LAW OF SALES BY HECTOR DE LEON PDF

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1 Part I SALES (Title VI, Arts. 1458-1637) INTRODUCTION Governing law. The provisions of the Code of Commerce relating to sales have been repealed by the Civil Code. (Art.* 2270[2].) Today, sales are governed by the provisions of the Civil Code on the subject. (Book IV, Title VI, Arts. 1458-1637.) T...

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Part I

SALES (Title VI, Arts. 1458-1637) INTRODUCTION Governing law. The provisions of the Code of Commerce relating to sales have been repealed by the Civil Code. (Art.* 2270[2].) Today, sales are governed by the provisions of the Civil Code on the subject. (Book IV, Title VI, Arts. 1458-1637.) The distinction between the so-called civil sales and commercial sales is eliminated. The provisions of the Civil Code on Obligations (Title I, Arts. 1156-1304.) and Contracts (Title II, Arts. 1305-1422.) are applicable to the contract of sale, but Articles 1458 to 1637 are special rules which are peculiar to sales alone. Sources of our law on sales. (1) The Philippine law on sales, as it exists today, is an admixture of civil law and common law principles. According to the Code Commission: “A majority of the provisions of the Uniform Sales Law which is in force in 31 States and Territories of the American Union have been adopted in the Civil Code with modifications to suit the principles of Philippine Law.” (Report of the Code Commission, p. 60.) *Unless otherwise indicated, refers to article in the Civil Code. 1

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In incorporating some provisions of the Uniform Sales Act of the United States, the Commission states: “This incorporation of a goodly number of American rules on sale of goods has been prompted by these reasons: (1) The present [old] Code does not solve questions arising from certain present-day business practices. Among them are: the sale of “future goods” (Art. 1482.); sale of goods by description or by sample (Art. 1501.); when goods are delivered “on sale or return” (Art. 1522.); sale of goods by negotiation or transfer of a document of title (Arts. 1527 to 1540.); and the rights of the unpaid seller of goods. (Arts. 1545 to 1555.)1 (2) The present Code fails to regulate many incidents and aspects of delivery and acceptance of goods, of warranty of title and against hidden defects, and of payment of the price. (3) It is probable that a considerable portion of the foreign trade of the Philippines will continue for many years with the United States. In order to lessen misunderstanding between the merchants on both sides of the Pacific, their transactions should, as far as possible, be governed by the same rules. This desirable condition will not only facilitate trade but will also perpetuate sentiments of esteem and goodwill between the two peoples. It is but a truism to say that fair and mutually beneficial trade incalculably enhances international friendship.” (Ibid., pp. 60-61.) (2) In addition: “The Title on ‘Sales’ has been enriched by the addition of new provisions based on the opinions of commentators (Arts. 1479, 1480, 1481, 1485, 1490, 1491, 1497, 1498, 1512, 1516, 1558, 1561, 1569, 1570, 1571.2) and on judicial decisions (Arts. 1486, 1487.3) and of new rules adopted with modifications to suit the philosophy and framework of Philippine Law, from the Uniform Sales Act of

1 The articles mentioned are now Arts. 1462, 1481, 1502, 1507-1520, 1525-1935, respectively, in the new Code. 2 Now, Arts. 1459, 1460, 1461, 1465, 1470, 1471, 1477, 1478, 1492, 1496, 1538, 1541, 1549, 1550, 1551, respectively. 3 Now, Arts. 1466, 1467, respectively.

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the United States, Arts. 1482 to 1484, 1494, 1496, 1501, 1503, 1514, 1522 to 1526, 1527 to 1540, 1541 to 1543, 1545 to 1555, 1565, 1566, 1567, 1582 to 1585, 1602 to 1608, 1614 to 1617, 1618 to 1619, 16574 x x x.” Many of the original articles were also amended for clarification or improvement.” (Ibid., p. 141.) — oOo —

4 Now, Arts. 1462 to 1464, 1474, 1476, 1481, 1483, 1494, 1502-1506, 1507-1520, 15211523, 1525-1535, 1545, 1546, 1547, 1562-1565, 1582-1586, 1594-1597, 1598-1599, 1637, respectively.

