Law are for Q: If there is a stipulation for the forfeiture of
the benefit of the buyer. the payment made – “the buyer will lose the
house and lot and he will not recover anything
Q: Is it correct to say that in this law, the buyer because all his payments will be treated as
cannot invoke this law if he has not yet paid for rentals” – is this a valid clause?
at least 2 years? A: No, the premise of course if he has already paid
A: No. Even if he has only paid for a month, there for 2 years because by law he is entitled to 50%
will be rights already of such buyer under the CSV.
Maceda Law. If he has paid at least 2 years, he
would have better rights. Q: “Upon failure to pay 1 or more installments
without need of notice, the seller would have
Q: If he has paid less than 2 years of the right to cancel the sale” – is this automatic
installment, what are his rights? cancellation clause valid?
A: (1) The grace period – he has a minimum A: Void. There has to be notice to the buyer but
of 60 days grace period (the seller can give him more than that if the buyer is already entitled to the
more). During the 60-day grace period, he can sell CSV, the cancellation will take effect only upon full
his rights under the contract, he can assign his payment of the CSV.
rights, he can update his account, he can pay the
balance. Q: Are the remedies under the Maceda Law
alternative? Can the buyer be able to exercise 2
(2) The right to recover a portion of what or more remedies all at the same time?
he has paid – cash surrender value (CSV). This A: Yes, remedies under the Maceda Law are
CSV is a minimum of 50% of what he has totally cumulative.
paid. This includes installment payments, deposit,
downpayment – every amount paid – 50% of that. REMEDIES FOR BREACH OF CONTRACT
It can be higher depending on the number of years REMEDIES OF AN UNPAID SELLER
that he has already paid. (ARTICLE 1526)
1. Right to retain the thing in his possession
Hence, if he has paid only twice, he may (possessory lien / withhold delivery)
be entitled to CSV if the payment is on annual 2. Right of stoppage in transitu / right to
payments not monthly. resume possession of the goods
3. Right of Resale
Q: The minimum of 50% - when higher? 4. Right to Rescind
A: 2 years – 50% 8 years – 60%

Page 20 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Q: Are there other remedies aside from Article 2. If the buyer lawfully obtained possession
1526? over the goods
A: Yes, the seller may opt to file an action for 3. When the thing is delivered to a common
specific performance or action for damages. carrier and the seller did not prefer his
ownership and possession over the
Q: Under 1526, who may be considered an goods.
unpaid seller? If the buyer has already paid
90% of the price, may the seller invoke these If you remember the discussion on delivery – the
remedies? rule here is delivery to the common carrier is
A: Yes, because an unpaid seller is one who has delivery to the buyer and therefore when the seller
not been fully paid of the price. delivered the goods to a common carrier as a rule
he loses his lien over the goods. The premise of
Q: May a person who was not a party to the that is that he did not preserve his possession over
sale be able to claim any of these remedies? the goods.
A: Yes, because a seller need not only pertain to a
party to the contract. A person who is in the Atty. Uribe’s Comment: With due respect to this
position of the seller is actually a seller under the article, the article says “if he did not reserve his
law. ownership or possession over the goods”. I don’t
think that phrase ownership is accurate because it
Q: Who would be in the position of the seller? does not matter under the law regardless of
A: The assignee or heirs of the seller or the agent whether ownership has passed to the buyer, the
to whom the bill of lading was indorsed by the seller would have the right to exercise any of these
seller. 4 remedies, notwithstanding ownership has passed
pwede pa syang magkaron ng possessory lien. In
Q: In unpaid seller, are his remedies fact, by express provision of law even if he is only
alternative? holding the thing as a bailee, he will still have
A: Not necessarily, because in fact by express possessory lien, hence, ownership is irrelevant
provision of the law, the right of resale and the right even if the seller did not reserve ownership, with or
to rescind may only be exercised if the seller has without reservation he may or he may not be
possessory lien. Pag wala na syang lien, he can no deemed to have lost his lien. Pero kung na reserve
longer exercise the right of resale or right to nya ang kanyang possession, definitely, he will not
rescind so cumulative to that extent. But if there be considered to have lost his lien kasi if under the
are 2 remedies that alternative and cannot exist at bill of lading deliverable to the seller then he will
the same time, these are the right of stoppage in not be considered to have lost his lien thus there is
transitu and possessory lien because a requisite in no need for him to exercise the right of stoppage in
order for the seller to have a right of stoppage in transitu.
transitu is that the seller must have already parted
possession over the goods. Q: If the seller opted to file an action to compel
the buyer to pay the price and the court
Specific Remedies decided in favor of the seller. The court ordered
1. Right to retain the thing in his possession the buyer to pay the price. Can the buyer tell
(possessory lien / withhold delivery) the seller to deliver the goods so that he will
Q: Why is it called possessory lien? pay the price? Can the seller now be compelled
A: Because there is another lien in the law. This is to deliver because there was a final judgment in
the lien under the rules on concurrence and his favor?
preference of credit. This is the lien of the seller for A: No, the very specific provision of the law – just
the price of the thing sold if the thing has already because there is a final judgment in favor of the
been delivered to the buyer and the buyer became plaintiff, that would not mean he will lose his lien
insolvent. While the thing is in the possession of over the goods.
the buyer there is such a lien but that is not the lien
under 1526. 1526 again is the right to retain the Atty. Uribe’s Comment: This is a very reasonable
goods in his possession – the possessory lien. rule because is there an assurance that the buyer
will pay even with court order?
Q: When would the seller have this possessory
lien? Is it required that the buyer should be 2. Right of stoppage in transitu / right to
insolvent? resume possession of the goods
A: It is not required that the buyer should be
insolvent but this is one of the instances when the Requisites:
lien may be invoked when the buyer is insolvent. 1. Insolvency of the buyer is an essential
requisite
Other Instances Where Seller May Invoke 2. The seller must have parted possession
Possessory Lien over the goods
1. When there is no stipulation as to the 3. The goods must be in transit
credit
2. Or there may be a stipulation as to the Q: Should the debtor be insolvent already at
period of credit but the period has already the time of the perfection of the sale?
expired. A: No, as long as at the time the right is invoked,
he is insolvent. The insolvency may happen a day
When would the Seller be Considered to have before or 2 days before basta at the time the right
Lost his Lien is invoked, the buyer is insolvent.
1. If he waives his right
Q: How is the right exercised?

Page 21 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
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A: (1) By obtaining actual possession of the goods that the buyer has been in default for an
(2) By mere notice to the common carrier. unreasonable time. Kasi from the notice makikita
how long the buyer has been in default. Second,
Q: If such notice was sent to the common as to the notice of the date, time and place of
carrier but the common carrier refused to resale, this is not necessary for the validity of
deliver the goods back to the seller, is the resale but may be relevant in determining whether
common carrier liable? the sale was a good faith sale. This is relevant as a
A: Not necessarily, if the goods are covered by a consequence of resale, if there is still a balance.
negotiable document of title, the common carrier For example, the total contract price is P100,000.
can be compelled to deliver the goods pursuant to The buyer did not pay a single centavo. Out of the
the exercise of the right of stoppage in transitu resale, ang proceeds lang P60,000. So may
back to the seller only if after the negotiable balance pang P40,000, can the buyer be
document of title is surrendered to the common compelled to pay the deficiency? Yes, but if the
carrier. It should be a negotiable document of title. sale is not a good faith sale, he may not be
This is a protection to the common carrier. Kasi if required to pay the balance. Why? What has the
not negotiable, pwede yun i-negotiate sa 3rd person letter got to do with good faith? Because if a
who may purchase the goods in good faith and for letter was sent, then the buyer could have been
value. That 3rd person would have a better right present and could have determined for himself
kaysa sa owner or seller. whether in fact an actual sale conducted and there
were actual bidders in that sale. Kasi pwedeng
Q: If the seller validly exercised the right of gawa gawa lang ng seller na kunwari may bumili.
stoppage in transitu, what is the effect?
A: He will be considered to have regained his Take note under the law, the resale may be a
possessory lien. private sale. The only limitation here is that the
seller cannot buy directly or indirectly.
Q: In a scenario where the seller still has
possessory lien, he may have invoked the right Q: What if there was an excess? Example – out
of stoppage in transitu so he regained of the 100k price the buyer paid 20k. balance
possessory lien, in the meantime, the buyer 80k. What if in the exercise of the right of
sold the same goods to another person, so resale, the seller was able to sell it at 130k?
tatlo na – the seller, the buyer and the 3rd May the buyer be able to recover at least the
person. Can this 2nd buyer compel the seller to amount that he paid?
deliver the goods to him as the 2nd buyer? A: No, because under the law, the seller will not be
A: As a rule no because the seller’s lien over the responsible for any profit that will derive from the
goods will not be affected by the disposition made resale. (See Article 1533)
by the buyer of the goods to a 3rd person. He will
retain his possessory lien. 2 exceptions: Q: Would there be unjust enrichment?
1. If the seller assented to the disposition A: None, because it was precisely the fault of the
2. Even if he did not give his consent to the buyer - his failure to pay that the seller exercised
sale, he will lose his possory lien if: the right of resale.
a. the goods are covered by a
negotiable document of title 4. Right to Rescind
b. the negotiable document of title Would only be available under 2 instances na
was property negotiated to a 3rd kapareho ng resale. Di ba resale 3 instances- ang
person in good faith and for value. di lang present sa rescission yung perishable
Not negotiation to a donee. goods. So the grounds in rescission are:
a. The right is expressly reserved
3. Right of Resale b. The buyer has been in default for an
Q: When would the seller have this right? unreasonable time
A: (1) If the goods are perishable
(2) The right is expressly reserved in the Note: In resale, SC said - if the ownership of the
contract thing has already been transferred to the buyer, in
(3) The buyer has been in default for an order for the seller to exercise the right of resale.
unreasonable time Should he first rescind the contract?
A: No, he can immediately sell the goods because
Note: In order to exercise this right, he must have the effect of the resale is to terminate the
at the same time possessory lien. ownership of the 1st buyer and that ownership
would be vested upon the 2nd buyer by operation of
Q: If necessary for the validity of resale that the law, hindi na kailangan mag-rescind.
seller should send a notice of the intention to
resell to the buyer which means that if there is In rescission, this cannot be exercised for casual
no notice of the intention to resell and then the breach. Parang 1191.
resale will be void. Is that correct? Is it correct
to say that for the resale to be valid, there Song Fo vs Hawaiian
should be notice to the buyer of the date, time Facts: The buyer failed to pay around 20 days from
and place of resale? the time the obligation to pay become due.
A: The answers to both questions → No. They are
not necessary for the validity of the resale. Held: The SC said, that it not a serious breach of
his obligation to pay which would entitle the seller
Q: So what is the relevance of these notices? the right to rescind the contract. The number of
A: First, the notice of the intention to resell will only days would depend on the circumstances
be relevant if the ground relied upon by the seller is

Page 22 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
surrounding the sale. In Song Fo, the sale pertains
to molasses/ sugar. Q: Despite the cancellation of sale which
normally result in mutual restitution, may the
RECTO LAW seller this time be able to retain everything
- promulgated to protect the buyer which he received?
- pertains to the right of the buyer A: Yes, if there is a forfeiture clause except if
- if you analyze the law, it only provided 3 retaining everything would be unconscionable.
remedies What is unconscionable would depend again on
- pertains to movable on installments the circumstances surrounding the sale. Example
200k is not unconscionable for Danding Cojuanco.
Q: Assuming this is a sale of diamond ring fro But if the sale is a sale of machinery where the
1M payable in 10 equal annual. 100k each year buyer is a poor farmer- 200k is unconscionable.
payable Jan 1 each year. The buyer was able to
pay 1st and 2nd installment. He failed to pay the Finally instead of cancellation another remedy is
3rd installment. Despite demand, the buyer foreclosure of mortgage.
failed to pay. Can the seller cancel the sale?
A: No, under the Recto Law, cancellation of the Q: Buyer bought a car and to secure the
sale and the foreclosure of mortgage may only be payment of the price, he mortgaged his
invoked if the buyer has failed to pay 2 or more diamond ring. The buyer failed to pay 2 or more
installments. If the buyer failed to pay only 1 installments (3rd and 4th installments). If the
installment the only remedy available to the seller seller foreclosed the mortgage and it turned out
is exact fulfillment meaning specific performance. there was still a deficiency, if payable amount
is 500k and in the foreclosure sale the
Q: If after 2 months (despite demand the buyer proceeds was only 300k. May an action for the
failed to pay) the seller filed an action to recovery of balance prosper?
recover a sum of money how much shall be A: Yes, because under the facts what was bought
recovered by the seller? Take note under the was not the one mortgaged. For 1484 (Recto Law)
facts he only paid 2 installments and hence the to apply, where there can be no recovery of the
balance 800k. Can the seller recover the 800k? deficiency of the foreclosure, the thing bought must
A: As a rule none because in a sale in installments, be the same thing mortgaged.
this is actually an obligation to pay with a period.
Every time the period would arrive only then the BE: Buyer bought a car to secure the fulfillment
obligation will become due and demandable. Ang of the obligation he mortgaged the car but the
nagiging due and demandable lang yung 3rd buyer gave another security. He asked his
installment. The 4th installment will be due only brother to mortgage his brother’s house and
another year and so on. What he can recover is lot. The seller agreed. The buyer failed to pay 2
only 100k which became due on the third or more installments. The seller foreclosed the
installment. That is the general rule. By way of mortgage but there is a deficiency. So the seller
exception he may be able to recover 800k or filed an action for the judicial foreclosure of the
everything if there is a clause known as REM. May that action prosper?
acceleration clause. Kung sa Maceda Law void A: No, the foreclosure of the 2nd mortgage is in fact
ang acceleration clause, sa Recto Law valid. a deficiency judgment. The only purpose of the
Because normally sa Recto Law, maliit lang foreclosure is to recover the deficiency and that is
binebenta so there can be an acceleration clause prohibited under the Recto Law.
wherein that would make the entire balance due
and demandable and therefore he can be EXTINGUISHMENT OF SALE
compelled to pay the entire 800k. Includes the ordinary causes of extinguishment of
obligation:
Q: This time 3rd installment default sya. After 1. Payment
few months he was able to pay the 3rd 2. Novation
installment. Nakabayad sya ng 4th, 6th. On the 3. Loss of the thing, etc…
7th he defaulted again. Would cancellation now
be a remedy? (Naka-dalawang default na sya Under the law on sales
eh) 1. The exercise of the right of resale will
A: No, under the Recto Law he should have failed result in the extinguishment of the 1st sale.
to pay 2 or more installments meaning 2 The ownership of the 1st buyer will be
consecutive installments. Hindi sinabi ng batas - terminated and such ownership will be
”failed to pay twice”. vested to the 2nd buyer.
2. Rescission or cancellation will extinguish
Q: If he failed to pay the 3rd and 4th then COS
cancellation would now be a remedy. So what if 3. Redemption either conventional or legal
the seller opted to cancel the sale (this is
rescission di ba?) and the effect of cancellation Kinds:
di ba mutual restitution and hence the buyer A. Conventional - it is because the right to
should return the thing delivered to him and the repurchase is expressly reserved in the contract
seller should return the amount he received as and thus this right may only arise in 1 kind of
payment. Would the seller really be obliged to contract. This is a sale with a right to repurchase or
return the entire 200k (1st and 2nd installment)? a pacto de retro sale.
A: No, under the law, he is allowed to retain a
reasonable sum which may be considered as a B. Legal- may be exercised by co-owners or by
form of rental. Example kung yung car ang binili, 2 owners of adjacent lot
years na nyang ginagamit, hence laspag na yun.

Page 23 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
A. Conventional Therefore, how much can the seller be
If there was no stipulation as to the right of compelled to pay? 25,000 – ¼ of the value. The
redemption then no right of redemption longer the buyer is in possession of the goods, the
bigger the amount which has to be paid by the
Q: In the exercise of this right, how much seller.
would have to be offered by the seller in order
to redeem the property? Would the price paid Atty. Uribe’s Comment: It is reasonable. If the
by the buyer be sufficient in order to buyer has been in possession for a longer period of
repurchase the same? time then he would have tend more for the
A: Not necessarily, under the law, the amount preservation of the thing or fruits. In fact, if the date
which has to be offered by the seller a retro in the of redemption period is July 1 and the seller would
exercise of the right of redemption are: (1) price have to pay 50% in proportion to the period when
paid; (2) the expenses incurred by the vendee for the buyer was in possession counted from the
the execution of the contract; (3) necessary and anniversary date.
useful expenses incurred by the buyer.
Period in conventional redemption
Example BE: Ariel sold a land to Jessica for 10k with a
In the sale of land, in order to preserve the land right to repurchase expressly agreed upon
which is located beside the river, the buyer may between the parties. Because they were
have put up a wall in order that it may not erode. friends, they did not provide for a period within
The expenses incurred by the buyer will be which the seller may exercise the right to
considered as necessary expenses for the repurchase. But again, there was a reservation
preservation of the thing sold and such expenses of the right to repurchase only that the parties
have to be reimbursed by the seller, in the right of failed to fix the period.
the seller to repurchase the thing sold. a. When should the seller a retro
exercise the right to
Growing fruits repurchase?
Example b. If the seller failed to
Q: In a mango plantation, there may be fruits at repurchase within the period
the time of redemption. The value of the fruits agreed upon or the period
is 100k. Can the seller be compelled to pay for prescribed by law, what will be
the value of the fruits? your advice to the buyer in
A: The answer will depend on whether there are order to protect the buyer
fruits at the time of the sale. If there were fruits at more?
the time of the sale, the seller will only be obliged A: (a) The period is 4 years. Under the law, if
to pay for the fruits at the time of redemption if at there is a right of redemption but the parties failed
the time of the sale, the buyer paid for the price of to provide for such a period, the law itself says that
the value of the fruits. right may be exercised only within 4 years.
However, if the parties stipulated as to the period
So again, there were fruits at the time of within which the right may be exercised like 20
redemption, whether or not the seller would have to years, the law provides, it cannot exceed 10 years
pay for the fruits at the time of redemption would and hence the 20-year period will be reduced.
depend on whether or not there were fruits at the Hindi naman void yung 20 years totally, it will just
time of the sale. Take note that the sale may have be reduced to 10 years because the law provides
been 2 years before that or 3 years before that but that it should not exceed 10 years.
if at the time of the sale there were fruits and the (b) To file an action for the consolidation of
buyer paid for the value of these fruits, it is the title.
reasonable that the seller would also have to pay
for the value of the fruits at the time of repurchase. Q: In a sale with a right to repurchase,
ownership passes when? Upon the expiration
But if at the time of the sale, there were fruits but of the period to repurchase?
the buyer did not pay for the value of the fruits then A: No, it follows the general rule in sale that
the seller should not likewise be compelled to pay ownership passes to the buyer upon the delivery
for the value of the fruits at the time of redemption. as a rule.

There were no fruits at the time of the sale but Q: So what will be the effect of the expiration of
there were fruits at the time of redemption. the period for repurchase without the seller
exercising such a right? Or even if he did
Q: If a COS was entered into in 2001 and there exercise it was not valid exercise of a right, like
were no fruits at the time of the sale. However, for example: a total amount which should have
at the time of redemption April 1, 2005 there offered 500k. He only offered to pay 300k.
were fruits. The value of which is 100k. How Hence, the buyer can refuse and therefore the
much can the seller be compelled to pay for right to repurchase was not validly exercised.
these fruits? Thus, assuming there was no exercise of the
A: Under the law, the seller can be compelled to right to repurchase what is the effect on the
pay for the value of the fruits in proportion to the ownership of the buyer?
period in which the buyer was in counted from the A: Buyers right or ownership over the thing
anniversary date of this contract. Yung anniversary becomes absolute. During the period he has
date ay every Jan 1. Yung anniversary date this ownership but his ownership is subject to a
year Jan 1, 2005, from Jan 1, 2005 up to April 1, resolutory condition which is the valid exercise of
2005 - the buyer would be in possession for 3 the right to repurchase. If the right to repurchase,
months out of 12 months is ¼ of the entire year. his ownership will be terminated.

Page 24 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
will not automatically pass by mere default of the
Q: Would this be correct - that upon the lapse principal debtor because pactum commissorium is
of the period without the seller having void because the remedy of the creditor is to have
exercised the right to repurchase the the property sold in a foreclosure sale not to
ownership of the buyer becomes absolute? Is appropriate the thing. So to avoid those
this true also in sale of immovable? Or true requirements sa mortgage, ang gagawin ng seller/
only in sale of movable? creditor is to have the debtor sign a DOS with a
A: It does not matter, it is true in every COS with a right to repurchase because the moment the debtor
right to repurchase. From the moment by the fact failed to repurchase within the period, absolute
that the seller was not able to exercise the right to ownership goes to the creditor who is in that sale
repurchase within the period provided by law, the the buyer (creditor) a retro. Wala na syang
ownership of the buyer becomes absolute. kailangan gawin.

Q: The law requires for an action for If the instrument is a DOS with a right to
consolidation of title, is this necessary in order repurchase it may actually be considered as an
the buyer to acquire ownership or at least to equitable mortgage by just examining the terms
acquire absolute ownership? and conditions of that contract. There are certain
A: No, this action is only necessary if he would instances when the law itself provides for a
want the property to be registered in his name. In a presumption that this is an equitable mortgage
sale of immovable with a right to repurchase and under 1602.
the period for repurchase has already expired
without the seller exercising such right, the buyer BE: What are those instances?
can only have the property registered in his name 1. The price is grossly inadequate.
by filing such an action with the court. Thus, in Example: If the value of land is 1M, the
order to protect him further maganda yung action price stated in the DOS is 100k which is
for consolidation of title kaysa naman the thing will grossly inadequate. Kaya 100k yun kasi
be sold by the seller to another person. ang utang nya talaga 100k.

