THE LAW ON SALES, AGENCY, AND CREDIT TRANSACTIONS

DE LEON & DE LEON

2010

Part 1: Sales

Chapter 1 – Nature and Form of Contract

I. Definitions

Contract of Sale – a contract 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 therefore a sum of money or its equivalent

Natural Elements – those which are deemed to exist in certain contracts, in the absence of

any contrary stipulations like warranty against eviction or hidden defects

Sale by description – occurs where a seller sells things as being of a particular kind, the

buyer not knowing whether the seller’s representations are true or false.

o Note: If the bulk of the goods delivered do not correspond with the description, the

contract may be rescinded

Fungible goods – goods of which any unit is, from its nature or by mercantile usage,

treated as the equivalent of any other unit such as grain, oil, wine, gasoline, etc.

Conditional Sale – sale contemplates a contingency and in general where the contract is

subject to certain conditions, usually the full payment of the purchase price

o Note: The delivery of the thing sold does not transfer ownership until the condition is

fulfilled

II. Discussions:

Difference between Earnest Money and Option Money

Earnest Money Option Money

Part of Purchase Price Money given as distinct consideration

for the option contract

Given only where there is a sale Applies to a sale not yet perfected

When earnest money is given, buyer is Would-be-buyer is not required to buy

bound to pay the balance when he gives option money

Remedies available to a vendor in sale of personal property payable in installments

o Elect fulfillment upon the vendee’s failure to pay

o Cancel the sale, if the vendee shall have failed to pay two or more installments

o Foreclose the chattel mortgage, if one has been constituted, if the vendee shall have

paid to pay two or more installments

Characteristics of a contract of sale:

o Consensual – perfected by mere consent without further act

o Bilateral – because both contracting parties are bound to fulfill obligations

reciprocally towards each other

o Onerous - thing sold is conveyed in consideration of price and vice versa

o Commutative - thing sold is considered the equivalent of the price paid and vice

versa

o Nominate – it is given a designation in the Civil Code, namely “Sale”

o Principal – does not depend for its existence and validity upon another contract

Contracts of sale that must be in writing to be enforceable by court action (Under Statute of

Frauds):

o Sale of personal property at a price not less than P500

o Sale of real property or an interest therein regardless of the price involved

o Sale of property not to be performed within a year from the date thereof regardless

of the nature of the property and the price involved

Distinctions between a Contract of Sale and a Contract of Agency

Contract of Sale Contract of Agency

Buyer receives the goods as owner Agent receives the goods as the goods

of the principal who retains his

ownership over them

Buyer has to pay the price Agent has simply to account for the

proceeds of the sale he may make on

the principal’s behalf

Buyer, as a general rule, cannot return

the object sold

Agent can return the object in case he

is unable to sell the same to a third

person

Seller warrants the thing sold Agent makes no warranty for which he

assumes personal liability as long as

he acts within his authority and in the

name of the seller

Buyer can deal with the thing sold as

he pleases

The agent in dealing with the thing

received, must act and is bound

according to the instructions of his

principal

Chapter 2 – Capacity to Buy or Sell

I. Definitions

Necessaries – things which are needed for sustenance, dwelling, clodting and medical

attendance, in keeping with the financial capacity of the family of the incapacitated person.

Compromise - a contract whereby the parties, by reciprocal concessions, avoid a litigation

or put an end to one already commenced

II. Discussions

Relative incapacity of husband and wife

o Husband and wife are prohibited by the above article from selling property to each

other

People who may enter into a contract of sale

o As a general rule, all persons, whether natural or juridicial, who can bind themselves

by contract have also legal capacity to buy and sell

Chapter 3 – Effect of the Contract When The Thing Sold Has Been Lost

I. Definitions

Specific goods – goods identified and agreed upon at the time a contract of sale is made

Divisible contract – its consideration is made up of several parts

II. Discussions

When a thing is considered lost

o When it perishes or goes out of commerce

“perishes” – material deterioration or complete change in the nature of the

thing

o Dissappears in such a way that its existence is unknown or it cannot be recovered

Effect of loss of thing at the time of sale

o Lost totally:

Contract is inexistent and void because there is no object

o Lost partially:

Vendee may:

Withdraw from the contract or

Demand the remaining part, paying its proportionate price

Chapter 4 – Obligations of the Vendor

I. Definitions

Unpaid Seller of Goods – one who has not been paid or tendered the whole price

Traditio Brevi Manu – mode of legal delivery which happens when the vendee has already

the possession of the thing sold by virtue of another title as when the lessor sells the thing

leased to the lessee

Sale or Return – A contract by which property is sold but the buyer (who becomes the

owner of the property on delivery), has the option to return the same to the seller instead of

paying the price.

o Option to ‘sale or return’ rests on the buyer

Tradition – a derivative mode of acquiring ownership by virtue of which one who has the

right and intention to alienate a corporeal thing, transmits it by virtue of a just title to one

who accepts the same

Redhibitory defect – a defect in the article sold against which defect the seller is bound to

warrant

o Defect must be hidden; and

o It must be of such nature that expert knowledge is not sufficient to discover it

o If veterinarian acts in bad faith (through ignorance or failure of disclosure), he shall

be liable for damages

*Article only applies tosale of animals

Implied Warranty of Fitness – seller guarantees that the thing sold is reasonably fit for the

known particular purpose for which it was acquired by the buyer

o If bought by description, it should be reasonably fit on its merchantable quality

Eviction – judicial process whereby the vendee is deprived of the whole or part of the thing

purchased by virtue of a final judgement based on a right prior to the sale or an act

imputable to the vendor

Caveat venditor – doctrine that states that the vendor is liable to the vendee for any

hidden faults or defects in the thing sold, even though h was not aware thereof.

II. Discussions

Sale by a person not the owner

o Where the owner of the goods is, by his conduct, precluded from denying the seller’s

authority to sell.

o Where the law enables the apparent owner to dispose of the goods as if he were the

true owner thereof

o Where the sale is sanctioned by statutory or judicial authority

o Where the sale is made at merchant’s stores, fairs or markets

o Where the seller has a voidable title which has not been avoided at the time of the

sale

o Where seller subsequently acquires title.

Ways of effecting delivery

o By actual or real delivery

o By constructive or legal delivery

Execution of a public instrument or document

Symbolic delivery

Traditio Longa Menu

Takes place by mere consent or agreement of the contracting parties

as when the vendor merely points to the thing sold which shall

thereafter be at the control/disposal of the vendee.

o Only qualifies if the thing sold cannot be delivered to the vendee

at time of sale

Traditio Brevi Manu

Traditio Constitutum Posessorium

Quasi-Traditio

o By delivery in any other manner signifying an agreement that the possession is

transferred to the vendee

Requisites for the exercise of right of stoppage in transit

o Seller must be unpaid

o Buyer must be insolvent

o Goods must be in transit

o Seller must either actually take possession of the goods sold or give notice of his

claim to the carrier or other person in possession

o Seller must surrender the negotiable instrument of title, if any, issued by the carrier

or bailee

o Seller must bear the expenses of delivery of the goods after the exercise of the right

Implied warranties in sale

o Implied warranty as to seller’s title

Seller guarantees that he has a right to the the sell the thing sold and transfer

ownership

o Implied warranty against hidden defects or unknown encumbrances

Seller guarantees that the thing sold is free from any hidden defects

o Implied warranty as to fitness or merchantability

“Sale or return” distinguished from “Sale on Trial”

Sale or Return Sale on Trial

Sale subject to a resolutory condition Subject to a suspensive condition

Depends entirely on the will of the

buyer

Depends on the character or quality of

the goods

Ownership of the goods passes to the

buyer on deliveryand subsequent

return of the goods revert ownership in

Ownership remains in the seller until

the buyer signifies his approval or

the seller acceptance to the seller

Risk of loss or injury rests upon the

buyer

Risk remains with the seller

Place of delivery of goods sold (with no agreement)

o Place of delivery is that determined by usage of trade

o When there is also no prevalent usage, the place of delivery is the seller’s place of

business

Principal Obligations of the Vendor

o To transfer ownership of the determinate thing sold

o To deliver the thing

o To warrant against eviction and hidden defects

o To take care of the thing, pending delivery, with proper diligence

o To pay for the expenses for the execution and registration of the deed of sale, unless

there is stipulation to the contrary

Risk of loss by fortuitous event after perfection but before delivery

o Borne by the buyer (as an exception to the rule of res perit domino)