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Chapter 1 NATURE AND FORM OF THE CONTRACT ART. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent. A contract of sale may be absolute or conditional. (1445a) Concept of contract of sale. The contract of sale is an agreement whereby one of the parties (called the seller or vendor) obligates himself to deliver something to the other (called the buyer or purchaser or vendee) who, on his part, binds himself to pay therefor a sum of money or its equivalent (known as the price). Under the Spanish Civil Code, the contract was referred to as a contract of “purchase and sale.” As every “sale” necessarily presupposes a “purchase,” this name was regarded as redundant. Hence, the name of Title VI has been simplified by calling it “sales” and the name of the contract has been changed for the same reason to “contract of sale.” (Report of the Code Commission, p. 141.) “It is required in the proposed Code that the seller transfers the ownership of the thing sold. (Arts. 1458, 1459, 1495, 1547.) In the present Code (Art. 1445.), his obligation is merely to deliver the thing, so that even if the seller is not the owner, he may validly sell, subject to the warranty (Art. 1474.) to maintain the buyer in the legal and peaceful possession of the 4

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thing sold. The Commission considers the theory of the present law unsatisfactory from the moral point of view.” (Ibid.) Characteristics of a contract of sale. The contract of sale is: (1) Consensual, because it is perfected by mere consent without any further act; (2) Bilateral,1 because both the contracting parties are bound to fulfill correlative obligations towards each other — the seller, to deliver and transfer ownership of the thing sold and the buyer, to pay the price; (3) Onerous, because the thing sold is conveyed in consideration of the price and vice versa (see Gaite vs. Fonacier, 2 SCRA 820 [1961].); (4) Commutative, because the thing sold is considered the equivalent of the price paid and vice versa. (see Ibid.) However, the contract may be aleatory2 as in the case of the sale of a hope (e.g., sweepstakes ticket); (5) Nominate, because it is given a special name or designation in the Civil Code, namely, “sale”; and (6) Principal, because it does not depend for its existence and validity upon another contract. ILLUSTRATIVE CASES: 1. Trial Court decided that there was no payment by buyer of lumber covered by invoices of seller but Court of Appeals held that 1 Obligations are bilateral when both parties are mutually bound to each other. They are reciprocal when the performance one is designed to be the equivalent and the condition for the performance of the other. In a contract of sale, in the absence of any stipulation, the obligations of the seller and buyer are reciprocal, the obligation or promise of each party is the cause or consideration for the obligation or promise by the other. The reciprocal obligations would normally be, in the case of the buyer, the payment of the agreed price and in the case of the seller, the fulfillment of certain express warranties. 2 Art. 2010. By an aleatory contract, one of the parties or both reciprocally bind themselves to give or to do something in consideration of what the other shall give or do upon the happening of an event which is uncertain, or which is to occur at an indeterminate time.

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delivery of lumber was not duly proved because counter-receipts issued by buyer merely certified to receipt of certain statement on claims for the lumber allegedly delivered. Facts: S filed a complaint for collection of a sum of money against B for lumber purchased on credit and received by B. B denied all the material allegations of the complaint. The trial court rendered judgment in favor of S. On appeal, the Court of Appeals reversed the judgment on the ground that the delivery of the lumber to B was not duly proved. S asserts that the case having been tried and decided by the trial court on the issue of whether or not there was payment by B of the lumber covered by invoices of S and counterreceipts issued by B, it is alone on this issue that the Court of Appeals should have decided the case and not on the issue of whether or not there was delivery of the lumber in question. The Court of Appeals found that the counter-receipts merely certified the fact of having received from S certain statements on claims for lumber allegedly delivered. Issue: Did the Court of Appeals decide the case on a new issue not raised in the pleadings before the lower court? Held: No. The issue of delivery is no issue at all. For delivery and payment in a contract of sale, or for that matter in quasicontracts, are so interrelated and interwined with each other that without delivery of the goods there is no corresponding obligation to pay. The two complement each other. (see Art. 1458, par. 1.) It is clear that the two elements cannot be dissociated, for the contract of purchase and sale is, essentially, a bilateral contract, as it gives rise to reciprocal obligations. (Pio Barretto Sons, Inc. vs. Compania Maritima, 62 SCRA 167 [1975].) ———

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2. To secure payment of the balance of the purchase price of iron ore, buyer executed a surety bond in favor of seller, the buyer, however, claiming that such payment was subject to a suspensive condition — the sale of the iron ore by buyer. Facts: B, owner of a mining claim, appointed S as attorneyin-fact to enter into a contract with any individual or juridical person for the exploration and development of said claim on a royalty basis. S himself embarked upon the exploitation of the claim.