Q: Assuming you are a lawyer, a client asked Q: But is this presumption conclusive?
you to examine a document which is A: No, this is merely a disputable presumption. In
denominated as a DOS with a right to fact, the SC would sustain the validity of a sale with
repurchase and that client was the seller was a right to repurchase despite the gross inadequacy
the seller a retro (he would have the right to of price because somehow it would be
repurchase). However, upon examination of the advantageous to the seller a retro. In the exercise
terms and conditions of the contract, it appears of the right to repurchase, it is more advantageous
that the right has long expired. Thus, the client if the price is small because he can easily come up
asked, may I still be able to recover this parcel with that amount and repurchase the thing.
of land which is the subject matter of this
contract? 2. If the vendor a retro would continue to be
A: Consider the possibility that the client may in the possession of the thing after the
recover. Ask the client of the circumstances sale, which is unusual because if indeed
surrounding the execution of that document. Ask this is a sale then the vendee should be in
him “Why did you execute this DOS?” If the answer possession after the sale.
is “kasi po atty. nagka utang ako sa kanya 150k
tapos sabi nya instead of executing a mortgage Note: This is only a disputable presumption.
agreement, DOS with a right to repurchase”.
Anyway, from the DOS with a right to repurchase, Q: What if there was a stipulation in the COS
he may appear to be protected. Kasi if he owes that the seller will shoulder the capital gains
that person 1M and if he is given in the debt a tax? Would the presumption that this is an
period of 1 year within which to pay in the DOS equitable mortgage will arise?
with a right to repurchase, he would also have 1 A: No, the presumption will only arise if the seller
year within which to repurchase. Diba parang bound himself to pay the tax on the thing not the
pareho lang? But instead of mortgage he was capital gains tax. That would be the real property
asked to sign a DOS. If that is the case, clearly you tax.
can conclude that this is not an honest to
goodness sale with a right to repurchase. You can Atty. Uribe’s Story: Hindi ako magaling sa tax.
treat this transaction merely as an equitable Sabi ni Justice Vitug, he was our reviewer, kung
mortgage. Hence, he may still be able to recover sya raw ang examiner, he would only ask
what was the subject matter of that transaction. questions on general principles on taxation wala
ung remedies or procedure. Naniniwala ako kay
Q: Why would the creditor ask his debtor to Justice Vitug, it turned out yung mga questions
sign a DOS with a right to repurchase instead talagang general principles kaya naka-tyamba ako.
of a mortgage to secure the fulfillment of his He He He He 
obligation?
A: To ensure that the property will be owned by Anyway, under the law on taxation it is the seller
him automatically upon the expiration of the period who has the obligation to pay the capital gains tax
within which to repurchase and the seller a retro unless otherwise agreed upon with the buyer would
failed to exercise the right to repurchase which will have to pay the tax. The presumption that this is an
not happen in a mortgage. There is a principle in equitable mortgage will only arise if the seller
mortgage known as pactum commissorium. Upon bound himself to pay on the tax of the thing even
the default of the debtor the mortgagee, cannot after the sale. Kasi hindi sya owner, why should he
validly appropriate the thing for himself. Ownership pay for the tax on the thing?

Page 25 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
the children sold the land to a 3 rd person. Can
Note: Presumptions under 1602 would arise the 2 other brothers redeem as co-owners?
regardless of whether the sale is denominated as a A: No, because under the facts, they are no longer
sale with a right to repurchase or a DOS. It doesn’t co-owners. A TCT is not conclusive as to the rights
matter. Even if it is a DOS if there is doubt as to of the parties to a certain property. Pwedeng
whether or not it is an equitable mortgage. It has to apparently co - owners sila but in reality there has
be resolved as an equitable mortgage. already been a participation of the property, yun
lang hindi pa naka-reflect sa TCT. In fact, a
Q: Remedy of seller a retro? property may be registered in a person who is not
A: Reformation because the contract as written did the owner kasi na - forge lang yung signature ng
not reflect the real intention of the parties. The real real owner. Thus, the requirement of the law that
intention is to secure the fulfillment of the obligation the co-owner would have the right to redeem is not
of the vendor a retro (debtor). present therefore, there would be no right of
redemption.
B. Legal Redemption
Q: Who have the right to redeem? Q: A, B, C co-owners. A’s share ¼. B’s share ¼.
A: 2 groups C’s share ½. B sold his interest in the land to X.
1. Co-owners However, A and C both wanted to redeem. (As
2. Owners of adjacent lots (object is lot) co-owners they may have the right to redeem).
- consider if rural or urban land If they cannot agree on the portion of the share
of B which will be redeemed by both of them -
Co-owners what would be the final sharing?
Q: Co-owners of what thing, movable or A: C will have 2/3, A will have 1/3 because they will
immovable? have the right to redeem in proportion to their
A: It does not matter. share in that property. Note: they may stipulate as
to the sharing.
Q: A, B, C, D co-owners of land. D donated his
interest in the land to X. would A, B, C, have the Q: What if in the DOS executed between B and
right to redeem? X, the price stated in DOS was 3M. Hence, A
A: No, in legal redemption, the alienation by a co- and C can be compelled to redeem by paying
owner must be by onerous title (sale, dacion en 3M?
pago, barter). This act (donation) is gratuitous act. A: Not necessarily, under the law, if the price
Hence, no right of redemption. stated in this sale is unconscionable, the
redemptioners can only be compelled to pay the
Q: What if B sold his interest in the land to D. reasonable value. Ang posibleng value could only
would A and C have the right to redeem? be 1M pero ang nakalagay sa DOS 3M. Is it
A: No, because for A and C to have the right to possible that X did not pay 3M? Yes. Why
reddem, the alienation should be in favor of a 3rd would they do that? The reason for that is to pre-
person. empt A and C from exercising the right of
redemption. To discourage them from redeeming
Q: What if B sold his interest in the land to X. A, the property kasi kung mura yan they can easily
D, C, wanted to redeem. May they be able to exercise the right of redemption.
exercise the right of redemption? All of them?
A: Yes. All of them. The law protects the redemptioners - if the price is
unconscionable - they may pay reasonable value.
Q: Is this the same rule in adjacent lots?
A: No, in adjacent lots, there can be so many Q: What if the value is 3M but DOS stated 1M
owners depending on how it is big. The owner with but X actually paid 3M (1M was stated to reduce
the smallest land area would have the right to tax liability). How much A and C can be
redeem. compelled to pay?
A: Doromal vs CA
Q: What if the owners of adjacent lots would Held: The co-owners can only be compelled to pay
have equal area? the price stated in the deed of sale. The trial court
A: The first one who manifested his desire to sustained the claim of the buyer that they be
redeem. reimbursed the actual amount paid because
according to the trial court that would be immoral to
As to Co - owners pay only the amount stated in the contract. SC said
BE: Land owned by spouses was sold by the it was more immoral yung ginagawa ng parties to
spouses to their three sons in 3 different deeds pay only a small amount where in fact the real
of sale. In each DOS the specific area was amount paid is a much higher amount. Because
already described. After the execution of the the only purpose of this is to defraud the
DOS, these children would actually harvest government.
only their respective area. They wanted to have
their respective share registered in their own Owners of Adjacent Lots
name. They filed a petition for the cancellation Make a distinction between a sale of an urban land
of the title of their parents for that property to and sale of rural land.
be divided, they submitted their individual DOS.
But the petition was denied by the register of Sale of Urban land
Deeds because they failed to submit a Requisites:
subdivision plan. The RD cancelled the TCT in 1. The land is so small and purchased only
the name of the parents issued another TCT in for speculation
the name of the 3 children in one TCT. One of

Page 26 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
If that is the case, then the adjacent lot owners
would have the right not only right of redemption
but also of right of pre-emption. (Article 1622)

Dito sa rural wala right of pre-emption meaning


even before the perfection of the sale, the adjacent
lot owners would already have the right to redeem
by way of pre-emption. 30 days also 30 days from
notice of such intention to sell.

But in rural lands and alienation is by onerous


title. Another requisite: the land which was the
object the sale must not be greater than 1 hectare.

Also, for the owners to have the right of


redemption, the buyer from whom the property will
be redeemed must have another rural land.

Another requisite - the land sold and the land


of redemptioner must not be separated by brooks,
rivers in order that these lot owners would have the
right to redeem.

BE: Sisters A and B co-owners of land. B sold


her interest in the land to X a 3rd person. X sent
a notice to the sister of the seller, the other co-
owner informing her of such sale and giving
her copy of the DOS. Despite notice, A did
nothing. After that, X requested for the
annotation of the sale in the title of that
property in the RD. RD sent another notice to A.
A did not do anything. After so many months, X
wanted the property to be partitioned. A then
give notice to X that she is exercising the right
to redeem. Does A have the right to redeem?
Right of redemption must be exercise within 30
days from what?
A: The co-owner still has the right to redeem.
Under 1623, the 30-day period would start to run
only from the time the co-owner received from the
vendor. Sino nagbigay ng notice from the facts?
Una, yung vendee pangalawa yung RD. so hindi
yung vendor amd nagbigay. So 30-day period has
not started to run. Hence, he still has the right to
redeem.

Atty. Uribe: Under the facts, she received 2


notices, not only written notices but also copies of
the DOS. Under the principle of estoppel, she
cannot claim that she still has 30 days. In fact, in a
decision of SC involving a sale of a co-owner share
which sale was facilitated by the other co-owner.
But the latter claimed he can still redeem because
he did not receive notice. SC said sya ang nag-
facilitate ng sale so why he could not be given
notice, hence he had knowledge of the sale. This is
still consistent in the case of Doromal. If you
consider the provision literally it says “30 days from
the time of notice in writing is given by the vendor
to the co-owner”. Ang nakalagay sa batas, notice in
writing. Hence, apparently even a letter written
by the vendor would suffice and hence the 30 LEASE
day period would start to run? SC said: No, the
co-owner should be given a copy of the DOS and it Notes:
is only from that moment that the 30-day period will  Read the Definition of Lease under Articles
start to run. This is a good ruling - not any ordinary 1643, 1644, 1713.
notice but a copy of the DOS because in
redemption, the redemptioner is supposed to be  Consider also on Formalities: Articles 1647,
subrogated under the same terms and conditions 1724 in relation to 1403 on Statute of Frauds
as the buyer. How would he know the terms and and 1403, 1878 on Agency to Lease.
conditions of the sale if he is not given a copy of
the DOS. So he must have a copy.  Assignment and Sublease: Articles 1649, 1650

Page 27 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Held: It is not a contract of agency, since from the
 Implied new lease or tacita recunducion: terms and condition of the contract it appears that
Article 1670 (important) the control of Mariano over Merit does not go into
the manner and method of performance of the
 Rights and Obligation of the Lessor and obligation but only goes into the result of the
Lessee: Articles 1673, 1678, 1680, 1723 (take product and therefore it cannot be considered an
note several questions in the bar have Agency Contract.
appeared under these provisions)
Note: In Agency, the control of the principal over
 Period of the Lease if the parties failed to the agent is so pervasive that the principal can
Fixed the Period: Articles 1682, 1687 control not only the result but also the manner and
method of the performance of the obligation which
 Rights of Third Person: Article 1729 (ex: rights is not present in this case and therefore Merit was
of owner of materials against the owner of the not considered an agent of Mariano.
building)
Note: The first thing to consider in lease is to Q: As to the relationship of the taxi driver with
consider the kind of lease. his operator, is this a contract of lease?
A: SC ruled that this is in fact a lease but not a
Kinds of Lease: lease of thing, but lease of service specifically an
1. Lease of Things employment contract, this is because of the control
2. Lease of Work or Service of the operator over the taxi driver, as to when,
3. Lease of Right what time the drive operates the vehicle.

Note: Under the law, under 1642 only lease of Q: As to safety deposit boxes does this involve
things and work or service are mentioned. lease of things?
A: No, in the latest decision of the SC, it
Note: In lease of Service, there are four (4) of them considered the contract as special kind of deposit.
but three (3) will not be covered by Civil Law, which This cannot be considered a lease of things
are Household Service and Contract of Labor because the lessee has no control over the safety
(covered by Labor Law), and Contract of Carriage deposit box. In fact he cannot even enter the bank
(covered by Commercial Law). The only kind of where the safety deposit boxes are located if it not
Lease of Service that will be discuss under the Civil a banking hour, like when the bank is close so he
Law is the Contract for a Piece of Work. cannot enter therein.

Definition: Note: Again, to distinguish lease contract from


other legal relationship you have to consider the
Q: If a party, binds himself to give another the characteristic of the contract. The best way to
enjoyment or use of thing, does that make the remember the kinds of contract is to know by heart
contract one of lease of things? what are the real contract (mutuum, commodatum,
A: No, the most important distinction here with that deposit, pledge) and formal contract (antichresis,
of commodatum is that in lease, it must be for a donation). Aside from that it may be safe to
price certain, otherwise if there is no valuable consider as a rule all the other contract as
consideration for the use or enjoyment of the thing consensual contract, where no particular form is
it will be commodatum. required except in exceptional case: e.g. sale of
large cattle.
Q: If in the agreement one of the parties binds
himself to render service, for price certain As a rule lease, therefore is a consensual
would that be a lease of service? contract by mere meeting of the mind as to the
A: Not necessarily, because it may also be a object and to the consideration the contract is
contract of agency, where a person binds himself perfected.
to render service for another person it may be a
contract of agency, thus under 1644, in order for A contract of lease of things is essentially
the contract to be considered as lease of service, onerous. In fact in one case decided by the SC,
there must be no relation of principal and agent involving an agreement between the Bureau of
existing between the parties. Animal Industry and Mr. Bagtas, where 3 bulls
were delivered by the Bureau to Bagtas for
Distinguish a Contract for Piece of Work from breeding purpose. There was a period agreed
Contract of Agency upon for one (1) year, after the lapse, despite
demand for the return of the bull Bagtas failed to
Frensel vs. Mariano Ochaco do so, thereafter he died and so his estate was
Facts: Mariano asked Merit to construct an edifice required to deliver to deliver the 3 bull but only the
for him and agreed that Merit was to supply not 2 were returned and the third bull could not be
only Labor but also Materials. Merit bought the returned allegedly on the ground that the said bull
materials from Frensel, however the price of the died in a crossfire between the Hukbalahap and
materials remain unpaid so Frensel demanded the AFP, so the claim was fortuitous event.
payment from Mariano, the ground relied upon by
Frensel is that Merit was an agent of Mariano Claiming that the agreement was
therefore, for failure to pay the price, Frensel claim commodatum it was argued that since there was
that Mariano can be held liable for the price of no transfer of ownership in commodatum, then the
material. risk of loss would still pertain to the Bureau.

Page 28 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
SC ruled that this cannot be help which when resolve Atty. Mutuc now
commodatum, because there was stipulation for demanded for his Atty. Fees.
the payment of breeding fee that has to be paid by
Bagtas, it cannot be commodatum but a lease of One of the defenses raised by Dy was that
thing, because there was a compensation to be there was no written contract between the parties
paid for the use of the bull. Again a contract of and therefore he is not entitled to Atty. Fees.
lease of things is essential onerous.
Held: Documentary formalism is not an essential
Note: Lease of things is not essentially personal. element in the contract. In fact the contract may be
express or implied. Thus, the absence of a written
Heirs of Fausto Dimaculangan vs. IAC contract will not preclude a finding that there was a
Held: Upon the death of parties like death of professional relationship which merit attorney’s
lessee, the contract is not thereby terminated. The fees for professional service rendered.
heirs of the lessee may continue to occupy the
premises by virtue of the lease because it is not Lease of Things – certain provision of the law
extinguish upon death of lessee. which requires certain forms to be enforceable.

Characteristic of Lease of things Under 1403, Statute of Fraud, when there


1. Consensual Contract is a contract of lease over an immovable and it is
2. Onerous (essentially onerous) for more than a year, the contract of lease must be
3. Bilateral in writing in order for it to be an enforceable
4. Nominate contract.
5. Principal.
In 1878, if a person is authorized to lease
Essential Requisites of Contract of Lease an immovable property of another for more than 1
1. Consent year, that person or agent should have special
Note: As a contract again, you have to go into the power of attorney.
essential requisite of contract in general which
would be applicable also to lease. Note: the problem in lease would normally be a
combination of an agency and lease.
But specifically as to consent in sale, there
are people who are prohibited from entering in BE: Where a principal appointed an agent
specific kind of lease, those mentioned in 1490, granting him unlimited and general
1491. When spouses are prohibited from selling to management over his properties withholding
each other similarly they are also prohibited from no power from him and authorizing the agent to
entering in contract of lease as spouses. act as may deemed appropriate. With this GPA
the agent entered in a contract of sale and two
As 1491 is also applicable to lease, hence (2) contracts of lease. The first lease pertains to
the guardian cannot lease property of the ward as a parcel of land in Kalookan for 4 years and
much as the agent cannot lease the property of the rental to be paid annually for 60k a year. He
principal which he is suppose to administer. also lease a certain land in QC but they did not
fixed the period of lease but they agreed on
2. Object payment of rentals on monthly basis rate of 3k
Q: In lease of things, may a consumable thing per month. These contracts were entered into
be the subject matter of lease? while the principal was in the hospital. Rule on
A: Normally when a consumable thing is use in the validity and binding effects of the contracts
accordance with its nature it is consumed, as a rule upon the principal.
therefore consumable things cannot be the subject A: The problem pertains to both lease and agency.
matter of lease of things. The exception is, when However in the problem itself there was no
the use of the things is only for exhibition, or when statement if the lease agreement itself was in
they are accessory to an industrial establishment writing.
then it may be a subject of lease.
As suggested answer, in the first lease,
3. Cause since it was for 4 years and involve as lease over
Lease of thing – the consideration for the lessor is an immovable and pertains to an act under 1878,
the payment of rental then the agent should have a special power of
attorney and under the facts he was only given a
Lease of work or service - it is the compensation to general power of attorney, hence since armed only
be paid by the other party by GPA, the contract is unenforceable as against
the principal.
Lease of right – it is the payment of royalties which
is the cause and consideration of the one leasing In the second lease, the agent
the right to another represented the principal did not fix the period of
the lease but only fixed the monthly rental of 3k,
FORMALITIES therefore under 1687, this will be construed as a
Lease of Service – there is no particular form month to month lease. Since only month to month,
required by law for the validity of the lease not involve merely acts of administration therefore not
even for the enforceability as a rule. require SPA therefore the second lease will be
valid and binding upon the principal.
Donald Dy vs. CA
Facts: The brother of Dy had a problem in one of BE: Agreement for the repair of a private plane
the casino in Las Vegas, so he ask Atty. Mutuc to and for a certain sum of money, however

Page 29 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
additional work was requested by a person who builder in good faith he therefore has the right
has the authority of a duly recognize to retain the thing until he is reimbursed. What
representative of the owner of the plane and are the rights and obligation of the lessor and
the request was merely verbal, when the lessee? Can the lessee be considered a builder
additional work was completed, the one who in good faith in the first place?
rendered the work demanded additional A: No, he cannot be considered a builder in good
payment, the defense raise was under 1724 in faith as he was merely a lessee and he is not
order that a claim for additional payment for the claiming ownership over the parcel of land when he
additional work, the agreement for the constructed the building therefore he has no right
additional work must be in writing and the of retention. In fact under the law the lessor has
changes should be authorized in writing. the option of appropriating the improvement or
A: The suggested answer of UP will sustain the requiring the lessee to vacate the premises and
defense because of 1724; such change not being remove the improvement. But if he decides to
authorized in writing, the request was merely appropriate the improvement for himself he has to
verbal then the claim may not prosper. pay 50% of the expense incurred by the lessee
because it is a useful improvement. If the lessor
Atty. Uribe agrees more in the alternative decides not to appropriate, the lessee may remove
answer where in provides that, the person who the improvement even if that would cause damage
requested though verbal was the authorized to the land as long as there is no unnecessary
representative of the owner, and this is given damage cause to the land.
already as a fact. If the defense would be sustain
under 1724 then there will be unjust enrichment on BE: Instead of building it was a chapel that is
the part of the plane owner. constructed by the lessee, will the same rule
1724 would give the proprietor the right to apply?
raise the defense that testimony may not be A: Consider also as useful improvement by the UP
admitted pertaining to a change in the plans Law Center.
because it was only verbal change, but the
moment the fact is established already, you can no Note: If the improvement however is an
longer invoke 1724 but you can raise it as a ornamental improvement and the lessor wants to
defense if there is a witness that is being presented appropriate the same, he has to pay for the value
in the effect that there was request or additional of the improvement not merely 50% but the value
change by invoking 1724, the additional change of the improvement itself.
not being in writing then no person may testify as
to such fact. BE: Pertain to construction of a building, where
an architect was authorized aside from
But in the problem given it was mentioned designing of the building also to supervise the
as a fact, that the verbal request was made by a work of the contractor. When completed it was
person authorized by the plane owner. Again the delivered to the owner however within 15 years,
better answer is the alternative answer, that, for the it collapse because of the earthquake due to
owner to be able to raise the defense under 1724, faulty construction, and it was the only building
would constitute unjust enrichment after he actually that collapse no other building. What are the
requested for such change thru an agent. rights of the owner against the architect and
contractor? Can the owner demand the
RIGHTS AND OBLIGATIONS OF THE LESSOR reconstruction of the building considering that
the cost of the construction of the building has
As to necessary repairs of the thing lease, tripled from the time of construction up to the
this is an obligation of the lessor, under the law the time of collapse?
lessor is oblige to make the necessary repairs. A: Under 1723, the owner can hold the architect
and contractor solidarily liable. Because the
Gonzales vs. Mateo architect not merely designed the building but also
This involved a contract of lease over a cockpit. It supervise the construction hence under 1723, they
was stipulated in the contract that “ang lahat ng are solidarily liable.
kailangang gagawin sa bahay sabungan ay
ipagagawang lahat ni Ginoong Gonzales (lessee) Under 1167, in obligation to do, if what
sa kanyang sariling ukol, na ang samahan ay has been poorly done may be undone at the
walang sinasagot”. In other words the lessee, expense of the debtor, in fact he can have another
bound to do the necessary repairs, so when the person to do the work at the expense of the debtor.
cockpit collapsed the lessee was held liable, even Notwithstanding that the cost tripled he may validly
if the lessor under the law has the obligation to do so.
make the necessary repairs it is still subject to
stipulation of the parties. Under the present practices in the real
estate business this may no longer happen. The
BE: A lease contract was entered into between liability of the architect and contractor normally may
A and B over a parcel of land for a period of 15 not happen because the standard practice
years wherein the lessee conducted his nowadays the architect would be totally separated
business where he constructed a 3 storey bldg from the contractor. As of now there would be a
for 300, 000. Upon the lapse of the 15 year project construction manager that would represent
period the parties not having been able to the owner in supervising the work of the contractor
agree on the extension of the lease, the lessor and no longer the architect.
demanded the lessee to vacate the premises.
Lessee refuse to vacate until he is reimburse RIGHTS AND OBLIGATIONS OF THE LESSEE
the 300, 000 and arguing that since he is a

Page 30 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Note: Two (2) favorite articles are 1649 pertaining therefore this lessee will be reverted back to his
to assignment of lease, and 1650 on sublease. rights, since he still has until June 1, so this made it
merely as sublease.
Q: The question in the Bar may be as simple as
may a lessee sublease the property without the There were other stipulations in the
consent of the lessor and what are the contract which made them to conclude that this is
respective liabilities of the lessee and merely a sublease. Like, in the contract, there was
sublessee? a prohibition by the lessee upon X from cutting the
A: Articles 1649 and 1650 would tell us that a trees on that land witout the consent of the lessee,
lessee may not assign his right on the lease so why would he prohibit X from cutting the trees if
without the consent of the lessor however he may he would consider himself from being
sublease the property in whole or in part even disassociated from the lease contract. In other
without the knowledge of the lessor as long as he words, he still intervened in the contract with
was not prohibited from subleasing the premises. respect to the subject land”.

