CIVIL LAW REVIEW II

Sales, Lease, Agency, Partnership, Trust and

Credit Transactions
Atty. Crisostomo Uribe

SALES act like it may be a donation if there is no

Articles / Laws to Remember: 1458, 1467, 1477
transfer of ownership, 1505, 559 who can transfer
xxx, 1504, 1544, 1484 Recto Law, R.A. 6552,
1602, 1606, 1620, 1623, Redemption xxx
Q: A obliged himself to deliver a certain thing
to B. Upon delivery, B would pay a sum of
money to A. Is that a contract of sale?
A: Not necessarily. Even if there is an obligation to
deliver, if there is no obligation to transfer
ownership, it will not be a contract of sale. It may
be a contact of lease.
Memorize: Art. 1458
Note: Sale is a contract, so the general principles
in oblicon are applicable to sale but note that there
are provisions which are contrary.
Characteristics of Contract of Sale (COS)
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
particular form for the validity of a contract of sale
in that sale, it can be said that kind of sale is a
formal contract Cattle Registration Decree. In a
sale of large cattle, the law provides that the
contract of sale of large cattle must be: in a public
instrument, registered and a certificate of title
should be obtained in order for the sale to be valid.
But otherwise, the other contracts are perfected by
mere consent or mere meeting of the minds.
2. Principal sale is a principal contract, it can
stand on its own. It does not depend on other
contracts for its existence and validity.
3. Bilateral (1458) necessarily in a COS, both
parties will be obligated. It is not possible that only
1 party is obligated because a contract of sale is
essentially onerous.
4. Onerous (1350) COS is essentially onerous.
Otherwise, it may be another contract or any other
compensation for the transfer of ownership to the
other party.
5. Commutative (2010) meaning there is
equivalency in the value of the prestation to be
performed by both parties. Normally, the thing sold
would be equal to the price paid by the other party
(buyer).
Exception: a contract of sale which is an aleatory
contract like sale of hope. In sale of hope, the
obligation of 1 party will arise upon the happening
of a certain event or condition.
Example Sale of Hope: Sale of a lotto ticket, PCSO
will have the obligation to pay you only if you got all
the 4 or 6 numbers which are drawn
Another Example of Aleatory: Insurance
6. Nominate (1458)
Classification of Contract of Sale
1. As to Nature of Subject Matter
a. Movable
b. Immovable
Q: Why there is a need to determine?
A: Because some concepts will apply if the object
is movable or some laws will apply if the object is
immovable.
Examples: Under the Statute of Frauds, you have
to determine if the object if movable or immovable
in order that statute of frauds will apply. The Recto
law will apply if the object is movable. The Maceda
law will apply if the object is realty. Article 1544 or
Double Sale will require you to determine the
nature of the subject matter.
2. As to Nature
a. Thing
b. Right
Q: Why there is a need to determine?
A: Relevant in the mode of delivery

Distinctions

Page 1 Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
November 2008
1. Deed of Absolute Sale (DAS) vs. Conditional
Sale (CS) vs. Contract to Sell (CTS)
2. Dation in Payment (DIP) vs. COS
3. Contract for a Piece of Work (CPW) vs. COS
4. Barter vs. COS
5. Agency to Sell (ATS) vs. COS
Deed of Absolute Sale (DAS) vs. Conditional
Sale (CS) vs. Contract to Sell (CTS)
DAS seller does not reserve his title over the
thing sold and thus, upon delivery of the thing,
ownership passes regardless of whether or not the
buyer has paid.
CS - condition/s are imposed by the seller before
ownership will pass. Normally, the condition is the
full payment of the price. In CS, ownership
automatically passes to the buyer from the moment
the condition happens. There is no need for
another contract to be entered into.
BE: Receipt was issued by A to B. The receipts
tenor Date of the receipt xxx Received from B
the sum of P75,000.00 as partial payment for
the car xxx the balance to be paid at the end of
the month xxx. Contract to Sell?
SA: No. It does not pertain to a CTS because in a
CTS ownership is reserved by the seller despite
delivery to the buyer. The buyer does not acquire
ownership. This is an Absolute Sale.
Q: In a CTS, upon the happening of the
condition/s imposed by the seller, would
ownership automatically pass to buyer?
A: No. While a CTS is considered a special kind of
conditional sale, it is a peculiar kind of sale
because despite the happening of the condition
and actual delivery, the buyer does not
automatically acquire ownership. In CTS, if
condition/s happen, the right of the buyer is to
compel the seller to execute a final deed of sale.
So ownership does not automatically pass.
Dation in Payment (DIP) vs. COS
DIP (1245) whereby property is alienated to the
creditor. It is provided that the law on sales shall
govern such transaction. It is specifically provided
that the pre-existing obligation must be in money. If
not in money and there is DIP, it will not be
governed by the law on sales but by the law on
novation because practically there is a change in
the object of the contract.
Example 1: If A owes B P100,000.00 instead of
paying P100,000, he offers B and B accepts the
car of A as an equivalent performance this is
DIP and will be governed by the law on sales.
Page 2
November 2008
Example 2: If the pre-existing obligation is to
deliver a specific horse but instead of delivering the
horse, the debtor told his creditor and the creditor
accepted, that he will instead deliver his car it is
still DIP but it will not fall on 1245 but on novation
because there is a change in the object of the
obligation which would extinguish the obligation.
Note: A guide to distinguish one concept from
another is to know the nature, requisites and
effects.
1. As to Nature
DIP a special form of payment
COS - it is a contract
2. As to Requisites
DIP with a pre-existing obligation
COS not a requirement
3. As to Effect
DIP to extinguish the obligation either wholly or
partially.
COS obligation will arise instead of being
extinguished.
Contract for a Piece of Work (CPW) vs. COS
BE: A team if basketball players went to a store
to buy shoes and out of the 10 members, 5 of
them were able to choose the shoes. They
agreed to pay the price upon delivery. The
other 4 members were able to choose but the
shoes were not available at that time but they
are normally manufactured. The last member
could not find shoes that could fit his 16 inches
feet and therefore he has to order for such kind
of shoes. What transactions were entered into
by these players?
SA: 1467 the first 2 transactions involving a total
of 9 players would be considered a COS because
the shoes which they ordered are being
manufactured or procured in the ordinary course of
business for the general market. However, the last
transaction which will be manufactured only
because of the special order of the player and is
not ordinarily manufactured for the general market
will be considered a CPW which is known as the
Massachusetts rule.
Massachusetts rule rule in determining whether
the contract is a COS or a CPW.
Barter vs. COS
Q: A obliged himself to deliver a determinate
car with a market value of P250,000.00. B
obliged himself to deliver his watch and
P150,000.00 in cash. What kind of contract?
A: First, you have to consider the intention of the
parties. They may want this transaction to be
considered as a sale or barter and that will prevail.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
But if the intention of the parties is not clear from
their agreement then the nature of the contract will
depend on the value of the watch. If the value of
the watch is greater than P150,000 then this is
barter. If the value of the watch is equal or less
than P150,000 then this is sale. The value of the
car is irrelevant. What is only relevant is the value
of the thing (watch) in relation to the cash to be
given by one of the parties.
Agency to Sell (ATS) vs. COS
BE: A gave B the exclusive right to sell his
maong pants (he has his own brand of maong
pants) in Isabela. It was stipulated in the
contract that B has to pay the price of maong
within 30 days from delivery to B. It was
stipulated that B will receive 20% commission
(discount) on sale. The maong pants were
delivered to B. However, before B could sell the
goods, the store was burned without fault of
anyone. Can B be compelled to pay the price?
From the wordings of the problem you may have
an idea that this is an agency to sell. If this is an
ATS, the fact that the agent has not yet sold the
maong pants when they were burned will not result
in a liability on his part, there being no negligence
on his part because with the delivery of the thing
from the principal to the agent, ownership does not
pass. Under the principle in the Civil Code res
perit domino it will be the seller (owner) who will
bear the loss. But if this transaction is sale then
with the delivery of the maong pants to B,
ownership passed to B because he did not reserve
ownership over the pants despite the fact that the
other party has not paid the price. So when the
pants were burned, it would now be B as the owner
who will bear the loss.
SA: This is exactly the case of Quiroga vs.
Parsons. Article 1466 in construing a contract
containing provisions characteristics of both a COS
and ATS, you have to go into the essential clauses
of the whole instrument. In this problem, one of the
clauses B has to pay the price within 30 days.
That would make the contract COS and not ATS
because in 30 days from delivery, whether or not B
has already sold those pants to other persons, he
is already obliged to pay a price. That is not an
ATS. Being a COS, therefore, after having been
delivered, ownership passed to the buyer and
hence under res perit domino rule, the buyer bears
the loss and therefore he can be compelled to pay
the price.
Essential Elements of a Contract of Sale
1. Consent of the Contracting Parties
2. Object or Subject Matter which is a
determinate thing or right
Note: Service cannot be the subject matter of sale.
Page 3
November 2008
3. Cause or Consideration as far as seller is
concerned, it is the price in money or the
equivalent of the payment of the price.
CONSENT OF THE CONTRACTING PARTIES
A. No consent of one or both of the parties
the contract is void. Under the law on sales, it is
a fictitious contract where the signature of one of
the parties was forged. Normally, the sellers
signature is forged. If the signature of the seller is
forged, that would be a fictitious contract. The
alleged seller will not have participation in the
execution of the contract. But another kind of
contract recognized in the Civil Code is a simulated
contract.
Simulated parties to this contract actually would
have participation. They would voluntarily sign in
the deed of sale. However, they do not intend to be
bound at all or they may intend to be bound to
another contract but they executed a deed of sale.
Thus, the law would ratify these contracts
considering there is a simulated sale.
Kinds of Simulated Contracts
1. Absolutely Simulated they do not intend to be
bound at all.
Q: Why would they enter into this kind of sale?
A: (a) To defraud creditors. The debtor would sell
his remaining assets to make it appear that he has
no more assets which may be reached by his
creditors.
(b) Applicants for residency abroad would
normally be required to present certificate of title
over parcels of land so that the applicant will
appear to have assets. Therefore, hindi mag TNT
yung applicant. These applicants would normally
ask his brother or sister or friends na kunwari that
land would be sold to them. They will have the
property registered in their name. They will present
the title to the Embassy. But actually the parties do
not intend to be bound. Take note that this may be
a root of a valid title as far as 3 rd persons are
concerned. These 3rd persons who relied on the
transfer certificate of title in the name of the seller
even if that seller is not the owner because the sale
is simulated may acquire ownership.
2. Relatively Simulated sale where they actually
intended another contract which normally would be
a donation.
Q: Why would they execute a deed of sale
instead of executing a deed of donation?
A: (a) To minimize tax liabilities. Donors tax is
higher than capital gains tax or final income tax
and documentary stamp tax.
(b) To circumvent the provisions on legitimes
and collation under succession. This may be
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
questioned if you can prove that there was no
consideration.
B. If consent was given
If consent was given, it does not necessarily
mean that the COS is valid. The consent may be
given by an incapacitated person or one with
capacity to give consent. If given by an
incapacitated person, consider the nature of the
incapacity. It may be:
a. Absolute Incapacity the party cannot
give consent to any and all contracts.
b. Relative Incapacity the party is
prohibited from entering sometimes with
specific persons and sometimes over
specific things.
Kind of Capacity
1. Juridical Capacity it is the fitness to be the
subject of legal relations. If a party to a sale has no
juridical capacity, the contract is void. Note that all
natural living persons have juridical capacity. Even
if he is a 1 day old baby, he has juridical capacity.
The baby can be the subject of donation. Even if
he is conceived, he has provisional personality.
Example: One example of a party to a sale without
juridical capacity would be a corporation not
registered with the SEC. The contract entered by
this corporation is a void contract because one of
the parties has no juridical capacity to enter into
that contract.
2. Capacity to Act it is the power to do acts with
legal effects. If the incapacity only pertains to
capacity to act, the contract would normally be
voidable. Without capacity to act or there are
restrictions with ones capacity to act such as
minority, insanity, deaf mute and does not know
how to write and civil interdiction.
Note: Under R.A. 6809 (December 1989) there is
no more creature known as unemancipated
minor. Before 1989, the age of majority was 21.
C. If both parties are incapacitated
not only voidable but unenforceable.
Q: What if one of the parties in a COS is a
minor and the minor actively misrepresented
as to his age?
A: The SC said that the minor will be bound to such
contract under the principle of estoppel. Active
misrepresentation, can be seen from the deed
itself. In a deed of sale, normally after the name,
the words of age were stated. If the minor signed
that contract, he will be bound. If no statement in
the deed of sale as to his age, in one case, the fact
he misrepresented to the notary public when he
appeared before the notary public for the
Page 4
November 2008
notarization of the document and he was asked by
the notary public as to his age and he again
misrepresented, he will be bound to such contract.
Atty. Uribes Comment: Estoppel is not a good
ground because the minor is not aware.
Sale of Necessaries
In sale of necessaries such as food, clothing and
medicine to a minor, the minor has to pay a
reasonable price. This contract is not voidable. The
sale of necessaries will bind the minor and he will
be compelled to pay not really the contract price
but only to reasonable price.
Relative Incapacity (Articles 1490 and 1491)
1. Sale between spouses it is void except:
a. The spouses executed a marriage
settlement and in the marriage settlement
they agreed for a complete separation of
property regime. Then they can sell to
each other.
b. If no marriage settlement, they may have
obtained judicial declaration of separation
of property. After that, they can sell to each
other.
2. Those mentioned in Article 1491
a. A guardian cannot buy the property of the
ward. The guardian is not actually
prohibited from entering into any and all
contracts. It is just that he cannot be the
buyer of a property of his ward.
b. An agent cannot buy without the consent
of the principal a property which he was
supposed to sell or administer.
c. The executors and administrators of the
estate cannot buy a property which is part
of the estate.
d. Public officers, judges, their staff, clerk of
court, stenographers and lawyers are
prohibited from buying those properties
which are the subject of litigation during
the pendency of the case.
Q: What is the status of the contracts under
1491?
A: Prof. Tolentino voidable
Justice Vitug & Prof. Baviera void
Prof. Pineda & Prof. de Leon the first 3
are voidable and the last 3 are void.
The better answer is void because these persons
are prohibited from entering into these contracts.
Under Article 1409, if the contract is prohibited, it is
void.
Discussion of Prof. De Leons Answer
The first 3 are voidable because these contracts
may be the subject of ratification. If you will read
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
his discussion, he based his discussion in the case
of Rubias vs. Batiller wherein the guardian bought
the property of his ward. So the contract is voidable
because if the ward becomes of age, he can enter
a COS over the thing to his guardian and that sale
would be a valid sale. (Pls. read the full text of Prof.
De Leons comment)
Atty. Uribe: It is correct that it is a valid sale. But
does that mean that the sale ratified the 1 st
contract? I disagree because ratification under the
Civil Code has the effect of cleansing the contract
from all its defects from the very beginning as if the
contract was entered into during the first
agreement that the agreement was valid from the
very start. In fact, the SC said in Rubias vs.
Batiller ratification (quote and quote), because
the effect of the second contract will not retroact to
the first contract. It will only be valid from the time
the second contract was entered into. After all,
there is no ratification in that sense under the Civil
Code. Thus, since it does not retroact to the first,
the second contract is void. Otherwise, if voidable
then it can be ratified. The defect on the first
contract would have been cleansed with the
execution of the second contract.
2. Aliens are prohibited from acquiring by purchase
private lands Take note acquiring which means
buying not selling. They can sell.
Exceptions / when aliens can buy:
a. Former natural born Filipino citizen. Under
the Constitution they are allowed to buy
small land which they can use for
residential purpose.
b. Another way of acquiring is by succession
but this is not a sale
D. Even if consent was given by one with
capacity to give consent but if the consent is
vitiated
voidable. FIVUM
E. If the party gave such consent in the name of
another without authority of that person or no
authority of law
unenforceable. Take note may be authorized by
the person or by law.
Example of authorized by law: notary public has
the right to sell in pledge because he has the
authority to sell under the law.
OBJECT OR SUBJECT MATTER
The requisites in sale as to thing would almost be
the same as the requisites of contracts in general.
1. The thing must be within the commerce of men
Examples: sale of a navigable river is void, sale of
a cadaver is void but donation of a cadaver is
allowed, sale of human organs is void, things which
Page 5
November 2008
are not appropriated like air is void but if
appropriated it can be the object of a valid sale.
2. The thing must be licit not contrary to law
Examples: sale of prohibited drugs or shabu is
void, sale of marijuana is void, sale of wild flowers
or wild animals is void
3. Must be determinate
Q: Sale of a car without agreement as to the
features for P1M. On the other hand, another
transaction would be a sale of Mitsubishi
Lancer, 2007, GSL and color black for P1M. Are
these 2 transactions, valid sale?
Both would pertain to generic thing. Under the law,
a thing is considered determinate only when it is
particularly designated or physically segregated
from all others of the same class. Both transactions
pertain to generic so both transactions are void?
A: No. The first transaction is void. The second
transaction is valid because Article 1460 requires
that the requirement of the law that a thing should
be determinate would be sufficiently complied with
if the thing which is the object of the sale is capable
of being made determinate without a need of a
new or further agreement.
Example: Sale of 1 gallon Minola pure coconut oil.
Though generic, it is valid under Article 1460.
RULES AS TO OBJECT OF COS
Q: A obliged himself to deliver and transfer
ownership over the palay that will be harvested
from a specific parcel of rice land in May 2008.
What if by May 2008, no palay was harvested?
a. What is the status of the sale?
b. May the seller A be held liable for
damages for failure to comply with his
obligation?
A:
a. Always consider that in a COS there are only
3 requisites. As long as these 3 were complied,
there is a valid sale. In fact, by express provision of
law, sale of things having potential existence
(emptio rei sperati) is valid.
b. Not necessarily because there are excuses to
non-performance such as pestilence, typhoon,
flood and therefore his failure to comply is an
excuse. But if the reason of the seller is because of
his negligence, he cannot find support under Art.
1174.
Sale of Hope (Emptio Spei)
Example: Sale of a lotto ticket
Q: Assuming the sale of a lotto ticket happened
the day after it was drawn, what is the status of
the sale?
A: It will depend whether the ticket is a winning or
losing ticket. What the law provides is that the sale
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
of a vain hope is a void sale. If the ticket is a
winning ticket, it is not a vain hope hence, it is a
valid sale.
Q: Why would a person sell a winning ticket?
A: He may need the money immediately. Parang
discounted yung ticket. Nanalo ng P1M, ibebenta
nya ng P990,000 because he needs the money
immediately.
Q: Sale of a land to B with a right to repurchase
within 1 year which A delivered. On the 3 rd
month, B sold the land to C. However, on the 9 th
month, A offered to repurchase the land.
(a) What is the status of the sale between A
and C?
(b) Who will have a better right over the land?
(Sale with a right to repurchase)
A: (a) Be guided by the fact that a COS is a
consensual contract. The mere meeting of the
minds as to the object and the price, then there is a
valid and perfected sale. Hence, this is a valid sale
even if the object of the sale is a sale with a right to
repurchase. Article 1465 provides that things
subject to a resolutory condition may be the object
of a COS.
Atty. Uribe: Mas tamang sabihin since the
ownership thereof is subject to a resolutory
condition. Hindi naman yung thing is the subject of
resolutory condition, it is the ownership over the
thing.
If A exercises the right to repurchase and such
would be a valid exercise of such right then the
ownership of B would be extinguished. The
exercise of the right is considered a resolutory
condition as to the ownership of B. The fact that
the object of the sale is subject to a repurchase will
not affect the validity of the sale.
(b) As a rule, it would be A as a seller a retro
because he has the right to repurchase assuming
his repurchase is valid. C may have a better right if
he can claim that he is an innocent purchaser for
value. Example: maybe the right to repurchase was
not annotated at the back of the title of the land
and he has no actual knowledge. If that is the
case, C may have a better right.
SALE OF RIGHT / ASSIGNMENT OF RIGHT
Assignment of right is not necessarily a sale. If
there is a valuable consideration for the
assignment, it is a sale. If there is no valuable
consideration, it may be a donation or dacion en
pago.
Examples of right: credit, shares of stock
Requisite of a right the only requirement is that
the right must not be intransmissible
Page 6
November 2008
Q: Why or when a right would not be
transmissible?
A: If it is intransmissible by nature or by stipulation
or by provision of law.
G.R.: As a rule, rights and obligations arising from
contracts are transmissible.
Exceptions:
1. Intransmissible by Nature Examples: right as
a legitimate child cannot be sold. Any contract
where the personal qualifications has been
considered .
2. Intransmissible because of Stipulation
Example: The parties stipulated in a lease contract
that the right to sublease cannot be transferred if it
is prohibited by the lessor.
3. Intransmissible because of Law Example: In
partnership, the right in specific partnership
property without all the partners making the
assignment cannot be validly assigned.
Q: Sale of a right, also perfected by mere
consent?
A: Yes. To bind 3rd persons, it must be in a public
instrument. Recorded in the Registry of Property.
CAUSE OR PRICE CERTAIN IN MONEY OR ITS
EQUIVALENT
Q: A deed of sale was entered into by A and B.
The price agreed upon was 1M yen.
(a) May that be a valid sale?
(b) Can the seller compel the
buyer to pay in yen?
A: (a) Yes, it is valid. Basis is Article 1458
because the only requirement of the law is in
money. Even Japanese yen is in money. The law
states that it may not even be in money, it may be
equivalent like promissory notes whether or not
negotiable or letters of credit.
(b) If the contract was entered into today,
yes it is valid because of R.A. 8183 which repealed
R.A. 529 in 1996. If COS was entered before R.A.
8183, the seller cannot compel even though the
contract is valid. The payment has to be made in
Philippine money.
Consider the date of the sale. If parties failed to
stipulate as to which currency, it has to be in
Philippine currency.
Q: Can there be a valid payment in P10,000 - P1
coins?
A: Yes.
Q: Can you compel the seller to accept?
A: No. Under the Philippine law, P1 will have legal
tender power only up to P1,000. He may accept
but he cannot be compelled.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan

Note: P1, P5, P10 up to P1,000
less than P1 up to P100
Price Must be Certain
Q: Sale of shares of stocks but there was no
date as to the value of the share, valid?
A: The value of the shares as to what date is
material because the value of the shares changes
almost everyday depending on the shares. Shares
of companies who are active in trading would
change every now and then. In fact, even if the
date as to the value of the shares has been fixed
but the time was not considered, maybe the
opening or the closing in a particular exchange
would affect the validity of the sale. For example, in
the opening, the value of the share is P50 but in
the closing it is P39. So again, it has to be certain.
Q: If you will fix the price by considering the
tuition fee of a student per unit, would that be a
certain price?
A: No because different schools would have
different tuition fees and even in a certain school,
fees per college are different.
Q: Who can fix the price?
A: (1) The best way is for the parties to agree as to
the price. (2) They may agree that one of them will
fix the price.
Q: May the sale be perfected if the agreement
of the parties was for one of them to fix the
price?
A: Yes, it may be perfected only if the price fixed by
the party who was asked to fix the price was
accepted by the other party. If not accepted, there
was no meeting of the minds.
Note: The perfection will only be considered at the
time of the acceptance of the price fixed by the
other party not from the time of the first agreement
of the parties.
Q: What if a 3rd person was asked to fix the
price A and B agreed that X will fix the price,
may the sale be void?
A: Yes, the sale may be void if the third person
does not want to fix the price or unable to fix the
price. Hence, there was no meeting of the minds.
Q: If the 3rd person fixed the price but it was too
high or too low or maybe there was fraud
committed by the 3rd person or he was in
connivance with one of the parties, may the
sale be void?
A: No, because the remedy of the other party is to
go to court for the court to fix the price.
Page 7
November 2008
Q: Sale of a car, the price of the car is P1,
valid?
A: Yes, it is valid. It can be a valid sale. Lesion or
gross inadequacy of the price does not as a rule
invalidate a contract unless otherwise specified by
law.
Exception: when otherwise provided by law.
Example: Article 1381 when the guardian sells
the property of the ward and there is lesion of more
than 25% or more than of the value of the thing.
Take note that the buyer must not be the guardian
otherwise 1491 will apply void. But if the
guardian sold it to another person there being
lesion of more than like when the value of the
property is P100,000 was sold for P65,000, the
contract is rescissible.
Note: Under the law on sales, if there is gross
inadequacy, it may reflect vitiation of consent so
the SC would normally enjoin the lower courts to
be warned of the possibility of fraud in case of
lesion. Lesion must be proven as a fact. It is not
presumed.
If there is gross inadequacy, it maybe because
actually they intended another contract and that
would make the sale a simulated sale and
therefore the sale is void.
Example: The value of the property is P1M but only
P10,000 was written in the contract because they
intended it to be a donation void.
TIME OF THE PERFECTION OF THE
CONTRACT
Auction Sale
Auction sale is perfected upon the fall of the
hammer or any other customary manner. Thus,
before the fall of the hammer in an auction sale,
the bidder even if he has already made a bid, he
can still withdraw the bid as long as he would do
that before the fall of the hammer. Otherwise, (if
after the fall of the hammer), there is already a
perfected sale.
Q: Can the auctioneer withdraw the goods
before the fall of the hammer?
A: As a rule, yes because the sale has not been
perfected at the moment unless the bidding or
auction has been announced to be without reserve.
Note: Before perfection, there is one contract
which maybe perfected. Before perfection meaning
in the negotiation stage this contract is known
as the option contract.
Option Contract
Sanchez vs. Rigos
Facts: Mrs. Rigos offered to sell her land to
Sanchez for a certain price. Rigos gave Sanchez 2
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
years within which to decide. (Note: The optionee
or promisee or offeree is not bound to purchase but
he has the option to buy or purchase). In this case,
Sanchez has the option. Before the lapse of 2
years, Sanchez told Rigos that he is buying and
offered the price agreed upon but Rigos refused
claiming that she was not bound by the written
option agreement because no option money
(consideration) was given by Sanchez. According
to Rigos, the option contract is void.
Held: Since Sanchez accepted the offer and
decided to buy within the period before the offer
was withdrawn, a perfected COS was created even
without option money. In this case, there was no
option contract because it was merely an option
agreement. Therefore, there was merely an offer
on the part of Rigos and once the offer was
accepted before it was withdrawn, regardless of
whether option money was given and in this case
no option money was given, a perfected COS was
created.
Note: Iba pag may option money
Q: 2 years within which to decide assuming
there was option money, before the offeree
could decide to buy, the offeror withdraw on
the 6th month.
(a) Can the offeree on the 10 th month
say I would like to buy?
(b) Can the buyer compel the seller to
sell?
A: (a) No.
(b) No, an action for specific performance will
not prosper because when he said he will but there
was not more offer to be considered. Na-withdraw
na eh.
Q: If the offeree files an action for damages,
may that action prosper there being option
money given?
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
failure to that he is liable not based on perfected
COS but on perfected contract of option.
Option Money (OM) vs. Earnest Money (EM)
OM is not part of the price while EM is part of the
price and at the same time, it is a proof of the
perfection of the contract.
Q: Can the parties themselves agree that there
would be a perfected COS and then the OM
would be treated as part of the price?
A: The SC said that this is binding between the
parties. Though it is an OM, it can be considered
as part of the price as long as it is stipulated.
Without stipulation, the OM cannot be considered
Page 8
November 2008
as partial payment because it is a consideration for
the option and therefore not part of the price.
Q: With EM, does it mean that there is already a
perfected COS?
A: Not necessarily. Under the law, it is only a proof
of the perfection of the sale. In fact, there may not
be a perfected sale even if there was EM given,
being merely a part of the purchase price or total
contract price. The parties may not have actually
agreed as to the total price, therefore, even if they
agreed that a certain amount is part of the price,
they have not agreed on the total price or if they
agreed on the total price, they have not agreed on
the object of the sale. So no perfected COS. EM
goes into only 1 of the essential elements, that is
not the only element in COS. That is only a proof of
the perfection of the contract. Take note, a proof
does not necessarily establish a fact, it may not be
sufficient to establish a fact.
Q: With a perfected COS, does it mean it is
already enforceable?
A: Not necessarily. Note that upon perfection, the
parties may compel the other party to perform their
respective obligations. But the perfection is subject
to the formalities prescribed by law for that
contract. Therefore, even under 1475, the
perfection of the contract is subject to the
provisions of law on the formalities of COS like the
statute of frauds. There may be meeting of the
minds but if it is not in the form prescribed by law, it
may be unenforceable.
G.R.: A COS may be in any form. Article 1483
provides that a COS may be in writing, partly in
writing xxx. This provision is exactly the same as
Article 1356 in contracts which provides that
contracts may be obligatory in whatever form they
may have been entered into provided all the
essential requisites are present. But then again
even Article 1356 just like Article 1475 would
provide for exceptions.
Exceptions: The law may require a particular form
for its validity. The Cattle Registration Decree is an
example - where the law itself provides for a
particular form for the validity of the sale. But the
law may require particular form for its enforceability
of the sale and that would be 1403 or the statute of
frauds. Concretely, the sale of a parcel of land if
not in writing is valid but unenforceable. It is not
void. Note that the price of the land is irrelevant if
immovable.
Example: Before, the sale of a land for P300 is
valid and enforceable even if not in writing. But
presently, it has to be in writing to be enforceable.
The price is still irrelevant.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
If the object of the sale is movable, you have to
consider not the value of the thing but the price
agreed upon. The value may be different from the
price. You can sell a thing worth P1,000 for P400
but the law provides for the price. If the price is at
least P500 and the sale is not in writing, it will be
unenforceable.
Q: Sale of a watch P450, not in writing, may it
be unenforceable?
A: It may be unenforceable if by the terms of such
agreement, the obligation therein is not to be
performed within 1 year. If they agreed that the
watch will be delivered 2 years after and the
payment will also be made upon delivery, it would
be unenforceable.
Paredes vs. Espino
Facts: Paredes was a prospective buyer. Espino
owns a land in Palawan. Paredes is from Northern
Luzon. Their negotiation was thru letters and
telegrams. Espino sent a letter to Paredes stating
that he and his wife agreed to sell the land to
Paredes, that the deed of sale will be executed
upon the arrival of Paredes in Palawan. When
Paredes arrived, Espino said he is no longer
interested in selling. Paredes filed a case to
compel Espino to sell the land. Espino contended
that the contract is unenforceable because it is not
in writing. He contended that under the statute of
frauds it is unenforceable. His contention was
sustained by the trial court.
Held: This contract is no longer covered by the
statute of frauds because there was a letter. Article
1403 provides that a note or memorandum signed
by the part charged would be sufficient to take that
contract out of the operation of the statute of
frauds. In this case, the defendant wrote a letter
with his signature on it. The letter took that contract
out of the operation of the statute of frauds and
therefore he may be compelled to execute the final
deed of sale.
RIGHTS AND OBLIGATIONS OF THE VENDOR
In a deed of sale (DOS), there can be
hundreds of obligations of the vendor but those
obligations would be because of the stipulation.
But there are only few obligations imposed by law.
The 3 most important:
1. To transfer ownership
2. To deliver
3. To warrant the thing
There are other obligations:
4. Obligation to take care of the thing sold
with the diligence of a good father of a
family prior to delivery.
5. From the time of the perfection up to the
time of delivery then there would be
obligation to pay for the expenses for the
Page 9
November 2008
execution and registration of the sale and
obligation to pay the capital gains tax
would be on the seller as a rule.
6. Obligation to deliver the fruits which is
related to the obligation to deliver the thing
OBLIGATION TO DELIVER THE FRUITS
BE: A sold a mango plantation to B but they
stipulated that delivery will be after the signing
of the deed of sale. After the expiration of the 6-
month period, B demanded for the delivery.
The vendor was able to deliver 1 month after
the date when he was supposed to deliver the
mango plantation. During this period, the
vendor harvested mango fruits and sold them
to X. The vendor was able to deliver only after
the other fruits were harvested and sold to Y.
Can B recover the mango fruits from Y during
the 6th month period?
SA: Determine first whether B is entitled to the
fruits because if he is not entitled, then he cannot
recover the fruits. Is he entitled to the fruits after 6-
month period during the 1-month period prior to
delivery? Yes, in fact, under 1537, the fruits of the
thing sold from the time of perfection shall pertain
to the buyer.
Q: Does it mean that the fruits from the time of
perfection shall pertain to the buyer?
A: Hindi naman. 1537 should be considered in
relation to 1164. Under 1164, the fruits shall pertain
to the creditor only from the time the obligation to
deliver the thing arises. Thus, B is entitled to the
fruits only from the time of the expiration of the 6-
month period. Di ba may agreement sila that the
mango plantation will be delivered only after 6
months? Upon the arrival of this period, the
obligation to deliver the thing arose, therefore, B,
consistent with 1164 and 1537 will have the right to
the fruits.
Q: Can he recover the fruits from X?
A: No. Under 1164, 2nd paragraph, the buyer or the
creditor will have no real right over the fruits after
the delivery of the thing.
Q: What is the remedy of the buyer?
A: The remedy is to go after the seller for selling
these fruits na hindi naman sya entitled. The buyer
is already entitled although again he will have no
real right over the fruits until the delivery of the
thing to him.
OBLIGATION TO TAKE CARE OF THE THING
G.R.: The thing sold should be determinate
because if generic (1460, 2nd paragraph) then there
is nothing to be taken cared of. It will become
determinate only upon delivery.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
Exceptions: There are sales transactions wherein
the vendor would not have this obligation:
a. Constructive delivery - brevi manu
There would be no obligation on the
part of the seller to take care of the
thing from the time of perfection
because at the time of perfection, the
buyer was already in possession of
the thing. Maybe he borrowed the
thing. Example: he borrowed the car
and he decided to buy it the thing
was already in his possession.
b. Kaliwaan ang bentahan upon
perfection may delivery na then there
is nothing to be taken cared of.
OBLIGATION TO PAY EXPENSES / TAXES
These obligations may be the subject of
stipulation. By agreement, it would be the buyer
who will pay xxx Normally, dito hindi natutuloy ang
sale dahil hindi magkasundo kung sino
magbabayad ng tax.
OBLIGATION TO TRANSFER OWNERSHIP
BE: May a person sell something which does
not belong to him? Would the sale be valid?
Would the buyer acquire ownership over the
thing sold, if seller does not own the thing?
SA: Yes. Ownership over the thing sold is not an
essential requisite for the sale to be valid. But if the
seller does not own the thing, he may have a
problem on his obligation to transfer ownership.
The problem would be whether or not the buyer
would acquire ownership over the thing sold if the
person who sold the thing is not the owner.
Q: Who can transfer ownership by way of
sales?
A: Only those who have the right to sell.
Q: Who would have the right to sell and
therefore they can transfer ownership by way
of sale?
A: First, is the owner. Even if he is not the owner,
he may have the right to sell because:
(1) He was given the authority by the
owner. Example: Agent
(2) He may be the owner but he may
have the authority of the law to sell,
known as Statutory Power to Sell
(Article 1505). Examples: Notary
public in pledge, liquidators, guardians
and receivers.
(3) Those who have the authority of the
court. Example: Sheriff. Note: it is as
if they have the authority of law
because not even the judge can
validly sell something if it is not
consistent with the law.
Page 10
November 2008
Q: May a buyer acquire ownership over the
thing sold if the seller has no right to sell?
A: The answer by way of exception is yes. But the
general rule here is under 1505 the buyer
acquires no better title than what the seller had. If
the seller is neither the owner nor does he have
the authority to sell, the buyer acquires no better
title than what the seller had. If his right is only as a
lessee that is the most that can be transferred to
the buyer. If he has no title then no title can be
transferred to the buyer.
Exceptions: (When the buyer can acquire a better
title than what the seller had. Even if the seller
does not have the right to sell, the buyer may
acquire ownership over the thing sold because the
law so provides and not because the seller was
able to transfer ownership to the buyer.)
1. By Estoppel
2. Estoppel by Deed
3. Estoppel by Record
4. Sale by an Apparent Owner
5. Negotiable Document of Title
6. Purchases from a Merchants Store xxx
1. By Estoppel by the principle of estoppel, a
person is precluded from denying that another
person has authority to sell because of his acts.
Also known as Estoppel in Pais which is a kind of
equitable estoppel because of the acts /
representation of the owner, he may not later on
deny the authority of the 3rd person.
2. Estoppel by Deed
BE: A and B co-owners of land sold (sale is
verbal) to X their land. X subsequently sold the
land to Y. Would Y be considered to have
acquired ownership over the land?
SA: Under 1434 which is considered as Estoppel
by Deed (technical estoppel) when the seller
who was not the ownerat the time of the sale,
acquires ownership, automatically, ownership
passes to the buyer by operation of law. However,
Article 1434 requires delivery to the buyer. And
under the facts, 1434 would not apply because:
a) There was no showing there was
payment
b) No showing that there was delivery of
the land to X.
It cannot be said that by operation of law, Y
likewise acquired ownership by way of estoppel by
deed.
3. Estoppel by Record
Jurisprudence: Sale by nephew of the owner of
the land. Since the nephew could not deliver the
land, the buyer sued the nephew for estafa. For the
accused to be acquitted, he asked his uncle to
testify that he actually had the authority to sell.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
When the uncle testified in court, the nephew is
acquitted. After acquittal, the buyer demanded from
the uncle the delivery of the land. The uncle
refused, claiming that sa totoo land, I did not
authorized my nephew.
Q: Case was filed against the uncle, would that
action prosper?
A: SC said yes because he cannot be allowed now
to claim that his nephew was not authorize to sell
after he testified in court that he gave such
authority.
This is estoppel by record which is considered a
technical estoppel.
4. Sale by an Apparent Owner
A. Factors Act
B. Recording Laws
C. Any other provision of law enabling the apparent
owner of the goods to dispose of them as if he was
really the owner.
A. Factors Act
Factor is an old name for agent. Even if
agent has no right to sell, a third person may
acquire ownership because he may rely on the
power of attorney as written.
Example: Special Power of Attorney (SPA) agent
was authorized to sell a car. However, in a verbal
instruction when the SPA was delivered, the
principal authorized the agent to sell that car to 1 of
the members of a certain organization but the
agent did not sell that car to one of the members of
a certain organization.
Q: Would the buyer acquire ownership?
A: Yes. Article 1900 provides that so far as 3 rd
persons are concerned, they only have to rely on
the SPA as written, even if agent has no authority
or right to sell.
B. Recording Laws
*most common question in the bar exam
Mapalo vs. Mapalo
Facts: The elder brother, Miguel Mapalo, donated
half of his land to his younger brother, Maximo
Mapalo, because the latter will get married. But
instead of the younger brother asking his elder
brother to sign a deed of donation over that land,
he asked his elder brother and the latters spouse
to sign a Deed of Sale over the entire parcel of
land. He was able to have the entire property
registered in his name. Few years after, he sold the
land to the Narcisos. Obviously, he does not have
the right to sell the other half. The Narcisos
claimed that they are buyers in good faith from an
apparent owner because the entire property was in
the name of Maximo.
Q: Did the Narcisos acquire ownership?
Page 11
November 2008
A: SC Said no, because the law requires that
the sale must not only be a sale by an apparent
owner but the buyer must be a buyer in good faith.
The buyers here were in bad faith because before
they bought the land, they went to the house of
Miguel and asked him whether he would allow
Maximo to sell the entire land. SC said they are in
bad faith.
BE: The owner of a parcel of land covered by
an OCT mortgaged the land to a creditor. The
owner delivered the OCT to the creditor. The
mortgagee forged the signature of the owner in
a deed of sale. He was able to register the
property in his name. He sold the land to a
third person who had no knowledge of the
transaction. Did the mortgagee acquire
ownership?
SA: No. A forged deed is a void instrument and
cannot convey a valid title to the buyer but under
the law the forged deed may actually be the root of
a valid title under the Mirror Principle when the
buyer bought it from the mortgagee in whose name
the property was registered and relied on the TCT,
then if he bought the property in good faith, he will
be considered the owner under Article 1505 in
relation to P.D. 529. He bought the land relying on
the TCT and bought the land in good faith then he
would have a better right than the real owner.
Q: When a buyer may be considered a buyer in
good faith?
A: By the mere fact that he had no knowledge at
the time of the execution of the deed does not
necessarily mean that he is in good faith. The law
further requires that he must have fully paid without
knowledge of the defect in the title of the seller. So
if after execution he is in good faith but before
payment he is in bad faith then he is in bad faith.
BE: A, the owner of a parcel of land entrusted
to his clerk the TCT of the land for safekeeping.
This clerk instead forged the signature in the
DOS with him as the buyer. Thereafter, he was
able to have the property registered in his
name. Then he sold the land to a third person.
Did the clerk acquire title over the land? Can
the owner of the land have the property
registered in his name?
SA: The 3rd person being in good faith, he is
considered to have acquired ownership over the
thing sold even if the seller had no right to sell. By
way of exception because the buyer bought it from
an apparent owner. An apparent owner who
disposed the thing as if it was owned by him.
5. Negotiable Document of Title
If goods are covered by a negotiable
document of title and it was thereafter negotiated.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
If the buyer bought it in good faith and for value, he
will be protected under the law. He will acquire
ownership even if the seller did not have the right
to sell.
Example: The seller may have acquired title by
violence. Binugbog nya yung owner ng goods.
Pero kung negotiable document of title yan and
properly negotiated, lalo na kung bearer document
of title, then the buyer may acquire ownership even
if the seller has no right to sell.
6. Purchases from a Merchants Store / Markets
/ Fairs
Sun Brothers vs. Velasco
Facts: Sun Brothers was the owner of a
refrigerator. Sun Brothers was engaged in the
business of selling refrigerator. Sun Brothers sold a
ref to Lopez on installment basis. As stipulated,
Sun Brothers reserved ownership until full
payment. Lopez only paid P300 out of P1,500. The
balance to be paid on installment. Lopez then sold
the ref to Velasco.
Q: Would Velasco acquire ownership?
A: No because Article 1505 provides that the buyer
acquired no better title than what the seller had.
However, Velasco was the owner of a store. On the
next day, Velasco sold the ref to Ko Kang Chu who
paid in full. When Sun Brothers learned this
transaction, it filed an action to recover the ref from
Ko Kang Chu.
Q: Can Sun Brothers recover the ref from Ko
Kang Chu by reimbursing the price?
A: SC Said no. Article 1505 provides that the
ownership of the buyer who bought the thing from
a merchants store and he bought it in good faith is
absolute in character. Article 559 does not apply
because Sun Brothers was not unlawfully deprived
of the ref and the ref was neither lost. 559 will
apply if the owner was unlawfully deprived
(Example: the thing was lost or stolen). Under 559
he can recover by reimbursing the buyer who
bought the thing in good faith. He has to
reimburse.
BE: The painting owned by F was stolen from
her and later she noticed the painting in the
room of B. When asked how he acquired the
painting, B said he bought it from a gallery
auction. Can the owner F recover the painting
from B?
SA: The first consideration here is the nature of the
gallery auction. Is it a public sale or not? Some
suggested answers of the UP Law Center would
claim that a gallery auction is not a public sale.
Atty. Uribe: I can agree that some gallery auctions
are private by invitation. Thus, in that auction I
would definitely agree, hindi yan public sale.
Page 12
November 2008
If it is not a public sale then the owner who was
unlawfully deprived can recover that property even
without reimbursement. If the auction sale is
considered a public sale, he can recover as long as
he is willing to reimburse the buyer of the price
paid in that sale. Article 559 is applicable because
the owner was unlawfully deprived.
BE: F lost her diamond ring in a hold-up. Later
on, this ring was an object of a public sale of
one pawnshop. Can F recover the ring from the
buyer in that public sale?
SA: Yes, Article 559 provides that even if the buyer
is in good faith so long as the owner is willing to
reimburse the buyer of the price paid in that sale.
Note: Again in 1505, there is no right to recover as
long as the buyer bought it in good faith from a
merchants store, there can be no recovery as a
matter of right.
Q: How transfer of ownership is effected?
A: Under the law, as far as things are concerned, it
is effected by delivery:
(a) Actual
(b) Constructive
There can be no transfer of ownership without
delivery.
Q: Is it correct to say that every time there is
delivery, the buyer acquires ownership upon
delivery?
A: Not necessarily. This is not an absolute rule.
There are kinds of sale where despite delivery the
buyer does not acquire ownership upon delivery:
(1) Conditional Sale ownership is reserved by
the seller such that despite delivery,
ownership does not pass.
Q: So when would the buyer acquire
ownership in conditional sale?
A: Not upon delivery but upon the happening of
the condition which is normally the full payment
of the price.
(2) Sun Brothers Case
(3) Sale on Trial / Sale on Satisfaction / Sale on
Approval upon delivery, even if there is
actual delivery there is no transfer of
ownership at the time of delivery.
Q: When would the buyer acquire
ownership?
A: From the moment he signifies his acceptance
or approval of the thing.
Q: What if he did not signify his acceptance
or approval? May he be considered to have
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
 accepted and therefore ownership may be
considered to have passed to him?
A: Yes. 2 Scenarios:
(a) There may be a period agreed upon by the
parties within which the buyer would have to
decide. Even if he failed to signify his
acceptance by the mere lapse of the period,
he is deemed to have accepted (impliedly
accepted) hence, ownership passes to him.
(b) Even before the lapse of the period, he may
be considered to have accepted if he did an
act wherein he would be considered to have
adopted the transaction then ownership
passed to him.
Example: Even if he has 10 days within
which to decide but on the 2 nd day, he sold
the car to another. Obviously, he is deemed
to have accepted the thing because he did
an act which is inconsistent with the
ownership of the seller like he donated or
destroyed the thing.
(c) If there is no period agreed upon, the law
says if he did not signify his acceptance he
will be considered to have accepted after the
lapse of a reasonable time. Reasonable time
will depend on the circumstances of the
sale, purpose of the sale, nature of the thing
sold. Example: Perishable goods.
Sale or Return
Q: Ownership passes upon delivery?
A: Yes. However, the buyer is given the right to
revest the title back to the seller normally within a
certain period. Example: Clauses in subscription
magazine which says that you can return within 30
days without payment.
BE: A car was sold for P150,000. P75,000 paid
upon the execution of DOS. The balance
payable on a monthly basis. P75,000 was paid.
The car was delivered to the buyer. However,
before he could pay the balance, the car was
destroyed due to a fortuitous event or was
burned xxx Can he still be compelled to pay the
balance?
SA: Yes. Upon the delivery of the car to the buyer,
there being no retention of ownership by the seller.
(Note: Wala sa facts na na-retain ng seller and
ownership). Therefore, ownership passed to the
buyer. Under the principle of res perit domino
Article 1504 the owner bears the loss and hence
it can be compelled to pay the price.
G.R.: Res perit domino 1504.
Note: Determination of when ownership passed is
important because if at the time of the loss, the
buyer is not yet the owner, as a rule, the buyer will
not bear the loss like in sale on approval and he
has 10 days within which to decide and the thing
Page 13
November 2008
was lost through a fortuitous event within the 10-
day period without fault on his part, the seller will
bear the loss.
Exceptions:
1. Lawyers Cooperative vs. Tabora
Facts: This pertains to a sale of American
Jurisprudence to Atty. Tabora. It was a sale on
installment basis. Upon delivery or on the day the
books were delivered to the office of Atty. Tabora,
the entire block where Atty. Taboras office was
located (in Naga City) was burned. The office
including the books was burned. Atty. Tabora
refused to pay the balance. Lawyers Cooperative
filed a case. Two defenses were raised by Atty.
Tabora: (1) Res perit domino there was a
stipulation in the contract that Lawyers
Cooperative will retain ownership over the books
until full payment. When the books were lost, no
full payment so Atty. Tabora was not yet the owner.
Hence, Lawyers Cooperative should bear the loss.
Q: Is this argument correct?
A: SC Said no. Although there was a stipulation
that Lawyers Cooperative retains ownership over
the books until full payment, there was another
stipulation in the contract which states that the risk
of loss shall pertain to the buyer from the time the
books are delivered whatever may be the cause of
the loss.
So with that stipulation, that is one of the
exceptions.
2. Title was reserved by the seller only to
secure the payment of the price by the buyer
Q: But even assuming that there was such no
stipulation under the contract, would Atty.
Tabora have to bear the loss?
A: Yes because it would fall into the other
exceptions under 1504 that when the title was
reserved by the seller only to secure the payment
of the price by the buyer, then by law, risk of loss
will already be with the buyer. This title of the seller
is known as Security Title and therefore by law
xxx the buyer will bear the loss.
3. Delay in the Delivery
When there is delay in the delivery due to
the fault of one of the parties, whoever was at fault
will bear the loss. Note that either buyer or seller
may be at fault.
Example 1: The buyer and the seller may have
agreed that the goods are to be obtained by the
buyer at the warehouse of the seller on a specific
date. On the date agreed upon, the seller
demanded the buyer to get the goods. Despite
such, the buyer failed to get the goods. On the next
day, the warehouse was destroyed due to
fortuitous event.
Q: Who is the owner at that time?
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
A: The seller but there was delay on the part of the
buyer hence under 1504 it is the buyer who will
bear the loss.
Example 2: The seller himself maybe the one at
fault. Thus, he is in delay in delivering the goods to
the buyer.
Q: Why would this be an exception to the res
perit domino rule?
A: Ang premise dito, the ownership has already
passed to the buyer but the goods are still with the
seller. Can this happen? Yes, because of
constructive delivery. If there was constructive
delivery, ownership passes to the buyer but
physical possession is still with the seller. They
may have agreed this time that the seller will be the
one to deliver the goods to the buyer at a certain
date. When the date arrived, despite demand from
the buyer, there was no delivery on the part of the
seller. Even if the goods are destroyed the next day
due to fortuitous event, take note ang owner ay
ang buyer na but who will bear the loss? The
seller because he was in delay in delivering the
goods.
DOUBLE SALE (ARTICLE 1544)
BE: F sold a registered parcel of land to R who
did not register the sale. Thereafter, F sold the
very same parcel of land to C who registered
and obtained a new TCT in his name. Who
would have a better right?
SA: Atty. Uribe: I fully agree with the UP Law
Centers answer. It depends on whether or not C
registered the sale in good faith. Registration is
only one of the requirements good faith is equally
an important requirement.
Note: In 1544 (double sale), as to which rule
applies will depend on the thing sold if movable or
immovable.
Q: If the thing is sold twice, who would have
the better right?
A: If movable, the buyer who first took possession
in good faith will have the better right. If
immovable, the buyer, who first registered in good
faith, will have the better right. If there was no
registration, it will be the first who took possession
in good faith. If no possession in good faith, the
buyer who has the oldest title in good faith.
Even the 1st buyer is required to be in good faith.
Obviously, the first buyer would have the oldest
title. Yung good faith ditto obviously would not
pertain to absence of knowledge of the 2 nd sale
kasi syempre 1st buyer sya. He is nonetheless
required to have bought the thing in good faith.
Good faith means that he had no knowledge of the
defect of the title of the seller.
Page 14
November 2008
Warning: Please be careful when you recite you
register the sale not the land.
BE: If a thing is sold to 2 or more persons,
what would be the effect of:
(a) The first buyer who registered the sale
with knowledge of the 2nd sale.
(b) The second buyer who first registered
the sale with knowledge of the prior sale.
Who would have a better right?
SA: (a) In the first scenario the first buyer who
registered the sale with knowledge of the second
sale would that make him a registrant in bad
faith? No. Yung knowledge would pertain to the
knowledge of the prior sale in order for him to be a
bad faith registrant. Eh una naman syang buyer eh
so even if he registered, it would not make him a
bad faith registrant.
(b) In the second scenario the buyer there is
in bad faith. He has knowledge of the prior sale.
Hence, he has no right.
Q: If a person bought a thing without
knowledge of the prior sale, does that mean he
is a registrant in good faith?
A: Not necessarily because from the sale he may
have acquired knowledge prior to the registration.
What is required by law is not being a buyer in
good faith but a registrant in good faith. Pwedeng
at the time of the sale xxx the buyer had no
knowledge na nagkabentahan na pala nung una
but after 2 months nung magpaparegister na, the
buyer had the knowledge of the prior sale and
therefore he will be a registrant in bad faith.
Bautista vs. Sioson
Facts: The owner A sold a registered land to B who
did not register and neither did B take physical
possession because after the sale they executed a
lease agreement in which B was now the lessor. A
continued to be in possession of the land. After the
sale and the contract of lease, A sold the land to C,
this time C took physical possession.
Can he do that? Yes. Kasi lessee sya eh, hence,
he can transfer possession to the 2nd buyer.
Who between B and C would have a better
right? (C did not also register the sale)
SC Said that B would have a better right because
when he executed a lease agreement with A, he is
in contemplation of law in possession which is legal
possession over the thing and thus making him a
possessor in good faith. Kay C, physical
possession nga pero pangalawang possession
lang. Yung legal possession was with B.
Note: This decision was criticized because some
authors said that it should be actual possession but
the SC said that legal possession would suffice.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan

Carumba vs. CA
Facts: Sale of land to B who took physical
possession but did not register. He is the first
buyer. However, the seller (A) is a judgment debtor
in one case to a certain creditor named C. The land
became the subject of an execution sale. The
buyer became C who registered the sale.
Q: Who would have a better right between C
and B (C had no knowledge of the sale)?
A: SC Said B because this land was not
registered under the Torrens System. 1544 would
not apply to unregistered lands.
Q: How would you know that the land is
registered under the Torrens System?
A: Pag may OCT or TCT na. Pero kung ibang
documents lang like tax declaration, it is not
considered registered.
Q: But C registered the sale, does it mean that
it is registered under the Torrens System?
A: No because there are also systems of
registration of sale of land in which the lands are
still considered as unregistered lands. Sa ibang
libro. Hindi libro under the Torrens System.
Q: If 1544 will not apply, who has the better
right?
A: B because there was delivery to him which was
actual delivery and hence under the general rules
on delivery, ownership passes to the buyer and
when ownership have passed to the buyer, when
the property was sold in an execution sale, ano
makukuha ng buyer sa execution sale? Wala.
He merely steps into the shoes of the judgment
debtor at the time of the sale then he did not
acquire ownership by virtue of that sale.
OBLIGATION TO DELIVER THE OBJECT OF
THE SALE
Determine the subject matter if it is a thing
or a right because there are different modes of
delivery as to thing and as to right.
Things
Kinds of delivery of things as a consequence of
sale known as tradition under the law:
1. Actual Delivery / Material Delivery / Physical
Delivery / Real Delivery the thing is in the
possession and control of the vendee. Take note
control. Take note to the vendee.
Q: What if the thing was delivered to a 3 rd
person?
A: Jurisprudence SC said yes, there maybe
actual delivery if the third person has authority to
receive from the vendee. Thus, making him an
agent of the vendee and that would still be actual
Page 15
November 2008
delivery.
Note: Philippine law does not only require actual
delivery constructive delivery may result in
transfer of ownership.
2. Constructive by the execution of a public
instrument if the contrary intention does not appear
on the document. By the mere execution of the
public instrument that is equivalent to delivery.
Hence, ownership passes to the buyer.
Kuenzle & Streiff vs. Macke & Chandler
Facts: The original owner here Stanley and
Griffindor (parang Harry Potter ) and the property
involved here are fixtures of a saloon. Macke and
Chandler are judgment creditor of Stanley and
Griffindor. Because of a judgment in favor of Macke
and Chandler, the sheriff levied upon these
properties which was still in the possession of
Stanley and Griffindor. The properties under
execution were questioned by Kuenzle and Streiff.
Kuenzle and Streiff claimed that these things were
sold to them prior to the levy. If they claimed that
the properties were sold to them, the properties
should be in their possession. Take note that
Stanley and Griffindor were still in possession of
the goods physically. Hence, there was no actual
delivery.
Held: In order that ownership would pass, it has to
be in a public instrument if that would be by
constructive delivery.
Note: The execution of a public instrument may be
equivalent to actual delivery if the contrary intention
does not appear on the DOS. Kasi pwedeng
notarized but it is clear in the contract that
ownership will not pass until full payment of the
price then that is not equivalent to delivery. The
intention is clear.
Kinds of Constructive Delivery
1. Delivery of the Keys of the place where the
goods are located like a warehouse.
Prof. De Leon: this also called as symbolic delivery.
2. By Mere Consent or Agreement of the Parties
if at the time of the sale, possession to the goods
cannot be transferred to the buyer. There must be
a reason why it cannot be transferred at the time of
the sale. This is also known as tradition longa
manu.
Example 1: The thing was the subject matter of a
lease with a 3rd person until the expiration of the
lease, the thing cannot be delivered.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
Example 2: The thing was the subject matter of
commodatum. As a rule, period of commodatum
has to be respected.
3. Brevi Manu this is a kind of constructive
delivery because the buyer was already in
possession of the thing sold at the time of the
perfection of the sale so he will continue to be in
possession after the sale, no longer as a lessee
but this time as the owner. So dati lessee lang sya
that is why he was in possession or maybe
depositary lang sya or maybe he was the agent at
the time prior to the sale.
4. Constitutum Possessorium the seller will
continue to be in the possession of the thing after
the sale but no longer as an owner but in another
capacity like lessee.
Bautista vs. Sioson
Because a lease agreement was entered into by
the buyer and seller after the sale then the buyer
became the lessor and the seller became lessee.
Therefore, the lessee would continue with the
possession no longer as an owner.
Q: What if pursuant to their agreement the
seller delivered the goods to a common carrier.
Upon delivery of the goods to a common
carrier, would that result in transfer of
ownership immediately? (This is important
because in case the goods were destroyed
even due to a fortuitous event while in transit,
who will bear the loss?)
A: If delivery to a common carrier is delivery to the
buyer, then ownership passes to the buyer upon
delivery to the common carrier. That is the general
rule.
Exceptions:
(1) If stipulated in the DOS that despite delivery
to common carrier ownership will not pass to
the buyer because ownership will pass upon
full payment.
(2) Even if DOS does not provide for such
stipulation, the seller may have obtained a
bill of lading which provides that the goods
are deliverable to the seller himself or the
agent of the seller.
Rights
Kinds of Delivery of Incorporeal Property /
Quasi Tradition:
1. Execution of Public Instrument
2. Placing the Title of Ownership in the Possession
of Vendee a right would normally be covered by
a certificate.
Example: delivery of the certificate of shares of
stocks.
Page 16
November 2008
3. Use by the Vendee of His Rights with the
Vendors Consent
Example: Sale of shares of stocks the vendee
may not always have the right to exercise his rights
under the shares of stocks. Concretely, if there is a
stockholders meeting, the books of the corporation
will be closed for 30 days before the meeting.
Thus, if the sale occurred when the books are
already closed, no one will be recognized except
those registered owners. So if you are the buyer of
those stocks, you can only use your right with the
consent of the vendor.
RULES ON SALE AS TO QUANTITY / QUALITY
OF THE THING SOLD
Q: In a sale involving 1,000 pairs of shoes with
a specific design as agreed upon. The seller
delivered 1,200 pairs of shoes instead of only
1,000. Can the buyer reject everything?
A: No. He has the right to reject only the excess.
Reject the 200 but he can be compelled to accept
the 1,000.
Q: What if instead of 1,000, 800 was only
delivered?
A: The buyer cannot be compelled to receive 800
because partial performance is non-performance.
You cannot compel the creditor to accept partial
fulfillment as a rule because (1) it can be a subject
of a stipulation that there can be partial delivery.
Other Exceptions:
(2) When obligation pertains to obligation which
is partly liquidated and partly unliquidated. The
debtor can compel the creditor to accept the
portion which was already liquidated.
(3) When the obligation is subject to different
terms and conditions.
Q: The shoes per pair is P1,000. The seller only
delivered 800 pairs out of 1,000 pairs. The
buyer accepted. It turned out that the seller can
no longer deliver the balance (200 pairs). How
much can the buyer be compelled to pay? 800
x P1,000?
A: Not necessarily. You have to make a distinction
as to whether the buyer was aware that the seller
could no longer deliver the balance or when he
accepted, he was not aware. If he was aware that
the seller could no longer deliver the balance then
he can be compelled to pay at the contract rate so
800 x P1,000 = P800,000. If he had no knowledge,
he can be compelled to pay only the fair value. Fair
value siguro non P700 each instead of P1,000.
Q: The obligation to deliver 1,000 cavans of
Milagrosa rice. Instead of delivering 1,000
cavans of Milagrosa, the seller delivered 1,100
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
cavans of both Milagrosa and Burmese rice.
May the buyer reject everything?
A: Yes, if the goods are indivisible. Meaning each
sack of rice, Milagrosa and Burmese rice were
mixed. However, if it is clear that per sack it is
Milagrosa rice and the 100 sacks, it is clear that
those are Burmese rice that would not be
considered as indivisible. He can be compelled to
accept 1,000 sacks Milagrosa and he has the right
to reject 100 sacks Burmese rice.
SALE OF REALTY
Q: Sale of a parcel of land. Price agreed upon
is P1M. More or less 100 sqm. The actual area
delivered by the seller was only 95 sqm. What
are the remedies of the buyer?
A: (1) Specific performance would be a remedy if
the seller is still in the position to deliver the
balance. Siguro yung katabing lupa sa seller din,
hence, he can afford to give additional 5 sqm.
(2) Q: If specific performance is not possible, is
proportional reduction a remedy?
A: It depends on whether the sale is considered as
a sale with a statement of an area of a rate of a
certain measure or if it is a lump sum sale.
(a) If lump sum even if the area delivered is
less than the area stated in the DOS, there
is no right to demand for the proportional
reduction of the price. Q: Pero pag
sumobra 120 sqm na deliver, can the
seller demand for the increase of the
price? A: If lump sum sale, no.
(b) If the sale was based at a rate of a certain
price per unit of measure like it was so clear
in the contract that the land is being sold at
P10,000 per sqm so P10,000 per sqm x 100
= P1M, the remedy of proportional reduction
of the price or accion quanti minoris is
applicable.
(3) Q: Under the facts, 95 sqm was delivered,
would rescission be a remedy?
A: As a rule no because rescission would only be
a remedy if the area lacking is more than 10% of
that area agreed upon. So kung 100 sqm, dapat 11
sqm or 15 sqm ang kulang, so out of 100 kung 85
lang ang na-deliver, then rescission is a matter of
right.
Q: But kung 95 lang ang na-deliver meaning
the area lacking is less than 10%, may
rescission be a remedy?
A: Yes, by way of exception
(a) If the buyer can prove that he would not
have bought the thing or land hand he
known that is less than 100 sqm. It is a
matter of proof.
Page 17
November 2008
This is consistent with a characteristic of rescission
under 1191, that in order for rescission to prosper
the breach must be a fundamental breach. Kung
kulang lang ng 5sqm / 10 sqm at malaki yung area,
there can be no rescission as a matter of right.
(b) The other one is even if the entire area was
delivered as stated, proportional reduction /
rescission may be a remedy if a part of the
land delivered is of inferior quality than that
stipulated by the parties.
Example: Sale of rice field, it turned out
about 20% of the land is swamp, so hindi
pwede taniman. Hence, proportional
reduction is possible if he still would want
the land or rescission would be a remedy
because the area of inferior quality is more
than 10% of the total land area unless he
can prove that he would not have bought the
land had he known a portion of the land is of
inferior quality.
PLACE OF DELIVERY
Read 1524, 1525 and 1198
The seller delivered the goods to the place of
business of the buyer. If the buyer refuses to
receive the goods, the buyer will be considered in
delay and therefore will be liable to the seller
because of unjust refusal.
Q: May the buyer be considered in delay for his
refusal to accept if there is no place stipulated
in the contract?
A: It depends on the kind of thing. Determine if it is
determinate or generic. If the thing is determinate,
the law provides that it will be the place where the
thing is located at the time of the perfection of the
contract.
Q: What if the object of the sale is a generic
thing?
A: Sellers place of business or residence.
Note: If there is no stipulation when to be
delivered, the seller cannot be compelled to deliver.
Q: What if at the time of the perfection of sale,
though the thing is determinate, it was on
board a ship while in transit. Where will be the
place of delivery?
A: Depending on the shipping arrangement agreed
upon by the parties.
F.O.B. Free on Board
C.I.F. Cost, Insurance, Freight
F.O.B. and C.I.F are rules of presumption which
would have to give way to the real intention of the
parties. So after all, the F.O.B. or C.I.F.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
arrangements do not really determine the place of
delivery, they only make rules of presumption.
So in a C.I.F. arrangement, it is only presumed that
the place of delivery is the port of origin.
In a F.O.B. destination, it is only presumed that the
point of destination is the place of delivery.
Q: What really determines the place of
delivery?
A: SC said this indication as to the intention of the
parties as to the place of delivery is the manner
and place of payment. If there is an agreement as
to where and how the price is to be paid that would
be the place considered for purposes of delivery
and therefore for transfer of ownership.
Concretely, in one case which was C.I.F.
arrangement it was stipulated that the seller can
demand the payment of the price upon the arrival
of the goods at the port of destination.
(Supposedly, in C.I.F. arrangement, the place of
delivery is the port of origin). SC said the place of
delivery because of the stipulation is the port of
destination. It is where the payment is to be made.
Q: What was the purpose of fixing the delivery
arrangement as a C.I.F. but the place of delivery
is the port of destination?
A: SC said the C.I.F. arrangement may have been
agreed upon only to fix the price. Example: They
fixed the price for P2M that would include the
freight, insurance or cost but still the place of
delivery is the port of destination.
In another case, F.O.B. destination so
based on the presumption the place of delivery will
be the port of destination xxx the seller would have
to bear all the expenses for the delivery of the
goods up to the port of destination. However, it was
stipulated in the contract that the seller may
demand for the payment of the price by mere
presentation of the bill of lading (BOL).
Q: Where do you get the BOL?
A: At the port of origin. Hence, even in the port of
origin he can already present the BOL to the buyer
and hence compel the buyer to pay the goods.
Again SC ruled in that stipulation, the place of
delivery is the port of origin. And the purpose of the
F.O.B. arrangement, it was only agreed upon in
order to fix the price meaning that the seller will still
have to bear the expenses for the transportation of
the goods up to the destination although the buyer
can already be compelled to pay the price even at
the port of origin.
Page 18
November 2008
So consider always the manner and place
of payment which is determinative as to the place
of delivery.
Read 1582
Obligations which cannot be Waived:
1. Obligation to transfer
2. Obligation to deliver
Obligation which can be Waived:
1. Obligation to warrant the thing
Kinds of Warranties under the Law:
1. Express
2. Implied
1. Express any affirmation of fact or any promise
by the seller relating to the thing, the natural
tendency is to induce to purchase the thing.
Requisites:
(a) There is an affirmation of fact
(b) The fact must pertain to the thing either to
the quality, character or title of the thing
Any other matter may not be considered as an
express warranty.
The use of the words / terminologies is not
conclusive as to whether or not there is an express
warranty.
Example: I guaranty / warranty you that you will be
happy if you buy this car at P100,000 this does
not result in an express warranty
Again, if the affirmation of fact pertains to the
quality of the thing, it is an express warranty.
Example: These 10 sacks of fertilizer would result
in 200 cavans of rice.
The statement of the sellers opinion is not as a
rule considered an express warranty.
Example: This is the best pia cloth it may turn
out that there are better pia cloth.
As long as the seller is not an expert on that field,
that would be treated merely as an opinion and
there can be no liability for breach of an express
warranty.
BE: A sold a land to B for P1M in Antipolo.
As agreed upon P100,000 will be paid upon the
signing of the DOS. The balance will be paid
within 30 days from the time the occupants
(squatters) of the land are evicted. It was so
stipulated that if within 6 months, the squatters
have not yet been evicted, the seller should
return the P100,000. Another stipulation states
within the 6-month period, the value of the
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
land doubled. Despite the filing of an eviction
suit by the seller and the lapse of the 6-month
period, the squatters were still occupying the
land. The seller offers to return the P100,000 to
the buyer. The buyer refused to accept the
P100,000 and told the seller never mind even
if the squatters are still there. I will still buy the
land. So the buyer offered to pay the balance
P900,000 and demanded that a DOS be
executed by the seller. The seller refused to
accept the P900,000. What he did is to file an
action to rescind the contract. Would the action
prosper?
SA: 2 answers:
(1) If the answer is based on rescission, the
action will not prosper because rescission may only
be invoked by the aggrieved party. The seller is not
an aggrieved party.
(2) However, under 1645 if the obligation is
subject to the happening of a certain condition,
Atty. Uribe: Actually, here the performance of the
obligation is subject to the happening of the
condition.
If the condition did not happen, the buyer would
have 3 options:
(a) Not to proceed with the contract, which is
rescission.
(b) He may waive the condition (eviction of the
squatters) and proceed with the sale this was
the remedy chosen by the buyer in this case.
(c) He can treat the non-happening of the condition
as a breach of warranty and claim damages.
Obviously, the buyer chose option (b) and therefore
the seller cannot rescind the contract.
2. Implied
Prof. De Leon: because of this implied warranty, it
cannot be said that Philippine law does not adopt
caveat emptor buyer beware. (Fayes Caveat :
Please check the book of Prof. De Leon regarding
this statement. Thanks )
Even if there is no stipulation as to these
warranties, the law itself would provide for these
warranties and hence if there are hidden defects
he would have remedies under the law or even if
he was deprived of the thing he bought he would
have a remedy against the seller. Hence, it is not
correct to say that Philippine law has adopted
caveat emptor. But there are certain instances
when there would be no such implied warranty
against hidden defects. There may be warranty as
to title or against eviction but there is no warranty
against hidden defects under certain
circumstances.
Warranty Against Eviction / Title
Page 19
November 2008
Q: If the seller was able to transfer ownership
to the buyer may the seller nonetheless be held
liable for breach of warranty against eviction?
A: Yes. These are 2 different obligations: the
obligation to transfer ownership and the obligation
to warrant the thing.
Example: This warranty against eviction would
include the warranty that the buyer from the
moment of the sale have and enjoy the legal and
peaceful possession over the thing sold.
He may be deprived of the thing by a 3 rd person
even if he would not lose ownership.
Q: When would this happen?
A: Maybe the 3rd person has a better right to the
possession of the thing. Maybe there was a lease
agreement entered into which has to be respected
by the buyer.
Note: A contract of lease may last for 99 years.
Q: If there is a claim or a 3 rd person claims a
right over the thing bought, does it mean that
the seller will already be liable for breach of
warranty against eviction?
A: No because there are requisites which must be
complied with.
Requisites:
1. There has to be final judgment depriving him of
such thing either wholly or partially. In other words,
a case was filed by a 3 rd person against the buyer
which resulted in a favorable decision as to the
plaintiff resulting in the deprivation of the property
by the buyer.
Note: For the seller to be liable, he must have
been notified of this case against the buyer. In fact,
he should be impleaded as a co-defendant in the
action because:
(a) The seller should have an opportunity to
defend his title.
(b) The seller would normally have the
knowledge of the defenses as to the
property which is sold. If there is one
person who can mediate the claim of the
plaintiff between the seller and the buyer
normally it would be the seller.
Q: If there is a decision in favor of the plaintiff
(3rd person) against the buyer in the trial court,
is it required that the buyer should appeal in
order for him to be able to hold the seller
liable?
A: No because the party who should appeal if he is
interested should be the seller. If he does not want
to be held liable, he should appeal the case up to
the SC. If the decision becomes final, he may be
held liable for breach of warranty.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan

2. Deprivation must be either:
(2.1) Based on a 3 rd persons prior right over
the thing prior to the sale or
(2.2) Based on an act after the sale but
imputable to the vendor.
Concretely, the reason for the deprivation maybe
because of non payment of real property taxes
by the seller and not the buyer.
Example: If land was sold in an execution sale
because of the failure of the seller to pay real
property taxes this can be the basis of liability
for breach of warranty.
Based on an Act after the Sale but Imputable to
the Vendor
Example: There was a first sale to A and then a 2 nd
sale to B. Under the law on double sale, B have a
better right if this is a sale involving immovable, if
he was the first one who registered the sale in
good faith.
The first buyer even if he was in possession maybe
evicted from such property by the 2 nd buyer
because the 2nd buyer would have a better right.
This is based on an act of the vendor after the sale
or after the 1st sale hence, there can be a liability
for breach of warranty against eviction.
Q: If during the sale a 3rd person was already
occupying the land by way of adverse
possession so in an open, continuous xxx for 7
years under the color of title. But after the sale,
the buyer did nothing. And hence, the
occupants claiming a right or ownership was
able to complete the prescriptive period of a
minimum of 10 years. Thus, if a 3 rd person
would be able to deprive this buyer of
ownership over the thing because of
acquisitive prescription, can the buyer hold the
vendor liable for breach of warranty?
A: No because it was his fault that the 3 rd person
was able to complete the period for acquisitive
prescription. Had he done something to interrupt
the running of the prescriptive period then he
would not have been deprived of the ownership of
the thing.
3. There should be no valid waiver
4. The action to hold the vendor liable should be
filed within the period prescribed by law.
Q: If indeed the seller can be held liable for
breach of warranty against eviction, what will
be the extent of liability of the vendor?
A: The vendor can be held liable for the value of
the thing at the time of the eviction, income or
Page 20
November 2008
fruits, cost of suit, expenses of the contract and
damages and interest.
Damages may only be claimed if the seller is a
seller in bad faith. As long as he sold the thing in
good faith, he cannot be held liable for damages
regardless of whether there was a waiver or not. In
fact, if there is a waiver but the vendor is in bad
faith, the waiver is void and hence he can be held
liable for everything under the law. If there was no
waiver and the vendor is in bad faith, again he will
not only be liable for expenses xxx but also for
damages, cost of suit xxx everything!
Q: If the seller was aware of the defect of his
title at the time of the sale, hence, he is a seller
in bad faith?
A: Not necessarily. He may be aware but he
informed the buyer of such defect in the title and
hence he cannot be considered bad faith vendor.
Even if he did not inform the buyer but if the buyer
was already aware of the defect.
Q: Why would a buyer buy a thing if the title of
the seller has defect?
A: Maybe because the buyer needs the thing for
his business.
If I am the vendor and I know there is a defect in
my title, I will ask the vendee to execute a waiver.
Q: Thus, if there is such a waiver and assuming
the vendor acted in good faith, can the vendor
be held liable for breach of warranty?
A: It depends on the kind of waiver.
(a) If waiver consiente the buyer executed a
waiver without knowledge of the defect in
the title of the seller. Also, the vendor does
not know of the defect. The only liability of
the vendor for breach of warranty against
eviction is the value of the thing at the time
of eviction.
(b) If the waiver is intentionada when the
vendee executed the waiver with
knowledge in the defect of the title of the
seller, hence, he knew of the possibility of
being evicted and nonetheless bought the
thing the vendee cannot hold the vendor
liable.
WARRANTY AGAINST HIDDEN DEFECTS
Requisites:
1. The defect must exist at the time of the sale. If
the defect started after the sale there can be no
such liability.
2. The defect must be hidden. If the defect is
patent and the buyer nonetheless bought the thing
then he can no longer hold the seller liable.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
If the seller is not aware of the hidden defects, he
can be held liable. If he was aware, his liability will
be greater because that makes him a bad faith
seller.
Q: Even if there is such a hidden defect, is it
possible that the vendee cannot hold the
vendor liable despite the fact that there was
hidden defect even if he was not informed
because maybe the seller was not aware?
A: Yes, he may not be able to hold the seller liable
if he is an expert on the thing. He is expected to
know the defect.
3. The defect must result in the thing being unfit for
the purpose of the buyer or at least it diminish the
fitness of the thing such that the buyer would not
have bought it at the price had he known of such
defect.
Q: If the thing which has a hidden defect was
lost or destroyed, can the vendee hold the
vendor liable for this breach of warranty? Does
it matter if the loss was due to a fortuitous
event or maybe the loss was due to the fault of
the buyer himself, nonetheless, can he hold the
vendor liable?
A: Yes. The vendee can hold the vendor liable for
breach of warranty against hidden defects even if
the thing was lost due to fortuitous event or due to
the fault of the vendee himself because of the
hidden defects. But of course, if the cause of the
loss was the defect itself, the liability is greater than
if the cause of the loss was a fortuitous event or
fault of the buyer.
If there would be a problem here as to the extent of
the liability of the vendor, he should first consider
the cause of the loss, maybe it was lost due to the
defect itself or lost through fortuitous event or lost
through the fault of the vendee. After that, he
should determine whether the vendor was aware of
the defects or he was not aware. Again, if he was
aware, damages may be recovered. If he was not
aware, he may not be held liable for damages
unless he can only be held liable for interest.
If the defect was the cause of the loss, the vendor
would be liable for the return of the price, not only
the price less value but also to refund the
expenses and damages because the vendor was
aware of the defects.
If the vendor was not aware of the defects, he
cannot be held liable for damages but he would
only be held liable for the price.
Q: The price may be higher or lower than the
value of the thing?
Page 21
November 2008
A: Yes. It does not matter. It may be higher or
lower. The thing may depreciate or appreciate or
maybe the thing was sold at a price less than the
value and therefore at the time of the loss, the
value is still greater than the price but he is only
obliged to return the price.
If the cause of the loss of the thing was a fortuitous
event, he can only be held liable for the price less
value.
Example: If price is P100,000 and the value at the
time of the loss is P80,000. He can be held liable
for P20,000 (P100,000 - 80,000 = P20,000)
Q: How would defect be proven if the thing was
lost or destroyed due to fortuitous event?
A: It is a matter of proof. The proof may have been
obtained already prior to loss. Pwedeng pina
examine na nya sa expert so meron na syang
evidence of the defects prior to the loss.
If the cause of the loss was fortuitous event or
fault of the vendee and the buyer was not
aware of the defects, is it possible that the
vendor may not be liable even for a single
centavo?
A: Yes, in this scenario because he only had the
obligation to return the price less value at the time
of the loss. If it happens that the value is greater
than the price, the vendor has no liability even
there is hidden defect.
ANY CHARGE OR NON APPARENT
ENCUMBRANCE NOT DECLARED OR KNOWN
TO THE BUYER
Q: Would there be an encumbrance over an
immovable which is a form of easement or
servitude?
A: An example of this is a road right of way.
Q: If the buyer bought the land which turned
out to have a road right of way in favor of a 3 rd
person, can he claim breach of warranty
against any charge or non apparent
encumbrance?
A: Of course there are requisites:
(1) The encumbrance or easement or burden or
the road right of way has to be non
apparent.
Q: May a road be non-apparent?
A: Yes, like in rural areas. In rural areas, yung
road right of way mga putik lang yan and
normally the road will only be used by the person
having this right during harvest period. Harvest
period is once every 6 or 3 months. In the
meantime, during the 3 or 6 month period, puro
cogon yan and hence the road maybe non
apparent.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan

If it is apparent, no liability.
Q: If the encumbrance is non apparent does
that necessarily mean that the vendor can be
held liable?
A: No because the encumbrance may be known to
the buyer. This liability would arise only if the
encumbrance is not known to the buyer.
Q: If he was not aware of this encumbrance
and the encumbrance is non apparent,
vendor will now be liable?
A: Not yet because the encumbrance may be
registered or annotated at the back of the title
negligence of the vendee so he cannot hold the
vendor liable.
Q: If there is an encumbrance, what are the
remedies of the buyer?
A: (a) He can seek for the reduction of the price.
Q: Can he rescind the contract?
A: (b) Yes but the law requires that the action for
rescission must be filed within 1 year from the date
of the contract. If after 1 year, no more rescission.
(c) If he became aware more than a year, he
may file an action for damages, But the law
requires that the action for damages has to be filed
within 1 year also but from the time of the
discovery of encumbrance. If he filed it for
example, after 2 years from discovery no
recovery of damages.
WARRANTY OF QUALITY
Prof. Deleon, Prof. Vitug, Prof. Baviera: there is
another warranty which is WARRANTY OF
QUALITY which includes:
(1) Warranty of Fitness
(2) Warranty of Merchantability
To some authors the warranty of quality is
considered under the warranty of hidden defects.
Atty. Uribe: I cannot agree that the warranty of
quality is in the warranty of hidden defects. I agree
with Prof. De Leon, Prof. Vitug and Prof, Baviera
that there is a warranty of quality.
WARRANTY OF FITNESS FOR A PARTICULAR
PURPOSE
The thing bought may not actually have any defect
and for 1 million buyers it would be fit for their
purpose. However, it may not be fit for the purpose
of 1 buyer and if all the requisites for this warranty
are present, then he may hold the seller liable for
breach of warranty of fitness for a particular
purpose although there is no hidden defect but it is
not fit for the purpose of the buyer.
Page 22
November 2008
In order for the seller may be held liable:
1. The buyer has to inform the seller of the
particular purpose for which the thing is to
be use and
2. The seller manifested that the thing would
be fit for the purpose and the buyer relied
on such representation of the seller.
Note: If the thing is sold under the trade name
there can be no warranty of fitness for a particular
purpose.
WARRANTY OF MERCHANTABILITY
It pertains to the fact that it is fit for the general
purpose. If the thing was sold by description or by
sample, it is considered that there is such a thing
as warranty of merchantability.
SALE OF ANIMALS WITH DEFECTS RULES:
1. The defect is a redhibitory defect it is such kind
of defect that even by examination of expert it
cannot be discovered.
Q: If one of the animals has redhibitory defect,
can the buyer rescind the entire contract
pertaining to all the animals?
A: G.R.: No. He can only rescind the contract
pertaining to the animal with redhibitory defect. He
cannot rescind the entire contract pertaining to all
animals.
Exception: If he can prove that he would not have
bought the others had he known the defect of one
then he can rescind the entire contract.
Q: Who has the burden of proof that he would
not have bought the others had he known of
the defect of one?
A: Normally, it would be the buyer. But the law
under certain circumstances would provide for this
presumption that it is presumed that he would have
bought the others had he known of the defect of
one.
Examples: He bought the animals in teams or in
pairs then the presumption arises.
- Love birds (Ang mga love birds, kapag
namatay yung isa later on mamatay din
yung isa. Minsan nga mgsuicide pa sya
pag mag isa na lang sya. Iuuntog nya ulo
nya sa cage nya. )
- Sledge dogs (Sa mga countries na may
nyebe snow may mga sledge dogs.
Kailangan pag binili ang mga dogs, team
sila. May leader pa nga sila eh at
sumusunod sila sa leader nila )
Q: If the animal which was bought, died of a
disease within 10 days, the disease existing at
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
the time of the sale, may he still have a remedy
under the law?
A: Yes, if the disease turned out to be a contagious
disease. In fact, under the law, the sale is void. If
he has already paid, he can recover what he paid
because the sale is void.
If the disease us not contagious, under the law he
would only have a remedy if the animal died within
3 days.
Instances whether there would be no warranty
against hidden defects and therefore caveat
emptor may be invoked:
1. Sale which is an as is where is sale which
means as it is found, where it is found xxx bahala
ka sa buhay mo if you want to buy the thing and
you cannot later on claim that there were hidden
defects. (Faye: pls. research the complete meaning
of as is where is sale. Atty. Uribe will ask the
meaning. )
Q: Can there be a claim of breach of warranty
against eviction?
A: Yes because the seller would have or would still
warrant the title over the goods.
2. Sale of 2nd hand items
3. Sale of animals in fairs
4. Sale in public auction
Note: There would still be warranty against
eviction.
Note: Rules on warranty also apply to judicial sale.
Q: In sale by authority of law or in execution
sale, can there be breach of warranty against
eviction?
A: Yes. The judgment debtor and not the sheriff
shall be liable.
The law would specifically exempt certain persons
from liability for breach of warranty like sheriff,
auctioneer, mortgagee, pledge and other persons
who sell by virtues of an authority of law like notary
public because they are not really selling for
themselves, they are selling on behalf of another
person.
RIGHTS AND OBLIGATIONS OF THE VENDEE
1. Obligation to accept the thing delivered.
2. Obligation to pay the price (if warranted,
with interest)
1. Obligation to accept the thing delivered
Q: If the buyer received the goods delivered,
does it mean that he already accepted?
Page 23
November 2008
A: No because receiving is preliminary to
accepting. In fact, this is consistent to the right
provided by law to the buyer which is the right of
inspection or the right of examination. Thereafter,
he may reject the goods if defective.
Q: When will he be considered to have
accepted?
A: (1) When he intimated his acceptance to
the seller.
(2) Even if he did not intimate his
acceptance or rejection, he will be deemed to have
accepted if he did an act which is inconsistent with
the ownership of the seller. Again, if he pledged the
thing to another that is an act of ownership or if he
sold or donated the thing.
(3) If he did not do anything by mere lapse
of a reasonable time, he will be deemed to have
accepted the thing. What is reasonable time would
depend on the circumstances surrounding the sale.
Q: What if after an examination or before the
examination, the buyer refused to accept and
informed the seller but the goods are already in
his place? What if the goods were lost or
destroyed in the possession of the buyer even
due to fortuitous event, who will bear the loss?
A: It will depend on the reason of the rejection. If
there is a just cause for the rejection, then the
seller will have to bear the loss because there will
be no transfer of ownership and he cannot be
compelled to pay the price. However, if the reason
for the rejection is unjustified, ownership passes to
the buyer by operation of law then he will have to
bear the loss under the res perit domino rule.
2. Obligation to pay the price
Q: When?
A: (1) As stipulated
(2) If there is no stipulation, it would be at
the time and place of delivery.
Q: If the delivery was made a year ago but the
payment of the price was made today, would
the buyer be liable for the interest from the
time of delivery up to the time of payment?
A: G.R. No. Exceptions:
(1) Stipulation the vendor may only agree
for the payment of the price for a certain
time only because there will be interest.
(2) Even if there is no stipulation if the thing
delivered produces fruits or income.
Example 1: The object of sale is a rice land.
Isang taon na sa buyer yung rice land ibig
sabihin he harvested twice already. The buyer
should be liable to pay interest.
Example 2: Apartment unit. Kumita na yung
buyer sa rentals.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan

(3) Even if no fruits, he may be liable for
interest if he is in delay. This delay would
start from the time there is judicial or
extrajudicial demand.
A COS is a bilateral contract resulting in reciprocal
obligations under 1169 from the moment one of the
parties in reciprocal obligation performed his
obligation and the other party has not even without
demand, the other party would be in delay and
therefore liable for interest and damages.
But in this provision, in order for the buyer to be
considered in delay there must be judicial or
extrajudicial demand. This article should be
construed to mean that there was a period fixed for
the payment of the price. Nakalagay sa agreement
today ang sale, after 1 year payment. Upon the
expiration of the 1 year period, there has to be
judicial or extrajudicial demand which is different
from 1169 when the SC interpreted to mean that
the obligation is already due and demandable at
the time of the perfection of the contract. Hence,
no need for demand anymore.
Right to Inspect or Examine
This right may not be present in all COS because
you can waive the right of inspection. Upon
delivery and receiving the goods, if you agree that
you are deemed to have accepted no more right
to inspect.
In C.O.D. arrangement, the delivery will not be
made until payment has already been made by the
buyer so in that scenario, he has to pay first even
before delivery. This is a sale transaction where the
buyer would have no right of examination prior to
acceptance.
Example
The arrangement between a mining
company and NAPOCOR in the sale of coal.
NAPOCOR will have no right to inspect preliminary
to acceptance, they will always accept. But after
acceptance, that there would be examination of the
quality of the coal not for the purpose of rejecting
but for the purpose of fixing the price. So this is not
a right of examination prior to acceptance. This is
only an examination for fixing the price.
MACEDA LAW
BE: What is the Maceda Law? Give its essential
features.
A: R.A. 6552 Realty Installment Buyer Protection
Act.
Realty object of the sale is realty (not real
estate). Specifically, residential unit and not
commercial or industrial.
Page 24
November 2008
Q: How about a condominium unit?
A: It is covered by the Maceda Law as long as it is
residential in character.
Q: Sale on credit, does it mean that the sale will
be covered by the Maceda Law?
A: No. There is such a sale on credit which is on a
straight term basis.
Example 1
1M down payment of 500,000 today and the
balance to be paid at the end of the year not
covered by Maceda Law
Example 2
300,000 today, the balance of 700,000 to be paid
on 10 equal monthly installments covered by the
Maceda Law
All the provisions under the Maceda Law are for
the benefit of the buyer.
Q: Is it correct to say that in this law, the buyer
cannot invoke this law if he has not yet paid for
at least 2 years?
A: No. Even if he has only paid for a month, there
will be rights already of such buyer under the
Maceda Law. If he has paid at least 2 years, he
would have better rights.
Q: If he has paid less than 2 years of
installment, what are his rights?
A: (1) The grace period he has a minimum
of 60 days grace period (the seller can give him
more). During the 60-day grace period, he can sell
his rights under the contract, he can assign his
rights, he can update his account, he can pay the
balance.
(2) The right to recover a portion of what
he has paid cash surrender value (CSV). This
CSV is a minimum of 50% of what he has totally
paid. This includes installment payments, deposit,
downpayment every amount paid 50% of that.
It can be higher depending on the number of years
that he has already paid.
Hence, if he has paid only twice, he may
be entitled to CSV if the payment is on annual
payments not monthly.
Q: The minimum of 50% - when higher?
A: 2 years 50% 8 years 60%
7 years - 55% 9 years 65%
10 years 70%
Every year thereafter, additional 5%.
Q: What if it is 20 years 100%?
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
A: No. Upto 90% only. So if 15 years or 16 years,
still it is 90%.
Q: Would the amount recoverable be bigger?
A: Yes. 90% depends on the total amount paid.
90% pa din pero malaki ang base.
BE: Ayce bought a condo unit for 10M. 3M
downpayment. The balance of 7M payable in 60
equal monthly payments. Ayce religiously paid
until the 46th installment. On the 49th
installment, she offered to update her account.
The seller Gerard said I have already
cancelled the sale. Is this cancellation valid?
A: No. Under the Maceda Law, if you have paid a
minimum of 2 years, you are entitled to 30 days for
every year of payment. Under the facts, she has
paid 3 years. Hence, she is entitled to 90 days
grace period. Nung nag default sya nung 47 th,
magstart pa lang yung grace period. On the 48 th
installment she was only 30 days in default. 49 th
installment 60 days in default. She was very
much within the 90-day grace period when she
decided to update her account.
Q: What if the installment period is for 15
years. The buyer defaulted on the 3rd year.
Under the law, she is entitled to a minimum
grace period of 60 days. Thereafter, she was
able to update. But on the 5th year, she
defaulted again. How many days is her grace
period?
A: None. The default must be once for every 5-year
lifetime of the contract.
Q: If there is a stipulation for the forfeiture of
the payment made the buyer will lose the
house and lot and he will not recover anything
because all his payments will be treated as
rentals is this a valid clause?
A: No, the premise of course if he has already paid
for 2 years because by law he is entitled to 50%
CSV.
Q: Upon failure to pay 1 or more installments
without need of notice, the seller would have
the right to cancel the sale is this automatic
cancellation clause valid?
A: Void. There has to be notice to the buyer but
more than that if the buyer is already entitled to the
CSV, the cancellation will take effect only upon full
payment of the CSV.
Q: Are the remedies under the Maceda Law
alternative? Can the buyer be able to exercise 2
or more remedies all at the same time?
A: Yes, remedies under the Maceda Law are
cumulative.
REMEDIES FOR BREACH OF CONTRACT
Page 25
November 2008
REMEDIES OF AN UNPAID SELLER
(ARTICLE 1526)
1. Right to retain the thing in his possession
(possessory lien / withhold delivery)
2. Right of stoppage in transitu / right to
resume possession of the goods
3. Right of Resale
4. Right to Rescind
Q: Are there other remedies aside from Article
1526?
A: Yes, the seller may opt to file an action for
specific performance or action for damages.
Q: Under 1526, who may be considered an
unpaid seller? If the buyer has already paid
90% of the price, may the seller invoke these
remedies?
A: Yes, because an unpaid seller is one who has
not been fully paid of the price.
Q: May a person who was not a party to the
sale be able to claim any of these remedies?
A: Yes, because a seller need not only pertain to a
party to the contract. A person who is in the
position of the seller is actually a seller under the
law.
Q: Who would be in the position of the seller?
A: The assignee or heirs of the seller or the agent
to whom the bill of lading was indorsed by the
seller.
Q: In unpaid seller, are his remedies
alternative?
A: Not necessarily, because in fact by express
provision of the law, the right of resale and the right
to rescind may only be exercised if the seller has
possessory lien. Pag wala na syang lien, he can no
longer exercise the right of resale or right to
rescind so cumulative to that extent. But if there
are 2 remedies that alternative and cannot exist at
the same time, these are the right of stoppage in
transitu and possessory lien because a requisite in
order for the seller to have a right of stoppage in
transitu is that the seller must have already parted
possession over the goods.
Specific Remedies
1. Right to retain the thing in his possession
(possessory lien / withhold delivery)
Q: Why is it called possessory lien?
A: Because there is another lien in the law. This is
the lien under the rules on concurrence and
preference of credit. This is the lien of the seller for
the price of the thing sold if the thing has already
been delivered to the buyer and the buyer became
insolvent. While the thing is in the possession of
the buyer there is such a lien but that is not the lien
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
under 1526. 1526 again is the right to retain the
goods in his possession the possessory lien.
Q: When would the seller have this possessory
lien? Is it required that the buyer should be
insolvent?
A: It is not required that the buyer should be
insolvent but this is one of the instances when the
lien may be invoked when the buyer is insolvent.
Other Instances Where Seller May Invoke
Possessory Lien
1. When there is no stipulation as to the
credit
2. Or there may be a stipulation as to the
period of credit but the period has already
expired.
When would the Seller be Considered to have
Lost his Lien
1. If he waives his right
2. If the buyer lawfully obtained possession
over the goods
3. When the thing is delivered to a common
carrier and the seller did not prefer his
ownership and possession over the
goods.
If you remember the discussion on delivery the
rule here is delivery to the common carrier is
delivery to the buyer and therefore when the seller
delivered the goods to a common carrier as a rule
he loses his lien over the goods. The premise of
that is that he did not preserve his possession over
the goods.
Atty. Uribes Comment: With due respect to this
article, the article says if he did not reserve his
ownership or possession over the goods. I dont
think that phrase ownership is accurate because it
does not matter under the law regardless of
whether ownership has passed to the buyer, the
seller would have the right to exercise any of these
4 remedies, notwithstanding ownership has passed
pwede pa syang magkaron ng possessory lien. In
fact, by express provision of law even if he is only
holding the thing as a bailee, he will still have
possessory lien, hence, ownership is irrelevant
even if the seller did not reserve ownership, with or
without reservation he may or he may not be
deemed to have lost his lien. Pero kung na reserve
nya ang kanyang possession, definitely, he will not
be considered to have lost his lien kasi if under the
bill of lading deliverable to the seller then he will
not be considered to have lost his lien thus there is
no need for him to exercise the right of stoppage in
transitu.
Page 26
November 2008
Q: If the seller opted to file an action to compel
the buyer to pay the price and the court
decided in favor of the seller. The court ordered
the buyer to pay the price. Can the buyer tell
the seller to deliver the goods so that he will
pay the price? Can the seller now be compelled
to deliver because there was a final judgment
in his favor?
A: No, the very specific provision of the law just
because there is a final judgment in favor of the
plaintiff, that would not mean he will lose his lien
over the goods.
Atty. Uribes Comment: This is a very reasonable
rule because is there an assurance that the buyer
will pay even with court order?
2. Right of stoppage in transitu / right to
resume possession of the goods
Requisites:
1. Insolvency of the buyer is an essential
requisite
2. The seller must have parted possession
over the goods
3. The goods must be in transit
Q: Should the debtor be insolvent already at
the time of the perfection of the sale?
A: No, as long as at the time the right is invoked,
he is insolvent. The insolvency may happen a day
before or 2 days before basta at the time the right
is invoked, the buyer is insolvent.
Q: How is the right exercised?
A: (1) By obtaining actual possession of the goods
(2) By mere notice to the common carrier.
Q: If such notice was sent to the common
carrier but the common carrier refused to
deliver the goods back to the seller, is the
common carrier liable?
A: Not necessarily, if the goods are covered by a
negotiable document of title, the common carrier
can be compelled to deliver the goods pursuant to
the exercise of the right of stoppage in transitu
back to the seller only if after the negotiable
document of title is surrendered to the common
carrier. It should be a negotiable document of title.
This is a protection to the common carrier. Kasi if
not negotiable, pwede yun i-negotiate sa 3 rd person
who may purchase the goods in good faith and for
value. That 3rd person would have a better right
kaysa sa owner or seller.
Q: If the seller validly exercised the right of
stoppage in transitu, what is the effect?
A: He will be considered to have regained his
possessory lien.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan

Q: In a scenario where the seller still has
possessory lien, he may have invoked the right
of stoppage in transitu so he regained
possessory lien, in the meantime, the buyer
sold the same goods to another person, so
tatlo na the seller, the buyer and the 3 rd
person. Can this 2nd buyer compel the seller to
deliver the goods to him as the 2nd buyer?
A: As a rule no because the sellers lien over the
goods will not be affected by the disposition made
by the buyer of the goods to a 3 rd person. He will
retain his possessory lien. 2 exceptions:
1. If the seller assented to the disposition
2. Even if he did not give his consent to the
sale, he will lose his possory lien if:
a. the goods are covered by a
negotiable document of title
b. the negotiable document of title
was property negotiated to a 3 rd
person in good faith and for value.
Not negotiation to a donee.
3. Right of Resale
Q: When would the seller have this right?
A: (1) If the goods are perishable
(2) The right is expressly reserved in the
contract
(3) The buyer has been in default for an
unreasonable time
Note: In order to exercise this right, he must have
at the same time possessory lien.
Q: If necessary for the validity of resale that the
seller should send a notice of the intention to
resell to the buyer which means that if there is
no notice of the intention to resell and then the
resale will be void. Is that correct? Is it correct
to say that for the resale to be valid, there
should be notice to the buyer of the date, time
and place of resale?
A: The answers to both questions No. They are
not necessary for the validity of the resale.
Q: So what is the relevance of these notices?
A: First, the notice of the intention to resell will only
be relevant if the ground relied upon by the seller is
that the buyer has been in default for an
unreasonable time. Kasi from the notice makikita
how long the buyer has been in default. Second,
as to the notice of the date, time and place of
resale, this is not necessary for the validity of
resale but may be relevant in determining whether
the sale was a good faith sale. This is relevant as a
consequence of resale, if there is still a balance.
For example, the total contract price is P100,000.
The buyer did not pay a single centavo. Out of the
resale, ang proceeds lang P60,000. So may
Page 27
November 2008
balance pang P40,000, can the buyer be
compelled to pay the deficiency? Yes, but if the
sale is not a good faith sale, he may not be
required to pay the balance. Why? What has the
letter got to do with good faith? Because if a
letter was sent, then the buyer could have been
present and could have determined for himself
whether in fact an actual sale conducted and there
were actual bidders in that sale. Kasi pwedeng
gawa gawa lang ng seller na kunwari may bumili.
Take note under the law, the resale may be a
private sale. The only limitation here is that the
seller cannot buy directly or indirectly.
Q: What if there was an excess? Example out
of the 100k price the buyer paid 20k. balance
80k. What if in the exercise of the right of
resale, the seller was able to sell it at 130k?
May the buyer be able to recover at least the
amount that he paid?
A: No, because under the law, the seller will not be
responsible for any profit that will derive from the
resale. (See Article 1533)
Q: Would there be unjust enrichment?
A: None, because it was precisely the fault of the
buyer - his failure to pay that the seller exercised
the right of resale.
4. Right to Rescind
Would only be available under 2 instances na
kapareho ng resale. Di ba resale 3 instances- ang
di lang present sa rescission yung perishable
goods. So the grounds in rescission are:
a. The right is expressly reserved
b. The buyer has been in default for an
unreasonable time
Note: In resale, SC said - if the ownership of the
thing has already been transferred to the buyer, in
order for the seller to exercise the right of resale.
Should he first rescind the contract?
A: No, he can immediately sell the goods because
the effect of the resale is to terminate the
ownership of the 1st buyer and that ownership
would be vested upon the 2nd buyer by operation of
law, hindi na kailangan mag-rescind.
In rescission, this cannot be exercised for casual
breach. Parang 1191.
Song Fo vs Hawaiian
Facts: The buyer failed to pay around 20 days from
the time the obligation to pay become due.
Held: The SC said, that it not a serious breach of
his obligation to pay which would entitle the seller
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
the right to rescind the contract. The number of
days would depend on the circumstances
surrounding the sale. In Song Fo, the sale pertains
to molasses/ sugar.
RECTO LAW
- promulgated to protect the buyer
- pertains to the right of the buyer
- if you analyze the law, it only provided 3
remedies
- pertains to movable on installments
Q: Assuming this is a sale of diamond ring fro
1M payable in 10 equal annual. 100k each year
payable Jan 1 each year. The buyer was able to
pay 1st and 2nd installment. He failed to pay the
3rd installment. Despite demand, the buyer
failed to pay. Can the seller cancel the sale?
A: No, under the Recto Law, cancellation of the
sale and the foreclosure of mortgage may only be
invoked if the buyer has failed to pay 2 or more
installments. If the buyer failed to pay only 1
installment the only remedy available to the seller
is exact fulfillment meaning specific performance.
Q: If after 2 months (despite demand the buyer
failed to pay) the seller filed an action to
recover a sum of money how much shall be
recovered by the seller? Take note under the
facts he only paid 2 installments and hence the
balance 800k. Can the seller recover the 800k?
A: As a rule none because in a sale in installments,
this is actually an obligation to pay with a period.
Every time the period would arrive only then the
obligation will become due and demandable. Ang
nagiging due and demandable lang yung 3rd
installment. The 4th installment will be due only
another year and so on. What he can recover is
only 100k which became due on the third
installment. That is the general rule. By way of
exception he may be able to recover 800k or
everything if there is a clause known as
acceleration clause. Kung sa Maceda Law void
ang acceleration clause, sa Recto Law valid.
Because normally sa Recto Law, maliit lang
binebenta so there can be an acceleration clause
wherein that would make the entire balance due
and demandable and therefore he can be
compelled to pay the entire 800k.
Q: This time 3rd installment default sya. After
few months he was able to pay the 3 rd
installment. Nakabayad sya ng 4th, 6th. On the
7th he defaulted again. Would cancellation now
be a remedy? (Naka-dalawang default na sya
eh)
A: No, under the Recto Law he should have failed
to pay 2 or more installments meaning 2
Page 28
November 2008
consecutive installments. Hindi sinabi ng batas -
failed to pay twice.
Q: If he failed to pay the 3 rd and 4th then
cancellation would now be a remedy. So what if
the seller opted to cancel the sale (this is
rescission di ba?) and the effect of cancellation
di ba mutual restitution and hence the buyer
should return the thing delivered to him and
the seller should return the amount he received
as payment. Would the seller really be obliged
to return the entire 200k (1 st and 2nd
installment)?
A: No, under the law, he is allowed to retain a
reasonable sum which may be considered as a
form of rental. Example kung yung car ang binili, 2
years na nyang ginagamit, hence laspag na yun.
Q: Despite the cancellation of sale which
normally result in mutual restitution, may the
seller this time be able to retain everything
which he received?
A: Yes, if there is a forfeiture clause except if
retaining everything would be unconscionable.
What is unconscionable would depend again on
the circumstances surrounding the sale. Example
200k is not unconscionable for Danding Cojuanco.
But if the sale is a sale of machinery where the
buyer is a poor farmer- 200k is unconscionable.
Finally instead of cancellation another remedy is
foreclosure of mortgage.
Q: Buyer bought a car and to secure the
payment of the price, he mortgaged his
diamond ring. The buyer failed to pay 2 or more
installments (3rd and 4th installments). If the
seller foreclosed the mortgage and it turned
out there was still a deficiency, if payable
amount is 500k and in the foreclosure sale the
proceeds was only 300k. May an action for the
recovery of balance prosper?
A: Yes, because under the facts what was bought
was not the one mortgaged. For 1484 (Recto Law)
to apply, where there can be no recovery of the
deficiency of the foreclosure, the thing bought must
be the same thing mortgaged.
BE: Buyer bought a car to secure the
fulfillment of the obligation he mortgaged the
car but the buyer gave another security. He
asked his brother to mortgage his brothers
house and lot. The seller agreed. The buyer
failed to pay 2 or more installments. The seller
foreclosed the mortgage but there is a
deficiency. So the seller filed an action for the
judicial foreclosure of the REM. May that action
prosper?
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
A: No, the foreclosure of the 2 nd mortgage is in fact
a deficiency judgment. The only purpose of the
foreclosure is to recover the deficiency and that is
prohibited under the Recto Law.
EXTINGUISHMENT OF SALE
Includes the ordinary causes of extinguishment of
obligation:
1. Payment
2. Novation
3. Loss of the thing, etc
Under the law on sales
1. The exercise of the right of resale will
result in the extinguishment of the 1 st sale.
The ownership of the 1st buyer will be
terminated and such ownership will be
vested to the 2nd buyer.
2. Rescission or cancellation will extinguish
COS
3. Redemption either conventional or legal
Kinds:
A. Conventional - it is because the right to
repurchase is expressly reserved in the contract
and thus this right may only arise in 1 kind of
contract. This is a sale with a right to repurchase or
a pacto de retro sale.
B. Legal- may be exercised by co-owners or by
owners of adjacent lot
A. Conventional
If there was no stipulation as to the right of
redemption then no right of redemption
Q: In the exercise of this right, how much
would have to be offered by the seller in order
to redeem the property? Would the price paid
by the buyer be sufficient in order to
repurchase the same?
A: Not necessarily, under the law, the amount
which has to be offered by the seller a retro in the
exercise of the right of redemption are: (1) price
paid; (2) the expenses incurred by the vendee for
the execution of the contract; (3) necessary and
useful expenses incurred by the buyer.
Example
In the sale of land, in order to preserve the land
which is located beside the river, the buyer may
have put up a wall in order that it may not erode.
The expenses incurred by the buyer will be
considered as necessary expenses for the
preservation of the thing sold and such expenses
have to be reimbursed by the seller, in the right of
the seller to repurchase the thing sold.
Growing fruits
Page 29
November 2008
Example
Q: In a mango plantation, there may be fruits at
the time of redemption. The value of the fruits
is 100k. Can the seller be compelled to pay for
the value of the fruits?
A: The answer will depend on whether there are
fruits at the time of the sale. If there were fruits at
the time of the sale, the seller will only be obliged
to pay for the fruits at the time of redemption if at
the time of the sale, the buyer paid for the price of
the value of the fruits.
So again, there were fruits at the time of
redemption, whether or not the seller would have to
pay for the fruits at the time of redemption would
depend on whether or not there were fruits at the
time of the sale. Take note that the sale may have
been 2 years before that or 3 years before that but
if at the time of the sale there were fruits and the
buyer paid for the value of these fruits, it is
reasonable that the seller would also have to pay
for the value of the fruits at the time of repurchase.
But if at the time of the sale, there were fruits but
the buyer did not pay for the value of the fruits then
the seller should not likewise be compelled to pay
for the value of the fruits at the time of redemption.
There were no fruits at the time of the sale but
there were fruits at the time of redemption.
Q: If a COS was entered into in 2001 and there
were no fruits at the time of the sale. However,
at the time of redemption April 1, 2005 there
were fruits. The value of which is 100k. How
much can the seller be compelled to pay for
these fruits?
A: Under the law, the seller can be compelled to
pay for the value of the fruits in proportion to the
period in which the buyer was in counted from the
anniversary date of this contract. Yung anniversary
date ay every Jan 1. Yung anniversary date this
year Jan 1, 2005, from Jan 1, 2005 up to April 1,
2005 - the buyer would be in possession for 3
months out of 12 months is of the entire year.
Therefore, how much can the seller be
compelled to pay? 25,000 of the value. The
longer the buyer is in possession of the goods, the
bigger the amount which has to be paid by the
seller.
Atty. Uribes Comment: It is reasonable. If the
buyer has been in possession for a longer period
of time then he would have tend more for the
preservation of the thing or fruits. In fact, if the date
of redemption period is July 1 and the seller would
have to pay 50% in proportion to the period when
the buyer was in possession counted from the
anniversary date.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan

Period in conventional redemption
BE: Ariel sold a land to Jessica for 10k with a
right to repurchase expressly agreed upon
between the parties. Because they were
friends, they did not provide for a period within
which the seller may exercise the right to
repurchase. But again, there was a reservation
of the right to repurchase only that the parties
failed to fix the period.
a. When should the seller a retro
exercise the right to
repurchase?
b. If the seller failed to
repurchase within the period
agreed upon or the period
prescribed by law, what will be
your advice to the buyer in
order to protect the buyer
more?
A: (a) The period is 4 years. Under the law, if
there is a right of redemption but the parties failed
to provide for such a period, the law itself says that
right may be exercised only within 4 years.
However, if the parties stipulated as to the period
within which the right may be exercised like 20
years, the law provides, it cannot exceed 10 years
and hence the 20-year period will be reduced.
Hindi naman void yung 20 years totally, it will just
be reduced to 10 years because the law provides
that it should not exceed 10 years.
(b) To file an action for the consolidation of
the title.
Q: In a sale with a right to repurchase,
ownership passes when? Upon the expiration
of the period to repurchase?
A: No, it follows the general rule in sale that
ownership passes to the buyer upon the delivery
as a rule.
Q: So what will be the effect of the expiration of
the period for repurchase without the seller
exercising such a right? Or even if he did
exercise it was not valid exercise of a right, like
for example: a total amount which should have
offered 500k. He only offered to pay 300k.
Hence, the buyer can refuse and therefore the
right to repurchase was not validly exercised.
Thus, assuming there was no exercise of the
right to repurchase what is the effect on the
ownership of the buyer?
A: Buyers right or ownership over the thing
becomes absolute. During the period he has
ownership but his ownership is subject to a
resolutory condition which is the valid exercise of
the right to repurchase. If the right to repurchase,
his ownership will be terminated.
Page 30
November 2008
Q: Would this be correct - that upon the lapse
of the period without the seller having
exercised the right to repurchase the
ownership of the buyer becomes absolute? Is
this true also in sale of immovable? Or true
only in sale of movable?
A: It does not matter, it is true in every COS with a
right to repurchase. From the moment by the fact
that the seller was not able to exercise the right to
repurchase within the period provided by law, the
ownership of the buyer becomes absolute.
Q: The law requires for an action for
consolidation of title, is this necessary in order
the buyer to acquire ownership or at least to
acquire absolute ownership?
A: No, this action is only necessary if he would
want the property to be registered in his name. In a
sale of immovable with a right to repurchase and
the period for repurchase has already expired
without the seller exercising such right, the buyer
can only have the property registered in his name
by filing such an action with the court. Thus, in
order to protect him further maganda yung action
for consolidation of title kaysa naman the thing will
be sold by the seller to another person.
Q: Assuming you are a lawyer, a client asked
you to examine a document which is
denominated as a DOS with a right to
repurchase and that client was the seller was
the seller a retro (he would have the right to
repurchase). However, upon examination of the
terms and conditions of the contract, it appears
that the right has long expired. Thus, the client
asked, may I still be able to recover this parcel
of land which is the subject matter of this
contract?
A: Consider the possibility that the client may
recover. Ask the client of the circumstances
surrounding the execution of that document. Ask
him Why did you execute this DOS? If the answer
is kasi po atty. nagka utang ako sa kanya 150k
tapos sabi nya instead of executing a mortgage
agreement, DOS with a right to repurchase.
Anyway, from the DOS with a right to repurchase,
he may appear to be protected. Kasi if he owes
that person 1M and if he is given in the debt a
period of 1 year within which to pay in the DOS
with a right to repurchase, he would also have 1
year within which to repurchase. Diba parang
pareho lang? But instead of mortgage he was
asked to sign a DOS. If that is the case, clearly you
can conclude that this is not an honest to
goodness sale with a right to repurchase. You can
treat this transaction merely as an equitable
mortgage. Hence, he may still be able to recover
what was the subject matter of that transaction.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
Q: Why would the creditor ask his debtor to
sign a DOS with a right to repurchase instead
of a mortgage to secure the fulfillment of his
obligation?
A: To ensure that the property will be owned by him
automatically upon the expiration of the period
within which to repurchase and the seller a retro
failed to exercise the right to repurchase which will
not happen in a mortgage. There is a principle in
mortgage known as pactum commissorium. Upon
the default of the debtor the mortgagee, cannot
validly appropriate the thing for himself. Ownership
will not automatically pass by mere default of the
principal debtor because pactum commissorium is
void because the remedy of the creditor is to have
the property sold in a foreclosure sale not to
appropriate the thing. So to avoid those
requirements sa mortgage, ang gagawin ng seller/
creditor is to have the debtor sign a DOS with a
right to repurchase because the moment the
debtor failed to repurchase within the period,
absolute ownership goes to the creditor who is in
that sale the buyer (creditor) a retro. Wala na
syang kailangan gawin.
If the instrument is a DOS with a right to
repurchase it may actually be considered as an
equitable mortgage by just examining the terms
and conditions of that contract. There are certain
instances when the law itself provides for a
presumption that this is an equitable mortgage
under 1602.
BE: What are those instances?
1. The price is grossly inadequate.
Example: If the value of land is 1M, the
price stated in the DOS is 100k which is
grossly inadequate. Kaya 100k yun kasi
ang utang nya talaga 100k.
Q: But is this presumption conclusive?
A: No, this is merely a disputable presumption. In
fact, the SC would sustain the validity of a sale with
a right to repurchase despite the gross inadequacy
of price because somehow it would be
advantageous to the seller a retro. In the exercise
of the right to repurchase, it is more advantageous
if the price is small because he can easily come up
with that amount and repurchase the thing.
2. If the vendor a retro would continue to be
in the possession of the thing after the
sale, which is unusual because if indeed
this is a sale then the vendee should be in
possession after the sale.
Note: This is only a disputable presumption.
Page 31
November 2008
Q: What if there was a stipulation in the COS
that the seller will shoulder the capital gains
tax? Would the presumption that this is an
equitable mortgage will arise?
A: No, the presumption will only arise if the seller
bound himself to pay the tax on the thing not the
capital gains tax. That would be the real property
tax.
Atty. Uribes Story: Hindi ako magaling sa tax.
Sabi ni Justice Vitug, he was our reviewer, kung
sya raw ang examiner, he would only ask
questions on general principles on taxation wala
ung remedies or procedure. Naniniwala ako kay
Justice Vitug, it turned out yung mga questions
talagang general principles kaya naka-tyamba ako.
He He He He
Anyway, under the law on taxation it is the seller
who has the obligation to pay the capital gains tax
unless otherwise agreed upon with the buyer would
have to pay the tax. The presumption that this is an
equitable mortgage will only arise if the seller
bound himself to pay on the tax of the thing even
after the sale. Kasi hindi sya owner, why should he
pay for the tax on the thing?
Note: Presumptions under 1602 would arise
regardless of whether the sale is denominated as a
sale with a right to repurchase or a DOS. It doesnt
matter. Even if it is a DOS if there is doubt as to
whether or not it is an equitable mortgage. It has to
be resolved as an equitable mortgage.
Q: Remedy of seller a retro?
A: Reformation because the contract as written did
not reflect the real intention of the parties. The real
intention is to secure the fulfillment of the obligation
of the vendor a retro (debtor).
B. Legal Redemption
Q: Who have the right to redeem?
A: 2 groups
1. Co-owners
2. Owners of adjacent lots (object is lot)
- consider if rural or urban land
Co-owners
Q: Co-owners of what thing, movable or
immovable?
A: It does not matter.
Q: A, B, C, D co-owners of land. D donated his
interest in the land to X. would A, B, C, have the
right to redeem?
A: No, in legal redemption, the alienation by a co-
owner must be by onerous title (sale, dacion en
pago, barter). This act (donation) is gratuitous act.
Hence, no right of redemption.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan

Q: What if B sold his interest in the land to D.
would A and C have the right to redeem?
A: No, because for A and C to have the right to
reddem, the alienation should be in favor of a 3rd
person.
Q: What if B sold his interest in the land to X. A,
D, C, wanted to redeem. May they be able to
exercise the right of redemption? All of them?
A: Yes. All of them.
Q: Is this the same rule in adjacent lots?
A: No, in adjacent lots, there can be so many
owners depending on how it is big. The owner with
the smallest land area would have the right to
redeem.
Q: What if the owners of adjacent lots would
have equal area?
A: The first one who manifested his desire to
redeem.
As to Co - owners
BE: Land owned by spouses was sold by the
spouses to their three sons in 3 different deeds
of sale. In each DOS the specific area was
already described. After the execution of the
DOS, these children would actually harvest
only their respective area. They wanted to have
their respective share registered in their own
name. They filed a petition for the cancellation
of the title of their parents for that property to
be divided, they submitted their individual
DOS. But the petition was denied by the
register of Deeds because they failed to submit
a subdivision plan. The RD cancelled the TCT
in the name of the parents issued another TCT
in the name of the 3 children in one TCT. One
of the children sold the land to a 3rd person.
Can the 2 other brothers redeem as co-
owners?
A: No, because under the facts, they are no longer
co-owners. A TCT is not conclusive as to the rights
of the parties to a certain property. Pwedeng
apparently co - owners sila but in reality there has
already been a participation of the property, yun
lang hindi pa naka-reflect sa TCT. In fact, a
property may be registered in a person who is not
the owner kasi na - forge lang yung signature ng
real owner. Thus, the requirement of the law that
the co-owner would have the right to redeem is not
present therefore, there would be no right of
redemption.
Q: A, B, C co-owners. As share . Bs share .
Cs share . B sold his interest in the land to X.
However, A and C both wanted to redeem. (As
co-owners they may have the right to redeem).
Page 32
November 2008
If they cannot agree on the portion of the share
of B which will be redeemed by both of them -
what would be the final sharing?
A: C will have 2/3, A will have 1/3 because they will
have the right to redeem in proportion to their
share in that property. Note: they may stipulate as
to the sharing.
Q: What if in the DOS executed between B and
X, the price stated in DOS was 3M. Hence, A
and C can be compelled to redeem by paying
3M?
A: Not necessarily, under the law, if the price stated
in this sale is unconscionable, the redemptioners
can only be compelled to pay the reasonable
value. Ang posibleng value could only be 1M pero
ang nakalagay sa DOS 3M. Is it possible that X
did not pay 3M? Yes. Why would they do that?
The reason for that is to pre-empt A and C from
exercising the right of redemption. To discourage
them from redeeming the property kasi kung mura
yan they can easily exercise the right of
redemption.
The law protects the redemptioners - if the price is
unconscionable - they may pay reasonable value.
Q: What if the value is 3M but DOS stated 1M
but X actually paid 3M (1M was stated to
reduce tax liability). How much A and C can be
compelled to pay?
A: Doromal vs CA
Held: The co-owners can only be compelled to pay
the price stated in the deed of sale. The trial court
sustained the claim of the buyer that they be
reimbursed the actual amount paid because
according to the trial court that would be immoral to
pay only the amount stated in the contract. SC said
it was more immoral yung ginagawa ng parties to
pay only a small amount where in fact the real
amount paid is a much higher amount. Because
the only purpose of this is to defraud the
government.
Owners of Adjacent Lots
Make a distinction between a sale of an urban land
and sale of rural land.
Sale of Urban land
Requisites:
1. The land is so small and purchased only
for speculation
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)
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
 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.
co-owner should be given a copy of the DOS and it
is only from that moment that the 30-day period will
start to run. This is a good ruling - not any ordinary
notice but a copy of the DOS because in
redemption, the redemptioner is supposed to be
subrogated under the same terms and conditions
as the buyer. How would he know the terms and
conditions of the sale if he is not given a copy of
the DOS. So he must have a copy.

