CPA Reviewer Law on Sales updated as of 2017 2018 PDF

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2017 -2018 ed. RFBTI. SALESA contract where one party obliges himself to transfer ownership and to deliver a determinate thing and the another party to pay a price certain in money or its equivalent.Elements of a Contract of Sale Essential Elements a. Consent b. Determinate object c. Price certain i...

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I.!

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SALES Nature of Obligation Created

A contract where one party obliges himself to transfer ownership and to deliver a determinate thing and the another party to pay a price certain in money or its equivalent. Elements of a Contract of Sale 1.! Essential Elements a.! Consent b.! Determinate object c.! Price certain in money 2.! Natural Elements a.! Warranty against eviction b.! Warranty against hidden defects and encumbrances 3.! Accidental Elements- refer to the stipulations of the contracting parties Characteristics of a Contract of Sale 1.! Consensual- perfected by mere consent 2.! Principal- capable of standing alone without the need of another contract 3.! Bilateral- there is a reciprocal obligation between the parties 4.! Onerous- valuable consideration is given by both parties 5.! Commutative- the consideration exchange are of equivalent values 6.! Nominate- has a name given by law Stages of a Contract of Sale 1.! Preparation/Conception- the time the contracting parties shows interest in the contract. 2.! Perfection/birth- concurrence of the essential elements of the sale 3.! Consummation/death- begins when the parties perform their respective undertakings, resulting in the extinguishment thereof. ! Ver.!1.07!|!BY:!R.M.P!

a.)! For the SELLER: To transfer ownership and to deliver possession of the subject matter b.)! For the BUYER: to pay the price Sale as a Title Contract of sale DOES NOT transfer the ownership of the subject matter. It is merely a title that creates the obligation to transfer ownership and a mode thereof. The contract of sale transfers no real rights. Ownership and position is transferred through delivery or tradition. II. SALE DISTINGUISH FROM OTHER CONTRACTS A)! DONATION Sale Onerous Perfected by mere consent

Donation Gratuitous Perfected by donee’s acceptance

Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. B)! BARTER Sale Cause or consideration is in money

Barter Cause or consideration is another thing

By contract of barter or exchange, one of the parties binds himself to give one thing in consideration of the other’s promise to give another thing. [Art. 1638] Note: Consideration is partly in money and partly in another thing.

CPA in Transit Reviewer: Law on Sales 2017-2018 ed.

The type of contract is determined under the following hierarchy; a.! Manifest intention of the parties b.! If intention is not clear, the following rules shall apply: i.! Thing is more valuable than money- barter ii.! Money is equal or more than to the value of the thing- sale C)! CONTRACT FOR PIECE OF WORK Sale Contract for Piece of Work Ordered in the Made specially for ordinary course of the customer upon the business his special order Thing transferred Thing transferred already existed and existed due to the can be a subject of order of the party sale to other desiring it. persons Within the statues Not within the of fraud statues of fraud When each product or system executed is always UNIQUE and could not massproduce the product because of its very nature, such is a contract for a piece of work. [Commissioner vs. Engineering Equipment and Supply Co., 1975] D)! DACION EN PAGO Sale Dacion en Pago No pre-existing Pre-existing debt debt Creates an Extinguishes an obligation obligation Freedom in Price is value of the determining price thing given The cause or Cause is the consideration is extinguishment of the price and the the obligation and delivery of the the delivery of the object object

! Ver.!1.07!|!BY:!R.M.P!

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E)! CONTRACT TO SELL Contract of sale Contract to sell Ownership is Ownership is transferred upon transferred upon full delivery payment Non-payment is a Full payment is a resolutory positive suspensive condition condition Sale is already No perfected sale yet perfected Subsequent buyer is Subsequent buyer is presumed to be in presumed to be in bad faith good faith Vendor loses and cannot recover Title remains in the ownership of the vendor if the vendee thing sold until does not comply contract of sale is with the conditions resolved and set of the contract aside Contract to sell cannot be considered as a contract of sale because the first element (consent) is lacking. The prospective seller does not consent until the happening of an event. The seller only agrees is to fulfill his promise to sell the subject when full payment is made. F)! AGENCY TO SELL Sale Agency to Sell Agent receives goods Buyer receives of the principal who goods as owner retains ownership Agent delivers the Buyer pays the price price which he got from his buyer Buyer, as a general Agent can return the rule, cannot return goods the object sold Seller warrants the Agent makes no thing sold warranty Agent can deal with the thing received as Buyer can deal with long as it is within the thing sold his authority given by the principal