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Subsequently, B revoked the authority granted by him to S who assented thereto subject to certain conditions. As a result, a document was executed wherein S transferred to B all of S’s rights and interests over the “24 tons of iron ore, more or less” that S had already extracted from the mineral claims in consideration of the sum of P75,000.00, P10,000.00 of which was paid upon the signing of the agreement, and “the balance of P65,000.00 will be paid from and out of the first letter of credit covering the first shipment of iron ores and of the first amount derived from the local sale of iron ore” from said claims. To secure the payment of the balance, B executed in favor of S a surety bond. No sale of approximately 24,000 tons of iron ore had been made nor had the balance of P65,000.00 been paid to S. Issue: Is the shipment or local sale of the iron ore a condition precedent (or suspensive condition) to the payment of the balance, or only a suspensive period or term? Held: (1) Obligation of B one with a term. — The words of the contract express no contingency in the buyer’s obligation to pay. There is no uncertainty that the payment will have to be made sooner or later; what is undetermined is merely the exact date at which it will be made. By the very terms of the contract, therefore, the existence of the obligation to pay is recognized; only its maturity or demandability is deferred. Furthermore, to subordinate B’s obligation to the sale or shipment of the ore as a condition precedent would be tantamount to leaving the payment at his discretion (Art. 1182.), for the sale or shipment could not be made unless he took steps to sell the ore. (2) A contract of sale is normally commutative and onerous. — In a contract of sale, not only does each one of the parties assume a correlative obligation, but each party anticipates performance by the other from the very start. Nothing is found in the record to evidence that S desired or assumed to run the risk of losing his right over the ore without getting paid for it, or that B understood that S assumed any such risk. This is proved by the fact that S insisted on a bond to guarantee the payment of the P65,000.00 and the fact that B did put such bond, indicated that he admitted the definite existence of his obligation to pay the balance of P65,000.00. The only

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rational view that can be taken is that the sale of the ore to B was a sale on credit, and not an aleatory contract, where the transferor, S, would assume the risk of not being paid at all by B. (Gaite vs. Fonacier, 2 SCRA 830 [1961].)

Essential requisites of a contract of sale. The rules of law governing contracts in general are applicable to sales. Like every contract, “sale” has the following requisites or elements: (1) Consent or meeting of the minds. — This refers to the consent on the part of the seller to transfer and deliver and on the part of the buyer to pay. (see Art. 1475.) The parties must have legal capacity to give consent and to obligate themselves. (Arts. 1489, 1490, 1491.) The essence of consent is the conformity of the parties on the terms of the contract, the acceptance by one of the offer made by the other. The contract to sell is a bilateral contract. Where there is merely an offer by one party without the acceptance of the other, there is no consent. (Salonga vs. Farrales, 105 SCRA 359 [1981].) The acceptance of payment by a party is an indication of his consent to a contract of sale, thereby precluding him from rejecting its binding effect. (Clarin vs. Rulova, 127 SCRA 512 [1984].) There may, however, be a sale against the will of the owner in case of expropriation (see Art. 1488.) and the three different kinds of sale under the law, namely: an ordinary execution sale (see Rules of Court, Rule 39, Sec. 15.), judicial foreclosure sale (Ibid., Rule 68.), and extra-judicial foreclosure sale. (Act No. 3135, as amended.) A different set of law applies to each class of sale mentioned. (see Fiestan vs. Court of Appeals, 185 SCRA 751 [1990].) The sale of conjugal property requires the consent of both the husband and the wife. The absence of the consent of one renders the sale null and void (see Art. 124, Family Code.) while the vitiation thereof (see Art. 1390.) makes it merely voidable. (Guiang vs. Court of Appeals, 95 SCAD 264, 290 SCRA 372 [1998].) (2) Object or subject matter. — This refers to the determinate thing which is the object of the contract. (Art. 1460.) The thing must be