BE: In the contract the lessee was prohibited There was stipulation also as to payment
from assigning the lease in one (1) floor of the of taxes. If the contract was really involve
building but what the lessee did is sublease the assignment of the lease, he should have nothing to
property, would that sublease bind the lessor? do anymore with the property. He would have
A: Yes. He was only prohibited was assign the disassociated himself from the original contract of
lease but was not prohibited from subleasing the lease such that, the parties that would remain
premises. In fact the lessor need not prohibit the bounded by the contract was only between the
lessee from assigning because under the law he is lessor and the assignee.
prohibited from assigning his interest as a lessee
without the consent of the lessor. If there is a Frensel vs. Mariano Ochaco
stipulation which must be state in the contract is In this case, the theory of Frensel that
the prohibition to sublease the premises in order to Merit was merely an agent was not sustained by
bind the lessee. the SC. SC sustained that theory that the
relationship of Merit and Mariano was that of a
Ultimately therefore the problem here is if employer or a principal an contractor in a contract
there is a contract entered into by the lessee with a of piece of work. Thus, can the supplier of the
third person involving his rights as a lessee, would material, Frensel, recover from the employer in
that contract involve assignment of the lease or a contract of piece of work? There appears to
merely sublease? be no privity of contract. There would be privity of
contract between the owner of the edifice Mariano
Malacat vs. Salazar and Merit in their construction agreement. And it
Facts: The lessor entered in a contract with the would be Merit and Frensel in the contract of sale.
lessee for a period of 20 years from 1947 to June So Mariano has no privity with the seller of the
1, 1967. however during the lease period, the material Frensel. Thus as a rule, there would be
lessee entered into agreement with third person no cause of action. In fact SC dismiss the case
without consent of the lessor, thereafter the lessor filed by Frensel. Although in fairness, the SC
question the validity of the contract on the ground ruled, in the absence of material mens lien the
that this was entered without his consent and action may not prosper.
claiming that this was an assignment of lease, void This case was decided in 1960, if the
therefore he can recover the property from the sub- action was filed today, may the action of
lessee. Does the contract involve assignment of Frensel prosper? Yes, under the theory of unjust
lease or merely sublease. enrichment, incorporated under Article 1729, that
the supplier of material may recover such amount
Held: Whether the contract is assignment of lease owing to him by the contractor to the extent that the
or sublease, would depend on whether there was owner of the edifice is still indebted to the
absolute transfer of rights from the lessee to the contractor.
third person, such that he desist himself from the
lease contract and his personality, resulting now in For example the owner of material is
two (2) persons the lessor and the assignee, and claiming 3 million, but the owner of the edifice is
the latter is now converted in to the new lessee. still indebted to the contractor for 5 million and the
However if the lessee retains interest no matter project has been completed, the supplier may
how small in the contract of lease then it will be recover from the owner of the edifice himself
treated only as sublease. instead of claiming from the contractor.

So again, in an assignment of lease there Again, on the basis of unjust enrichment


has to be an absolute transfer of interest by the principle, since the owner of the edifice really owes
lessee of his rights and he disassociated himself the contractor and this liability of the contractor
from the contract however if there is reversionary may not excuse by the fact that he already paid the
interest retained by him then it will considered contractor, if the payment was made in advance. If
merely as sublease. his obligation was not due and yet he paid the
contractor the supplier of the material, can still
In this contract, the SC merely treated it as recover the price of the material from the owner of
a sublease and therefore valid even without the the edifice.
consent of the lessor, because, first the contract
was with a period that would last only until May 31, The liability of the owner may not also be
1967, upon the termination of the contract, there excuse by the fact that the contractor waived his
would still be one (1) day in the lease agreement, claim against the owner.

Page 31 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
A: In a lease of thing, death of the lessee does not
Ultimately even if the owner has already terminate the contract. A contract of lease is not
fully paid the contractor at the time it is already due essentially a personal contract therefore upon the
and demandable he may still be held liable to the death of the lessee, it may be continued until the
supplier of the material if he did not demand for the expiration of period of the lease by the heirs.
delivery of a construction bond which would (Case: Heirs of Dimaculangan vs. IAC)
answer for the claims of the laborer and suppliers
of materials. IMPLIED NEW LEASE

BE: This pertains to the lease of fishpond. The Note: One of the most favorite in the bar exam.
agreement was for five (5) years however after
one (1) year period of the lease, the lessee BE: The question in the bar could be as simple
demanded from the lessor for (a) reduction of as under what circumstance would an implied
the price and (b) extension of the lease for new lease or tacita recunducion arise?
another 1 year because he was only able to A: Under the law, the only requirement is that
harvest half of what is normally being 1. The lease period has expired and
harvested in the fishpond due to unlawful 2. The lessee continues to be in possession of the
elements from the area, extorting money from lease for at least 15 days from the time of the
those leasing the property in that area. expiration of the lease and
A: If we are to consider the relevant provision on 3. No notice to the contrary from the lessor and the
this matter, the law provides that reduction of rental lessee.
may only be demanded by the lessee if he
harvested less than half of what normally would be BE: Pertain to contract of lease entered into for
harvested in that property. Normally it can already period of 3 years Jan 1, 81 up to 1984. Rentals
be said that he is no longer entitled to the reduction were paid on monthly basis. It was stipulated
because under the facts, he was able to recover that the lessee has the option to buy property
one half. At any rate even if he was only able to at a certain price within a certain period (option
harvest less than one half this would not entitle him to buy). Despite the lapse of the 3 year period,
to reduction of rentals, because under the law, this the lessee did not exercise the option, but
may only be claimed if it was due to extra ordinary continued to be in possession of the property
FE event as oppose to merely an ordinary FE. and paying the monthly rentals and the lessor
Storm is an ordinary FE, what could be considered accepting the same. This continued until June
as an extra ordinary FE event is pestilence, 1984 when the lessee stated that he would now
unusual flood. buy the property in accordance with the option
to buy. The lessor refuse, caliming there was
Thus, the presence merely of unlawful no more option. Was the lessor correct? Yes.
element may be considered as extra ordinary FE Was it correct to say that there was extension
under the law and may not be considered as a of the lease under the facts?
basis for the claim of reduction of the rental. A: Yes, there was an extension known was implied
new lease. However, with the implied new lease it
As to claim of extension of the lease, does not mean that all the terms and condition of
again for the same reason, even if there is a FE in the contract in the original lease continue also.
contract of lease of thing, the happening of which First as to the term, under the law, the term of the
would not give the lessee the right to have the renewed lease would not be the term agreed upon
contract extended that would only result to but only be of a period depending on the manner
suspension of the lease during the happening of the rentals are paid. If the payment is on annual
the FE. Example, war as FE would only have the basis, the renewal would only be for a year and if
lease suspended and the lessee may bot be monthly payment of rental is made, the implied
compelled to pay the rentals during that period but new lease would only last for 30 days.
would not give the lessee the right to extend the
lease contract. As to the option, it was renews, SC held,
in an implied new lease, only those terms and
TERMINATION OF THE LEASE conditions which are germane in a contract of
lease are deemed renewed as to the rest like
BE: A building was constructed by A, for this B option to buy, will not be considered renewed.
gave A 5 million pesos with the agreement that Even in the facts of the case itself, it was stipulated
B will be the lessee of the entire building for a that the option may be exercise within the period
period of 10 years for 1,000 rentals a month. agreed upon (3 years).
However, on the 5th of the agreement the entire
building was burned due to FE without fault of
anyone. A reconstructed the building, just
before the building is completed, B notified A
of his intent to continue the lease, as to
complete the 10 year period. A refuse, is A
justified in refusing B’s offer to continue the
lease?
A: Yes. He was justified because by the destruction
of the lease due to FE the lease contract was
terminated so it can no longer be continued.

BE: Discuss the effect of death of lessee,


lessor, agent and principal.

Page 32 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
AGENCY
Definition 1868, 1874 and 1878 - formalities

Because a form is required for the validity or for


the enforceability of the contract entered by the
agent-1878, 1874

1892 - pertain to appointment of the substitute-


effect- may the agent nonetheless be held liable for
the loss that incurred by the principal as the result
of the appointment of the substitute.

Other provisions pertain to the right and obligations


of commission agent or more importantly the
guaranty commission agent – 1907 - 1908

Effect of death -1919, 1930 and 1931


Either of the agent or principal

Revocation - kind of agency - agency coupled with


interest - 1927

BE: A asked her best friend to B buy for her


certain items in a grocery store. Is there a
nominate contract created between A and B?
A: Better answer, if B agreed to the request of A,
an agency relationship has been created, a
nominate contract has been created.
Alternative Answer: I can agree with the answer
given by the UP Law Center that a lease of service
may have been created so long as there was no
principal agency created or existing between A and
B, although from the facts hindi ito lease of service,
bestfriend eh, good possibility, so that’s why I can
agree with the alternative answer of the UP Law
Center the absence of principal agency relationship
may result in a lease of service.

Q: I’m sure all of you or most of you must have


been a proxy in a baptismal or wedding
ceremony, but also you may have ask by a
politician to represent in gathering because
probably he may be in another gathering in
another place, so if you’ve been a proxy in a
wedding ceremony or baptismal ceremony,
actually accepted the request of the real ninong
or ninang then it mean an agency relationship
created between you and the actual ninong or
ninang? Or if you have accepted the request of
the politician were for you to deliver the speech
in a gathering would that result an agency
relationship?

Page 33 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
A: In both instances, no. It may appear under the right to sell a particular brand / product in a territory
definition of agency under 1868, that there is such .
an agency relationship because as defined, a Distinguishing Contact of Agency from other
contract of agency at first bind himself to render Contract and other Legal Relationship
some service or to do something in representation Consider the characteristics of a contract of agency
or on behalf another with the consent or authority as a contract and as a legal relationship business
of the latter. So, kung proxy ka that would fall organization.
under 1868 di ba but the definition has been
criticized by some authors, one of them is Justice CHARACTERISTICS OF A CONTRACT OF
Reyes, that the definition of a contract of agency AGENCY
under 1868 does not contemplate social and Q: Real? Formal?
political representation, hindi kasama ang social A: Definitely it is not a real contract and also not a
representation, political representation in order to formal contract.
have a contract of agency under the New Civil
Code, the purpose of the agency must be the 1. Consensual - conclude that it is consensual
execution of the juridical act, the agent must ask or contract. It is perfected by mere meeting of the
bind himself to execute a juridical act, meaning the minds as to the object and consideration of the
act that will be executed by the agent on behalf of contract.
the principal should either create, modify or
extinguish a legal relationship between the 2. Principal - Why it is a preparatory contract?
principal and a third person. This is a distinct feature of agency similar to
partnership, they are both preparatory contracts,
Concretely if the agent was authorized to they can stand on their own don’t depend on any
buy, the act - the contract entered into by the agent other contract for their validity, which means that
with the third person would create a legal even if the agent did not enter into another
relationship between the principal and the third contract, which means he did not perform their
person, that would be a seller-buyer relationship, obligation it doesn’t mean that the contract of
so it is a juridical act. agency is void, he may be held liable to such other
contract for not performing his obligations, this is
On the other hand, if the agent is an agency in problems pertaining to agency, you
authorized to pay an indebtedness of the principal should always consider the facts that normally, 2
to a certain person or to a bank and he in fact paid contracts involved, you have to deal with the
the said amount, the result of the act is the requisite of both contracts, in order to enable to
extinguishment of the existing legal relationship, reach the correct conclusion, this is the principal -
the legal relationship would be the debtor-creditor agent with the contract of agency and second
relationship between the principal and third person, contract will be the contract entered into by the
which would be extinguished by the act of the agent with the third person, this other contract may
agent known as payment. be a lease, sale, or any other contract an act made
by the agent.
Again therefore for a contract of agency to
arise the subject matter or the object of the As of Principal contract, it can stand on its own
contract must be the execution of the juridical act, even if the agent did not enter into another contract
mere social or political representative would not
result to a contract of agency. Q: Now, is this contract similar to sale as to
cause, in that it is also essentially an onerous
Q: If a contract well first if the instrument is contract?
titled or denominated as with agency does it A: No, but it is presumed to be for compensation,
mean that there is an agency relationship presumed to be onerous, however it may be
between the parties entered into a contract? deemed gratuitous. Gratuitous also different from
A: Not necessarily, again the contract is not the partnership, because partnership is essentially
what parties want to call it to be, but rather how the onerous, a partner will always have to contribute
law will consider such contract if it is the law something, now after this a nominate contract -
determines the nature of the contact depending on commutative contract.
the stipulation of the parties.
As distinguished from other legal relation, you
Q: But what if the agency was used by the have to go into the feature of a contract of agency,
parties in the stipulation? Does it mean that it how it is created? Then you will know, for example
is a contract of agency? that is different from other legal relationships,
A: Not necessarily, in Quiroga vs. Parsons the which are created by operation of law like,
word agency appeared about 3 times in the negotiorum gestio, agency and negotiorum gestio
contract but the word agency does not pertain to a may be similar in the sense that there is
contract of agency but it pertains to another representation in its legal relationship but they can
concept of the word agency. You can use the word be distinguished as to their manner of creation in
agency several times in another concept like it may that agency is created by mere agreement of the
be an instrumentality like a travel agency, security parties, negotiorum gestio created by operation of
agency, or even a government agency, but their is law.
no agency relationship or it may pertain to
exclusive right to sell in a particular territory diba, A feature of agency which is peculiar is
so there is an exclusive he is considered an representation.
exclusive agenct to sell a particular brand in the No representative in a contract - he cannot be
province of Iloilo, there is actually no agency considered as an agent.
relationship created, it is done only in an exclusive

Page 34 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Nielson vs. Lepanto Minning (LM) personalities would be that personality of the
Held: While there was a claim by LM that there is principal and the personality of the agent.
an agency, the SC ruled that not a contract of
agency. Nielson has no power of representation to Some authors would classify contract of
bind LM with third person even it has power to buy agency into three:
certain items he still has to obtain or seek the 1. Actual agency
opinion or approval of the BOD of the LM in order 2. Apparent / Ostensible
to buy certain items, which means he is not really 3. Estoppel
an agent as to their has no right of representation.
1. Estoppel
But a feature which would make agency similar
to partnership Kang Case
It is based on trust and confidence that there are Facts: Flores appears to have full control in a
fiduciary obligations of an agent as much as there restaurant (Washington Café) owned by Kang and
are fiduciary obligations of a partner unlike in sales in the administration of the restaurant he bought
or other legal relationships which are not based on certain items from Mack - items needed for
trust and confidence. restaurant. But a portion / price was not paid by
Flores. So Mack (seller) went after the owner of the
Another very important feature of Agency is the restaurant. The only defense raised by the owner
manner of termination. was that Flores was not his agent.

This is unusual for a contract that it can be Take note: It is very difficult to prove actual
terminated at will by the principal agent, maski agency, because an agreement between 2
sino. If the termination was made by the principal, it persons, eh kung verbal lang ang agreement dun,
is called revocation. if made by the agent it is how would you be able to prove?
called withdrawal.
Held: The owner of the restaurant can be held
Mariano Case liable by estoppel because he clothed Flores with
To extend the contract of one party over another - full power as if he had the authority to buy those
in agency the principal has almost full control of the items necessary for the administration of the
agent, he can give specific instructions to the restaurant. Aside from that, Mack was able to
agent, on how the obligations are to be performed, prove pieces of evidence - like in the lease
the manner of the obligations, the remedies agreement over the building where the restaurant
performed, with whom, where it is to be performed, was located and comes the owner of the restaurant
lahat, that would be the extent of the control of the as lessee and Flores signed as an agent of the
principal over the agent. lessee with all these the SC ruled that the owner of
the restaurant is liable under the Principle of
But as held in the case of control of one party Estoppel.
over another which only goes into the result, it
cannot be considered as a contract of agency but it 2. Apparent / Ostensible
may be considered a contract for a piece of work.
Rallos Case
Another important feature as to effect of Facts: Letter was sent by B to X, informing X that A
delivery of the thing has the authority to enter into a contract with X
If there is a transfer of ownership upon delivery specifically to obtain goods from X, like copra,
of one party to the other party, that is not a contract abaca which goods will be sold by A. After the sale
of agency. In a contract of agency, when the a portion can be deducted as a commission and
principal delivers the thing to the agent, only the rest to be delivered to X. After a certain period,
possession is transferred to the agent, ownership the goods obtained by A from X remained unpaid.
is retained by the principal (owner) in fact in In other words, A will get the goods from X. A did
agency to sell, an agent who was not able to sell not deliver the proceeds of the sale. X demanded
he has the right to return the goods to the seller. payment from B. The defense of B was as of that
moment from that certain period he has already
Whether there was a stipulation as to there revoked the authority of the agent and therefore be
would be no transfer of ownership despite the bound by any contract entered into by A in
delivery of the goods from one party to another, representation of B with 3rd person. Is the claim of
and ownership of the goods, first party will only be B tenable?
terminated upon the sale of the goods to a third No, 1873 so far as 3rd person are concerned, this
person, despite another stipulation stating that notice itong letter nya kay X remain in full force and
there is no agency relationship created between effect until it is rescinded in the same manner it
the parties. The SC ruled actually principal agent was given.
ang relationship nila.
Q: What if B was able to prove that he posted
2 concepts similar in agency and partnership the notice in Manila Bulletin - notice of fact of
Both of them are business organizations, both are revocation of A. If there was such publication
based on trust and confidence, there would be of notice, would the ruling of the SC be
normally a representation, however the very different?
important distinction between the two - in A: No, still the same (Article 1873)
partnership, there is a juridical personality created
separate and distinct from that of the individual (See phraseology of 1873)
partner. In agency, despite the perfection of a Q: What if in this problem he had actual
contract of agency, wala sila pa rin, the only knowledge of the revocation even if he did not