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G)! KINDS OF CONTRACT OF SALE 1)! Absolute- sale is not subjected to any condition and the title immediately passes to the purchaser upon delivery 2)! Conditional- ownership of the object remains with vendor until fulfillment of condition/s. Conditional Contract of Sale Sale is already perfected Upon fulfillment of condition, ownership automatically transfers to the buyer H)! LEASE Sale Ownership transferred by delivery Seller must be the owner at the time of delivery

Contract to Sell Sale is not perfected Upon fulfillment of condition, ownership does not automatically transfers to the buyer

Lease No transfer of ownership Lessor need not be the owner

One person binds himself to grant temporarily the use of the thing or to render some service to another who undertakes to pay some rent.III. OBJECT/SUBJECT MATTER Requisites of a Valid Subject Matter a.! For Things: 1.! Licit/ lawful 2.! Should not be impossible 3.! Determinate or determinable b. For Rights: 1. Transmissible 2. Licit

! Ver.!1.07!|!BY:!R.M.P!

Goods which may be Object of Sale a.! Existing Goods- goods owned or possessed by the seller b.! Future Goods- goods to be manufactures, raised or acquired by the seller after the perfection of the contract. These are things which are expected Objects must be within the commerce of men. If the subject is illicit, contract is VOID and cannot be ratified. Instances of sale of things not actually or already owned by seller at time of sale 1.! Sale of thing having potential existence 2.! Sale of future goods 3.! Contract for the delivery at a certain price of a thing the vendor produces in the ordinary course of the business or for the general market. LICIT The thing is licit when: 1)! It is within the commerce of man 2)! When right is transmissible 3)! It does not contemplate a future inheritance, unless expressly authorized by law Example of properties not within the commerce of man:a)! Public property a.! Property for public use b.! Intended for public service c.! Intended for development of national wealth b)! Church c)! Narcotics or drugs Kinds of Illicit Things 1)! Per Se- of its nature 2)! Per Accidens- due to provisions of law declaring it illegal

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Examples of illicit sale: a.! Sale of Future inheritance b.! Sale of animals suffering from contagious disease c.! Sale of animal to be used for a service stated in a contract, and they have found to be unfit therefor. d.! Sale or transfer of land to aliens EXISTING, FUTURE, CONTINGENT Goods which form the subject may either be: 1)! Existing 2)! Goods to be manufactures, raise or acquired by the seller 3)! Things having potential existence 4)! Sale of specific things 5)! Fungible goods 6)! Undivided interest Future Goods (Emptio Rei Speratae) It is in the form of a present sale, is valid only as an executory contract to be fulfilled by the acquisition and delivery of the goods specified. Upon the acquisition of goods, either party may demand the execution of the contract. Example of future things: 1.! Goods to be manufactured or printed 2.! To be raised or future agricultural products 3.! To be acquired by seller after the perfection of the contract 4.! Things whose acquisition depends upon a contingency Potential Existence Goods not existing at the time can be an object as long as it has a potential or possible existence, that is, it is reasonably certain to come into existence, and the title will vest in the buyer the moment the thing comes into existence.

! Ver.!1.07!|!BY:!R.M.P!

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Mere Hope or expectancy (Emptio Spei) The sale of a mere hope or expectancy is deemed subject to the condition that the thing contemplated or expected will come into existence. The Sale it self is valid even if the thing hoped or expected does not come into existence, unless if such hope or expectancy is in vain, such sale is VOID. Emptio Rei Speratae Sale of an expected thing Subjected to the condition that the thing will come into existence Uncertain with regard to quantity and quality of the thing Object is a future thing

Emptio Spei Sale of the hope itself Sale produces effect even if the thing does not come into existence Uncertain with the existence of the thing Object is a present thing

Note: In case of doubt, presumption is in favor of emptio rei speratae since it is more in keeping the commutative character of the contract. SALE OF SPECIFIC THINGS A)! Sale of Things in Litigation Entered into by defendant, without knowledge and approval of the litigants or the court is rescissible. [Art. 1381 (4)] Rescission will not take place when the thing legally is in the possession of a 3rd person who acted in good faith. [Art. 1385 (2)] B)! Sale of Undivided Interest Makes the buyer a co-owner of the thing. The co-owner can dispose his share even without the consent of the other co-owner/s.