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 3 rd 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
day period would start to run? SC said: No, the

Page 33 Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
November 2008

LEASE
Notes:
Read the Definition of Lease under Articles
1643, 1644, 1713.
Consider also on Formalities: Articles 1647,
1724 in relation to 1403 on Statute of Frauds
and 1403, 1878 on Agency to Lease.
Assignment and Sublease: Articles 1649, 1650
Implied new lease or tacita recunducion:
Article 1670 (important)
Rights and Obligation of the Lessor and
Lessee: Articles 1673, 1678, 1680, 1723 (take
note several questions in the bar have
appeared under these provisions)
Period of the Lease if the parties failed to
Fixed the Period: Articles 1682, 1687
Rights of Third Person: Article 1729 (ex: rights
of owner of materials against the owner of the
building)
Note: The first thing to consider in lease is to
consider the kind of lease.
Kinds of Lease:
1. Lease of Things
2. Lease of Work or Service
3. Lease of Right
Note: Under the law, under 1642 only lease of
things and work or service are mentioned.
Note: In lease of Service, there are four (4) of them
but three (3) will not be covered by Civil Law, which
are Household Service and Contract of Labor
(covered by Labor Law), and Contract of Carriage
(covered by Commercial Law). The only kind of
Lease of Service that will be discuss under the Civil
Law is the Contract for a Piece of Work.
Definition:
Q: If a party, binds himself to give another the
enjoyment or use of thing, does that make the
contract one of lease of things?
A: No, the most important distinction here with that
of commodatum is that in lease, it must be for a
price certain, otherwise if there is no valuable
Page 34
November 2008
consideration for the use or enjoyment of the thing
it will be commodatum.
Q: If in the agreement one of the parties binds
himself to render service, for price certain
would that be a lease of service?
A: Not necessarily, because it may also be a
contract of agency, where a person binds himself
to render service for another person it may be a
contract of agency, thus under 1644, in order for
the contract to be considered as lease of service,
there must be no relation of principal and agent
existing between the parties.
Distinguish a Contract for Piece of Work from
Contract of Agency
Frensel vs. Mariano Ochaco
Facts: Mariano asked Merit to construct an edifice
for him and agreed that Merit was to supply not
only Labor but also Materials. Merit bought the
materials from Frensel, however the price of the
materials remain unpaid so Frensel demanded
payment from Mariano, the ground relied upon by
Frensel is that Merit was an agent of Mariano
therefore, for failure to pay the price, Frensel claim
that Mariano can be held liable for the price of
material.
Held: It is not a contract of agency, since from the
terms and condition of the contract it appears that
the control of Mariano over Merit does not go into
the manner and method of performance of the
obligation but only goes into the result of the
product and therefore it cannot be considered an
Agency Contract.
Note: In Agency, the control of the principal over
the agent is so pervasive that the principal can
control not only the result but also the manner and
method of the performance of the obligation which
is not present in this case and therefore Merit was
not considered an agent of Mariano.
Q: As to the relationship of the taxi driver with
his operator, is this a contract of lease?
A: SC ruled that this is in fact a lease but not a
lease of thing, but lease of service specifically an
employment contract, this is because of the control
of the operator over the taxi driver, as to when,
what time the drive operates the vehicle.
Q: As to safety deposit boxes does this involve
lease of things?
A: No, in the latest decision of the SC, it
considered the contract as special kind of deposit.
This cannot be considered a lease of things
because the lessee has no control over the safety
deposit box. In fact he cannot even enter the bank
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
where the safety deposit boxes are located if it not
a banking hour, like when the bank is close so he
cannot enter therein.
Note: Again, to distinguish lease contract from
other legal relationship you have to consider the
characteristic of the contract. The best way to
remember the kinds of contract is to know by heart
what are the real contract (mutuum, commodatum,
deposit, pledge) and formal contract (antichresis,
donation). Aside from that it may be safe to
consider as a rule all the other contract as
consensual contract, where no particular form is
required except in exceptional case: e.g. sale of
large cattle.
As a rule lease, therefore is a consensual
contract by mere meeting of the mind as to the
object and to the consideration the contract is
perfected.
A contract of lease of things is essentially
onerous. In fact in one case decided by the SC,
involving an agreement between the Bureau of
Animal Industry and Mr. Bagtas, where 3 bulls
were delivered by the Bureau to Bagtas for
breeding purpose. There was a period agreed
upon for one (1) year, after the lapse, despite
demand for the return of the bull Bagtas failed to
do so, thereafter he died and so his estate was
required to deliver to deliver the 3 bull but only the
2 were returned and the third bull could not be
returned allegedly on the ground that the said bull
died in a crossfire between the Hukbalahap and
the AFP, so the claim was fortuitous event.
Claiming that the agreement was
commodatum it was argued that since there was
no transfer of ownership in commodatum, then the
risk of loss would still pertain to the Bureau.
SC ruled that this cannot be
commodatum, because there was stipulation for
the payment of breeding fee that has to be paid by
Bagtas, it cannot be commodatum but a lease of
thing, because there was a compensation to be
paid for the use of the bull. Again a contract of
lease of things is essential onerous.
Note: Lease of things is not essentially personal.
Heirs of Fausto Dimaculangan vs. IAC
Held: Upon the death of parties like death of
lessee, the contract is not thereby terminated. The
heirs of the lessee may continue to occupy the
premises by virtue of the lease because it is not
extinguish upon death of lessee.
Characteristic of Lease of things
Page 35
November 2008
1. Consensual Contract
2. Onerous (essentially onerous)
3. Bilateral
4. Nominate
5. Principal.
Essential Requisites of Contract of Lease
1. Consent
Note: As a contract again, you have to go into the
essential requisite of contract in general which
would be applicable also to lease.
But specifically as to consent in sale, there
are people who are prohibited from entering in
specific kind of lease, those mentioned in 1490,
1491. When spouses are prohibited from selling to
each other similarly they are also prohibited from
entering in contract of lease as spouses.
As 1491 is also applicable to lease, hence
the guardian cannot lease property of the ward as
much as the agent cannot lease the property of the
principal which he is suppose to administer.
2. Object
Q: In lease of things, may a consumable thing
be the subject matter of lease?
A: Normally when a consumable thing is use in
accordance with its nature it is consumed, as a rule
therefore consumable things cannot be the subject
matter of lease of things. The exception is, when
the use of the things is only for exhibition, or when
they are accessory to an industrial establishment
then it may be a subject of lease.
3. Cause
Lease of thing the consideration for the lessor is
the payment of rental
Lease of work or service - it is the compensation to
be paid by the other party
Lease of right it is the payment of royalties which
is the cause and consideration of the one leasing
the right to another
FORMALITIES
Lease of Service there is no particular form
required by law for the validity of the lease not
even for the enforceability as a rule.
Donald Dy vs. CA
Facts: The brother of Dy had a problem in one of
the casino in Las Vegas, so he ask Atty. Mutuc to
help which when resolve Atty. Mutuc now
demanded for his Atty. Fees.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
 One of the defenses raised by Dy was that
there was no written contract between the parties
and therefore he is not entitled to Atty. Fees.
Held: Documentary formalism is not an essential
element in the contract. In fact the contract may
be express or implied. Thus, the absence of a
written contract will not preclude a finding that
there was a professional relationship which merit
attorneys fees for professional service rendered.
Lease of Things certain provision of the law
which requires certain forms to be enforceable.
Under 1403, Statute of Fraud, when there
is a contract of lease over an immovable and it is
for more than a year, the contract of lease must be
in writing in order for it to be an enforceable
contract.
In 1878, if a person is authorized to lease
an immovable property of another for more than 1
year, that person or agent should have special
power of attorney.
Note: the problem in lease would normally be a
combination of an agency and lease.
BE: Where a principal appointed an agent
granting him unlimited and general
management over his properties withholding
no power from him and authorizing the agent
to act as may deemed appropriate. With this
GPA the agent entered in a contract of sale and
two (2) contracts of lease. The first lease
pertains to a parcel of land in Kalookan for 4
years and rental to be paid annually for 60k a
year. He also lease a certain land in QC but
they did not fixed the period of lease but they
agreed on payment of rentals on monthly basis
rate of 3k per month. These contracts were
entered into while the principal was in the
hospital. Rule on the validity and binding
effects of the contracts upon the principal.
A: The problem pertains to both lease and agency.
However in the problem itself there was no
statement if the lease agreement itself was in
writing.
As suggested answer, in the first lease,
since it was for 4 years and involve as lease over
an immovable and pertains to an act under 1878,
then the agent should have a special power of
attorney and under the facts he was only given a
general power of attorney, hence since armed only
by GPA, the contract is unenforceable as against
the principal.
Page 36
November 2008
In the second lease, the agent
represented the principal did not fix the period of
the lease but only fixed the monthly rental of 3k,
therefore under 1687, this will be construed as a
month to month lease. Since only month to month,
involve merely acts of administration therefore not
require SPA therefore the second lease will be
valid and binding upon the principal.
BE: Agreement for the repair of a private plane
and for a certain sum of money, however
additional work was requested by a person
who has the authority of a duly recognize
representative of the owner of the plane and
the request was merely verbal, when the
additional work was completed, the one who
rendered the work demanded additional
payment, the defense raise was under 1724 in
order that a claim for additional payment for
the additional work, the agreement for the
additional work must be in writing and the
changes should be authorized in writing.
A: The suggested answer of UP will sustain the
defense because of 1724; such change not being
authorized in writing, the request was merely
verbal then the claim may not prosper.
Atty. Uribe agrees more in the alternative
answer where in provides that, the person who
requested though verbal was the authorized
representative of the owner, and this is given
already as a fact. If the defense would be sustain
under 1724 then there will be unjust enrichment on
the part of the plane owner.
1724 would give the proprietor the right to
raise the defense that testimony may not be
admitted pertaining to a change in the plans
because it was only verbal change, but the
moment the fact is established already, you can no
longer invoke 1724 but you can raise it as a
defense if there is a witness that is being
presented in the effect that there was request or
additional change by invoking 1724, the additional
change not being in writing then no person may
testify as to such fact.
But in the problem given it was mentioned
as a fact, that the verbal request was made by a
person authorized by the plane owner. Again the
better answer is the alternative answer, that, for the
owner to be able to raise the defense under 1724,
would constitute unjust enrichment after he actually
requested for such change thru an agent.
RIGHTS AND OBLIGATIONS OF THE LESSOR
As to necessary repairs of the thing lease,
this is an obligation of the lessor, under the law the
lessor is oblige to make the necessary repairs.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan

Gonzales vs. Mateo
This involved a contract of lease over a cockpit. It
was stipulated in the contract that ang lahat ng
kailangang gagawin sa bahay sabungan ay
ipagagawang lahat ni Ginoong Gonzales (lessee)
sa kanyang sariling ukol, na ang samahan ay
walang sinasagot. In other words the lessee,
bound to do the necessary repairs, so when the
cockpit collapsed the lessee was held liable, even
if the lessor under the law has the obligation to
make the necessary repairs it is still subject to
stipulation of the parties.
BE: A lease contract was entered into between
A and B over a parcel of land for a period of 15
years wherein the lessee conducted his
business where he constructed a 3 storey bldg
for 300, 000. Upon the lapse of the 15 year
period the parties not having been able to
agree on the extension of the lease, the lessor
demanded the lessee to vacate the premises.
Lessee refuse to vacate until he is reimburse
the 300, 000 and arguing that since he is a
builder in good faith he therefore has the right
to retain the thing until he is reimbursed. What
are the rights and obligation of the lessor and
lessee? Can the lessee be considered a builder
in good faith in the first place?
A: No, he cannot be considered a builder in good
faith as he was merely a lessee and he is not
claiming ownership over the parcel of land when he
constructed the building therefore he has no right
of retention. In fact under the law the lessor has
the option of appropriating the improvement or
requiring the lessee to vacate the premises and
remove the improvement. But if he decides to
appropriate the improvement for himself he has to
pay 50% of the expense incurred by the lessee
because it is a useful improvement. If the lessor
decides not to appropriate, the lessee may remove
the improvement even if that would cause damage
to the land as long as there is no unnecessary
damage cause to the land.
BE: Instead of building it was a chapel that is
constructed by the lessee, will the same rule
apply?
A: Consider also as useful improvement by the UP
Law Center.
Note: If the improvement however is an
ornamental improvement and the lessor wants to
appropriate the same, he has to pay for the value
of the improvement not merely 50% but the value
of the improvement itself.
BE: Pertain to construction of a building, where
an architect was authorized aside from
Page 37
November 2008
designing of the building also to supervise the
work of the contractor. When completed it was
delivered to the owner however within 15
years, it collapse because of the earthquake
due to faulty construction, and it was the only
building that collapse no other building. What
are the rights of the owner against the architect
and contractor? Can the owner demand the
reconstruction of the building considering that
the cost of the construction of the building has
tripled from the time of construction up to the
time of collapse?
A: Under 1723, the owner can hold the architect
and contractor solidarily liable. Because the
architect not merely designed the building but also
supervise the construction hence under 1723, they
are solidarily liable.
Under 1167, in obligation to do, if what has
been poorly done may be undone at the expense
of the debtor, in fact he can have another person to
do the work at the expense of the debtor.
Notwithstanding that the cost tripled he may validly
do so.
Under the present practices in the real
estate business this may no longer happen. The
liability of the architect and contractor normally may
not happen because the standard practice
nowadays the architect would be totally separated
from the contractor. As of now there would be a
project construction manager that would represent
the owner in supervising the work of the contractor
and no longer the architect.
RIGHTS AND OBLIGATIONS OF THE LESSEE
Note: Two (2) favorite articles are 1649 pertaining
to assignment of lease, and 1650 on sublease.
Q: The question in the Bar may be as simple as
may a lessee sublease the property without the
consent of the lessor and what are the
respective liabilities of the lessee and
sublessee?
A: Articles 1649 and 1650 would tell us that a
lessee may not assign his right on the lease
without the consent of the lessor however he may
sublease the property in whole or in part even
without the knowledge of the lessor as long as he
was not prohibited from subleasing the premises.
BE: In the contract the lessee was prohibited
from assigning the lease in one (1) floor of the
building but what the lessee did is sublease the
property, would that sublease bind the lessor?
A: Yes. He was only prohibited was assign the
lease but was not prohibited from subleasing the
premises. In fact the lessor need not prohibit the
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
lessee from assigning because under the law he is
prohibited from assigning his interest as a lessee
without the consent of the lessor. If there is a
stipulation which must be state in the contract is
the prohibition to sublease the premises in order to
bind the lessee.
Ultimately therefore the problem here is if
there is a contract entered into by the lessee with a
third person involving his rights as a lessee, would
that contract involve assignment of the lease or
merely sublease?
Malacat vs. Salazar
Facts: The lessor entered in a contract with the
lessee for a period of 20 years from 1947 to June
1, 1967. however during the lease period, the
lessee entered into agreement with third person
without consent of the lessor, thereafter the lessor
question the validity of the contract on the ground
that this was entered without his consent and
claiming that this was an assignment of lease, void
therefore he can recover the property from the sub-
lessee. Does the contract involve assignment of
lease or merely sublease.
Held: Whether the contract is assignment of lease
or sublease, would depend on whether there was
absolute transfer of rights from the lessee to the
third person, such that he desist himself from the
lease contract and his personality, resulting now in
two (2) persons the lessor and the assignee, and
the latter is now converted in to the new lessee.
However if the lessee retains interest no matter
how small in the contract of lease then it will be
treated only as sublease.
So again, in an assignment of lease there
has to be an absolute transfer of interest by the
lessee of his rights and he disassociated himself
from the contract however if there is reversionary
interest retained by him then it will considered
merely as sublease.
In this contract, the SC merely treated it as
a sublease and therefore valid even without the
consent of the lessor, because, first the contract
was with a period that would last only until May 31,
1967, upon the termination of the contract, there
would still be one (1) day in the lease agreement,
therefore this lessee will be reverted back to his
rights, since he still has until June 1, so this made it
merely as sublease.
There were other stipulations in the
contract which made them to conclude that this is
merely a sublease. Like, in the contract, there was
a prohibition by the lessee upon X from cutting the
trees on that land witout the consent of the lessee,
Page 38
November 2008
so why would he prohibit X from cutting the trees if
he would consider himself from being
disassociated from the lease contract. In other
words, he still intervened in the contract with
respect to the subject land.
There was stipulation also as to payment
of taxes. If the contract was really involve
assignment of the lease, he should have nothing to
do anymore with the property. He would have
disassociated himself from the original contract of
lease such that, the parties that would remain
bounded by the contract was only between the
lessor and the assignee.
Frensel vs. Mariano Ochaco
In this case, the theory of Frensel that
Merit was merely an agent was not sustained by
the SC. SC sustained that theory that the
relationship of Merit and Mariano was that of a
employer or a principal an contractor in a contract
of piece of work. Thus, can the supplier of the
material, Frensel, recover from the employer in
a contract of piece of work? There appears to
be no privity of contract. There would be privity of
contract between the owner of the edifice Mariano
and Merit in their construction agreement. And it
would be Merit and Frensel in the contract of sale.
So Mariano has no privity with the seller of the
material Frensel. Thus as a rule, there would be
no cause of action. In fact SC dismiss the case
filed by Frensel. Although in fairness, the SC ruled,
in the absence of material mens lien the action
may not prosper.
This case was decided in 1960, if the
action was filed today, may the action of
Frensel prosper? Yes, under the theory of unjust
enrichment, incorporated under Article 1729, that
the supplier of material may recover such amount
owing to him by the contractor to the extent that
the owner of the edifice is still indebted to the
contractor.
For example the owner of material is
claiming 3 million, but the owner of the edifice is
still indebted to the contractor for 5 million and the
project has been completed, the supplier may
recover from the owner of the edifice himself
instead of claiming from the contractor.
Again, on the basis of unjust enrichment
principle, since the owner of the edifice really owes
the contractor and this liability of the contractor
may not excuse by the fact that he already paid the
contractor, if the payment was made in advance. If
his obligation was not due and yet he paid the
contractor the supplier of the material, can still
recover the price of the material from the owner of
the edifice.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan

The liability of the owner may not also be
excuse by the fact that the contractor waived his
claim against the owner.
Ultimately even if the owner has already
fully paid the contractor at the time it is already due
and demandable he may still be held liable to the
supplier of the material if he did not demand for the
delivery of a construction bond which would
answer for the claims of the laborer and suppliers
of materials.
BE: This pertains to the lease of fishpond. The
agreement was for five (5) years however after
one (1) year period of the lease, the lessee
demanded from the lessor for (a) reduction of
the price and (b) extension of the lease for
another 1 year because he was only able to
harvest half of what is normally being
harvested in the fishpond due to unlawful
elements from the area, extorting money from
those leasing the property in that area.
A: If we are to consider the relevant provision on
this matter, the law provides that reduction of rental
may only be demanded by the lessee if he
harvested less than half of what normally would be
harvested in that property. Normally it can already
be said that he is no longer entitled to the reduction
because under the facts, he was able to recover
one half. At any rate even if he was only able to
harvest less than one half this would not entitle him
to reduction of rentals, because under the law, this
may only be claimed if it was due to extra ordinary
FE event as oppose to merely an ordinary FE.
Storm is an ordinary FE, what could be considered
as an extra ordinary FE event is pestilence,
unusual flood.
Thus, the presence merely of unlawful
element may be considered as extra ordinary FE
under the law and may not be considered as a
basis for the claim of reduction of the rental.
As to claim of extension of the lease,
again for the same reason, even if there is a FE in
contract of lease of thing, the happening of which
would not give the lessee the right to have the
contract extended that would only result to
suspension of the lease during the happening of
the FE. Example, war as FE would only have the
lease suspended and the lessee may bot be
compelled to pay the rentals during that period but
would not give the lessee the right to extend the
lease contract.
TERMINATION OF THE LEASE
Page 39
November 2008
BE: A building was constructed by A, for this B
gave A 5 million pesos with the agreement that
B will be the lessee of the entire building for a
period of 10 years for 1,000 rentals a month.
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 Bs 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.
A: In a lease of thing, death of the lessee does not
terminate the contract. A contract of lease is not
essentially a personal contract therefore upon the
death of the lessee, it may be continued until the
expiration of period of the lease by the heirs.
(Case: Heirs of Dimaculangan vs. IAC)
IMPLIED NEW LEASE
Note: One of the most favorite in the bar exam.
BE: The question in the bar could be as simple
as under what circumstance would an implied
new lease or tacita recunducion arise?
A: Under the law, the only requirement is that
1. The lease period has expired and
2. The lessee continues to be in possession of the
lease for at least 15 days from the time of the
expiration of the lease and
3. No notice to the contrary from the lessor and the
lessee.
BE: Pertain to contract of lease entered into for
period of 3 years Jan 1, 81 up to 1984. Rentals
were paid on monthly basis. It was stipulated
that the lessee has the option to buy property
at a certain price within a certain period (option
to buy). Despite the lapse of the 3 year period,
the lessee did not exercise the option, but
continued to be in possession of the property
and paying the monthly rentals and the lessor
accepting the same. This continued until June
1984 when the lessee stated that he would now
buy the property in accordance with the option
to buy. The lessor refuse, caliming there was
no more option. Was the lessor correct? Yes.
Was it correct to say that there was extension
of the lease under the facts?
A: Yes, there was an extension known was implied
new lease. However, with the implied new lease it
does not mean that all the terms and condition of
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
the contract in the original lease continue also.
First as to the term, under the law, the term of the
renewed lease would not be the term agreed upon
but only be of a period depending on the manner
the rentals are paid. If the payment is on annual
basis, the renewal would only be for a year and if
monthly payment of rental is made, the implied
new lease would only last for 30 days.

As to the option, it was renews, SC held,

in an implied new lease, only those terms and
conditions which are germane in a contract of
lease are deemed renewed as to the rest like
option to buy, will not be considered renewed.
Even in the facts of the case itself, it was stipulated
that the option may be exercise within the period
agreed upon (3 years).