Page 35 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
receive the letter eh under 1873 he should be Issues: (1) Who was then the agent during the
sent a letter in order that the revocation of period?; (2) Can the 1st agent be held liable after
authority of A will be effective as to third the appointment of another administrator?
person?
A: If the 3rd person has actual knowledge of the Held: From the silence of the principal, due to his
revocation, it is bad faith on his part to continue inaction, due to his failure to repudiate the acts of
transacting with the agent. The agent acting on the substitute, he is thereby deemed impliedly
behalf of the principal and thus he should not be consented to the appointment of another person as
allowed to recover. the new agent, therefore implied agency was
created.
Pwede nabasa yung publication, informed by
phone, telephone conversation but it is very hard to This goes to implied agency pertaining to the
prove because the word of the principal is against principal because of the silence of the principal,
the 3rd person. because of lack of action of principal, because of
failure to repudiate the acts of another principal, na
As far as 3rd person are concerned they would alam nyang was acting on his behalf.
have the right to believe that the agency has the
authority until they have receive a notice in the Q: However, is this rule applicable also to the
same manner that he received notice as to the agents or to the other party? Concretely, if a
authority of the agent. person was asked to administer the property of
another or to sell the property, and he said
Q: In agency by estoppel / apparent agency, is nothing - by his silence, by his inaction, may he
there really an actual agency existing? be deemed to have accepted agency?
A: It does not matter, the principal can be held A: Not necessarily, thus under the law, you have to
liable under the Principle of Estoppel because it is make distinction to determine the scenario under
very hard to prove the existence of the actual which the said appointment was made, okie! The
agency. It can only be the principal in estoppel that law would say when the 2 parties are absent, and
can be held liable. Just like in apparent / ostensible when the 2 parties are present.
agency sa totoo lng it is possible that he did not
revoke the authority pwede pa din diba, pwedeng When 2 parties are absent - 1 is in Manila and the
kunwari nirevoke na niya just to avoid liability to 3rd other is in Cebu.
person but that is a matter or a claim that he
already revoked. Pati mga letter, halimbawa even When 2 parties are present - present in the same
assuming the principal held a letter to the agent room
that letter can be easily denied kunwari, pinadala
nya 3 months ago pero ngaun lng pinadala nilagay (A) 2 persons present - present in the same
nya lng ung date nung unang panahon. Thus, it conference hall
only protects 3rd person. Thus, 1873 is included in
the law in agency. Q: When both parties are within the same
conference hall, A said to B that he would sell
3. Actual Agency his (B) parcel of land in Cagayan De Oro City
The law itself classifies actual agency into – as to but that B did not react, he just stared at the
manner of creation, express or implied. There is no speaker, nakatingin lng sya, he said nothing, by
problem with express agency. his silence would have deemed the agency?
A: No.
A. Express Agency - it is a kind of agency
wherein the consent of both parties is Q: But if B delivered a special power of
expressly given. attorney to A, sabi nya “Here is the SPA, I am
authorizing you to sell my parcel of land in
B. Implied Agency - were the consent of one Cagayan De Oro City”. The SPA was accepted
of the parties was only impliedly given on by B but he said nothing, basta tinanggap na
the part of principal. lng nya, deemed impliedly consented to that
agency?
Dela Pena vs. Hidalgo A: Yes.
Facts: Dela Pena authorized Hidalgo to administer
his properties in the Philippines, He has to leave (B) If 2 persons are in different place, one in
the country. Hidalgo managed the properties of Manila and the other one in Cebu
Dela Pena, after a while he has to leave the
country also and go to Spain for health reasons. So Q: What if A was in Manila B in Cebu. A asked
he appointed another person, another Hidalgo to B to be his agent to sell a parcel of land and B
administer said properties of Dela Pena and wrote did not say anything, wala lng, is B considered
a letter to Dela Pena informing him of the to have impliedly consented as an agent?
appointment of another person to replace him as A: No.
the administrator of his property. Dela Pena
received a letter, he did not reject the appointment, Q: But this time again a SPA was sent by A
he did not question the acts of the new (Manila) through DHL to B (Cebu) which was
administrator. After a while he died and his heirs accepted / received by B, now he did nothing
(Dela Pena heirs) filed an action against Hidalgo by his inaction, by silence he is deemed to
(the 1st agent) for accounting, damages etcetera for have accepted the agency?
the period after the appointment of the other agent. A: Not necessarily, it will depend on the nature of
the business of B, kung ang negosyo, again under
the facts in the Special Power of Attorney he was

Page 36 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
authorized to sell the parcels of land of A, if B was into the contract entered into by the agent with the
in the business of piggery / poultry ay walang 3rd person. 1874 and 1878 - formalities.
kinalaman yan sa selling of a parcel of land. He will
not be considered to have impliedly accepted the REQUISITES OF A CONTRACT OF AGENCY
agency. However, if B is a real estate broker, Essential requisites of a contract of agency are like
talagang ganun yung negosyo nya di ba, buying any other contract - there are 3 essential elements:
and selling parcels of land, then and only then on (1) consent of the contracting parties; (2) as
his silence, he is deemed to have impliedly mentioned a while ago, the object of a contact of
consented to the agency. agency is the execution of the juridical act; (3) as to
cause, as far as the principal is concerned it is the
COMPENSATION OF THE AGENT service to be rendered by the agent and as to the
Q: As to the compensation in a contract of agent, it is the compensation to be paid by the
agency consider again if agency is gratuitous principal or it may just be liberality in gratuitous
or onerous? contract.
A: Agency is presumed to be for compensation. If
that principal is claiming that the agent agreed to Rallos Case
render service without compensation the burden is Held: The SC enumerated the essential elements
on him (the principal) to prove that in fact it is or the alleged essentials elements of a contract of
gratuitous because the law presumes that it is for agency:
compensation. But there is one other relevance in 1. Consent
this distinction - for example, due to the negligence 2. Execution of the juridical act - subject
of the agent the principal suffered damages in the matter
amount of 100k. It was actually proven that the 3. Acts within the scope of authority
agency was gratuitous. The agency in other words 4. The acts must be in representation of
sa abogado, pro bono or libre ang serbisyo nang the principal
agent, may the agent be held liable?
A: Of course sa abogado even if pro bono yan if he Atty. Uribe’s Comment: These are allegedly the
caused damage to the principal or client due to his essential elements. Again, some authors would
negligent acts, he can be held liable. However, discuss in their books that these are the essential
under the law if the contract of agency is gratuitous elements. With due respect to the ponente of this
in character, the court may mitigate the liability of case, medyo mali mali ang enumeration, first there
the agent, dahil gratuitous. was nothing mentioned about the cause or
consideration as a contract, a contract will never
Atty. Uribe’s Comment: I definitely agree with the validly have a cause or consideration. Well, it may
provision. As to this, the only recognition of human be liberality, pwede naman cause yan but there
nature, pag walang sweldo mahirap mgtrabaho, in must have a cause. That the agent act within the
fact, mahirap gumising sa umaga. Buti na lng scope and that the agent must act in
nauna ang sweldo sakin ditto sa review kaya representation are not essential elements of a
ganado ako magsalita  contract of agency. They are actually obligations of
the agent which means they have already
Article 1909 - The liability of the agent for causing perfected the contract of agency. No obligation will
damage to the principal due to his negligence or arise kung void yung kontrata kung wala pang valid
even bad faith or fraud committed against the contract. So the essential elements are only those
principal may be mitigated if the agency is elements necessary for the validity of the contract.
gratuitous in character. Once the contract is valid then the obligations will
arise.
BE: What is the scope of authority of the agent
- whether it only pertains to the acts of Q: If the agent acted outside the scope of his
administration or acts of strict dominion? authority, does it mean that the contract of
A: Under Article 1877, if the agency is in general agency is void?
term this only comprises acts of administration. A: Of course not. He can be held liable for acting
Even if the principal beholds power to the agent or outside the scope of his authority or if he acted not
it is stated that the agent may execute any act as in representation of the principal.
may be deemed appropriate, that will still be an
agency pertaining to act of administration. Q: Does it mean that there was no agency at
all?
FORM OF A CONTRACT OF AGENCY A: Of course not. There is a contract of agency.
As to form, the law is clear that it may be oral Under the rule, there are consequences if the
however, the law may require a particular form agent did not act in representation of the principal.
or specific form for what? for the validity of
agency? Is there a law which requires a PARTIES IN A CONTRACT OF AGENCY
particular form for the validity of the agency? Going to the consent of the parties, 1
A: Wala, there is no such form. author may claim that there are 3 parties in a
contract of agency that is totally wrong!
Q: Is there a particular form required by law for
the agency to be enforceable? There are only 2 parties in a contract of
A: At least one, under the statutes of frauds – if in agency the principal and the agent. However, in
the terms or agreement if it is not to be performed problems involving agency, normally, there are
within 1 year, it should be in writing otherwise, it is three persons involved. The third person with
unenforceable. The effect of the agency if the whom the agent transacted is no longer part of the
authority of the agent it is not in writing would go concept agency. The contract entered into between
the principal and the agent is the contract of

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November 2008
agency. But when the agent entered into another proceedings. The members of the Board would
contract, it may be a sale, lease or other contract normally not exclude you as an observer, as a
and the 3rd person is not a party to this contract. representative of the other BOD.
The 3rd person is a party to a 2nd contract.
But obviously if the person himself cannot lawfully
Again the parties are the principal and the do, cannot delegate anyone like if the agent cannot
agent. They may be called in other names the buy a parcel of land in the Philippines, he cannot
principal may also be called the employer, also delegate such acts to another person that is
constituent, chief. The agent may be called void sale.
attorney-in-fact, proxy, representative.
FORM OF CONTRACT OF AGENCY
1. Consent of the Contracting Parties As mentioned earlier, agency may be oral. It
Q: What if the principal authorized an agent doesn’t matter if the contract of agency would be
who was then 16 years old to sell a house and valid but the parties even if it is by verbal
lot, giving him a Special Power of Attorney. agreement, any effect in the verbal authorization,
Pursuant to his mandate, the agent (minor) sold the agreement between the agent and the principal
the house and lot to X, a 3rd person, thereafter if it was only verbal will only be in the contract
X filed an action to annul the contract of sale entered into by the agent. Concretely, under 1874,
on the ground that the agent is minor at the if the agent was authorized to sell a parcel of land
time of the sale, will the action prosper? and his authority is not in writing, the sale itself is
A: It will not prosper. On 2 grounds: void under 1874, however, if for example, the
(1) In that contract of lease entered into by agent was authorized to sell a car and his authority
the agent and the third person or the is not in writing, what is the status of the sale?
contract of sale between the third person Would that be valid and enforceable against the
and the agent, while A is considered as principal?
the seller but only acting on behalf of the A: No, it is unenforceable under 1878. San yung
principal still the real party in the contract car sa 1878? It falls under the last paragraph of
is the principal and not the agent 1878 - any other act of strict dominion would
(2) The other reason is under the rules in require special power of attorney. So 1878 would
contracts – In annulment of contract, only enumerate cases, acts of contracts where the law
the incapacitated person has the right to requires the authority of the agent in writing, it
have the contract annulled, the party in should have a Special Power of Attorney,
the contract who is not otherwise otherwise the contract entered into by the agent is
incapacitated has no right to institute an unenforceable against the Principal.
action for annulment.
Q: Concretely, the agent was authorized to
Either ground would be a valid ground to administer a rice land. In the administration of
dismiss the case. the rice land, he had to buy fertilizer, if he paid
the sellers of fertilizer without Special Power of
2. Object of the Contract of Agency Attorney, would the payment be binding
As to the object of the contract of agency we have against the principal?
mentioned already that this is the execution of A: Yes because that payment is only considered as
juridical act. an act of administration.

Q: Is it correct to say that any act which a Q: However, kung na-harvest na ung palay then
person can lawfully do, he can delegate to a 3rd he used the proceeds of the palay to pay the
person or to an agent? indebtedness of his principal with a certain
A: Not all. There are acts which are considered bank (PNB) without SPA, would that payment
purely personal acts. This he may not delegate to be valid and binding as against the principal?
an agent – like the execution of an affidavit, you A: No because that would fall under the first
cannot ask somebody to sign on her behalf in an paragraph of 1878 – to make such payment not in
affidavit or even in succession you cannot the matter of acts of administration without SPA.
delegate the execution of a will to a 3rd person,
note that it is execution not drafting of the will. You Other Acts / Contracts which Require a SPA
can ask somebody to sign for you, under certain 1. Entering into a compromise agreement
circumstances, but the execution per se cannot be with SPA. He cannot submit the matter to
left to a 3rd person, it is a purely personal act. the arbitrator without another SPA, those
are 2 and separate distinct powers - the
Q: The right to vote may be delegated to power to submit matters in the arbitrator
another person? and the power to compromise.
A: The answer is - it depends. Voting in national /
local election cannot at least be validly delegated. BE: The agent of the principal entered into a
Well it may be delegated, may have been contract of lease (without SPA) with X and the
delegated by other people, pero pag nahuli ka, pag period of lease is for 3 years. Would the
bad ka, kulong ka sabi ni Joker  But in a contract of lease be valid and enforceable as
corporation, as for corporation can there be a against the principal?
valid delegation of the right to vote? Yes. In a A: It depends on the object of the lease. If this
stockholders’ meeting, this cannot happen but in a lease involves immovable like a parcel of land, for
BOD’s meeting, in a BOD meeting it is the personal a period of 3 years without a SPA, would that be
presence of the Director which will be counted for valid and Binding?
the purposes of quorum but for purposes of voting, Unahin natin ung car, if it would be a car for 3
you can ask somebody to observe dun sa years without SPA, even if it is for 3 years this

Page 38 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
would be a valid and binding contract of lease as sufficient a power of attorney to bind him as a
against the principal. However, if this is an principal in the sale of the parcels of land.
immovable like a parcel of land, would this be
valid and binding against the principal? It Held: A letter suffices as a power of attorney.
depends on whether in this contract of lease if the When you sent a letter to your brothers or sisters
principal is the lessor or the lessee. Under Article you do not notarize such letter.
1878, this contract is unenforceable as against the
principal only if: (1) in the contract of lease the OBLIGATIONS OF THE AGENT
principal is the lessor; (2) the object is immovable 1. To carry out the agency.
and (3) the period is more than 1 year. Take note 2. In carrying out the agency, there are 2
of the 3 requirements. obligations of the agent:
(a) To act within the scope of authority
Under 1878, it is to lease the property of the (b) To act in behalf of the principal or in
principal to another. Therefore, if the principal is representation of the principal.
the lessee SPA is not required, kasi ang burden 3. To render an account of his transactions and to
wala naman sa principal, dun sa lessor, kc property deliver to the principal whatever he may have
ng lessor yan di ba? Thus, the law only required receive pursuant to an agency even if it not owing
the SPA if the principal is a lessor, and the lease to the principal.
contract involves immovable property and the
period is more than 3 years. 1. Primarily, the obligation of the agent is to
carry out the agency. If he failed to carry out,
Q: Lease contract was entered into by A in he may be held liable.
representation of B, with B as the lessor, the
period of lease of a parcel of land is 3 years. A Q: Should he carry out the agency after the
has a SPA. May this contract be unenforceable death of the principal?
as against the principal? A: As a rule no, because there is no one to be
A: Yes, it is possible if this lease is not in writing. represented. In fact under 1919, the agency is
This time under the Statute of Frauds. Kanina ang extinguished by the death of the principal.
discussion natin ay under 1878 but if you However, the law provides for an exception - if
remember the SOF, a lease over immovable delay would impair danger for an already began
property for more than 1 year must be in writing to but then unfinished contract, he should continue to
be enforceable (Article 1403). carry out the agency. Again, if it would cause
danger.
There is an author again who would claim that a
Power of attorney may be oral. He is really Q: But if he did not carry out agency, he may
wrong. A power of Attorney by its nature is in not be held liable?
writing, by definition it is a written authority. It A: As a rule, he is liable for not carrying out the
cannot be called a power of attorney if it is not in agency.
writing, in fact, if you consider the specific provision
in the agency all this provisions pertain to a power Q: So what is the exception?
of attorney in a written instrument. For example, A: Professor de Leon gave an example of this, if
Article 1871, pertains to the delivery of a power of the agent was authorized to buy a specific car from
attorney; 1872 refers to transmittal of a power of a specific person. When the agent was about to
attorney; 1900 - power of attorney is written; 1902- buy the car, he was informed by the seller that
presentation of a power of attorney. there is a defect in the brake system of the car.
Nonetheless, without informing the principal he
Obviously in a power of attorney, you cannot do bought the car. If damage was caused to the
that if it is merely a verbal authorization. How can principal because of the defective brake system
a third person demand the presentation of a and a claim is filed against the agent, can the
power of attorney if that alleged power of agent invoke that he merely carried out the
attorney is verbal? By its nature, it is in writing. agency? No, here the law is very clear that he
should not carry out agency if it would result in loss
Q: Would that power of attorney be valid and / damage in the principal.
binding as against the principal if it is not in a
public instrument? Another Example
A: Yes, even if a power of attorney is only in a An agency to buy a parcel of land before the Mt.
private instrument, the power of attorney is valid Pinatubo eruption. During that time, agents all over
and binding against the principal. The law does not Luzon, will buy a parcel of land not only in Metro
require that it must be in a public instrument. Manila but also in Pampanga and South
CALABARZON but if the agent was given authority
Jimenez vs. Rabot and he bought parcels of land immediately after the
Facts: Jimenez was the owner of certain parcels of eruption somewhere in Porac / Bacolor Pampanga,
land in Pangasinan. He was then in the province of mukhang you can be held liable for buying those
North Luzon when he sent a letter to his sister parcels of land. That it would be a valid sale?
asking his sister to sell one of his parcels of land. A: Yes, that would be a valid and binding sale as
With that letter, the sister indeed sold one of his far as the 3rd person is concerned. If nakita naman
parcels of land to Rabot. However, the sister did na puro lahar, nakita mo pa binili mo pa, the agent
not remit the proceeds of the sale, binulsa lng nya, can be held liable because the act definitely would
so when Jimenez went back to Pangasinan, he result in loss or damage to the principal at least for
demanded the property, yun ay na kay Rabot na, about 15 years.
so he filed an action against Rabot, the defense
raised by him is that the letter would not be

Page 39 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
2. In carrying out the agency, there are 2 Another Article which would help you in
obligations of the agent, he should always determining if the act is within the scope of the
remember: authority is Article 1882.
(a) To act within the scope of authority Example of this, the principal authorized his agent
(b) To act in behalf of the principal or in to sell his car, a specific car for 300k. The agent
representation of the principal. sold the car for 400K. It is possible for the principal
to say that you acted outside the scope of
(a) To act within the scope of authority authority, galit pa cya 300k na binebenta pero 400k
Q: How would you know if the agent was acting nabenta. Technically, yes, the agent indeed may
within the scope of authority? be considered to have or may be claimed to have
A: You will be guided by the power of authority. In acted outside or in excess of his authority because
fact, as a 3rd person, you can demand the power of he told to sell the car for 300k.
attorney, so that you will know whether in fact he
had authority to enter into a contract. But sa totoo Q: What is the reason that the principal would
lng there are some SPAs which would be subject claim that the agent acted outside the scope of
of the case up to the SC pertaining to the scope of his authority?
authority of the agent. A: Many reasons: for example he asked to buy
somebody to sell his car because he expected sum
Linal vs. Puno money to arrive from abroad to buy a brand new
Q: Was Puno authorized to sell the land or car but wala napornada, di binigay ng kapatid yung
merely authorize to administer the land? pera. Therefore, if the car will be sold wala na
A: There was a dissenting opinion. syang kotse and it is an excuse that the agent
Atty. Uribe: Mas magaling ang dissenting opinion. acted outside the scope of his authority but the
Sa phraseology ng authority ni Puno he was only common reason would be because the principal
to buy, to sell, etc…in the administration of land, so already talked to somebody else which will really
the buying and selling should not be construed as buy the car for 400k. When you may choose this
a separate authority from the administration and 1? Because dun sa isa, walang commission di ba
should be construed as a buying and selling in sa 1 may commission. He may not recognize this
relation to the administration. If you have to contract.
administer a parcel of land, you have to buy so
many things, lalo na kapag agricultural land yan. Article 1882 - the limits of the agent’s
You have to buy tools, fertilizers, and therefore you authority shall not be considered exceeded should
have the authority to buy. Do you have to it have been performed in a manner more
authority to sell? Yes, the products of that land. advantageous to the principal than that specified
You have the authority to sell pero ung ginawa ni by him. So under the law, that the act is deemed
Puno, binenta nya mismo yung land. When the not in extent of his authority, even on its face
case reached the SC, the majority of the decision parang in excess, the law will consider it as not in
was – he has the authority to sell under the power excess merely because it is advantageous to the
of authority. principal.

One of the bases of the SC in the You distinguish these transactions from an
conclusion that there was a power to sell also agency to sell 100 kilos of mangoes and there is a
because the fact that the agent acted in good faith, specific instruction that the mangoes will be sold 30
that is an incredible argument, by the mere pesos per kilo. If you sold the mangoes for 50
allegation that the agent acted in good faith he pesos, 30 lang binenta 50 pesos per kilo ang
already acted within the scope of the his nangyari out of 100 kilos sisenta lng ang nabenta,
authority? Parang malabo yung dalawang yun. 60 sisenta, 70 sitenta, so instead of 30 pesos per
Even if I would claim that I thought I am authorized, kilo he sold 50 per kilo. Actually, this is a violation
does it mean therefore that I was authorized? of the instructions of the principal kaya siguro di
Those are 2 different things - believing in good faith lahat nabenta ung mga mangga binenta nya with a
that you have the authority is different from in fact much higher price.
having the authority.
Another Article 1879 - the law specifically
Nonetheless, again, as a rule you can be provides that the special power to sell excludes the
guided by the power of attorney but even if without power to mortgage. Even if the agent was
the power of attorney or despite the fact there was authorized to sell, he cannot mortgage that without
a specific mandate of the power of attorney, you another power of attorney, as much as the power
should be guided by specific provisions of law to mortgage does not include the power to sell as
whether the act is within the scope of your mentioned a while ago the power to compromise
authority. For example: 1881 - the agent may do does not authorize for the submission to arbitration.
such acts as may be conducive for the
accomplishment of the purpose of agency. This Q: However, if the principal authorized the
particular provision has been cited by the SC in the agent to borrow money without the authority of
case of Mack vs. Kang, if a person who is an the principal can the agent himself be the
agent has the authority to manage the restaurant, lender?
necessarily, he must have the authority to A: The law provides yes, as long as the interest
purchase items for the management of the rate will be the market rate, so the agent may be
restaurant - the act of buying these items, like the lender.
plates, these are reasonable and necessary for the
accomplishment of the agency. Q: The agent was authorized to lend money of
the principal, may the agent himself be the

Page 40 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
borrower of the money without the consent of his principal. Later on, he defaulted. Can the
the principal? bank go after the principal?
A: This time hindi na pwede. He may be a good A: Of course no, the contract is between the agent
agent to lend the money to other person but he and the bank only. The principal has nothing to do
may not be a good debtor. Thus, the law would with the contract. Under the facts, the agent
protect the principal in that case. borrowed for himself.