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IV. C)! Sale of undivided share of a Specific Mass of Fungible Goods The sale of an undivided share in a specific mass of fungible goods makes the buyer a co-owner of the entire mass in proportion to the amount he bought. If later on it was discovered that the mass of fungible goods contain less than what was agreed upon, the buyer becomes owner of whole mass and seller must make up for the difference. D)! Sale of Things Subject to a Resolutory Condition If the resolutory condition happens, the vendor cannot transfer ownership of what he sold since there is no object.

PRICE

It is the sum stipulated as equivalent of the thing sold and also every incident taken into consideration for the fixing of the price put to the debit of the buyer and agreed to by him. Requisites 1.! Certain or ascertained at the time of perfection 2.! In money or its equivalent 3.! Real, not fictitious A)! CERTAINTY OF PRICE Price must be certain, otherwise the sale is void by reason of absence of meeting of minds. Price can be determined or certain when:

DETERMINATE OR DETERMINABLE A)! Determinate A thing is determinate when it is particularly designated or physically segregated from all others of the same class. B)! Determinable A thing is determinable when it is capable of being made determinate at the time the contract was entered without the necessity of a new or further agreement between the parties. Note: o! Failure to state the exact location of the land does not make the object indeterminate, so long as it can be located. o! The fact that the exact area of the land specified in the contract of sale is subjected to the result of the survey does not make the object indeterminate.

! Ver.!1.07!|!BY:!R.M.P!

a.)! Parties have fixed or agreed upon a definite price Fixing of price cannot be left to the discretion of one of the parties unless if such was accepted by the other, therefor the sale is perfected. b.)! If it be certain with reference to another thing certain c.)! Determination is left to the judgement of a specified person Price fixed by 3rd persons designated by the parties is binding upon them. Exemptions 1.! If unable or unwilling: sale is inefficacious unless parties subsequently agree about the price. 2.! If in bad faith/by mistake: Courts may fix the price. 3.! If 3rd person is prevented from fixing price by fault of seller or buyer: Innocent party may avail of remedies through recession or fulfillment of obligation, with damages.

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B)! INADEQUACY OF PRICE Gross inadequacy of price does not affect the contract of sale except that it may indicate a defect in consent. 1.! Voluntary Sales • General rule: Mere inadequacy of the price does not affect validity of the sale.

• Exceptions: a.)! When low price indicates vice of consent, sale may be annulled b.)! Where the price is so low as to be “shocking to conscience”, sale may be set aside c.)! Where the parties did not intend to be bound at all, sale is VOID 2.! Involuntary Sales

• General Rule: Mere inadequacy of the price is not a sufficient ground for the cancellation of the sale if property is real. • Exceptions: 1.! Where the price is so low as to be shocking to the moral conscience, judicial sale will be set aside. 2.! In the event of resale, a better price can be obtained. C)! SIMULATION OF PRICE If the price is simulated, the contract is void for the lack of cause or consideration, but can be shown as a donation or some other contract. Disagreement on the matter of payment is tantamount to a failure on the price 1.! False Price (Relative Simulation) Price stated in the contract is not the true price parties intended to be bound

! Ver.!1.07!|!BY:!R.M.P!

2.! Simulated Price (Absolute Simulation) Price stated in the contract is not intended to be paid. Parties never intended to be bound. Contract is void and inexistent. D)! FAILURE TO DETERMINE PRICE 1.! Where contract executory- contract is without effect. There is no obligation created. 2.! Where delivery has been made- buyer must pay a reasonable price. Reasonable Price What is a reasonable price is a question of fact dependent on the circumstances of each case. It may be determined on the basis of a company’s balance sheet showing the book or fair value of its shares. Generally, reasonable price is the market price at the time and place fixed by the contract or by law for delivery of goods. E)! EARNEST MONEY Partial payment of the purchase price & considered proof of the perfection of the contract. Earnest Money Part of purchase price Given only when there is already a sale Buyer is bound to pay the balance In case of nonpayment, specific performance or rescission can be filed

Option Money Separate and distinct from purchase price Given when sale in not yet perfected Would-be-buyer is not required to buy In case of nonpayment, there can be an action for specific performance.