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

Page 40 Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
November 2008
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 thats 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: Im 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 youve 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?
A: In both instances, no. It may appear under the
definition of agency under 1868, that there is such
an agency relationship because as defined, a
contract of agency at first bind himself to render
some service or to do something in representation
or on behalf another with the consent or authority
of the latter. So, kung proxy ka that would fall under
1868 di ba but the definition has been criticized by
some authors, one of them is Justice Reyes, that
the definition of a contract of agency under 1868
does not contemplate social and political
representation, hindi kasama ang social
representation, political representation in order to
have a contract of agency under the New Civil
Code, the purpose of the agency must be the
execution of the juridical act, the agent must ask or
Page 41
November 2008
bind himself to execute a juridical act, meaning the
act that will be executed by the agent on behalf of
the principal should either create, modify or
extinguish a legal relationship between the
principal and a third person.
Concretely if the agent was authorized to
buy, the act - the contract entered into by the agent
with the third person would create a legal
relationship between the principal and the third
person, that would be a seller-buyer relationship,
so it is a juridical act.
On the other hand, if the agent is
authorized to pay an indebtedness of the principal
to a certain person or to a bank and he in fact paid
the said amount, the result of the act is the
extinguishment of the existing legal relationship,
the legal relationship would be the debtor-creditor
relationship between the principal and third person,
which would be extinguished by the act of the
agent known as payment.
Again therefore for a contract of agency to
arise the subject matter or the object of the
contract must be the execution of the juridical act,
mere social or political representative would not
result to a contract of agency.
Q: If a contract well first if the instrument is
titled or denominated as with agency does it
mean that there is an agency relationship
between the parties entered into a contract?
A: Not necessarily, again the contract is not the
what parties want to call it to be, but rather how the
law will consider such contract if it is the law
determines the nature of the contact depending on
the stipulation of the parties.
Q: But what if the agency was used by the
parties in the stipulation? Does it mean that it
is a contract of agency?
A: Not necessarily, in Quiroga vs. Parsons the
word agency appeared about 3 times in the
contract but the word agency does not pertain to a
contract of agency but it pertains to another
concept of the word agency. You can use the word
agency several times in another concept like it may
be an instrumentality like a travel agency, security
agency, or even a government agency, but their is
no agency relationship or it may pertain to
exclusive right to sell in a particular territory diba,
so there is an exclusive he is considered an
exclusive agenct to sell a particular brand in the
province of Iloilo, there is actually no agency
relationship created, it is done only in an exclusive
right to sell a particular brand / product in a territory
.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
Distinguishing Contact of Agency from other
Contract and other Legal Relationship
Consider the characteristics of a contract of agency
as a contract and as a legal relationship business
organization.
CHARACTERISTICS OF A CONTRACT OF
AGENCY
Q: Real? Formal?
A: Definitely it is not a real contract and also not a
formal contract.
1. Consensual - conclude that it is consensual
contract. It is perfected by mere meeting of the
minds as to the object and consideration of the
contract.
2. Principal - Why it is a preparatory contract?
This is a distinct feature of agency similar to
partnership, they are both preparatory contracts,
they can stand on their own dont depend on any
other contract for their validity, which means that
even if the agent did not enter into another
contract, which means he did not perform their
obligation it doesnt mean that the contract of
agency is void, he may be held liable to such other
contract for not performing his obligations, this is
an agency in problems pertaining to agency, you
should always consider the facts that normally, 2
contracts involved, you have to deal with the
requisite of both contracts, in order to enable to
reach the correct conclusion, this is the principal -
agent with the contract of agency and second
contract will be the contract entered into by the
agent with the third person, this other contract may
be a lease, sale, or any other contract an act made
by the agent.
As of Principal contract, it can stand on its own
even if the agent did not enter into another contract
Q: Now, is this contract similar to sale as to
cause, in that it is also essentially an onerous
contract?
A: No, but it is presumed to be for compensation,
presumed to be onerous, however it may be
deemed gratuitous. Gratuitous also different from
partnership, because partnership is essentially
onerous, a partner will always have to contribute
something, now after this a nominate contract -
commutative contract.
As distinguished from other legal relation, you
have to go into the feature of a contract of agency,
how it is created? Then you will know, for example
that is different from other legal relationships,
which are created by operation of law like,
negotiorum gestio, agency and negotiorum gestio
may be similar in the sense that there is
Page 42
November 2008
representation in its legal relationship but they can
be distinguished as to their manner of creation in
that agency is created by mere agreement of the
parties, negotiorum gestio created by operation of
law.
A feature of agency which is peculiar is
representation.
No representative in a contract - he cannot be
considered as an agent.
Nielson vs. Lepanto Minning (LM)
Held: While there was a claim by LM that there is
an agency, the SC ruled that not a contract of
agency. Nielson has no power of representation to
bind LM with third person even it has power to buy
certain items he still has to obtain or seek the
opinion or approval of the BOD of the LM in order
to buy certain items, which means he is not really
an agent as to their has no right of representation.
But a feature which would make agency similar
to partnership
It is based on trust and confidence that there are
fiduciary obligations of an agent as much as there
are fiduciary obligations of a partner unlike in sales
or other legal relationships which are not based on
trust and confidence.
Another very important feature of Agency is the
manner of termination.
This is unusual for a contract that it can be
terminated at will by the principal agent, maski
sino. If the termination was made by the principal, it
is called revocation. if made by the agent it is
called withdrawal.
Mariano Case
To extend the contract of one party over another -
in agency the principal has almost full control of the
agent, he can give specific instructions to the
agent, on how the obligations are to be performed,
the manner of the obligations, the remedies
performed, with whom, where it is to be performed,
lahat, that would be the extent of the control of the
principal over the agent.
But as held in the case of control of one party
over another which only goes into the result, it
cannot be considered as a contract of agency but it
may be considered a contract for a piece of work.
Another important feature as to effect of
delivery of the thing
If there is a transfer of ownership upon delivery
of one party to the other party, that is not a contract
of agency. In a contract of agency, when the
principal delivers the thing to the agent, only
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
possession is transferred to the agent, ownership
is retained by the principal (owner) in fact in
agency to sell, an agent who was not able to sell
he has the right to return the goods to the seller.
Whether there was a stipulation as to there
would be no transfer of ownership despite the
delivery of the goods from one party to another,
and ownership of the goods, first party will only be
terminated upon the sale of the goods to a third
person, despite another stipulation stating that
there is no agency relationship created between
the parties. The SC ruled actually principal agent
ang relationship nila.
2 concepts similar in agency and partnership
Both of them are business organizations, both are
based on trust and confidence, there would be
normally a representation, however the very
important distinction between the two - in
partnership, there is a juridical personality created
separate and distinct from that of the individual
partner. In agency, despite the perfection of a
contract of agency, wala sila pa rin, the only
personalities would be that personality of the
principal and the personality of the agent.
Some authors would classify contract of
agency into three:
1. Actual agency
2. Apparent / Ostensible
3. Estoppel
1. Estoppel
Kang Case
Facts: Flores appears to have full control in a
restaurant (Washington Caf) owned by Kang and
in the administration of the restaurant he bought
certain items from Mack - items needed for
restaurant. But a portion / price was not paid by
Flores. So Mack (seller) went after the owner of the
restaurant. The only defense raised by the owner
was that Flores was not his agent.
Take note: It is very difficult to prove actual
agency, because an agreement between 2
persons, eh kung verbal lang ang agreement dun,
how would you be able to prove?
Held: The owner of the restaurant can be held
liable by estoppel because he clothed Flores with
full power as if he had the authority to buy those
items necessary for the administration of the
restaurant. Aside from that, Mack was able to
prove pieces of evidence - like in the lease
agreement over the building where the restaurant
was located and comes the owner of the restaurant
as lessee and Flores signed as an agent of the
Page 43
November 2008
lessee with all these the SC ruled that the owner of
the restaurant is liable under the Principle of
Estoppel.
2. Apparent / Ostensible
Rallos Case
Facts: Letter was sent by B to X, informing X that A
has the authority to enter into a contract with X
specifically to obtain goods from X, like copra,
abaca which goods will be sold by A. After the sale
a portion can be deducted as a commission and
the rest to be delivered to X. After a certain period,
the goods obtained by A from X remained unpaid.
In other words, A will get the goods from X. A did
not deliver the proceeds of the sale. X demanded
payment from B. The defense of B was as of that
moment from that certain period he has already
revoked the authority of the agent and therefore be
bound by any contract entered into by A in
representation of B with 3rd person. Is the claim of
B tenable?
No, 1873 so far as 3rd person are concerned, this
notice itong letter nya kay X remain in full force and
effect until it is rescinded in the same manner it
was given.
Q: What if B was able to prove that he posted
the notice in Manila Bulletin - notice of fact of
revocation of A. If there was such publication
of notice, would the ruling of the SC be
different?
A: No, still the same (Article 1873)
(See phraseology of 1873)
Q: What if in this problem he had actual
knowledge of the revocation even if he did not
receive the letter eh under 1873 he should be
sent a letter in order that the revocation of
authority of A will be effective as to third
person?
A: If the 3rd person has actual knowledge of the
revocation, it is bad faith on his part to continue
transacting with the agent. The agent acting on
behalf of the principal and thus he should not be
allowed to recover.
Pwede nabasa yung publication, informed by
phone, telephone conversation but it is very hard to
prove because the word of the principal is against
the 3rd person.
As far as 3rd person are concerned they would
have the right to believe that the agency has the
authority until they have receive a notice in the
same manner that he received notice as to the
authority of the agent.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
Q: In agency by estoppel / apparent agency, is
there really an actual agency existing?
A: It does not matter, the principal can be held
liable under the Principle of Estoppel because it is
very hard to prove the existence of the actual
agency. It can only be the principal in estoppel that
can be held liable. Just like in apparent / ostensible
agency sa totoo lng it is possible that he did not
revoke the authority pwede pa din diba, pwedeng
kunwari nirevoke na niya just to avoid liability to 3rd
person but that is a matter or a claim that he
already revoked. Pati mga letter, halimbawa even
assuming the principal held a letter to the agent
that letter can be easily denied kunwari, pinadala
nya 3 months ago pero ngaun lng pinadala nilagay
nya lng ung date nung unang panahon. Thus, it
only protects 3rd person. Thus, 1873 is included in
the law in agency.
3. Actual Agency
The law itself classifies actual agency into as to
manner of creation, express or implied. There is no
problem with express agency.
A. Express Agency - it is a kind of agency
wherein the consent of both parties is
expressly given.
B. Implied Agency - were the consent of one
of the parties was only impliedly given on
the part of principal.
Dela Pena vs. Hidalgo
Facts: Dela Pena authorized Hidalgo to administer
his properties in the Philippines, He has to leave
the country. Hidalgo managed the properties of
Dela Pena, after a while he has to leave the
country also and go to Spain for health reasons.
So he appointed another person, another Hidalgo
to administer said properties of Dela Pena and
wrote a letter to Dela Pena informing him of the
appointment of another person to replace him as
the administrator of his property. Dela Pena
received a letter, he did not reject the appointment,
he did not question the acts of the new
administrator. After a while he died and his heirs
(Dela Pena heirs) filed an action against Hidalgo
(the 1st agent) for accounting, damages etcetera for
the period after the appointment of the other agent.
Issues: (1) Who was then the agent during the
period?; (2) Can the 1st agent be held liable after
the appointment of another administrator?
Held: From the silence of the principal, due to his
inaction, due to his failure to repudiate the acts of
the substitute, he is thereby deemed impliedly
consented to the appointment of another person as
Page 44
November 2008
the new agent, therefore implied agency was
created.
This goes to implied agency pertaining to the
principal because of the silence of the principal,
because of lack of action of principal, because of
failure to repudiate the acts of another principal, na
alam nyang was acting on his behalf.
Q: However, is this rule applicable also to the
agents or to the other party? Concretely, if a
person was asked to administer the property of
another or to sell the property, and he said
nothing - by his silence, by his inaction, may
he be deemed to have accepted agency?
A: Not necessarily, thus under the law, you have to
make distinction to determine the scenario under
which the said appointment was made, okie! The
law would say when the 2 parties are absent, and
when the 2 parties are present.
When 2 parties are absent - 1 is in Manila and the
other is in Cebu.
When 2 parties are present - present in the same
room
(A) 2 persons present - present in the same
conference hall
Q: When both parties are within the same
conference hall, A said to B that he would sell
his (B) parcel of land in Cagayan De Oro City
but that B did not react, he just stared at the
speaker, nakatingin lng sya, he said nothing,
by his silence would have deemed the agency?
A: No.
Q: But if B delivered a special power of
attorney to A, sabi nya Here is the SPA, I am
authorizing you to sell my parcel of land in
Cagayan De Oro City. The SPA was accepted
by B but he said nothing, basta tinanggap na
lng nya, deemed impliedly consented to that
agency?
A: Yes.
(B) If 2 persons are in different place, one in
Manila and the other one in Cebu
Q: What if A was in Manila B in Cebu. A asked B
to be his agent to sell a parcel of land and B
did not say anything, wala lng, is B considered
to have impliedly consented as an agent?
A: No.
Q: But this time again a SPA was sent by A
(Manila) through DHL to B (Cebu) which was
accepted / received by B, now he did nothing
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
by his inaction, by silence he is deemed to
have accepted the agency?
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
authorized to sell the parcels of land of A, if B was
in the business of piggery / poultry ay walang
kinalaman yan sa selling of a parcel of land. He will
not be considered to have impliedly accepted the
agency. However, if B is a real estate broker,
talagang ganun yung negosyo nya di ba, buying
and selling parcels of land, then and only then on
his silence, he is deemed to have impliedly
consented to the agency.
COMPENSATION OF THE AGENT
Q: As to the compensation in a contract of
agency consider again if agency is gratuitous
or onerous?
A: Agency is presumed to be for compensation. If
that principal is claiming that the agent agreed to
render service without compensation the burden is
on him (the principal) to prove that in fact it is
gratuitous because the law presumes that it is for
compensation. But there is one other relevance in
this distinction - for example, due to the negligence
of the agent the principal suffered damages in the
amount of 100k. It was actually proven that the
agency was gratuitous. The agency in other words
sa abogado, pro bono or libre ang serbisyo nang
agent, may the agent be held liable?
A: Of course sa abogado even if pro bono yan if he
caused damage to the principal or client due to his
negligent acts, he can be held liable. However,
under the law if the contract of agency is gratuitous
in character, the court may mitigate the liability of
the agent, dahil gratuitous.
Atty. Uribes Comment: I definitely agree with the
provision. As to this, the only recognition of human
nature, pag walang sweldo mahirap mgtrabaho, in
fact, mahirap gumising sa umaga. Buti na lng
nauna ang sweldo sakin ditto sa review kaya
ganado ako magsalita
Article 1909 - The liability of the agent for causing
damage to the principal due to his negligence or
even bad faith or fraud committed against the
principal may be mitigated if the agency is
gratuitous in character.
BE: What is the scope of authority of the agent
- whether it only pertains to the acts of
administration or acts of strict dominion?
A: Under Article 1877, if the agency is in general
term this only comprises acts of administration.
Even if the principal beholds power to the agent or
it is stated that the agent may execute any act as
Page 45
November 2008
may be deemed appropriate, that will still be an
agency pertaining to act of administration.
FORM OF A CONTRACT OF AGENCY
As to form, the law is clear that it may be oral
however, the law may require a particular form
or specific form for what? for the validity of
agency? Is there a law which requires a
particular form for the validity of the agency?
A: Wala, there is no such form.
Q: Is there a particular form required by law for
the agency to be enforceable?
A: At least one, under the statutes of frauds if in
the terms or agreement if it is not to be performed
within 1 year, it should be in writing otherwise, it is
unenforceable. The effect of the agency if the
authority of the agent it is not in writing would go
into the contract entered into by the agent with the
3rd person. 1874 and 1878 - formalities.
REQUISITES OF A CONTRACT OF AGENCY
Essential requisites of a contract of agency are like
any other contract - there are 3 essential elements:
(1) consent of the contracting parties; (2) as
mentioned a while ago, the object of a contact of
agency is the execution of the juridical act; (3) as to
cause, as far as the principal is concerned it is the
service to be rendered by the agent and as to the
agent, it is the compensation to be paid by the
principal or it may just be liberality in gratuitous
contract.
Rallos Case
Held: The SC enumerated the essential elements
or the alleged essentials elements of a contract of
agency:
1. Consent
2. Execution of the juridical act - subject
matter
3. Acts within the scope of authority
4. The acts must be in representation of
the principal
Atty. Uribes Comment: These are allegedly the
essential elements. Again, some authors would
discuss in their books that these are the essential
elements. With due respect to the ponente of this
case, medyo mali mali ang enumeration, first there
was nothing mentioned about the cause or
consideration as a contract, a contract will never
validly have a cause or consideration. Well, it may
be liberality, pwede naman cause yan but there
must have a cause. That the agent act within the
scope and that the agent must act in
representation are not essential elements of a
contract of agency. They are actually obligations of
the agent which means they have already
perfected the contract of agency. No obligation will
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
arise kung void yung kontrata kung wala pang valid
contract. So the essential elements are only those
elements necessary for the validity of the contract.
Once the contract is valid then the obligations will
arise.
Q: If the agent acted outside the scope of his
authority, does it mean that the contract of
agency is void?
A: Of course not. He can be held liable for acting
outside the scope of his authority or if he acted not
in representation of the principal.
Q: Does it mean that there was no agency at
all?
A: Of course not. There is a contract of agency.
Under the rule, there are consequences if the
agent did not act in representation of the principal.
PARTIES IN A CONTRACT OF AGENCY
Going to the consent of the parties, 1
author may claim that there are 3 parties in a
contract of agency that is totally wrong!
There are only 2 parties in a contract of
agency the principal and the agent. However, in
problems involving agency, normally, there are
three persons involved. The third person with
whom the agent transacted is no longer part of the
concept agency. The contract entered into between
the principal and the agent is the contract of
agency. But when the agent entered into another
contract, it may be a sale, lease or other contract
and the 3rd person is not a party to this contract.
The 3rd person is a party to a 2nd contract.
Again the parties are the principal and the
agent. They may be called in other names the
principal may also be called the employer,
constituent, chief. The agent may be called
attorney-in-fact, proxy, representative.
1. Consent of the Contracting Parties
Q: What if the principal authorized an agent
who was then 16 years old to sell a house and
lot, giving him a Special Power of Attorney.
Pursuant to his mandate, the agent (minor)
sold the house and lot to X, a 3 rd person,
thereafter X filed an action to annul the
contract of sale on the ground that the agent is
minor at the time of the sale, will the action
prosper?
A: It will not prosper. On 2 grounds:
(1) In that contract of lease entered into by
the agent and the third person or the
contract of sale between the third person
and the agent, while A is considered as
the seller but only acting on behalf of the
Page 46
November 2008
principal still the real party in the contract
is the principal and not the agent
(2) The other reason is under the rules in
contracts In annulment of contract, only
the incapacitated person has the right to
have the contract annulled, the party in
the contract who is not otherwise
incapacitated has no right to institute an
action for annulment.
Either ground would be a valid ground to
dismiss the case.
2. Object of the Contract of Agency
As to the object of the contract of agency we have
mentioned already that this is the execution of
juridical act.
Q: Is it correct to say that any act which a
person can lawfully do, he can delegate to a 3 rd
person or to an agent?
A: Not all. There are acts which are considered
purely personal acts. This he may not delegate to
an agent like the execution of an affidavit, you
cannot ask somebody to sign on her behalf in an
affidavit or even in succession you cannot
delegate the execution of a will to a 3 rd person,
note that it is execution not drafting of the will. You
can ask somebody to sign for you, under certain
circumstances, but the execution per se cannot be
left to a 3rd person, it is a purely personal act.
Q: The right to vote may be delegated to
another person?
A: The answer is - it depends. Voting in national /
local election cannot at least be validly delegated.
Well it may be delegated, may have been
delegated by other people, pero pag nahuli ka, pag
bad ka, kulong ka sabi ni Joker But in a
corporation, as for corporation can there be a
valid delegation of the right to vote? Yes. In a
stockholders meeting, this cannot happen but in a
BODs meeting, in a BOD meeting it is the personal
presence of the Director which will be counted for
the purposes of quorum but for purposes of voting,
you can ask somebody to observe dun sa
proceedings. The members of the Board would
normally not exclude you as an observer, as a
representative of the other BOD.
But obviously if the person himself cannot lawfully
do, cannot delegate anyone like if the agent cannot
buy a parcel of land in the Philippines, he cannot
also delegate such acts to another person that is
void sale.
FORM OF CONTRACT OF AGENCY
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
As mentioned earlier, agency may be oral. It
doesnt matter if the contract of agency would be
valid but the parties even if it is by verbal
agreement, any effect in the verbal authorization,
the agreement between the agent and the principal
if it was only verbal will only be in the contract
entered into by the agent. Concretely, under 1874,
if the agent was authorized to sell a parcel of land
and his authority is not in writing, the sale itself is
void under 1874, however, if for example, the agent
was authorized to sell a car and his authority is not
in writing, what is the status of the sale? Would
that be valid and enforceable against the
principal?
A: No, it is unenforceable under 1878. San yung
car sa 1878? It falls under the last paragraph of
1878 - any other act of strict dominion would
require special power of attorney. So 1878 would
enumerate cases, acts of contracts where the law
requires the authority of the agent in writing, it
should have a Special Power of Attorney, otherwise
the contract entered into by the agent is
unenforceable against the Principal.
Q: Concretely, the agent was authorized to
administer a rice land. In the administration of
the rice land, he had to buy fertilizer, if he paid
the sellers of fertilizer without Special Power of
Attorney, would the payment be binding
against the principal?
A: Yes because that payment is only considered as
an act of administration.
Q: However, kung na-harvest na ung palay then
he used the proceeds of the palay to pay the
indebtedness of his principal with a certain
bank (PNB) without SPA, would that payment
be valid and binding as against the principal?
A: No because that would fall under the first
paragraph of 1878 to make such payment not in
the matter of acts of administration without SPA.
Other Acts / Contracts which Require a SPA
1. Entering into a compromise agreement
with SPA. He cannot submit the matter to
the arbitrator without another SPA, those
are 2 and separate distinct powers - the
power to submit matters in the arbitrator
and the power to compromise.
BE: The agent of the principal entered into a
contract of lease (without SPA) with X and the
period of lease is for 3 years. Would the
contract of lease be valid and enforceable as
against the principal?
A: It depends on the object of the lease. If this
lease involves immovable like a parcel of land, for
Page 47
November 2008
a period of 3 years without a SPA, would that be
valid and Binding?
Unahin natin ung car, if it would be a car for 3
years without SPA, even if it is for 3 years this
would be a valid and binding contract of lease as
against the principal. However, if this is an
immovable like a parcel of land, would this be
valid and binding against the principal? It
depends on whether in this contract of lease if the
principal is the lessor or the lessee. Under Article
1878, this contract is unenforceable as against the
principal only if: (1) in the contract of lease the
principal is the lessor; (2) the object is immovable
and (3) the period is more than 1 year. Take note of
the 3 requirements.
Under 1878, it is to lease the property of the
principal to another. Therefore, if the principal is the
lessee SPA is not required, kasi ang burden wala
naman sa principal, dun sa lessor, kc property ng
lessor yan di ba? Thus, the law only required the
SPA if the principal is a lessor, and the lease
contract involves immovable property and the
period is more than 3 years.
Q: Lease contract was entered into by A in
representation of B, with B as the lessor, the
period of lease of a parcel of land is 3 years. A
has a SPA. May this contract be unenforceable
as against the principal?
A: Yes, it is possible if this lease is not in writing.
This time under the Statute of Frauds. Kanina ang
discussion natin ay under 1878 but if you
remember the SOF, a lease over immovable
property for more than 1 year must be in writing to
be enforceable (Article 1403).
There is an author again who would claim that a
Power of attorney may be oral. He is really
wrong. A power of Attorney by its nature is in
writing, by definition it is a written authority. It
cannot be called a power of attorney if it is not in
writing, in fact, if you consider the specific provision
in the agency all this provisions pertain to a power
of attorney in a written instrument. For example,
Article 1871, pertains to the delivery of a power of
attorney; 1872 refers to transmittal of a power of
attorney; 1900 - power of attorney is written; 1902-
presentation of a power of attorney.
Obviously in a power of attorney, you cannot do
that if it is merely a verbal authorization. How can
a third person demand the presentation of a
power of attorney if that alleged power of
attorney is verbal? By its nature, it is in writing.
Q: Would that power of attorney be valid and
binding as against the principal if it is not in a
public instrument?
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
A: Yes, even if a power of attorney is only in a
private instrument, the power of attorney is valid
and binding against the principal. The law does not
require that it must be in a public instrument.
Jimenez vs. Rabot
Facts: Jimenez was the owner of certain parcels of
land in Pangasinan. He was then in the province of
North Luzon when he sent a letter to his sister
asking his sister to sell one of his parcels of land.
With that letter, the sister indeed sold one of his
parcels of land to Rabot. However, the sister did
not remit the proceeds of the sale, binulsa lng nya,
so when Jimenez went back to Pangasinan, he
demanded the property, yun ay na kay Rabot na,
so he filed an action against Rabot, the defense
raised by him is that the letter would not be
sufficient a power of attorney to bind him as a
principal in the sale of the parcels of land.
Held: A letter suffices as a power of attorney. When
you sent a letter to your brothers or sisters you do
not notarize such letter.
OBLIGATIONS OF THE AGENT
1. To carry out the agency.
2. In carrying out the agency, there are 2
obligations of the agent:
(a) To act within the scope of authority
(b) To act in behalf of the principal or in
representation of the principal.