Chapter 5 – Obligations of the Vendee

I. Definitions

Acceptance of the goods – assent to become owner of the specific goods when

delivery of them is offered to the buyer

Wrongful refusal of buyer to accept – when buyer refuses to accept the goods

without just cause

o Risk of loss is borne by him from the moment they are placed in his disposal

II. Discussions

Implied acceptance by the vendee of the goods sold

o After delivery of goods: When buyer does any act inconsistent with the seller’s

ownership (as when he sells or attempts to sell the goods, uses or makes

alteration in them in a manner proper only for an owner)

o After the lapse of reasonable time: When buyer retains the goods without

intimating his rejection

When vendee can suspend payment of price

o If he is disturbed in the possession or ownership of the thing bought

o If he has a well-grounded fear that his possession or ownership would be

disturbed by a vindicatory action or foreclosure of mortgage

Chapter 6 – Actions for Breach of Contract of Sale of Goods

I. Definitions

Goods – includes all chattels personal but not things in action or money of legal tender

in the Philippines. This term also includes growing fruits or crops

Recoupment – accept the goods and set up the seller’s breach to reduce or extinguish

the price

II. Discussions

Actions available to the buyer in case of breach of warranty by the seller of the

goods:

o Recoupment:

Accept the goods and set up the seller’s breach to reduce or extinguish

price

o Action or counterclaim for damages:

Accept the goods and maintain an action for damages

Refuse to accept the goods and maintain an action for damages for the

breach of the warranty

o Rescission:

Rescind the contract of sale by returning or offering the return of the

goods and recover the price

Cases where rescission by the buyer is not allowed although the seller has

committed a breach of warranty:

o If the buyer accepted the goods knowing of the breach of warranty without

protest

o If the buyer fails to notify the seller within a reasonable time of his election to

rescind

o If the buyer fails to return or offer to return the goods in substantially as good

condition as they were in at the time of the transfer of ownership to him

Situations where the seller is given the right to bring an action for damages against

the buyer

o If the buyer, without lawful cause, neglects or refuses to accept and pay for

the goods he agreed to buy (damages for non-acceptance)

o In an executory contract, where the ownership in the goods has not passed,

and the seller cannot maintain an action to the price, seller’s remedy will be

also an action for damages

o If the goods are not yet identified at the time of the contract or subsequently,

the seller’s right is necessarily confined to an action for damages

Situations where the seller of specific goods is given the right to be paid

notwithstanding that delivery to the buyer has not been effected:

o When the price is payable on a certain day, and the buyer wrongfully neglects

or refuses to pay such price, irrespective of delivery or transfer of title

o When the buyer wrongfully refuses to accept delivery

Chapter 7 – Extinguishment of Sale

I. Definitions

Legal Redemption – is the right to be subrogated, upon the same terms and conditions

stipulated in the contract, in the place of one who acquires a thing by purchase or dation

in payment, or by any transaction whereby ownership is transmitted by onerous title

Equitable Mortgage – is one which, although it lacks the proper formalities of a

mortgage, shows the intention of the parties to make the property subject of the contract

as a security for the fulfillment of an obligation

Conventional Redemption – is the right which the vendor reserves to himself, to

reacquire the property sold provided he reimburses the vendee of the price, the

expenses of the contract, any other legitimate payments made therefor and the

necessary and useful expenses made on the thing sold and fulfills other stipulations

which may have been agreed upon

II. Discussions

Requisites for the right of legal redemption of a co-owner to exist

o There must be co-ownership

o There must be alienation of all or of any of the shares of the other co-owners

o Sale must be to a third person or stranger

o Sale must the before partition

o Right must be exercised within the period provided in Article 1623

o Vendee must be reimbursed for the price of the sale

Cases when the contract shall be presumed to be an equitable mortgage:

o When the price of a sale with right to repurchase is unusually inadequate

o When the vendor remains in possession as lesee or otherwise

o When upon or after the expiration of the right to repurchase another instrument

extending the period of redemption or granting a new period is executed

o When the purchaser retains for himself a part of the purchase price

o When the vendor binds himself to pay the taxes on the thing sold

o In any other case where it may be fairly inferred that the real intention of the

parties is that the transaction shall secure the payment of a debt or the

performance of any other obligation

Obligations of a vendor a retro in case of redemption

o The vendor must return to the vendee:

Price of the sale (not the value of the thing)

Expenses of contract and other legitimate expenses

Necessary expenses – those incurred for the preservation of the

thing

Useful expenses – those which increase the value of the thing or

create improvements thereon

Chapter 8 – Assignment of Credits and Other Incorporeal Rights

I. Definitions

Assignment of credit – a contract by which one person transfers to another his rights

and actions against a third person (debtor) in consideration of a price certain in money

or its equivalent

II. Discussions

Warranties of the assignor of credit

o The assignor of credit only warrants the existence and legality of the credit at the

perfection of the contract

o There is no warranty as to solvency of the debtor unless expressly stipulated or

unless the insolvency was already existing (and of public knowledge) at the time

of the assignment

Liabilities of the assignor of credit

o The liability of the assignor in good faith is limited only to the price received and

to the expenses of the contract, and any other legitimate payments by reason of

the assignment

o The assignor in bad faith is liable not only for the payment of the price and all

expenses, but also for damages.

Nature of assignment of credit

o It is really a sale

Subject matter: credit or right assigned

Consideration: Price paid for the credit or right

Consent: The agreement of the parties to the assignment at the agreed

price

Chapter 9 – General Provisions

I. Definitions

Legal tender – is that currency which a debtor can legally compel a creditor to accept in

payment of a debt in money when tendered by the debtor in the right amount

Thing or chose in action – is any claim or right which may be pleaded in a suit at law,

such as claim of reparation for a tort or right guaranteed under certain types of contracts

II. Discussions

Objects included in the phrase “document of title to goods” according to Art. 1636:

Any

o Bill of Lading;

o Dock Warrant;

o Warehouse receipt or;

o Order for the delivery of goods or;

o Any other document used in the ordinary course of business as proof of the

possession and control of the goods

A person is deemed insolvent when:

o A person who was ceased to pay his debt in the ordinary course of business

Goods are in a deliverable state when:

o They are in such a state that the buyer would, under the contract, be bound to

take delivery of them

Chapter 10 – Barter or Exchange

I. Definitions

Barter – one of the parties binds himself to give one thing in consideration of the other’s

promise to give another thing.

II. Discussions

Similarities to Sale and Barter

o Barter is similar to sale with the only difference is that instead of paying a price in

money, another thing is given in lieu thereof

Perfection and Consummation of the Contract of Barter

o Perfected from the moment there is a meeting of minds upon the things promised

by each party in consideration of the other

o It is consummated from the time of mutual delivery by the contracting parties of

things they promised

Chapter 11 – The Bulk Sales Law

I. Definitions

Fixtures – merchandise usually possessed and annexed to the premises occupied by

merchants to enable them better to store, handle, and display their wares

Merchandise – must be construed to mean such things as are usually bought and sold

in trade by merchants

II. Discussions

When sale or transfer in bulk

o Sale, transfer, mortgage or assignment of

A stock of goods, wares, and merchandise otherwise than in the

ordinary course of trade and the regular prosecution of the business

All or substantially all, of the business or trade

All or substantially all, of the fixtures and equipment used in the

business of the vendor, mortgagor, transferor, or assignor

Purpose of the Law

o Designed to prevent defrauding of creditors by the secret sale in bulk of all or

substantially all of a merchant’s stock of goods

Scheme of the law

o That such Bulk Sales are fraudulent and void as to creditors of the vendor, or

presumptively so, unless specified formalities are observed such as

Demanding and giving list of creditors

Giving of actual or constructive notice to such creditors

Making of an inventory