But also, be guided by the decision of the SC as to However, if you have read the suggested
the extent of the authority of the agent. For answer, may 2nd paragraph - to the effect that the
example in the case of Insular Drug vs. PNB bank can at least foreclose the mortgage they can.
Facts: The agent here was authorized to collect If you remember the question, di tinatanong ng
sums of money including checks from the client of examiner can the bank go after the principal as far
Insular. So may agent ang Insular. He did collect as the thing is concerned. The only question
the sums of money and the checks, and the checks pertains to the payment of loan.
were payable to Insular but instead of delivering
the checks in the Insular, he encashed the check Another thing in the suggested answer
or deposited the checks in his account in PNB. which is totally wrong - under the facts, the
principal authorized the agent to mortgage the
Issue: Does the authority to collect the checks property for the loan that will be obtained by the
includes the power to indorse the checks or even agent in the name of the principal. If indeed he
the power to encashed the check? mortgaged the land for a loan in his name, would
that mortgage be valid?
Held: No, the power to collect does not include the A: Definitely not. If he mortgaged it as a mortgagor
power to indorse or the power to encash the the mortgage is void. The law requires that the
checks. So kasalanan ng PNB kung bakit nila mortgagor must be the absolute owner of the thing
tinanggap ung check without the proper mortgaged. On other hand, even if the agent
indorsement samantalang ang payee ay Insula. mortgaged the thing on behalf of the principal, the
Hindi naman si agent. principal is the mortgagor. Would that be a valid
and binding mortgage as against the principal?
Atty. Uribe: In fact, the money involved here is A: Also not. His authority to have the property
18,000 and I would still remember na Philippine mortgaged to secure a loan, not to secure any
Reports pa itong case. The agent (Mr. Foster) other person’s loan and that therefore it cannot be
committed suicide when that fraud was committed. within the authority of the agent and therefore any
Sabi nung isang nagbasa for sure ahead pa sa foreclosure of such mortgage will not prosper.
akin, encircle nya 18,000, gago naman ito 18,000
lng maliit lng ang amount…. But there was another
guy, sumunod dun sa isa, sinagot nya, mas gago Q: If the agent acted within the scope of his
ka 1932 pa eto eh…  authority and in representation of the principal,
who will be bound in such contract?
Q: The obligation to act on behalf of the A: Aside from the 3rd person, it will be the principal
principal - If the agent acted for himself and did because again the agent is merely representing the
not disclose his principal, would that 3rd person principal.
has a cause of action against the principal?
A: No. Q: However, is it possible for the agent himself
to be bound in such contract or be held liable
Q: Would that principal have a cause of action under such contract?
against the 3rd person? A: Yes. If he expressly binds himself to that
A: Wala din. But there is an exception in this rule if contract, why he would do that? Agent lang naman
the object involved in the contract entered into by sya, when he would bind himself personally /
the agent and the 3rd person belongs to the expressly? In the very nature of the agency the 3rd
principal - the law grants / gives a cause of action person actually knows that it is the agent and not
to the 3rd person against the principal and vice- the principal. Ang nakikita lang ng 3rd person sa
versa. It is because of the possible collusion palengke eh ung nagtitinda baka ung principal
between the principal and the agent di ba, so that nasa espana. Therefore, the 3rd person to whom a
sasabihin ng principal alam ko yang kotse na yan thing is offered for sale for example the agency to
sira sira na makina (may katok). Thus, in actual sell, the 3rd person will say that “I will buy that if you
case the SC said, the vehicle has a “knock” , SC also bind yourself as one of the sellers” because I
decicion yan! Hehehehehe  Kasi may katok ang don’t know the principal. Eh ang agent gusto
kotse, the principal would agree with the agent just kumita, sige na din di ba. He will bind himself
to sell it by yourself in your own name so that if personally in the contract as a seller and not as an
there would be a complaint the 3rd person has no agent.
cause of action against me and the principal. But to
avoid such possibility the law would grant a cause The agent may be held liable in the
of action to the 3rd person if the object of the contract even if he acted within the scope, acted in
contract belongs to the principal. representation of the principal, he acted negligently
or in bad faith di ba.
BE: A authorized B to borrow sum of money
from any bank and he also authorized B to Article 1909 is consistent also on the law
mortgage a specific parcel of land to secure on obligations that every person who is guilty of
that loan. What B did, he borrowed money for fraud, negligence, etc.. will be held liable for
himself from a certain bank without disclosing damages.

Page 41 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
But aside from these 2 scenarios, of course, the principal to lower the price of the thing which would
agent may be held liable if he acted beyond the be sold, which is inconsistent with the interest of
scope of authority. Also, if he acted beyond the the principal. As an agent of the principal, he is
scope of his authority, however, he may not be supposed to protect the interest of the principal not
held liable under such contracts and under certain to lower the price to be paid by the buyer. If only for
circumstances: this the SC will not dismiss the case. In fact,
(a) The principal ratified - then the principal ginawa pa syang liable for the share of the sub-
will be held liable and be bound on such agent.
contract.
(b) Even if the principal did not ratify, if the 3rd Obligation to deliver to the principal what he
person was notified of the fact that the may have receive
agent was in excess of his authority or In fact this obligation is so serious. If the agent
even if he was not notified, he was aware would fail to perform this obligation, he may be
of the fact that the agent was in excess of imprisoned.
his authority, the agent will not be held
liable because under 1898 that contract is US vs. Reyes
void. So this contract being void, the third Facts: The agent was authorized to collect sums of
person cannot hold him liable for acting money for convenience of the principal. More or
within the scope of authority. less 800 lang yun or 800+ is the amount to be
collected. Now he was able to collect only 500
3. One important obligation of an agent is to instead of 800. He claimed that he is entitled to
render an account of his transactions and to 20% as a commission (20% of 800 is 160). So hee
deliver to the principal whatever he may have only remitted 340 to the principal, because of that
receive pursuant to an agency even if it not the principal demanded a greater amount than the
owing to the principal. 340. A criminal complaint was filed (for estafa).
In fact, any stipulation exempting him from this
obligation to render an accounting is void. Held: Regardless of the commission whether 10%
or 20%, the agent was not entitled to retain 160
Domingo vs. Domingo because even if 20% the 20% of the 500 and he is
Facts: The relationship between the principal and not entitled to the 20% of 800. The commission
the agent was not mentioned in this case but the should be based on the actual amount he collected
agent Domingo was authorized to sell a property of not the total amount which he is supposed to
the principal Domingo but in pursuant to this collect. And because of his failure to deliver 400 to
authority, he introduced a perspective buyer to the the principal he was convicted.
principal Oscar de Leon. Oscar, just any other
prospective buyer wanted the price to be lowered. Obligation to render an accounting
So he was asking that the price be lowered. During Q: The principal authorized the agent to sell a
the negotiation, this Oscar de Leon bid 1,000 to the car for 300k, the description of the car was
agent, which amount the agent did not disclose to mentioned in the SPA. However, before the
the principal. However, may violation na ng agent would sell the car, the principal called
obligation ang agent. The principal on the other him by phone and instructed him to sell the car
hand, somehow to only accommodate the demand in QC to a member of IBP chapter. Instead of
of the prospective buyer, nakaisip ng paraan, what selling the car in QC to an IBP member, he sold
he did, he had an agreement with the prospective the car in Manila to a person not known by the
buyer that kunwari the sale would no longer push principal for 300k.
through so they have this drama that the (1) Can the principal recover the car from the
prospective buyer was expecting money from buyer if that car is already delivered to the
abroad and therefore the principal would have a buyer?
reason to the agent na hindi na matutuloy ang (2) Any remedy provided by the law to the seller
agency and therefore I am revoking your authority or to the principal?
as an agent. A: (1) It depends, if that buyer has no knowledge of
that instruction of the principal then he has all the
Thereafter, the agent discovered that right to retain the car and that sale will be valid and
something is wrong with what happened. He went binding as against the principal. As provided under
to the register of deeds and he discovered that in Art. 1900 so far as 3rd persons are concerned they
fact a sale was executed between Domingo and only rely on the SPA as written. They have no
Oscar de Leon. The agent demanded for his obligation to inquire on the special instructions
commission. May sub agent pa sya dahil made by the principal which are not mentioned in
inintroduce cya kay Oscar, did the action the SPA, eh wala naman dun sa SPA na it will be
prosper? sold to an IBP member chapter in QC.
Held: No, the SC ruled that for the failure of the (2) To go after the agent for damages, if there is
obligation to deliver to the principal for whatever he any damage sustained by him for his failure to
may have received pursuant to the agency, even if follow the instructions of the principal.
that is not only to the principal, that is a breach of
fiduciary relation which resulted in not giving the Article 1898 - if the agent acted outside the scope
agent his commission. But is the 1,000 of his authority and this was known to the 3rd
important? Supposedly, parang 10,000 ang person the contract is void. Take note by the
marereceive nya as commission? specific provision of the law this contract is void
A: The answer would be yes because why would and subject to ratification. This is only the void
the prospective buyer give 1,000 sa agent? hindi contract which can be ratified under Article 1898.
dahil mahal nya ang agent?! That would be
because he wanted the agent to continue with the

Page 42 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Q: Is it possible that the agent be held liable to certain circumstances. Take note that the operative
the 3rd person even if the 3rd person was aware word here is responsible and not liable. You may
of the fact that the agent was in excess or be responsible - there are consequences.
outside his authority?
A: Yes, if the agent promised to obtain the If he was not prohibited there are 2
ratification of the principal and failed to obtain the scenarios:
ratification. Nagkwento sya sa 3rd person (1) Not prohibited but he was neither given the
”you know I was acting in excess of my authority, power to appoint or
but don’t worry I will get the ratification of my (2) He was not prohibited precisely because he
principal”. If he failed to get the ratification of the was given the power to appoint.
principal he will be held liable not because of the Kung he was not prohibited he but he also lacks
contract itself is void but because of failure to get the power to appoint, ang scenario dito wala lng
the ratification of the principal. If the principal namention sa SPA so nothing was mentioned in
ratifies the contract, he cannot be held liable even the SPA regarding the appointment of the
if it is a void contract because the principal is substitute. Ang ibig sabihin nun he was not
bound to the contract. prohibited and he was neither given the power to
appoint. If that is the case will he be liable
APPOINTMENT OF SUBSTITUTE necessarily because of losses which were
Another possible obligation of an agent may result incurred by the principal?
from an appointment of substitute A: Hindi naman. If the substitute acted within the
scope of authority in representation of the principal
BE: X appoints Y as his agent to sell his (X) and the substitute acted in good faith with the
products in Cebu City. Can Y appoint sub- diligence of a good father of the family,
agent? And if he does what are the effects of nonetheless losses were incurred by the principal -
this appointment? Pwede bang mangyari un? Yes, ang negosyo ay
A: Yes, the agent may appoint a substitute or sub- negosyo kahit na napakagaling mo pang
agent, if the principal does not prohibit him in doing negosyante kung palugi na talaga negosyo, there
so. But he shall be responsible for the acts of the are forces beyond the control of every person. To
substitute (because he was not given authority by be factual about this kapag ngcoconstruct ng LRT
the principal) especially if one appointed turns to halimbawa sa Aurora boulevard, during the
be incompetent or insolvent. construction stage ilang taon yan 2 or 3 years, sa
tingin nyo kung may restaurant pa dyan buhay
Atty. Uribe: Is this correct? pa ba? Wala na kakain dyan puro alikabok na.
Mukhang mali. Mukhang confused ang sagot. Ang
tanong sub-agent? Can Y appoint sub-agent? Yes, As long as he acted within the scope of his
the agent may appoint substitute or sub-agent authority, in representation of the principal and he
which means apparently there is no distinction acted with good faith, the agent cannot be held
between a sub-agent and substitute. With due liable. He is responsible for the acts of the
respect to the answer of the UP Law Center, substitute and if the substitute acted within the
Professor de Leon is really good on this matter, a scope of authority di ba. This is consistent to the
sub-agent is very much different from a substitute. principle of agency - that the agent is not the
insurer of the success of the business of the
If it is in replacement (kapalit) that is a principal. Otherwise, wala na mag-a-agent dahil
substitute which means that the agent would be kapag nalugi liable sya.
disassociating himself from the agency (Aalis na
sya or lalabas na sya ng Pilipinas etc.) and However, if in the management of the
somebody else must take over his functions. business of the principal losses were incurred
because the substitute misappropriated the income
An agent who appoints a sub-agent will of the business or acted with gross negligence,
continue to be an agent in that agency relationship. mga once a week lng nya dinadalaw ang business,
He does not disassociate himself from the if that is the case, the agent will be responsible for
relationship. He is still the agent and therefore all the acts of the substitute and he may be held liable
the rights and obligations would still be there even for the losses incurred by the principal because the
if he appointed a sub-agent. But if the agent substitute acted negligently, outside the scope of
appointed a substitute, the answer will depend on the authority and in bad faith.
Art 1892.
However, if the agent was given the power
Kung ang tanong ay substitute and during to appoint, there may be 2 scenarios:
the management of the business by the substitute, (1) The person to be appointed as the substitute
losses were incurred by the principal, mask isang may have been designated or (2) the person to be
taon pa lng ang substitute 2M was incurred by the appointed was not designated.
principal, may the principal hold the agent
liable? Iba ung can the principal hold the Sabi ng principal – “ok you can appoint a
substitute liable? substitute but if you will appoint a substitute,
A: The first thing you have to consider is if he was appoint Pedro”. If the agent appointed Pedro,
prohibited in appointing a substitute or not. If he would he be held liable for the losses incurred
was prohibited he will be held liable because he by the principal coz of the acts of Pedro?
appointed 1 despite the prohibition. In fact, under A: Hindi naman. The substitute was designated
the law all acts of the substitute appointed, if it is because the principal said that he should appoint
against the prohibition, such acts are void. If he Pedro kaya inaapoint nya si Pedro but this should
was not prohibited under the law, he shall be be subjected to the provision of agency that he
responsible for the acts of the substitute under

Page 43 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
should not carry out the agency if such would principal, he is entitled to any profit which he would
manifest loss or damage to the principal. derive from such obligation.

Example Q: If he was obliged to collect or sell 10


At the time of the appointment, the agent was at refrigerators but he was able to sell only 1
that time fully aware that the person was refrigerator, can he be held liable for not selling
notoriously incompetent. He should have at least the remaining refrigerator?
informed the principal that the substitute is A: Normally, he would be because that is failure to
notoriously incompetent. If he failed to do so comply with his obligations as an agent. But he has
having the opportunity to inquire, then he can be a defense – exercise of the diligence required. If
held liable. there was no law or stipulation, it will be diligence
of a good father of a family. The fact that he was
If the person to be appointed was not able to prove that he exercised the diligence of a
designated, he will only be liable if the substitute good father of a family xxx nonetheless, he was not
turns out to be notoriously incompetent or able to sell, he can no longer be held liable. Again,
insolvent. (Article 1892). he is not the insurer of the success of the principal.

LIABILITIES OF 2 OR MORE AGENTS BE: The agent was authorized to sell 20 units of
Q: If the principal appointed 2 or more agents refrigerator. He received in addition to his
for a certain transaction, what would be the commission, a guaranty commission. He was
nature of their liability? Can they be held liable able to sell the refrigerators and received his
jointly or solidarily? guaranty. However, the buyer failed to pay the
A: Agents can only be held jointly liable unless they price of these refrigerators. The principal
expressly bound themselves solidarily. demanded from the agent the money which he
could have delivered to the principal as a
But in fact, even if they bound themselves solidarily guaranty commission agent. The defense
and damage was incurred by the principal due to raised by the agent is that he has no obligation
the act of one of the agents, it is still possible that to collect the price. The agent said that his only
they may not be held solidarily liable despite that obligation is to sell the refrigerator. Is that
there is an express agreement, if that agent who correct?
caused damage to the principal acted outside the A: No, as he received a guaranty commission, he
scope of his authority. is known as a guaranty commission agent. He is
also known as “del credere agent” and as such, he
Commission Agent bears the risk of collection.
Authorized to sell and he would have a commission
as to the price. OBLIGATIONS OF THE PRINCIPAL
(1) To comply with the obligations which the agent
Q: If the agent sold a refrigerator on credit may have contracted within the scope of his
without the consent of the principal – pag on authority and in representation of the principal.
credit, he can still sell it at a higher price. Kung (2) Obligation to advance the money necessary for
normally 10k ang sabi ng principal, he may be the accomplishment of the purpose of the agency.
able to sell it at 15k pero 4 gives. If payable (3) Obligation to Reimburse
every other month, the next day after the sale,
the principal having been informed of the sale, (1) To comply with the obligations which the
he demanded for the proceeds of the sale. Can agent may have contracted within the scope of
the agent be compelled to pay or deliver the his authority and in representation of the
proceeds of the sale kahit hindi pa nya na- principal.
collect? This is the main obligation of the principal.
A: Yes, he can be compelled to deliver the
proceeds as if it was sold on a cash basis because If the agent acted outside the scope of his
he sold it on credit without the consent of the authority, the principal may not be bound to such
principal. contract. But even if the agent acted beyond or
outside the scope of his authority, the principal may
Q: How much would the commission agent be bound if:
deliver if he was able to sell it at 15k, payable in 1. He ratified
4 months but under the agreement of the 2. He contributed to deceive the 3rd person
principal and the commission agent, it should into believing that the agent acted outside
be sold only at 10k? (Assuming that the agent’s the scope of his authority (estoppel). The
commission is 10%) principal and the agent will be solidarily
A: He should deliver 9,000 to the principal (10,000 liable.
x 10% = 1,000 commission... 10,000 – 1,000 = 3. When the 3rd person could not have
9,000) known of the limitations on the power of
the agent (Example: Verbal limitation)
Q: What if 4 months after, he have already
collected 15k, can the principal claim “di ba Article 1900 – the third person will only have to
you only gave me 9k which is based on the 10k rely on the power of attorney as written.
price but you were able to sell it at 15k, so I
should get 90% of the 15k”. Is that a valid (2) Obligation to advance the money necessary
claim? for the accomplishment of the purpose of the
A: No, under the law, if the commission agent sold agency.
the thing on credit without the consent of the The principal, unless otherwise stipulated or unless
the he is already insolvent, must advance the

Page 44 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
money. Even if the agent bound himself to on the part of Jessica in walking alone with that
advance, if the principal is already insolvent, he pendant. Decide.
need not advance the sum of money kasi wala ng A: The case is identical to Austria vs. CA. As to
mag-re-reimburse sa kanya. the contention of Ariel, conviction is not required.
Preponderance of evidence is sufficient. Jessica
(3) Obligation to Reimburse cannot be held liable because walking alone is not
G.R.: The principal a negligent act.
Exc: 1918
a. If the agent is acting in contravention of Atty. Uribe’s Comment: The answer is erroneous.
the instructions of the principal. In the case of Austria which was decided on June
Example: He sold items in Cebu instead in 10, 1971, the incident happened in the 60’s. The
Cagayan. SC said, we cannot consider the agent negligent in
However, if the principal wants to avail of going home alone. SC said that if the incident
the benefits derived by the agent, the happened today (referring to year 1971), the agent
principal will be obliged to reimburse. can be held liable for concurring negligence,
b. Agent was at fault considering the crime rate.

TWO OR MORE PRINCIPALS APPOINTED AN Problem Areas in Extinguishment


AGENT BE: What is the effect of the death of the
Q: An agent was appointed to a single and agent?
common transaction and damage was incurred A: G.R.: The agency is extinguished (Article 1919).
by the agent. What is the nature of the liability EXC.: Article 1930 – if the agency was constituted
of the principals? for the benefit of both parties or for the benefit of a
A: Solidary. third person who accepted the benefit, then that
agency shall continue even after the death of the
Q: Ayce was authorized to lease a specific agent.
property (warehouse). She entered into a lease
contract with Dian. However, the principal BE: P authorized A to sell a land (14 hectares).
(Chato) also entered into a contract of lease In 1950, before A could sell, P died. After P
over the same property with another person died, in 1954, the heirs sold the land to X. In
named Gerard. Which contract will be 1956, A sold it to Y. Who has a better right?
recognized? A: If A has no SPA, this sale is void under Article
A: Based on priority in time, priority in right. The 1874. X would have a better right. If there was a
prior date should prevail. Take note that this is a SPA, it depends if A has knowledge of the death of
lease of property. P or if he was in good faith. If A has knowledge of
the death, X has a better right. If Y is in bad faith
In sale, priority in time is not applicable. See Article (he knows of the death of P), X has a better right.
1544 (double sale).
Under Article 1931, the act of an agent after the
Q: What if the person filed an action for death of the principal will be valid if he had no
damages against both principal and agent, who knowledge of the death of the principal and the
will be liable? third person is in good faith.
A: G.R.: The principal
EXC.: If agent acted in bad faith Q: What if A has no knowledge and Y is in good
(incompatible contracts) faith?
A: This will be incompatible contracts. Apply Article
MODES OF EXTINGUISHING AGENCY 1544.
E – xpiration of the period
D – eath, civil interdiction, insanity Rallos vs. Felix
W – ithdrawal Facts: The agent was a brother of his two sisters.
A – ccomplishment of purpose He was authorized to sell the land. The brother
R – evocation sold the land only after the death of one of the
D – issolution of the entity sisters. He sold it to Felix. The administrator of his
sister filed an action to recover the property.
Q: Is this enumeration exclusive?
A: No, the other modes of extinguishing obligations Issue: What is the effect of the death of one of the
are equally applicable to agency. Example: mutual principals?
dissent, loss of the thing due to fortuitous event.
Held: As to the surviving sister’s portion, it is valid
BE: Ariel authorized Jessica to sell a pendant and binding. But as to the deceased sister (Article
with a diamond valued at 5k. While Jessica was 1919), the authority of agent was terminated after
on her way home, 2 persons snatched the bag the death. But if agent has no knowledge of the
containing the pendant. Thus, Jessica was not death – it is valid. But obviously, the brother had
able to sell the pendant. Ariel sued Jessica. knowledge of the death of her sister.
Jessica raised the defense that robbery is a
fortuitous event and therefore he cannot be Note: Civil interdiction – accessory penalty (more
held liable for the loss of the pendant. Ariel than 12 years penalty)
claimed that before Jessica could invoke
fortuitous event, there has to be conviction of Revocation
the perpetrators of the crime and even though It is an act of the principal. The principal can
this is a fortuitous event, there was negligence revoke the authority of the agent at will at any time.