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determinate or at least capable of being made determinate because if the seller and the buyer differ in regard to the thing sold, there is no meeting of the minds; therefore, there is no sale. The subject matter may be personal or real property. The terms used in the law are “thing” (e.g., Art. 1458), “article” (Art. 1467), “goods” (e.g., Art. 1462), “personal property” (e.g., Art. 1484), “property” (e.g., Art. 1490), “movable property” (e.g., Art. 1498), “real estate” (e.g., Art. 1539), “immovable” (e.g., Ibid.), “immovable property” (e.g., Art. 1544), and “real property.” (Art. 1607.) A buyer can only claim right of ownership over the object of the deed of sale and nothing else. Where the parcel of land described in the transfer certificate of title is not in its entirety the parcel sold, the court may decree that the certificate of title be cancelled and a correct one be issued in favor of the buyer, without having to require the seller to execute in favor of the buyer an instrument to effect the sale and transfer of the property to the true owner. (Veterans Federation of the Philippines vs. Court of Appeals, 138 SCAD 50, 345 SCRA 348 [2000].) The sale of credits and other incorporeal rights is covered by Articles 1624 to 1635; and (3) Cause or consideration. — This refers to the “price certain in money or its equivalent” (Art. 1458.) such as a check or a promissory note, which is the consideration for the thing sold. It does not include goods or merchandise although they have their own value in money. (see Arts. 1468, 1638.) However, the words “its equivalent” have been interpreted to mean that payment need not be in money, so that there can be a sale where the thing given as token of payment has “been assessed and evaluated and [its] price equivalent in terms of money [has] been determined.” (see Republic vs. Phil. Resources Dev. Corp., 102 Phil. 968 [1958].) The price must be real, not fictitious; otherwise, the sale is void although the transaction may be shown to have been in reality a donation or some other contract. (Art. 1471.) A seller cannot render invalid a perfected contract of sale by merely contradicting the buyer’s allegation regarding the price and subsequently raising the lack of agreement as to the price. (David vs. Tiongson, 111 SCAD 242, 313 SCRA 63 [1999].)

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The absence of any of the above essential elements negates the existence of a perfected contract of sale.3 Sale, being a consensual contract (see Art. 1475.), he who alleges it must show its existence by competent proof. (Dizon vs. Court of Appeals, 302 SCRA 288 [1999].) Natural and accidental elements. The above are the essential elements of a contract of sale or those without which no sale can validly exist. They are to be distinguished from: (1) Natural elements or those which are deemed to exist in certain contracts, in the absence of any contrary stipulations, like warranty against eviction (Art. 1548.) or hidden defects (Art. 1561.); and (2) Accidental elements or those which may be present or absent depending on the stipulations of the parties, like conditions, interest, penalty, time or place of payment, etc. ILLUSTRATIVE CASES: 1. Supposed sale was evidenced by a receipt acknowledging receipt of P1,000.00. Facts: B bought on a partial payment of P1,000.00, evidenced by a receipt, a portion of a subdivision from S, administrator of the testate estate of his deceased spouse. Subsequently, S was authorized by the court to sell the subdivision. In the meantime, PT Co. became the new administrator. It sold the lot to another which sale was judicially approved. B files a complaint which seeks, among other things, for the quieting of title over the lot in question. Issue: Was there a valid and enforceable sale to B? Held: No. An examination of the receipt reveals that the same can neither be regarded as a contract of sale nor a prom3 When a contract of sale is void, the possessor is entitled to keep the fruits during the period for which he held the property in good faith. Good faith of the possessor ceases when an action to recover possession of the property is filed against him and he is served summons therefor. (Development Bank of the Phils. vs. Court of Appeals, 316 SCRA 650 [1999]; see Arts. 526, 528.)

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ise to sell. There was merely an acknowledgment of the sum P1,000.00. There was no agreement as to the total purchase price of the land nor to the monthly installments to be paid by B. The requisites for a valid contract of sale are lacking. (Leabres vs. Court of Appeals, 146 SCRA 158 [1986].) ———— ———— ———— 2. Buyer did not sign draft of Contract to Sell because it covered seven (7) lots instead of six (6), but sent to seller five (5) checks as down payment which the seller did not encash. Facts: B Company and S, subdivision developer, agreed to enter into a new Contract to Sell whereby S will sell seven (7) lots at P423,250.00 with a down payment of P42,325.00 and the balance payable in 48 monthly installments of P7,395.94. The draft of the Contract to Sell prepared by S was sent to B Company but B’s president did not sign it although he sent five (5) checks covering the down payment totalling P27,542.72. S received the checks but did not encash it because B’s president did not sign the draft contract, the reason given by the latter was that the draft covered seven (7) lots instead of six (6). Since no written contract was signed, S sued B to recover possession of the lots still occupied by the latter. Issues: (1) May the unsigned draft be deemed to embody the agreement between the parties? (2) May the receipt of the five (5) checks by S serve to produce the effect of tender of down payment by B? Held: (1) Based ...