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the description, the contract may be rescinded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 bound to pay the balance

Would-be-buyer is not required to

buy 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 Consnsual – 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 the seller

Ownership remains in the seller

until the buyer signifies his

approval or 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