Page 45 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Q: Would this be correct if the parties agreed for a loan. The agent’s motive is because he had
for the period of agency? Can the agent hold an agreement with another person (Mr. So) that
the principal liable for breach of contract? they wanted to take over the business of Claparol.
A: Baretto vs. Sta. Maria – the principal can
revoke anytime even when there is a period agreed
upon because agency is based on trust and
confidence.

Q: If he has the power to revoke, may the


principal be held liable?
A: Yes because even in the exercise of a right, it
must be exercised in good faith. If there is abuse of
right, the liability would be under the provisions on
human relations.

Domingo vs. Domingo


The reason of the principal is that in order for him
to avoid payment of commission, that revocation is
a bad faith revocation. However, in this case, the
agent is also in bad faith.

BE: A sold a land to B at 100M. They agreed


that it will be paid in 10 years. The seller
reserved title over the land. In order for B to
pay the price, A constituted B as his agent for
the development of the land – subdividing the
land, constructing houses and selling the
house and lot. Proceeds to be delivered to the
seller who is also the principal as payment of
the price in the sale of land. However, in the 5th
year, the principal revoked the authority of the
agent. Was the revocation valid?
A: Not valid, because this is an agency which is
coupled with interest. Here, (1) a bilateral contract
depends upon the agency and (2) the agency is
the means of fulfilling an obligation which has
already been contracted.

Atty. Uribe: #2 is correct but #1 is not applicable to


the problem. Ang mas applicable is the case of
Collongco vs. Claparol. Partnership
Facts: Claparol was the owner of a nail factory and
he needed additional capital. Collongco offered to BE: Chato, using all his savings in the total
advance the money needed by Claparol only on amount of 2,000, decided to establish a
the condition that he will be constituted as agent for restaurant. Faye, however, gave 4,000 as
some aspects of the business (example: agent for “financial assistance” with the agreement that
advertisement). Faye will have 22% share of the profits of the
Held: From that arrangement, it is clear that a business. After 22 years, Faye filed an action to
bilateral contract depends upon the agency. compel Chato to deliver to her the share in the
Bilateral contract which is the contract of loan. He profits claiming that she was a partner. Chato
would not have advanced that money, had he not denied that Faye was her partner. Is Faye a
been constituted as an agent by Claparol. These partner of Chato?
contracts are considered agency coupled with A: Yes, Faye was a partner in the business
interest. because there was a contribution of money to a
common fund and there was an agreement to
Note: The SC said that for an agent to claim that divide the profit among themselves.
the agency is coupled with interest and hence
cannot be revoked by the principal, the interest Atty. Uribe’s Comment: I do not agree with the
must not be the usual compensation of the agent answer. I’d rather agree with the alternative
which is commission and must be stated in the answer. WHY? In the alternative answer as can be
SPA. seen from the facts, Faye gave 4,000 only as a
financial assistance. It was not a contribution to a
Q: If agency coupled with interest – possible common fund. As such, she actually became a
that it could be revoked? creditor of Chato. Therefore, she did not contribute
A: SC said in Collongco – Yes, if the revocation to a common fund.
was with a just cause. In the case of Collongco,
there was a just cause because the agent Q: What about the stipulation that Faye will
committed acts contrary to the interest of the have 22% share of the profits?
principal. Collongco attempted to ask the A: The law on partnership is very clear that a
superintendent of the factory to destroy the sharing in the profits does not necessarily result in
machinery by pouring acid. Agent also sent a partnership contract because the sharing of the
derogatory letters to banks where Claparol applied profits may only be a way of compensating the

Page 46 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
other person, in fact that can be a mode of
payment of the loan. Kasi yung loan, supposedly ESSENTIAL ELEMENTS OF PARTNERSHIP
pwede payable every month with a fixed amount. Like any other contract, it should have the three
But mas maganda ang agreement na ito, 22% of essential requisites:
the profits, so that if walang profit sa isang taon, 1.) Consent
wala munang bayad. ‘Di ba that’s reasonable 2.) Object: to engage to a lawful activity,
agreement. Only kung may profit, saka lang whether a business or profession.
babayaran. Kumbaga, friendly loan ito. The sharing 3.) Cause or consideration: the promise of
in the profits as expressly provided by law does not each partner to contribute money, property
necessarily result in a partnership contract. Thus, it or industry
can be said that really Faye was not a partner but
is actually a creditor of Chato. Note: From the definition alone, it can be known
that a contract of partnership is essentially
DEFINITION OF PARTNERSHIP onerous-each partner has to contribute either
Q: What if two or more persons agreed to put property, money or industry. Walang free rider sa
up a partnership but they never intended to partnership.
divide the profits among themselves, would
that still be considered a valid partnership 1. Consent of the contracting parties:
contract? The rules in contract would be equally applicable
A: Yes, under the second paragraph of the article, but, just like in sales and lease, there are persons
two or more persons can form a partnership for the who are prohibited from entering into a contract of
exercise of a profession. partnership:
1.) Spouses:
Partnership vs. Co-ownership
Consider the essential features: BE: May the spouses enter into a limited
Creation: partnership to engage in a realty business, with
Partnership is obviously created by agreement. Co- the wife as a limited partner?
ownership may be created by agreement, but it A: Yes, because spouses are only prohibited,
may also be created by operation of law. In fact, by under the New Civil Code, to enter into a universal
express provision of the law, the fact that there is partnership. Therefore, if they form a limited
co-ownership does not necessarily mean that there partnership, they can constitute only Php100,000
is a partnership existing between two persons. each, and that will not be a universal partnership
Example: Two persons may inherit a property from because that would be a particular partnership.
their father or mother, and under the law, they may
be considered as co-owners of the same property. 2.) Corporations:

Purpose: BE: Can a corporation enter into a contract of


Partnership: either to divide profits or exercise a partnership with an individual? Can a
profession. corporation enter into a contract of partnership
Co-ownership: Common enjoyment of the thing or with another corporation?
right owned in common; merely to enjoy the A: To these two questions, the answer is no.
property, thus they may have different purposes. Ruled by the Supreme Court in the Case
of Tuazon, while a corporation may enter into a
A very important feature of partnership in relation joint venture, it cannot validly enter into a contract
to co-ownership: it has a juridical personality, of partnership. Under the Corporation Code, the
separate and distinct from the individual partner business of the corporation is supposed to be
which is obviously not present in co-ownership. In governed by the board of directors, and if such a
co-ownership, they have their respective corporation will enter into a contract of partnership,
personalities and no new personality will be the other partners may bind the corporation in
created. certain activities without the consent of the board of
directors. Another reason is that the properties r
Powers of the Members: investments of the stockholders may be exposed to
Partnership: Unless otherwise agreed upon, each a risk not contemplated by the stockholders.
partner is an agent of the other partners and of the
partnership. 3.) Those persons who are prohibited from
Co-ownership: As a rule, a co-owner cannot act as giving each other any donation or advantage
an agent of the other co-owners unless otherwise cannot enter into a UNIVERSAL partnership:
agreed upon between the co-owners. a.) those guilty of adultery or concubinage
PROFITS: at the time of the execution of the contract because
Co-owner: Mas malaki ang profits, mas malaki ang it would be easy to circumvent the provision on
interest. But not necessarily in partnership, donation if they would enter into a universal
because the sharing in the profits may be partnership, kasi pwede’ng yung paramour ang na-
stipulated upon by the parties. Pero kung walang contribute lang Php10.00, while yung isa ang na-
stipulation, it may be based on the capital contribute Php10 Million, however, pagdating ng
contribution. sharing, kabaligtaran. Yung paramour, 90%, while
yung nag-contribute ng Php10 Million, 10% lang ng
Q: Will death extinguish co-ownership? profit. In fact, sa dissolution, pwedeng ganun din
A: No, Kapag namatay ang isang co-owner, his ang agreement. That would be a circumvention of
heirs will be the co-owners of the surviving co- the provision on donation.
owners at pwedeng tulou-tuloy lang yan. However Other persons prohibited are those
in partnership, if it is a general partnership, if one of mentioned in Art. 1739, those persons mentioned
the partners dies, the partnership is dissolved. in the law on donation.

Page 47 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
article alone, it is clear that despite non-compliance
2. Object of Partnership: with the requirements of the law as to form, there is
To engage in a lawful activity. a partnership created, because this is without
prejudice to the liability of the partnership (kung
Q: If the object is to engage in a lawful activity, may partnership). But more directly, Art. 1768, the
necessarily the partnership is valid? law provides, the partnership has a juridical
A: No. There are specific business activities personality separate and distinct from that of each
wherein the law would require particular business if the partners, even in case of failure to comply
organization which may engage in such business with the requirements of Art. 1772, par.1.
activity, specifically the Corporation Code which After all, a verbal partnership contract is valid and
provides that only corporation may engage in binding between the parties.
insurance and banking business, therefore there
can be no partnership engaging in such business: Q: Is there a partnership agreement which
banking and insurance. would require a particular form for the validity
of the partnership agreement?
3. Cause of Partnership A: Yes. There is only one scenario here: if one of
The promise of each partner to contribute either the contracting parties promised to contribute an
money, property or industry. immovable, there has to be an inventory of such
immovable and signed by the contracting parties. If
Q: What would be the effect if either the cause there is no inventory, the law is very clear, the
or the object of the partnership is illegal or if partnership is void.
the partnership has an unlawful cause or
object? Q: What if there was an agreement to
A: The contract of partnership is void and under the contribute an immovable and there was an
law, when the contract is void, it produces no legal inventory signed by all the partners, however,
effects whatsoever, therefore, action to compel a the partnership agreement itself was not put
party to the contract to distribute the profits will into writing, what is the status of that
never prosper. In fact, under the law on partnership contract?
partnership, the State will confiscate the profits of Atty. Uribe: I agree with the position of Professors
such illegal partnership. Agbayani and Bautista that, despite Art. 1771, as
long as there is an inventory of such immovable,
Q: Will an action to compel a partner to render the partnership agreement is valid and binding and
an accounting prosper? the juridical personality will be created.
A: No. Any action to enforce a void contract will Why?: As ruled by the SC consistently, like in the
never prosper. case of Dauden-Hernaez vs. delos Angeles, for a
contract to be void for non-compliance with the
Q: May a party to such void contract at least be requirements of the law as to form, the law itself
able to recover what he contributed or must provide for the nullity of the contract. If the
delivered pursuant to that void contract? law only required a form, but the law itself did not
A: As a rule, no, because of the in pari delicto rule provide for the nullity of the contract, if the parties
under Article 1411. failed to comply with that form, then that form is not
EXCEPTIONS: Article 1411, 1412, 1414,1415 and necessary for the validity. It may be necessary for
1416. Under these circumstances, a party to a void the enforceability of the contract or greater efficacy
contract may be able to recover what he of that contract. Thus, in partnership, it is said that
contributed. this requirement as to form will only be necessary
for the greater efficacy, kasi kailangan naka-
Atty. Uribe: I would always consider one of these register sa SEC. That is apparently the only reason
provisions as a very practical one: why the law would require a particular form in
In a contract that is void, it is so provided that a partnership where there is an immovable
party to such contract may recover what contributed by one of the contracting parties.
contributed if he repudiated the contract before the Atty. Uribe: The position of Prof. Agbayani is well-
consummation of the contract and before damage supported by the SC.
is incurred by a third person.
A partnership has a juridical personality
which is separate and distinct. This is consistent
with the “legal person theory,” as opposed to the
FORMALITIES: partnership in the United States which adheres to
Q: If the agreement of the parties to a contract the “aggregate theory” which states that their
of partnership was only a verbal agreement, partnership has n juridical personality separate and
would that be a valid and binding contract? Will distinct from the contracting parties.
there be a juridical personality created?
A: As a rule, yes. Even if under Art. 1772, the law Consequences: separate and distinct
provides that every contract of partnership, having personality
a capital of more than Php3,000 or more, shall be 1.) It can own its properties;
in a public instrument and must be registered with 2.) It can sue and be sued;
the SEC. 3.) It may be found guilty of an act of
insolvency;
The 2nd paragraph of Art. 1772 provides 4.) It may be dissolved for committing an
that despite failure to comply with the requirements act of insolvency.
in the preceding paragraph, this is without Concretely, in the case of Campos-Rueda vs.
prejudice to the liability of the partnership and the Pacific Commercial
individual partners to third persons. From that

Page 48 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Facts: The partnership here filed a petition for the
dissolution of the partnership, but one of the This classification is relevant only in limited
creditors opposed the petition for dissolution on the partnership.
ground that there was no showing that the
individual partners are already insolvent. In general partnership, partners are
general partners and they are liable for partnership
Held: The solvency or insolvency of the individual obligations up to their personal property. Each one
partners is irrelevant as to the petition of the of them has the right to participate in the
dissolution of the partnership. The partnership management of the partnership unless otherwise
itself, having a separate and distinct personality agreed upon by the partners.
may be dissolved or may commit acts of insolvency
regardless of the solvency or insolvency of the In limited partnership, while a limited
partners. partner cannot be held liable up to his personal
property, the liability of a limited partner will only be
Actually, if one of the partners in a general up to his capital contribution. He also would not
partnership is insolvent, there is already dissolution have the right to participate in the management of
of the partnership by operation of law, if the same the business of the partnership.
be proven. G.R.: A limited partner cannot be held personally
liable for partnership obligations.
CLASSIFICATION OF PARTNERSHIP: EXC: Instances when a limited partner may be
As to the object of the partnership is only to held liable up to his personal property:
determine whether a person may enter such 1.) If he participates in the management of
partnership, there is a need to distinguish whether the business of the partnership.
a partnership is a UNIVERSAL or PARTICULAR
partnership. 2.) If his surname appears in the firm name.
Except: a.) even if a limited partner’s
2 Kinds of Universal Partnership: name appears in the firm name, if the
1.) Universal Partnership of Property surname of a general partner is the same
2.) Universal Partnership of Profit as that of the limited partner. b.) such
surname was already in the firm name
Under the law, if the partners agreed to form a prior to his entry in the partnership.
universal partnership, however, they failed to state
what kind of universal partnership, it shall be 3.) When he is a general partner and a limited
treated merely as a universal partnership of profit, partner in the same partnership at the
meaning, it shall comprise only the result of their same time.
work and industry. In universal partnership of Who? A person who is both a general and
property, the partners are deemed to have limited partner at the same time and in the
contributed all their property, not literally all, for same partnership would have all the rights
there some properties which are exempt from and obligations of a general partner,
execution and under the law may not be however, he would have a right as to his
considered as having been contributed by the contribution as against the other partners,
partners. which he would not have, had he not been
a limited partner. When it comes to
TERM OF PARTNERSHIP division of assets upon dissolution he has
the priority as a limited partner. That is the
Q: If the partners failed to fix a period, does it only edge, otherwise, he has all the rights
mean that the partners agreed a partnership at and obligations of the general partner.
will and may be dissolved at any time without
any liability so long as they acted in good 4.) When there is failure to comply
faith? substantially as to the formalities
A: No, because a partnership may be a partnership prescribed by law in the formation of a
for a particular undertaking even if no period was limited partnership.
fixed by the parties.
Under the law, if there is a failure
In one case, a partner, dissolved a to comply substantially with the formalities
partnership, claiming it to be a partnership at will, for the creation of a limited partnership,
the partnership being involved in a bowling that agreement will be valid among the
business. The SC ruled that even if the partners partners, however, all of them can be
failed to fix a period, the partnership cannot be treated as general partners by third
considered as a partnership at will because there persons. Therefore, a third person, in this
was a stipulation in the partnership agreement that scenario, can hold a limited partner liable
the debt of the partnership shall paid out of the up to his personal properties. The limited
profits that will be obtained by the bowling partner’s remedy is to seek
business. Thus, after all, it cannot be dissolved at reimbursement from his other partners.
will, for the debts will have to be paid. Therefore,
the SC ruled that the said partnership is a As to the contribution:
partnership for a particular undertaking. 1.) Capitalist
2.) Industrial
CLASSIFICATION OF PARTNERS:
According to the liability of the partners: Q: An industrial partner, may be a general
1.) General partner?
2.) Limited

Page 49 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
A: Yes. A capitalist partner may either be an A: If A is a limited partner, there shall be no
industrial or general partner. distribution in proportion to the credit of these two
creditors. The law which requires that payment be
Q: May an industrial partner be a limited distributed in proportion to the two credits will only
partner? apply if the partner to whom the amount is
A: No. A limited partner can only contribute money delivered is a managing partner. If he is a limited
or property. He cannot contribute service. partner, normally, he would not have any
participation in the management of the partnership
Q: But can a partner be both capitalist and business. Thus, if he is a limited partner, then he
industrial? can have the right t receive everything he received.
A: Yes, he can contribute both money and industry.
He can be both capitalist and industrial and there Q: Assuming that A is in fact a managing
will be consequences to that. partner and he received the 30,000 from X, is it
possible still for A to retain everything which
BE: A and B formed a partnership to operate a he received?
car repair shop. A contributed money, B A.: Yes, if this debt is already due and
contributed industry. While the car repair shop demandable. In this scenario, the debt is not yet
was already in operation, A operated a coffee due and demandable. Such debt MUST be due
shop beside the car repair shop. B also and demandable in order for the law on the
operated a car accessories store on the other proportional distribution to apply to both debts.
side of the shop. May these partners engage in
those business activities? Q: A is a managing partner and both debts are
A: As far as A is concerned, he can validly engage due and demandable. 30,000 was delivered to
in such business because the law would only A. Is it possible for the partnership to have the
prohibit him from engaging in a similar activity. As right to the entire 30,000?
far as B, an industrial partner, is concerned, he A: If A receipted the amount in the name of the
cannot engage in any business activity without any partnership. By specific provision of the law, if the
express authority or grant by the partnership for managing partner who received such amount,
him to engage in such business. Thus, if A did not receipted the same in the name of the partnership,
give his consent, B cannot validly engage in ANY the partnership will be entitled to the entire amount.
business, not only similar business, for B, as
industrial partner, is supposed to give his time in Q: If A, as managing partner, and both debts
the said partnership business. being due and demandable, he received the
amount of Php30,000 and receipted the same in
Incoming Partner: his own name, may he be entitled to retain
Q: ABC Partnership is composed of A, B and C. everything?
Thereafter, D became a member of the A: Yes, if X’s debt to A is more onerous and X
partnership. Six months after D’s entry as a chose to have this amount paid to this debt. Under
member, a certain obligation, 3 Million became the law, the debtor has the right to choose to pay
due and demandable. For this partnership the debt which is more onerous. Again, the
obligation, can D be held liable? premise is the debt to A is more onerous than the
A: As was provided in the facts, the 3 Million debt to the partnership.
became due and demandable. Thus, this obligation
may have been incurred after D’s entry or before If A, as managing partner, received the same
his entry, although it became due after his entry or amount, receipted in the name of the partnership,
admission to the partnership. both debts are due and demandable and are of the
same burden, there will be a proportional
If the obligation is incurred after his entry, distribution of the amount, 20,000 will go to the
there is no question that, if he is a general partner, partnership, and 10,000 will go to A, the debt to the
he can be held liable up to his personal properties. partnership being 100,000 and the debt to A being
50,000.
Q: If this obligation is incurred prior to his entry
as a partner, can he be held liable? PROPERTY RIGHTS
A: Yes. As a rule, he may be held liable, but only to 3 Major property rights of a partner:
the extent of partnership property which would 1.) Right in specific partnership property;
include his capital contribution, unless there is a 2.) Interest in the partnership; and
stipulation to the contrary. Even if the obligation 3.) The right of the partner to participate in the
was incurred prior to his entry, however, if in the management of the business of the partnership.
partnership agreement, he agreed to be bound by
those obligations, then he can be held liable even Property rights considered as minor:
to the extent of his personal property, though he is 1.) Right to have access to the books of the
a new partner. partnership;
2.) Rght to demand for a formal accounting.
Q: X is indebted to ABC Partnership which may
be limited. The same debtor of the partnership Q: Can a partner demand for a formal
is also a debtor of one of the partners. The debt accounting at any time?
to the partnership is 100,000, while the debt to A: No. The law will only give a right to a formal
the partner is 50,000. X delivered 30,000 to A. accounting under very specific circumstances.
Should this 30,000 be distributed in proportion Why? Because a partner already has access to
to the debts to the partnership and to A, the books, thus, it may be unnecessary to demand
meaning, 20,000 will go to the partnership and for a formal accounting at any time.
10,000 will go to A.