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NOTE: Expenses for the execution and registration of the sale shall be borne by the vendor, unless there is a stipulation to the contrary. Remedies of vendor to unpaid price 1.! Exact fulfillment 2.! Cancel the sale, should vendee failed to pay two or more installments. 3.! Foreclose the chattel mortgage. Requisites a.)! Must be a contract of sale b.)! Object is personal property c.)! Sale must be in installments Does not apply for sale for cash or straight terms. V.

OFFER

• General Rule: Offer may be withdrawn at any time without even communicating such withdrawal to the interested buyer • Exception: When the offeror has allowed the offeree a certain period to accept, may be withdrawn at any time before acceptance by communicating such withdrawal. Exception to the exception: Cannot be withdrawn within a certain period if found under a consideration. OPTION CONTRACT An accepted unilateral promise to buy or sell supported by a consideration distinct from the price. It secures the privilege to buy. Option Contract Sale Unilateral Bilateral Sale of right to Sale of Property purchase An option without consideration is VOID and the effect is the same as if there was no option. ! Ver.!1.07!|!BY:!R.M.P!

Kinds of Promises 1.! Unilateral promise to sell- promise elects to buy 2.! Unilateral promise to buy- promise elects to sell 3.! Bilateral promise to buy and selleither parties choose to exact fulfillment VI.

ACCEPTANCE

The acceptance referred to which determines consent is the acceptance of the offer, and not of the goods delivered. Requisites 1.! It must be absolute 2.! Must be plain and unconditional 3.! To bind the offeror, the offeree must comply with the conditions of the offer. VII.

PERFECTION

Contract of sale is perfected at the moment of the meeting of the minds of the parties. From the moment of perfection, parties may reciprocally demand performance. Requirements for Perfection 1. When parties are face to face, when an offer is accepted without conditions and without qualifications. If negotiation is made through a phone, it is as if the parties are face to face. 2. When contract is through a correspondence or thru telegram, there is perfection when the offeror receives or has knowledge of the acceptance by the offeree. 3. When sale is made subject to a suspensive condition, perfection is when from the moment the condition is fulfilled.

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Statute of Fraud

Effect of Perfection

The following transaction must be in writing, otherwise contract is unenforceable. Unless ratified by failure to object to oral acceptance of benefits under the contract.

After perfection, parties must now comply with their mutual obligations. In the meantime, buyer has personal rather than real right. Hence if seller sells again a parcel of land to a stranger in good faith, the proper remedy of the buyer would be to sue for damages for he cannot recover ownership over something he had never owned before.

1.! Sale of property at price not less than P500.00 2.! Sale not to be performs within one year 3.! Sale of real property or interest therein NOTE: Applicable only to executory contracts and not to contracts which are totally or partially performed. Sale by Auction Perfected when the auctioneer accepts the bid by the falloff the hammer, gavel, or in any other customary manner. If the auction is announced “without reserved”, goods cannot be withdrawn from sale after the bid is made. By taking part in the auction, the buyer voluntarily submitted to the terms and condition of the auction. Sale Of Goods By Description Seller sells things as being a particular kind, and buyer has not seen the article sold and relies on the description given by the vendor. Sale by Sample Parties contracted solely with reference to the sample, with the understanding that the bulk was like it. The vendor warrants the thing sold will conform with the sample in kind, character, and quantity. It is the sole basis or inducement of the sale. NOTE: goods must satisfy all the warranties. Otherwise, contract may be rescind.

! Ver.!1.07!|!BY:!R.M.P!

VIII. CAPACITY TO BUY AND SELL All persons who can bind themselves by contract have also legal capacity to buy and sell. Kinds of Incapacity 1.! Absolute Incapacity- persons cannot bind themselves at all a.! Minors b.! Insane or Demented c.! Deaf-mutes who do not know how to write d.! Civil Interdiction 2.! Relative Incapacity- only with regards to certain persons and certain class of property Husband and Wife