Page 50 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Right in specific partnership property: A: Such stipulation is void. Take note that only
Under the law, a partner is a co-owner such stipulation is void and not the whole
with the other partners as to specific partnership partnership agreement.
property. Again, he is a co-owner with his partners
and NOT with the partnership over specific Q: Thus, if the stipulation as to the sharing of
partnership properties. the profits is void, or that there is no stipulation
with this regard, what would be the sharing in
Q: How could a person be a co-owner of a the profits of the partners?
property owned by another if he is not a co- A: It will depend on their capital contribution.
owner of that other person? The owner is the
partnership. How can a partner be a co-owner Q: What if one of the partners is an industrial
of that property if he is not a co-owner with the partner?
partnership? A: By express provision of the law, he shall be
A: Other authors would say that the problem with given his share by determining the value of the
this provision is that it was copied from the Uniform service rendered. Thus, determine first the value of
Partnership Act of the United States, where a the service rendered, give the same to the
partnership has no separate and distinct industrial partners, then the balance will be
personality, thus making them merely co-owners. distributed to the capitalist partners in accordance
to their capital contribution.
But, in fairness with the Code commission,
the 2nd sentence would tell you that this co- BE: A, B and C are partners. In their
ownership has its own incidence. In other words, partnership agreement, they agreed in the
this is no ordinary co-ownership under the property equal sharing of the profits. Thereafter, C
law. That’s why some authors would call it co- assigned his whole interest in the partnership
ownership sui generis. to X. X now demanded that he be allowed to
participate in the management of the business
Q: Concretely, in property law, if two persons of the partnership and also his share in the
are co-owners of a parcel of land, can a co- profits in the business of the partnership. Are
owner sell his interest over the parcel of land the claims f X valid?
without the consent or even knowledge of the A: As to X’s claim t participate in the management
other co-owner? Would that be a valid of the business, he has no such right as an
assignment of interest? assignee. By express provision of the law, an
A: Yes. However, in specific partnership property, assignee has no right to participate in the
there can be no valid assignment of interest by one management of the business of the partnership,
partner. The assignment of interest of a specific unless otherwise agreed upon. He will not even
partnership property would only be valid if all the have the access to the books of the partnership.
partners would likewise assign their interests. His only right would be to receive whatever the
assigning partner may receive as share in the
Q: May a creditor of a co-owner of a parcel of profits and in the surplus.
land levy upon such portion of the land interest
over that land owned by the debtor / co-owner? Q: If profits were declared, for instance, in the
A: Yes, there can be such valid levy. amount of 360,000, would the assignee have
the right to share in the profits?
Q: In partnership, can a creditor of a partner A: Yes. X is entitled to share of Php120,000, since
levy upon the rights of the partner over a the agreement is equal sharing of profits.
specific partnership property?
A: That is not possible. Only partnership creditors Right to participate in the management of the
can levy upon partnership assets or partnership business of the partnership
property. This is different in the partner’s interest in
the partnership for this interest in the partnership BE: W, X, Y and Z formed a partnership. W and
can be validly assigned by one of the partners X contributed industry; Y contributed 50,000; Z
even without the consent or knowledge of the other contributed 20,000. In a meeting, the partners
partners. unanimously agreed to designate W and X as
managing partners, such appointment having
Interest in the Partnership no stipulation as to their respective duties nor
Simply put, this is a partner’s share in the profit and was there any statement that neither can act
surplus. Whatever is his share in the profit or without the consent of the other. Thereafter, 2
surplus is his interest in the partnership. persons applied for two positions: 1.) as
secretary; and 2.) as an accountant. As far as
Q: What would be the share of a partner in a the secretary is concerned, it was W and X who
partnership? appointed the secretary, opposed by W and Z.
1.) Stipulation. For instance, in a partnership The accountant was appointed by W concurred
of 3 persons, they can agree that one by Z, which was opposed by X and Y. Whose
may have 95% of the profits, while the 2 appointment would bind the partnership?
other partners may have 5% of the same A: This management arrangement is known as
respectively. joint management. Any managing partner may
execute acts which are merely acts of
Q: What if, in such agreement, one of the administration even if opposed by all the other
partners was excluded in sharing in the partners, kung mag-isa lang sya. But, if there are
profits? two or more managing partners, they have to
decide by a majority vote.

Page 51 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Q: Is the appointment of the secretary an act of Q: The question now is, can he be easily be
administration? removed?
A: Yes. A: No. The requirements for the removal of a
managing partner would depend on whether he
Q: Would it bind the partnership? was constituted as such in the articles of
A: Yes, even if opposed by the other partners, the partnership or he was merely appointed as
capitalist partners, the latter would not have any managing partners after the constitution of the
right for this is merely an act of administration well- partnership.
within the powers of a managing partner.
If he was constituted as a managing
Q: With regard to the accountant, take note that partner in the articles f partnership, he can only be
the appointment by W was opposed by another validly removed under two conditions:
managing partner. How will this tie be 1.) There has to be just cause; and
resolved? 2.) by those partners having controlling
A: Under the law, this will be resolved by all the interests.
partners with the controlling interest. The partners
with controlling interest will prevail. Absent one of these conditions, he cannot be
validly removed. In fact, even if there is just cause,
Q: In this case, who has the controlling if the managing partner controls 51% of the
interest? partnership, he can never be removed.
A: Y. The determination as to who has controlling
interest depends on the capital contribution. Thus, However, if he was appointed as a
an industrial partner is excluded in such cases. In managing partner only after the constitution of the
this case, it is obvious that 50,000 is more than the partnership, he can be validly removed even
capital contribution, and because Y opposed to the without just cause, so long as it was done by those
appointment, such appointment will not bind the partners having controlling interests.
partnership.
OBLIGATIONS OF THE PARTNERS AMONG
Other management arrangements are provided in THEMSELVES AND AS TO THE PARTNERSHIP
Articles 1800, 1801, 1802, 1803. AND IN CASE OF NON-PERFORMANCE OF
THE OBLIGATION
TYPES OF MANAGEMENT:
1.) Solidary Management: 3 Obligations of the partners:
-without specification as to each other’s 1.) To make good his promised contribution;
duties or without stipulation that one of them shall 2.) Fiduciary duties; and
act without the consent of all. 3.) To participate in the losses incurred by the
partnership business.
2.) Joint Management:
-two or more managing partners with the 1. To make good his promised contribution:
stipulation that none of them shall act without the A. Money:
consent of all others. The incapacity of one of the In order to know the remedies that may be
partners, or his absence will not be a valid ground availed of by the non-defaulting partners and the
not to obtain his consent to a contract. It has to be partnership, it must be known first what was
by unanimous consent, unless, in obtaining his promised by the partner, whether he promised to
consent (he is absent or incapacitated) it would contribute money, property or industry.
result in irreparable damage to the partnership,
then the consent of the absent or incapacitated If the partner promised to contribute
managing partner may be dispensed with. This is money, for instance, the partners agreed to
also known as management by consensus. contribute 1 Million with 4 partners, without an
agreement as to respective amount to be
3.) If there was management arrangement contributed, the law provides that they will have to
agreed upon between the partners, each partner is share equally. Thus, in this example, 1 Million will
considered as an agent of the partnership. have to be divided into 4 or the respective
contribution will be 250,000. If one partner failed to
Into these arrangements, if only one partner is make good his promised contribution which is a
appointed as a manager, he can execute any acts sum of money, he can be held liable by the non-
of administration even if opposed by all the other defaulting partners up to the amount promised plus
partners. interest. If no rate was stipulated by the parties, it
will be the legal rate of 12%, because this is
Q: In a partnership of which the business is forbearance in money. Aside from paying the
into buying and selling cars, the managing interest, which is unusual, not only will that
partner decided to buy a vintage Mercedes defaulting party be held liable to pay interest, he
Benz, to the opposition of the other partners for will also be liable to pay damages.
they consider it bad investment, will the
decision or the act of the managing partner in Normally, in obligations involving money,
buying the said car bind the partnership? in case of damage incurred by another party, the
A: Yes, because such act is merely an act of liability will only be payment of interest. In
administration. The problem is, if the managing partnership, not only will he be liable to pay
partner continues to not consider the sentiments of interest, but also of damages.
the other partners, he may be removed as a
managing partner. Remedies that may be invoked by the non-
defaulting partners:

Page 52 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
1.) Specific performance - the other partners 2. Fiduciary Duties:
can compel him to make good his The duty to observe utmost good faith, honesty,
promised contribution. fairness, integrity in being with each other. This
2.) Dissolution - may be an option by the duty commences even during the negotiation
non-defaulting partners, if that is the only stage.
amount that they are expecting for the
partnership. Test to determine whether there was a violation
of this duty:
Q: Can a non-defaulting partner rescind the Whether the partner has an advantage himself at
partnership agreement? the expense of the partnership. If he has such
A: In a SC decision, it held that rescission is not a advantage at the expense of the partnership, then
remedy of the non-defaulting partners. Under the there is a breach of the fiduciary duty. There need
law, the defaulting partners are treated as a debtor not be a proof of evil motive so long as he has this
of the partnership by specific provision of the law. advantage at the expense of the partnership.
Therefore, the SC held that provision prevails over
the general rule in obligations and contracts under This duty lasts, normally, until the
Art. 1191, wherein rescission may be a remedy in termination of the partnership.
case of serious breach.
Q: May a partner may be held liable for breach
B. Property: of fiduciary duty even after the termination of
If a partner promised to contribute the partnership?
property, it must be determined as to what was A: Yes. The SC held that even if the act of a
really contributed: was it the property itself or the partner was made after the termination of the
use of the property. partnership, if the foundation of that act was made
during the existence of the partnership that can still
If it was the ownership of the property that be considered as a breach of fiduciary duty. In
was contributed then he would have the obligation other words, pinaghandaan na nya yun act during
to deliver and transfer ownership, aside from that, the existence of the partnership, however, it was
under the law, he would have the obligation to executed only after the termination of the
warrant the thing. partnership.

Before the delivery of the thing to the 3. Participate in the Losses:


partnership, who will bear the loss? The partner Q: What will be the share of the partner in the
will bear the loss. The partnership will bear the loss losses incurred in the partnership?
when the thing is already in its possession A: Consider first whether there was a stipulation as
to losses or there was no stipulation.
If what was contributed was merely the
use of the property, the risk of loss will be with the If there was a stipulation as to losses, the
contributing partner for there was no transfer of first scenario would pertain to, for instance, A, B
ownership in this case. Under the res perit domino and C agreed to share 50%, 30% and 20% of the
rule, even if possession of the thing is with the losses. This will be a valid and binding stipulation
partnership, so long as there is no fault on the part among the partners.
of the partnership, then the contributing partner-
owner will bear the loss. Q: Would this still be a valid stipulation if one
EXCEPTIONS: of them is an industrial partner?
1.) When the thing contributed is fungible; Atty. Uribe: Yes, this would still be a valid
2.) or it cannot be kept without stipulation. If the industrial partner agreed to share
deteriorating; in the losses, then who are we to deny him that?
3.) If contributed by the partner to be sold;
and Q: What if in the stipulation regarding losses,
4.) When it has an appraised value of such one or more of the partners is excluded in
property. sharing with the same, what will be the status
of the stipulation?
In all these circumstances, it is the partnership A: It depends on who was excluded. If the
which will bear the loss if the thing was lost or excluded partner is a capitalist partner, that
destroyed while in the possession of the stipulation is definitely void, 100%.
partnership.
If the partner excluded is an industrial
Again, if the contributing partners fails to make partner, it depends. As among the partners, this
good his promise to contribute property, he will be stipulation is valid, however, this is void among
treated as a debtor of the partnership, thus specific third persons. In other words, despite the
performance will likewise be a remedy. stipulation among partners, in excluding the
industrial partner in sharing in the losses, the
C. Industry creditors of the partnership can still hold such
If a partner fails to render service as industrial partner liable for his contractual
promised, will specific performance be a remedy? obligations. The remedy of the industrial partner, if
Ans.: Definitely not. It would be a violation of his held liable, is to go after his partners, for the
rights against involuntary servitude. The remedy agreement is valid among themselves.
would be to demand for the value of the service
plus damages. It can be easily done because there Q: What if there is no stipulation as to the
is an industry rate. sharing of the losses, or that the stipulation in
void?

Page 53 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
The first scenario is, there is an if the partnership has no assets remaining, each
agreement as to profits. If there is an agreement as partner shall only be held liable up to his share in
to profits, then the sharing in the profits will be the the partnership indebtedness. Thus, if the debt is
same basis in the sharing of the losses which is a 100,000 and there is no agreement as the share in
very reasonable rule. Thus, for instance, if A, in the the losses, they have to share in the losses,
agreement, is entitled to 90%, B-% and C-5%, equally into 20,000, yung apat na lang na
then it would also be reasonable that A share 90% defendants, kasi yung isa, condoned na yung
of the loss, B&C 5% of the loss respectively. obligation.

The last scenario, there is no stipulation as to OBLIGATIONS OF PARTNER RE: 3RD PERSONS
losses and there is also no stipulation as to profits. Q: When would a contract entered into by a
In this case, it would depend on their capital partner bind the partnership?
contribution. Their share in the losses would Ex.: If a partner went to a furniture shop to buy
depend on their capital contribution. furniture the of which is Php100,000, and such
amount remained unpaid, can the seller
Thus, in this scenario, would the industrial demand payment from the partnership?
partner share in the losses? A: It depends as to whether the contract was
A: Wala, kasi wala syang capital contribution. entered into in the name of the partnership, for the
account of the partnership, under its signature, by
Note: Under Art. 1816, even if he is excluded by a partner who is authorized to enter into that
the partners/partnership in sharing in the losses, contract to bind the partnership. Thus, in this
that is a void stipulation as to third persons and can example, if in the agreement the buyer was the
still hold the industrial partner liable as to the partner himself and not the partnership, that
contractual obligation of the partnership. partner should be held liable, for the furniture was
not bought in the name of the partnership.
Q: If indeed a partner, assuming that the assets
of the partnership are not sufficient to cover The problem, if the contract would be binding in the
the obligations of the partnership, what would partnership, then would be, whether the partner
be the nature of the obligation of the partner? who represented the partnership had the authority
Would the partners be held solidarily liable? Or to bind the partnership.
would they only be held jointly liable?
A: It would depend on the nature of the liability. For Normally, if a partner would enter into a
contractual obligations, as a rule, the partners contract, a partnership resolution is not necessary.
would only be jointly liable, unless they bound Whether or not a contract would bind the
themselves solidarily, for contractual obligations. partnership would depend on the nature of the act
However, under Art. 1824, if the obligation arose of such partner and the nature of the business of
from a tortuous act or a wrongful act under Arts. the partnership.
1822 and 1823, for example, while in the
performance of his obligation, a partner received a Q: Concretely, if a partner bought a complete
sum of money from one of its clients which sum of set of SCRA in the name of the partnership and
money was misappropriated that partner, such signed by that partner, would that contract bind
partner will be held solidarily liable with his partners the partnership for the set was bought in the
and with the partnership. Also, if a sum of money name of the partnership?
was delivered, even if it was delivered to the A: It would depend on the nature of the act and the
partnership, however, one of the partners nature of the business of the partnership. In this
misappropriated the same, all the partners will be example, the partner bought the set of SCRA, pero
considered solidarily liable among themselves and naman, and business ng partnership ay restaurant,
with the partnership. hindi naman ata na i-bind nya ang partnership to
such contract, ang negosyo nila restaurant. 
In the United Pioneers General
Construction Case, the creditor filed a collection Q: But the seller would raise the defense,
suit impleading the 5 general partners. During the “hindi ko naman alam na restaurant yung
pendency of the case, the creditor asked for the business, e ang nagrepresent ng partnership si
dismissal of the action as against one of the Atty. ABC, so akala law firm.” Is that a valid
partners. Ultimately, the court decided in favor of defense?
the plaintiff. Assuming the amount which was found A: No. The SC would tell that the third party
to be the liability of the partnership was contracting with the partnership has the obligation
Php100,000, the court ruled that the partnership to know at least the nature of the business of the
will have to pay the said amount and in case that partnership. In fact, he can demand for the
the assets of the partnership will not be sufficient to presentation of the articles of partnership in order
cover this indebtedness, the partners will be liable for the third party to know the nature of the
to pay equally. So, naging issue yung “equally,” business of the partnership. For, if this time, the
meaning silang apat na lang? for the case as partnership is a law office, and the partner bought
against one of the partners was dismissed. If the a set of SCRA, that act of buying a set of SCRA
amount of the obligation is 100,000, should they be will be considered apparently for carrying the
liable 25,000 each or 20,000 each including the 5th business of the partnership the usual way.
partner? Therefore, that contract will bind the partnership.

The SC ultimately held, in this case, that Q: Even if he had no authority from the
the liability of the partners is only joint, therefore, partners?
the condonation of the liability of one partner will A: Yes.
not increase the liability of the other partners. Even

Page 54 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
Q: Even if there was a resolution among
partners that he should not be the one who will Judicial causes are necessarily voluntary because
enter into the contract? For instance, A,B,C,D, it is by application.
and E did decide to buy the set, but designated
A to buy the same and not E, but the E bought Under voluntary causes would fall, the
the SCRA, would that contract bind the cause of the dissolution may result on the violation
partnership? of the agreement or it may be without violation of
A: Yes, as long as the third person was not aware the partnership agreement. Concretely, the
of that agreement of the partnership because such expiration of the period would be voluntary,
act is an act apparently for carrying on the extrajudicial but without violation of the agreement.
business of the partnership the usual way. So, if The fixing of the term is an agreement of the
the partnership is a law office, but the partner parties therefore, it is voluntary.
bought certain things for a restaurant, then such
act is not apparently for carrying on the business Termination of a definite term or a
the usual way, thus such act would require the particular undertaking: voluntary but without
consent of the partners in order to bind the violation.
partners.
By the will of one of the partners: the
Under Article 1818, there are certain acts which partnership may be dissolved without liability on
law requires the unanimous consent of the partners the part of the partner, if the partnership is a
for such a contract or act to bind the partnership, partnership at will and he dissolved the partnership
like, disposing the goodwill of the partnership or to in good faith. Those are the two requirements, in
contest a judgment against the partnership or order for a partner to be able to dissolve the
renounce a claim of the partnership. partnership without liability on his part. Again, in an
express will of any partner who acted in good faith,
DISSOLUTION, WINDING UP AND when no definite term or particular undertaking is
TERMINATION specified, which means, again that a partnership is
These are three different concepts. Upon a partnership at will.
dissolution of the partnership, it is NOT DEEMED
dissolved. It will still have to go through the process BE: A, B and C agreed to form a partnership for
of winding up of the affairs of the business of the a period of five years. After 2 years of business,
partnership before the partnership itself will be C assigned his whole interests to Philip. The
terminated. two other partners, realizing that they would
not be able to deal with Philip, decided to
Q: When would there be a dissolution of a dissolve the partnership. Philip, not knowing of
partnership? the dissolution done by the 2 partners, filed a
A: Under the law, there will be a dissolution if there petition for the dissolution of the partnership
is a change in the relation of the partners caused with the court. Was the partnership dissolved
by any of the partners ceasing to be associated in by the act of the two partners? May the action
the carrying on of the business of the partnership. filed by Philip to dissolve the partnership
That will result in the dissolution of the partnership. prosper?
Again, if one of the partners ceased to be A: As already mentioned, by the express will of all
associated in the carrying on of the business of the the partners who have not assigned their interest is
partnership, that will result in the dissolution of the a cause for the dissolution of the partnership.
partnership. Therefore, the 2 partners validly dissolved the
partnership by mere will of the partners.
Q: May there be a dissolution even if none of
the partners ceased to be associated with the Q: As far as Philip was concerned, will his
carrying on of the business of the partnership petition prosper, even assuming that no
despite the definition of dissolution under Art. dissolution was made by the 2 partners?
1828? A: No. With the assignment of the interest of a
A: Yes. One scenario is the admission of a new partner to another person that does make the
partner. With the admission of a new partner, assignee a partner of the partnership without the
under Art. 1840, the partnership is dissolved. consent of the other partners, therefore, he has no
personality to file a petition for the dissolution of the
Q: What is the effect of the dissolution? partnership.
A: Again, it will not result in the termination, it will
only start the winding up process, effectively, this Expulsion of any partner in good faith, it
will terminate the authority of all partners to bind maybe because the grounds for expulsion was
the partnership, EXCEPT, if that act is necessary agreed upon by the partners and one of the
for the winding up of the partnership or necessary partners violated such agreement, thus he may be
to complete a business which was then began but expelled in good faith, therefore it may be voluntary
was not yet finished at the time of the dissolution of and without violation.
the partnership.
In contravention, because one of the
CAUSES OF THE DISSOLUTION partners may dissolve a partnership, even if the
1.) Extrajudicial; partnership has a fixed period or it is a partnership
2.) Judicial. for a particular undertaking and that particular
undertaking has not yet been completed, that
Extrajudicial causes: would be in contravention of the agreement of the
1.) Voluntary; partners.
2.) Involuntary.

Page 55 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
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INVOLUNTARY CAUSES: b.) if one partner would refuse to allow
another partner in the management of the
Q: If one of the partners in a partnership was partnership business, if he has such right to
elected a Senator, would this dissolve the participate in the management ;
partnership by operation of law? c.) if the managing partner would refuse to
A: No. distribute the profits of the partnership when there
is such obligation to distribute the profits;
Q: Even if it is a partnership of lawyers or a law d.) misappropriation of the income of the
office? partnership business.
A: No.
Note: If a limited partner becomes a limited partner
Under the Constitution, these elected officials are in another partnership, that is not a valid ground to
prohibited only from appearing before tribunals and file a petition for the dissolution of the partnership.
not from private pratice. Limited partners has nothing to do with the
management of the partnership business, thus,
Q: If a lawyer was appointed in the cabinet, for there is no conflict of interest.
instance as Presidential Legal Counsel, would
that result in the dissolution of the partnership Note: The fact that the partnership incurred losses
by operation of law? for the past three years is not necessarily a ground
A: Yes. Under the Constitution, Cabinet for dissolution.
Secretaries are prohibited from private practice of
their profession. However, even if the partnership incurred
Classic ex.: The Firm (Carpio Villaraza Cruz Law) losses once and it can be shown by the partners
This also includes appointment in the judiciary. that there is no prospect for recovery, it can be a
valid ground for the filing of the petition for the
Q: What if the law partner was elected as dissolution of the partnership.
governor of his province will it result in the
dissolution of the partnership? Q: Quarrels among partners, valid ground?
A: Yes. Under the Local Government Code, chief A: Normally, no. However, if such quarrels give rise
executives are also prohibited from the private to dissension among the partners, affecting the
practice of their profession. conduct of the business of the partnership, this can
also be a valid ground, falling under “other
Q: What if the partner who died is a partner in a circumstances” which would render the dissolution
limited partnership? Would that dissolve equitable.
automatically the partnership?
A: It depends as to who is the partner. Q: Upon the dissolution of the partnership, and
there were assets left, how will these be
If he is a general partner, as a rule, it distributed? To whom these assets be given?
dissolves the partnership, unless there was an A: As far as partnership assets are concerned:
agreement in the articles of partnership that they 1.) Partnership creditors who are not
would continue with business of the partnership partners.
even after the death of the partner. Or even without 2.) Partnership creditors
such agreement in the articles of partnership, if the 3.) If there are remaining assets, to the
surviving partners decide to continue with the capitalist partners;
business of the partnership, then the partnership is 4.) Excess - profits based on their agreement
not deemed dissolved even if the partner who died as to profits.
is a general partner.
Q: What if, in their agreement, Partner A
If the partner who died is a limited partner, contributed 100,000; Partner B, 50,000; Partner
that does not result in the dissolution of the C, industrial partner. The total assets of the
partnership. In fact, the executor or administrator of partnership is 1 Million at the time of
the estate of the deceased limited partner will the dissolution, however, there were partnership
right to choose or to appoint a substitute limited creditors obligation of which amounted to
partner in the said partnership. 900,000. Would the industrial partner have a
share in that 1 Million asset?
Insolvency or civil interdiction of any partner will A.: No. Since the amount of the obligation is
result in the dissolution of the partnership. Php900,000, the remaining Php100,000 should be
given back to the capitalist partners for their capital
Judicial Causes: Grounds: contribution.
1.) Insanity or incapacity:
-The courts require that it should be Q: Assuming that there was no agreement as
permanent in character; and their share in the losses, also there was no
-such incapacity or insanity must affect the agreement as to their share in the profits, what
performance of such partner of his obligations if one of the partners became insolvent, will the
with respect to the partnership business. In other partner’s liability be increased?
other words, kung wala syang pakialam sa A: No, because their liability is JOINT.
management ng business ng partnership,
insanity or incapacity is not a valid ground. Q: For instance A, a partner is insolvent, his
assets being 100,000. A is indebted X and Y.
2.) Gross misconduct: The partnership also has its creditors. To
a.) wrongful expulsion; whom shall this 100,000 be given?

Page 56 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
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A.: It should be given to the separate creditors of 1.) Applicability of the parole evidence
the individual partner. rule; and
2.) Prescription, specifically, acquisitive
For a limited partnership to be formed, there has to prescription.
be at least one limited partner and one general
partner. Note: An express trust over an immovable may not
be proven by parole evidence. This means that
For the establishment of a limited implied trust over an immovable may be proven by
partnership, the law requires certain formalities. parole evidence or express trust over a movable,
Concretely, under Art. 1844, there has to be a may be proved by parole evidence.
certificate signed and sworn to by the contracting
parties which has to be filed with the SEC. So long EXPRESS TRUST
as there was substantial compliance with the Q: May an express trust over an immovable be
formalities required by law, a limited partnership proven by mere testimony of the witness?
will be valid and binding. A;Yes, if the lawyer of the other party did not object
to the presentation of the witness.
Q: What if there was no substantial compliance
as to these formalities? BE: In an agreement between A and B, a
A: Even if there was no substantial compliance, the property of A was to be registered in the name
agreement will be valid and binding among of B, with an agreement the B will reconvey the
themselves. As to third persons, all of them may be property to A’s son upon the graduation of the
held liable as general partners, as if all of them are said son (A’s son). This agreement was entered
general partners. Thus, even a limited partner may into in 1980. The property was in fact registered
be held liable even up to his personal properties. in the name of B the following yea, 1981. In
1982, A died. In 1983, A’s son graduated.
Despite that fact, B did not reconvey the
property. He had no knowledge of this
agreement until 1993, when accidentally, the
son of A discovered such instrument pertaining
to the agreement of A and B. Thus, he
demanded that the land be conveyed to him. B
refused raising the defense of prescription. Is
this claim tenable?
A: Definitely not. This pertains to an express trust.
In an express trust, trustee will be holding the
property only in the name of the beneficiary or the
cestui que trust, therefore, he cannot acquire the
said property by acquisitive prescription unless
there would be adverse possession over the
property.

Q: When would there be adverse possession?


A: It may only start with repudiation. Without
repudiation, the period for acquisitive prescription
will not start to run. Such act of repudiation should
be made known to the beneficiary.

IMPLIED TRUST

Resulting Trust:
BE: A and B, brother and sister respectively,
inherited two identical parcels of land. For
purposes of convenience, B, sister of A, agreed
to have the land registered in the name of A.
However, when the parcels of land were
registered in the name of A, A sold one of the
parcels of land to a buyer in good faith and for
value. Can B recover the land from the buyer?
TRUST What would be the remedy of B?
A: This question clearly pertains to a resulting trust.
2 KINDS: This is specifically, Art. 1451 of the NCC.
1.) Express;
2.) Implied. B cannot recover the land from the buyer.
As discussed in Sales, a buyer who had bought the
Implied Trust: 2 Kinds: property from a seller who has no right to sell, but
1.) Resulting trust; he has apparent authority to sell, who appears to
2.) Constructive trust be the owner and the buyer bought the property in
good faith, he will acquire ownership over the thing
The classification of trust into two kinds even if the seller has no right to sell.
(express and implied) and implied trust into two
kinds (resulting and constructive) would be relevant
in two concepts:

Page 57 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
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B’s remedy would be to go after her property in the name of another person. Pero sa
brother for breach of trust in selling the property constructive trust, itong pinsan at yung abogado in
without her consent. one case, would be claiming ownership over the
property, right from the very start and therefore
BE: A property was bought by a father and was without need of repudiation, yung prescriptive
registered in the name of his illegitimate period will start to run in a constructive trust.
daughter. The illegitimate daughter occupied
the said parcel of land and constructed a house
where she and her husband and their children
lived. Several years thereafter, her father died.
The other heir of her father (his legitimate
children) demanded for the delivery of the said
property to the estate for distribution to the
other heirs, claiming that a trust relationship
was established between the father and the
illegitimate child. Is this a valid claim?
A: Under the law, there is no presumption as to
trust relationship under 1448, because the donee
in this situation is a child, even if illegitimate, of the
father. Therefore, it may be a donation as provided
under Art. 1448.

Q: Can the other heirs recover that property?


A: It depends, considering that it is a donation, if
the donation is inofficious. If the same be
inofficious, the other heirs may demand for the
return of the property or at least the value of the
property.

Resulting trust includes Articles 1448, 1451, 1449,


1450,1452,1453,1454.

Constructive Trust:
BE: A applied for the registration of a parcel of
land in his name. However, he was called in
New York to be a chef in a hotel. So, he asked
his cousin to follow up his application for
registration of land while he was in New York.
Instead of ensuring the registration of the
property in the name of A, he had the property
registered in his (cousin) name. After which, he
sold the property to a thi4rd person who
bought the land relying on the TCT. When A
returned to the Phils., he learned of what his
cousin had done. May A recover the parcel of
land from the 3rd person who bought the
property in good faith and for value?
A: No.

Q: Let’s assume that the remedy here is


conveyance, the cousin has not yet been able
to sell the property to the 3rd person, however
the same in registered in the name of the
cousin. If the cousin would raise the defense
that the action was filed more than one year
from the time of registration of the property in
his name, is that claim tenable?
A: Untenable. The one year period provided by law
is relevant only if the action filed is for the re-
opening of the registration case because of fraud.
Thus, if the action is for reconveyance, it does not
matter of the one year period has already lapsed.

N.B.: Art. 1456, 1455.

Q: In constructive trust, may the trustee


acquire the property by prescription by mere
lapse of time, without repudiation?
A: Yes, because from the very start, he was
already claiming ownership over the thing. Iba don
sa resulting trust or express trust. When this trust
was constituted, the trustee was holding the

Page 58 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
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1. C – are perfected by mere consent thus upon
meeting of the minds as to the object and the
cause there is already a perfected contract
RC – are perfected upon delivery of the thing which
is the object of the contract.

Examples of Real Contracts


Credit transactions 1316 – Commodatum, deposit and pledge
Mutuum (memorize these 4 examples)

Note: Perfection is subject to the formalities of the


Q: Why credit transactions? law. Even if the contract has already been
A: Because these transactions all involved credit perfected, the contract may be unenforceable
meaning there is a belief in the capacity of one of because it is not in the form prescribed by law for
the parties to perform his obligation in the future. the enforceability of the contract. Example –
contract of sale (subject to the provisions of the
Note: Credit transactions ang tawag but they are statute of frauds)
not all contracts. There can be legal relationship
even without an agreement – examples – legal Note: There are different rules in mutuum and
pledge, judicial deposit. But the others are commodatum. There are also different rules in
contracts – there are contractual deposit and judicial and extrajudicial deposit. But all these are
pledge by agreement. principal contracts. All the other credit transactions
are accessory contracts – guaranty, suretyship,
Transactions: pledge, CM, REM, antichresis – they depend on
A. Kinds of Loans other contracts for their existence or their validity.
1. Mutuum (memorize)
2. Commadatum
Note: An accepted promise to loan is consensual.
B. Kind of Deposits
1. Judicial Saura vs. DBP – when the loan application of
2. Extrajudicial Saura was accepted or approved by the bank,
there was already a perfected contract but it is not
C. Guaranty mutuum. SC said, it is perfected consensual
contract of loan because the loan itself will only be
D. Suretyship perfected upon the delivery of the amount to the
borrower. Until the amount is delivered, there is no
E. Real Guaranty – favorite in the bar exams perfected mutuum rather there was only a
1. Pledge perfected consensual contract of loan. Thus, with
2. Chattel Mortgage (CM) that perfected contract, the borrower can already
3. Real Estate Mortgage (REM) demand for the delivery of money. That is his right
4. Antichresis but until then the mutuum itself will not yet be
perfected. Ganun din sa commodatum, ganun din
Focus on the following provisions: sa deposit.
1933, 1962, 2047, 2132, 2140
Obligations of the bailee – 1942 Commodatum
Obligations of depositary - 1979 It is essentially gratuitous contract. If there is
Right to demand for interest – 1956 compensation, it is not commodatum. In the case
Requisites of pledge and mortgage - 2085 of Republic vs. Bagtas, SC said it is lease not
Pactum Commissorium – 2088 commodatum because there was an obligation to
Indivisibilty Principle pay breeding fee.
Right to recover the deficiency / excess – 2115
Loan
Mutuum vs. Commodatum Loan is normally gratuitous (utang mo sa friend
1. C – a thing is delivered to the bailee for the use mo) unless there is an express stipulation in
of the property and therefore ownership is not writing. Take note under Article 1956, a creditor in
transferred. a contract of mutuum cannot demand for interest
M – a consumable thing is delivered and therefore unless it was expressly stipulated in writing. Take
ownership thereof is transferred to the bailee or note that we are talking here a kind of interest
borrower. known as compensatory interest for the use of the
2. M – only consumables are the object money. So if you borrowed money in January
C – may be immovables (house, rice field) payable at the end of the year, during that period,
the creditor may be entitled to an interest known as
Usufruct vs. Commodatum compensatory interest but after the obligation
1. U – is a right to enjoy the property which means became due and there was demand for the
that the usufructuary will not only have the right to payment nonetheless the borrower failed to pay,
possess but he would have the right to the fruits of this time there will be a liability to pay interest by
the thing. way of damages not compensatory interest. And
C – no right to the fruits but only right to use the this kind of interest (damages) need not be in
thing but it may be expressly stipulated that he can writing. This interest by way of damages is the
also use the fruits. effect of delay because of the failure to pay despite
demand when the obligation was already due, he
Consensual vs. Real Contracts

Page 59 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
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will be liable for damages. In monetary obligations,
the liability for damages is in the form of interest. Yung iba – if you kept it longer, it is consistent with
delay under 1165 - in an obligation to deliver a
In monetary obligations, if there was a stipulation determinate thing and the thing was lost due to a
that there is liability to pay interest but the interest fortuitous event, that debtor will still be liable for the
rate was not fixed, it will be the legal rate that can loss if he was in delay.
be invoked (12%) – loan or forbearance of money.
If there is a stipulation like 6% per month or 72% Republic vs. Bagtas
per annum, the SC ruled in Solamon vs. CA, that Held: Even if this is commadatum under Article
although the usury law has already been 1942, it will be the bailee or the borrower who will
suspended and therefore apparently the parties bear the loss.
can stipulate any interest rate is not true. The
interest rate agreed upon may be unconscionable Deposit
and therefore the SC will strike down the stipulation The same rule in deposit – in deposit, ownership
and the interest will be the legal rate. The SC had does not pass to the depositary. Thus, under the
struck down interest above 60% per annum. Below res perit domino rule, it will be the depositor who
50% per annum, the SC allowed this interest. will bear the loss if the thing was lost due to a
fortuitous event. In robbery, the depositor will bear
There is still no decision if what is the status if the the loss unless there is negligence on the part of
interest is between 50% to 60% per annum the depositary or if it is stipulated that the
depositary will be liable. (If you are the depositary,
Commodatum demand for a higher rental so you have money to
In commodatum, the object is movable or pay for insurance)
immovable. Usually, it is non-consumable because
the very thing borrowed should also be the very If he uses it without compensation, he will be liable
thing that should be returned. If it is consumable it because in deposit the purpose of the delivery is
will be consumed in accordance with its nature. But for safekeeping, the depositary is not supposed to
the law provides for exception, if the purpose of the use the thing. So if he uses the thing, he will be
commodatum is not for consumption – examples – liable for the loss of the thing.
for display or exhibit – then there can be a valid
commodatum over a consumable item. But it is non Loan
– fungible because it cannot be replaced with a There is a special kind of commodatum known as
similar kind. The very thing borrowed should be the precarium. Precarium – in this kind of
same thing that should be returned. commodatum the bailor has the right to demand for
the return of the thing at will at any time.
BE: R upon request loaned his passenger
jeepney to F to enable to bring his wife from Q: When would there be a precarium?
Tarlac to PGH for treatment. On the way back to A: There would be a precarium if there was no
Tarlac after leaving his wife in PGH, people stipulation as to duration nor the use of the thing
stopped the passenger jeepney and R allowed unless there is a custom. So no agreement as to
them to ride accepting payments from them period or no agreement as to particular use then
just as in the case of ordinary passenger the bailor would have the right to demand the thing
jeepney. As he was crossing Bamban, Tarlac, at any time or the use of the thing is merely
there was an on rush of lahar from Mt. tolerated.
Pinatubo. The jeep was wrecked. What do you
call the contract that was entered into by R and From this rule, you should be able to conclude that
F? Is F obliged to pay R for the use? Is F liable even if commadatum is essentially gratuitous, if
to R for the loss of the jeep? there was a period agreed upon as a rule the bailor
SA: This is commadatum. In commadatum, it is should respect the period. He cannot demand for
essentially gratuitous (no payment). Take note the the return of the thing just because there is no
jeep was lost due to a fortuitous event. If you follow payment. But there are exceptions:
the general rule under 1174, he should not be held 1. Even if there was a period, he can
liable. But by express provision of the law in demand for the return if there is an urgent
commodatum, the borrower is liable. Under 1942, need on the part of the bailor. But in that
when the borrower devotes the thing to other scenario, the commadatum is not
purpose not agreed upon (the purpose is to bring extinguished, it is only suspended. After
the wife to the hospital), the borrower is liable even the bailor have used the thing, he should
if the loss is due to fortuitous event. return the thing to the bailee so the latter
could finish the period.
Note: Bailor need not be the owner himself
because there is no obligation to transfer 2. When the bailee committed an act of
ownership. ingratitude. The grounds will be similar to
donation.
BE: M borrowed B’s truck. During a fire that Deposit
broke out in M’s garage, M had time to save Q: Are checking accounts, savings account,
only 1 vehicle and M saved his car instead of dollar accounts irregular deposits?
B’s truck. Is he liable for the loss of B’s struck? A: No. They are not deposits under the law
SA: Yes. This is an exception to the res perit because they are governed by the rules on
domino rule. It would also fall under 1942 that he mutuum (loan). The bank is the debtor. SC called
chose to save his thing when he had the these deposits “in the nature of irregular deposits”
opportunity to save one of two things, the other but not irregular deposits because the banks use
being a borrowed item.

Page 60 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
the money that is why it is in the nature of irregular
deposits.

Irregular Deposits – these are deposits where the


depositary has the right to use the thing because
normally in an ordinary deposit, the depositary has
no right to use because the purpose is
safekeeping. But if he has the right to use, that
deposit may be called an irregular deposit, the
limitation of the law is that the use must not be the
principal purpose (the principal purpose should be
the safekeeping).

Examples: Car was delivered to you as depositary.


Kung pwede mo gamitin araw araw sa paghatid
sundo sa mga anak mo, hindi ito deposit, mukhang
commodatum ito kung walang bayad for the use.
But if the delivery is for safekeeping but the
depositor allowed you to use the car for an
occasion – that is an irregular deposit because the
depositary has the right to use the thing with the
permission of the depositor.

Another scenario where the depositary would have


the right to use and therefore the deposit is an
irregular deposit - when the preservation of the
thing deposited delivered to depositary requires the
use of the thing like using the car to preserve it.

BE: The parties in a contract of loan of money


agreed that the yearly interest rate is 12% and it
can be increased if there is a law that would
authorize the increase of interest rates.
Suppose the lender would increase the rate by
5% to be paid by the borrower without a law
authorizing such increase. Would the lender’s
action be just and valid? What is the remedy of
the borrower?
SA: Not valid because by the agreement of the
parties, the increase in the rate will only be made if
there is a law that would authorize the increase.

SC Case: There can be no valid increase without a


law authorizing it but in this case the Bangko
Sentral issued a resolution increasing the
maximum rate. The SC said the banks cannot
increase the interest rates because a Monetary
Board Resolution is not the same as a law. It may
have the effect of a law but that is not a law and
therefore that could not be a basis.

Credit Transaction notes is incomplete. Refer


to your codal.

Page 61 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008
CREDIT TRANSACTIONS
Quiz

1. Deposit is a real contract – TRUE


2. A contract of deposit is not covered by the statute of frauds – FALSE
3. If deposit has been made by capacitated person, if perfected with another who is not a
depositor shall only have an action to recover the thing deposited while it is still in the
possession of the depositary - FALSE
4. Depositary is obliged to keep the thing safely and to return it to the depositor – FALSE
5. If deposit with a third person is allowed, the depositary shall not be liable for the loss –
FALSE
6. The depositary cannot make use of the thing deposited without the express permission
of the depositor – FALSE
7. When depositary has permission to use the thing deposited the contract loses the
concept of deposit and becomes a loan - FALSE
8. Depositary cannot demand that the depositor prove his ownership of the thing deposited
– TRUE
9. The thing deposited must be returned to the depositor even though there is a specified
period or time for such – FALSE
10. The deposit of effects made by travelers of inns is a necessary deposit – TRUE
11. Contracts of loan and deposit are essentially gratuitous – FALSE
12. The bailor in commodatum acquires the use of the thing loaned without compensation
but not the fruits, if there is a stipulation to the contrary, the contract ceases to be
commodatum
13. Bailee shall not be liable for loss of thing if it should be through fortuitous event. –FALSE
14. A contract of deposit is a consensual contract, thus xxx to deliver arise. – FALSE
15. An escalation clause is void if there is no de-escalation clause – FALSE (true only if
loans in banks)
16. While a surety undertakes to pay if the principal does not pay, the guarantor only binds
himself to pay if the principal cannot pay. The one is the insurer of the debt, the other is
the insurer of the solvency of the debtor. – TRUE
17. Guaranty is essentially gratuitous. – FALSE
18. A guaranty may be constituted to guaranty the performance of a voidable contract. -
TRUE
19. A guaranty may also be given as security for future debts, the amount of which is not yet
known. – TRUE
20. The guarantor cannot be compelled to pay the credit unless the latter has exhausted all
the properties of the debtor and has resorted to all the legal remedies against the debtor.
- FALSE

Page 62 Faye Marie C. Martinez – Chato Cabigas – Jessica A. Lopez – Dian Rosapapan
November 2008

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