3. To render an account of his transactions and to
deliver to the principal whatever he may have
receive pursuant to an agency even if it not owing
to the principal.
1. Primarily, the obligation of the agent is to
carry out the agency. If he failed to carry out, he
may be held liable.
Q: Should he carry out the agency after the
death of the principal?
A: As a rule no, because there is no one to be
represented. In fact under 1919, the agency is
extinguished by the death of the principal.
However, the law provides for an exception - if
delay would impair danger for an already began
but then unfinished contract, he should continue to
carry out the agency. Again, if it would cause
danger.
Q: But if he did not carry out agency, he may
not be held liable?
A: As a rule, he is liable for not carrying out the
agency.
Q: So what is the exception?
A: Professor de Leon gave an example of this, if
the agent was authorized to buy a specific car from
Page 48
November 2008
a specific person. When the agent was about to
buy the car, he was informed by the seller that
there is a defect in the brake system of the car.
Nonetheless, without informing the principal he
bought the car. If damage was caused to the
principal because of the defective brake system
and a claim is filed against the agent, can the
agent invoke that he merely carried out the
agency? No, here the law is very clear that he
should not carry out agency if it would result in loss
/ damage in the principal.
Another Example
An agency to buy a parcel of land before the Mt.
Pinatubo eruption. During that time, agents all over
Luzon, will buy a parcel of land not only in Metro
Manila but also in Pampanga and South
CALABARZON but if the agent was given authority
and he bought parcels of land immediately after
the eruption somewhere in Porac / Bacolor
Pampanga, mukhang you can be held liable for
buying those parcels of land. That it would be a
valid sale?
A: Yes, that would be a valid and binding sale as
far as the 3rd person is concerned. If nakita naman
na puro lahar, nakita mo pa binili mo pa, the agent
can be held liable because the act definitely would
result in loss or damage to the principal at least for
about 15 years.
2. In carrying out the agency, there are 2
obligations of the agent, he should always
remember:
(a) To act within the scope of authority
(b) To act in behalf of the principal or in
representation of the principal.
(a) To act within the scope of authority
Q: How would you know if the agent was acting
within the scope of authority?
A: You will be guided by the power of authority. In
fact, as a 3rd person, you can demand the power of
attorney, so that you will know whether in fact he
had authority to enter into a contract. But sa totoo
lng there are some SPAs which would be subject of
the case up to the SC pertaining to the scope of
authority of the agent.
Linal vs. Puno
Q: Was Puno authorized to sell the land or
merely authorize to administer the land?
A: There was a dissenting opinion.
Atty. Uribe: Mas magaling ang dissenting opinion.
Sa phraseology ng authority ni Puno he was only
to buy, to sell, etcin the administration of land, so
the buying and selling should not be construed as
a separate authority from the administration and
should be construed as a buying and selling in
relation to the administration. If you have to
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
administer a parcel of land, you have to buy so
many things, lalo na kapag agricultural land yan.
You have to buy tools, fertilizers, and therefore you
have the authority to buy. Do you have to
authority to sell? Yes, the products of that land.
You have the authority to sell pero ung ginawa ni
Puno, binenta nya mismo yung land. When the
case reached the SC, the majority of the decision
was he has the authority to sell under the power
of authority.
One of the bases of the SC in the
conclusion that there was a power to sell also
because the fact that the agent acted in good faith,
that is an incredible argument, by the mere
allegation that the agent acted in good faith he
already acted within the scope of the his
authority? Parang malabo yung dalawang yun.
Even if I would claim that I thought I am authorized,
does it mean therefore that I was authorized?
Those are 2 different things - believing in good faith
that you have the authority is different from in fact
having the authority.
Nonetheless, again, as a rule you can be
guided by the power of attorney but even if without
the power of attorney or despite the fact there was
a specific mandate of the power of attorney, you
should be guided by specific provisions of law
whether the act is within the scope of your
authority. For example: 1881 - the agent may do
such acts as may be conducive for the
accomplishment of the purpose of agency. This
particular provision has been cited by the SC in the
case of Mack vs. Kang, if a person who is an
agent has the authority to manage the restaurant,
necessarily, he must have the authority to
purchase items for the management of the
restaurant - the act of buying these items, like
plates, these are reasonable and necessary for the
accomplishment of the agency.
Another Article which would help you in
determining if the act is within the scope of the
authority is Article 1882.
Example of this, the principal authorized his agent
to sell his car, a specific car for 300k. The agent
sold the car for 400K. It is possible for the principal
to say that you acted outside the scope of
authority, galit pa cya 300k na binebenta pero 400k
nabenta. Technically, yes, the agent indeed may be
considered to have or may be claimed to have
acted outside or in excess of his authority because
he told to sell the car for 300k.
Q: What is the reason that the principal would
claim that the agent acted outside the scope of
his authority?
Page 49
November 2008
A: Many reasons: for example he asked to buy
somebody to sell his car because he expected sum
money to arrive from abroad to buy a brand new
car but wala napornada, di binigay ng kapatid yung
pera. Therefore, if the car will be sold wala na
syang kotse and it is an excuse that the agent
acted outside the scope of his authority but the
common reason would be because the principal
already talked to somebody else which will really
buy the car for 400k. When you may choose this
1? Because dun sa isa, walang commission di ba
sa 1 may commission. He may not recognize this
contract.
Article 1882 - the limits of the agents
authority shall not be considered exceeded should
it have been performed in a manner more
advantageous to the principal than that specified
by him. So under the law, that the act is deemed
not in extent of his authority, even on its face
parang in excess, the law will consider it as not in
excess merely because it is advantageous to the
principal.
You distinguish these transactions from an
agency to sell 100 kilos of mangoes and there is a
specific instruction that the mangoes will be sold 30
pesos per kilo. If you sold the mangoes for 50
pesos, 30 lang binenta 50 pesos per kilo ang
nangyari out of 100 kilos sisenta lng ang nabenta,
60 sisenta, 70 sitenta, so instead of 30 pesos per
kilo he sold 50 per kilo. Actually, this is a violation
of the instructions of the principal kaya siguro di
lahat nabenta ung mga mangga binenta nya with a
much higher price.
Another Article 1879 - the law specifically
provides that the special power to sell excludes the
power to mortgage. Even if the agent was
authorized to sell, he cannot mortgage that without
another power of attorney, as much as the power
to mortgage does not include the power to sell as
mentioned a while ago the power to compromise
does not authorize for the submission to
arbitration.
Q: However, if the principal authorized the
agent to borrow money without the authority of
the principal can the agent himself be the
lender?
A: The law provides yes, as long as the interest
rate will be the market rate, so the agent may be
the lender.
Q: The agent was authorized to lend money of
the principal, may the agent himself be the
borrower of the money without the consent of
the principal?
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
A: This time hindi na pwede. He may be a good
agent to lend the money to other person but he
may not be a good debtor. Thus, the law would
protect the principal in that case.
But also, be guided by the decision of the SC as to
the extent of the authority of the agent. For
example in the case of Insular Drug vs. PNB
Facts: The agent here was authorized to collect
sums of money including checks from the client of
Insular. So may agent ang Insular. He did collect
the sums of money and the checks, and the
checks were payable to Insular but instead of
delivering the checks in the Insular, he encashed
the check or deposited the checks in his account in
PNB.
Issue: Does the authority to collect the checks
includes the power to indorse the checks or even
the power to encashed the check?
Held: No, the power to collect does not include the
power to indorse or the power to encash the
checks. So kasalanan ng PNB kung bakit nila
tinanggap ung check without the proper
indorsement samantalang ang payee ay Insula.
Hindi naman si agent.
Atty. Uribe: In fact, the money involved here is
18,000 and I would still remember na Philippine
Reports pa itong case. The agent (Mr. Foster)
committed suicide when that fraud was committed.
Sabi nung isang nagbasa for sure ahead pa sa
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
ka 1932 pa eto eh
Q: The obligation to act on behalf of the
principal - If the agent acted for himself and did
not disclose his principal, would that 3 rd person
has a cause of action against the principal?
A: No.
Q: Would that principal have a cause of action
against the 3rd person?
A: Wala din. But there is an exception in this rule if
the object involved in the contract entered into by
the agent and the 3rd person belongs to the
principal - the law grants / gives a cause of action
to the 3rd person against the principal and vice-
versa. It is because of the possible collusion
between the principal and the agent di ba, so that
sasabihin ng principal alam ko yang kotse na yan
sira sira na makina (may katok). Thus, in actual
case the SC said, the vehicle has a knock , SC
decicion yan! Hehehehehe Kasi may katok ang
kotse, the principal would agree with the agent just
Page 50
November 2008
to sell it by yourself in your own name so that if
there would be a complaint the 3rd person has no
cause of action against me and the principal. But to
avoid such possibility the law would grant a cause
of action to the 3rd person if the object of the
contract belongs to the principal.
BE: A authorized B to borrow sum of money
from any bank and he also authorized B to
mortgage a specific parcel of land to secure
that loan. What B did, he borrowed money for
himself from a certain bank without disclosing
his principal. Later on, he defaulted. Can the
bank go after the principal?
A: Of course no, the contract is between the agent
and the bank only. The principal has nothing to do
with the contract. Under the facts, the agent
borrowed for himself.
However, if you have read the suggested
answer, may 2nd paragraph - to the effect that the
bank can at least foreclose the mortgage they can.
If you remember the question, di tinatanong ng
examiner can the bank go after the principal as far
as the thing is concerned. The only question
pertains to the payment of loan.
Another thing in the suggested answer
which is totally wrong - under the facts, the
principal authorized the agent to mortgage the
property for the loan that will be obtained by the
agent in the name of the principal. If indeed he
mortgaged the land for a loan in his name, would
that mortgage be valid?
A: Definitely not. If he mortgaged it as a mortgagor
the mortgage is void. The law requires that the
mortgagor must be the absolute owner of the thing
mortgaged. On other hand, even if the agent
mortgaged the thing on behalf of the principal, the
principal is the mortgagor. Would that be a valid
and binding mortgage as against the principal?
A: Also not. His authority to have the property
mortgaged to secure a loan, not to secure any
other persons loan and that therefore it cannot be
within the authority of the agent and therefore any
foreclosure of such mortgage will not prosper.
Q: If the agent acted within the scope of his
authority and in representation of the principal,
who will be bound in such contract?
A: Aside from the 3rd person, it will be the principal
because again the agent is merely representing
the principal.
Q: However, is it possible for the agent himself
to be bound in such contract or be held liable
under such contract?
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
A: Yes. If he expressly binds himself to that
contract, why he would do that? Agent lang naman
sya, when he would bind himself personally /
expressly? In the very nature of the agency the 3 rd
person actually knows that it is the agent and not
the principal. Ang nakikita lang ng 3 rd person sa
palengke eh ung nagtitinda baka ung principal
nasa espana. Therefore, the 3 rd person to whom a
thing is offered for sale for example the agency to
sell, the 3rd person will say that I will buy that if you
also bind yourself as one of the sellers because I
dont know the principal. Eh ang agent gusto
kumita, sige na din di ba. He will bind himself
personally in the contract as a seller and not as an
agent.
The agent may be held liable in the
contract even if he acted within the scope, acted in
representation of the principal, he acted negligently
or in bad faith di ba.
Article 1909 is consistent also on the law
on obligations that every person who is guilty of
fraud, negligence, etc.. will be held liable for
damages.
But aside from these 2 scenarios, of course, the
agent may be held liable if he acted beyond the
scope of authority. Also, if he acted beyond the
scope of his authority, however, he may not be held
liable under such contracts and under certain
circumstances:
(a) The principal ratified - then the principal
will be held liable and be bound on such
contract.
(b) Even if the principal did not ratify, if the 3 rd
person was notified of the fact that the
agent was in excess of his authority or
even if he was not notified, he was aware
of the fact that the agent was in excess of
his authority, the agent will not be held
liable because under 1898 that contract is
void. So this contract being void, the third
person cannot hold him liable for acting
within the scope of authority.
3. One important obligation of an agent is to
render an account of his transactions and to
deliver to the principal whatever he may have
receive pursuant to an agency even if it not
owing to the principal.
In fact, any stipulation exempting him from this
obligation to render an accounting is void.
Domingo vs. Domingo
Facts: The relationship between the principal and
the agent was not mentioned in this case but the
agent Domingo was authorized to sell a property of
the principal Domingo but in pursuant to this
authority, he introduced a perspective buyer to the
Page 51
November 2008
principal Oscar de Leon. Oscar, just any other
prospective buyer wanted the price to be lowered.
So he was asking that the price be lowered. During
the negotiation, this Oscar de Leon bid 1,000 to the
agent, which amount the agent did not disclose to
the principal. However, may violation na ng
obligation ang agent. The principal on the other
hand, somehow to only accommodate the demand
of the prospective buyer, nakaisip ng paraan, what
he did, he had an agreement with the prospective
buyer that kunwari the sale would no longer push
through so they have this drama that the
prospective buyer was expecting money from
abroad and therefore the principal would have a
reason to the agent na hindi na matutuloy ang
agency and therefore I am revoking your authority
as an agent.
Thereafter, the agent discovered that
something is wrong with what happened. He went
to the register of deeds and he discovered that in
fact a sale was executed between Domingo and
Oscar de Leon. The agent demanded for his
commission. May sub agent pa sya dahil
inintroduce cya kay Oscar, did the action
prosper?
Held: No, the SC ruled that for the failure of the
obligation to deliver to the principal for whatever he
may have received pursuant to the agency, even if
that is not only to the principal, that is a breach of
fiduciary relation which resulted in not giving the
agent his commission. But is the 1,000
important? Supposedly, parang 10,000 ang
marereceive nya as commission?
A: The answer would be yes because why would
the prospective buyer give 1,000 sa agent? hindi
dahil mahal nya ang agent?! That would be
because he wanted the agent to continue with the
principal to lower the price of the thing which would
be sold, which is inconsistent with the interest of
the principal. As an agent of the principal, he is
supposed to protect the interest of the principal not
to lower the price to be paid by the buyer. If only for
this the SC will not dismiss the case. In fact,
ginawa pa syang liable for the share of the sub-
agent.
Obligation to deliver to the principal what he
may have receive
In fact this obligation is so serious. If the agent
would fail to perform this obligation, he may be
imprisoned.
US vs. Reyes
Facts: The agent was authorized to collect sums of
money for convenience of the principal. More or
less 800 lang yun or 800+ is the amount to be
collected. Now he was able to collect only 500
instead of 800. He claimed that he is entitled to
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
20% as a commission (20% of 800 is 160). So hee
only remitted 340 to the principal, because of that
the principal demanded a greater amount than the
340. A criminal complaint was filed (for estafa).
Held: Regardless of the commission whether 10%
or 20%, the agent was not entitled to retain 160
because even if 20% the 20% of the 500 and he is
not entitled to the 20% of 800. The commission
should be based on the actual amount he collected
not the total amount which he is supposed to
collect. And because of his failure to deliver 400 to
the principal he was convicted.
Obligation to render an accounting
Q: The principal authorized the agent to sell a
car for 300k, the description of the car was
mentioned in the SPA. However, before the
agent would sell the car, the principal called
him by phone and instructed him to sell the car
in QC to a member of IBP chapter. Instead of
selling the car in QC to an IBP member, he sold
the car in Manila to a person not known by the
principal for 300k.
(1) Can the principal recover the car from the
buyer if that car is already delivered to the
buyer?
(2) Any remedy provided by the law to the
seller or to the principal?
A: (1) It depends, if that buyer has no knowledge of
that instruction of the principal then he has all the
right to retain the car and that sale will be valid and
binding as against the principal. As provided under
Art. 1900 so far as 3rd persons are concerned they
only rely on the SPA as written. They have no
obligation to inquire on the special instructions
made by the principal which are not mentioned in
the SPA, eh wala naman dun sa SPA na it will be
sold to an IBP member chapter in QC.
(2) To go after the agent for damages, if there is
any damage sustained by him for his failure to
follow the instructions of the principal.
Article 1898 - if the agent acted outside the scope
of his authority and this was known to the 3 rd
person the contract is void. Take note by the
specific provision of the law this contract is void
and subject to ratification. This is only the void
contract which can be ratified under Article 1898.
Q: Is it possible that the agent be held liable to
the 3rd person even if the 3rd person was aware
of the fact that the agent was in excess or
outside his authority?
A: Yes, if the agent promised to obtain the
ratification of the principal and failed to obtain the
ratification. Nagkwento sya sa 3rd person
you know I was acting in excess of my authority,
but dont worry I will get the ratification of my
Page 52
November 2008
principal. If he failed to get the ratification of the
principal he will be held liable not because of the
contract itself is void but because of failure to get
the ratification of the principal. If the principal
ratifies the contract, he cannot be held liable even
if it is a void contract because the principal is
bound to the contract.
APPOINTMENT OF SUBSTITUTE
Another possible obligation of an agent may result
from an appointment of substitute
BE: X appoints Y as his agent to sell his (X)
products in Cebu City. Can Y appoint sub-
agent? And if he does what are the effects of
this appointment?
A: Yes, the agent may appoint a substitute or sub-
agent, if the principal does not prohibit him in doing
so. But he shall be responsible for the acts of the
substitute (because he was not given authority by
the principal) especially if one appointed turns to
be incompetent or insolvent.
Atty. Uribe: Is this correct?
Mukhang mali. Mukhang confused ang sagot. Ang
tanong sub-agent? Can Y appoint sub-agent? Yes,
the agent may appoint substitute or sub-agent
which means apparently there is no distinction
between a sub-agent and substitute. With due
respect to the answer of the UP Law Center,
Professor de Leon is really good on this matter, a
sub-agent is very much different from a substitute.
If it is in replacement (kapalit) that is a
substitute which means that the agent would be
disassociating himself from the agency (Aalis na
sya or lalabas na sya ng Pilipinas etc.) and
somebody else must take over his functions.
An agent who appoints a sub-agent will
continue to be an agent in that agency relationship.
He does not disassociate himself from the
relationship. He is still the agent and therefore all
the rights and obligations would still be there even
if he appointed a sub-agent. But if the agent
appointed a substitute, the answer will depend on
Art 1892.
Kung ang tanong ay substitute and during
the management of the business by the substitute,
losses were incurred by the principal, mask isang
taon pa lng ang substitute 2M was incurred by the
principal, may the principal hold the agent
liable? Iba ung can the principal hold the
substitute liable?
A: The first thing you have to consider is if he was
prohibited in appointing a substitute or not. If he
was prohibited he will be held liable because he
appointed 1 despite the prohibition. In fact, under
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
the law all acts of the substitute appointed, if it is
against the prohibition, such acts are void. If he
was not prohibited under the law, he shall be
responsible for the acts of the substitute under
certain circumstances. Take note that the operative
word here is responsible and not liable. You may
be responsible - there are consequences.
If he was not prohibited there are 2
scenarios:
(1) Not prohibited but he was neither given the
power to appoint or
(2) He was not prohibited precisely because he
was given the power to appoint.
Kung he was not prohibited he but he also lacks
the power to appoint, ang scenario dito wala lng
namention sa SPA so nothing was mentioned in
the SPA regarding the appointment of the
substitute. Ang ibig sabihin nun he was not
prohibited and he was neither given the power to
appoint. If that is the case will he be liable
necessarily because of losses which were
incurred by the principal?
A: Hindi naman. If the substitute acted within the
scope of authority in representation of the principal
and the substitute acted in good faith with the
diligence of a good father of the family,
nonetheless losses were incurred by the principal -
Pwede bang mangyari un? Yes, ang negosyo ay
negosyo kahit na napakagaling mo pang
negosyante kung palugi na talaga negosyo, there
are forces beyond the control of every person. To
be factual about this kapag ngcoconstruct ng LRT
halimbawa sa Aurora boulevard, during the
construction stage ilang taon yan 2 or 3 years, sa
tingin nyo kung may restaurant pa dyan buhay
pa ba? Wala na kakain dyan puro alikabok na.
As long as he acted within the scope of his
authority, in representation of the principal and he
acted with good faith, the agent cannot be held
liable. He is responsible for the acts of the
substitute and if the substitute acted within the
scope of authority di ba. This is consistent to the
principle of agency - that the agent is not the
insurer of the success of the business of the
principal. Otherwise, wala na mag-a-agent dahil
kapag nalugi liable sya.
However, if in the management of the
business of the principal losses were incurred
because the substitute misappropriated the income
of the business or acted with gross negligence,
mga once a week lng nya dinadalaw ang business,
if that is the case, the agent will be responsible for
the acts of the substitute and he may be held liable
for the losses incurred by the principal because the
substitute acted negligently, outside the scope of
the authority and in bad faith.
Page 53
November 2008
However, if the agent was given the power
to appoint, there may be 2 scenarios:
(1) The person to be appointed as the substitute
may have been designated or (2) the person to be
appointed was not designated.
Sabi ng principal ok you can appoint a
substitute but if you will appoint a substitute,
appoint Pedro. If the agent appointed Pedro,
would he be held liable for the losses incurred
by the principal coz of the acts of Pedro?
A: Hindi naman. The substitute was designated
because the principal said that he should appoint
Pedro kaya inaapoint nya si Pedro but this should
be subjected to the provision of agency that he
should not carry out the agency if such would
manifest loss or damage to the principal.
Example
At the time of the appointment, the agent was at
that time fully aware that the person was
notoriously incompetent. He should have at least
informed the principal that the substitute is
notoriously incompetent. If he failed to do so
having the opportunity to inquire, then he can be
held liable.
If the person to be appointed was not
designated, he will only be liable if the substitute
turns out to be notoriously incompetent or
insolvent. (Article 1892).
LIABILITIES OF 2 OR MORE AGENTS
Q: If the principal appointed 2 or more agents
for a certain transaction, what would be the
nature of their liability? Can they be held liable
jointly or solidarily?
A: Agents can only be held jointly liable unless they
expressly bound themselves solidarily.
But in fact, even if they bound themselves solidarily
and damage was incurred by the principal due to
the act of one of the agents, it is still possible that
they may not be held solidarily liable despite that
there is an express agreement, if that agent who
caused damage to the principal acted outside the
scope of his authority.
Commission Agent
Authorized to sell and he would have a commission
as to the price.
Q: If the agent sold a refrigerator on credit
without the consent of the principal pag on
credit, he can still sell it at a higher price. Kung
normally 10k ang sabi ng principal, he may be
able to sell it at 15k pero 4 gives. If payable
every other month, the next day after the sale,
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
the principal having been informed of the sale,
he demanded for the proceeds of the sale. Can
the agent be compelled to pay or deliver the
proceeds of the sale kahit hindi pa nya na-
collect?
A: Yes, he can be compelled to deliver the
proceeds as if it was sold on a cash basis because
he sold it on credit without the consent of the
principal.
Q: How much would the commission agent
deliver if he was able to sell it at 15k, payable in
4 months but under the agreement of the
principal and the commission agent, it should
be sold only at 10k? (Assuming that the
agents commission is 10%)
A: He should deliver 9,000 to the principal (10,000
x 10% = 1,000 commission... 10,000 1,000 =
9,000)
Q: What if 4 months after, he have already
collected 15k, can the principal claim di ba
you only gave me 9k which is based on the 10k
price but you were able to sell it at 15k, so I
should get 90% of the 15k. Is that a valid
claim?
A: No, under the law, if the commission agent sold
the thing on credit without the consent of the
principal, he is entitled to any profit which he would
derive from such obligation.
Q: If he was obliged to collect or sell 10
refrigerators but he was able to sell only 1
refrigerator, can he be held liable for not selling
the remaining refrigerator?
A: Normally, he would be because that is failure to
comply with his obligations as an agent. But he has
a defense exercise of the diligence required. If
there was no law or stipulation, it will be diligence
of a good father of a family. The fact that he was
able to prove that he exercised the diligence of a
good father of a family xxx nonetheless, he was not
able to sell, he can no longer be held liable. Again,
he is not the insurer of the success of the principal.
BE: The agent was authorized to sell 20 units
of refrigerator. He received in addition to his
commission, a guaranty commission. He was
able to sell the refrigerators and received his
guaranty. However, the buyer failed to pay the
price of these refrigerators. The principal
demanded from the agent the money which he
could have delivered to the principal as a
guaranty commission agent. The defense
raised by the agent is that he has no obligation
to collect the price. The agent said that his only
obligation is to sell the refrigerator. Is that
correct?
Page 54
November 2008
A: No, as he received a guaranty commission, he
is known as a guaranty commission agent. He is
also known as del credere agent and as such, he
bears the risk of collection.
OBLIGATIONS OF THE PRINCIPAL
(1) To comply with the obligations which the agent
may have contracted within the scope of his
authority and in representation of the principal.
(2) Obligation to advance the money necessary for
the accomplishment of the purpose of the agency.
(3) Obligation to Reimburse
(1) To comply with the obligations which the
agent may have contracted within the scope of
his authority and in representation of the
principal.
This is the main obligation of the principal.
If the agent acted outside the scope of his
authority, the principal may not be bound to such
contract. But even if the agent acted beyond or
outside the scope of his authority, the principal may
be bound if:
1. He ratified
2. He contributed to deceive the 3 rd person
into believing that the agent acted outside
the scope of his authority (estoppel). The
principal and the agent will be solidarily
liable.
3. When the 3rd person could not have known
of the limitations on the power of the agent
(Example: Verbal limitation)
Article 1900 the third person will only have to
rely on the power of attorney as written.
(2) Obligation to advance the money necessary
for the accomplishment of the purpose of the
agency.
The principal, unless otherwise stipulated or unless
the he is already insolvent, must advance the
money. Even if the agent bound himself to
advance, if the principal is already insolvent, he
need not advance the sum of money kasi wala ng
mag-re-reimburse sa kanya.
(3) Obligation to Reimburse
G.R.: The principal
Exc: 1918
a. If the agent is acting in contravention of
the instructions of the principal.
Example: He sold items in Cebu instead in
Cagayan.
However, if the principal wants to avail of
the benefits derived by the agent, the
principal will be obliged to reimburse.
b. Agent was at fault
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
TWO OR MORE PRINCIPALS APPOINTED AN
AGENT
Q: An agent was appointed to a single and
common transaction and damage was incurred
by the agent. What is the nature of the liability
of the principals?
A: Solidary.
Q: Ayce was authorized to lease a specific
property (warehouse). She entered into a lease
contract with Dian. However, the principal
(Chato) also entered into a contract of lease
over the same property with another person
named Gerard. Which contract will be
recognized?
A: Based on priority in time, priority in right. The
prior date should prevail. Take note that this is a
lease of property.
In sale, priority in time is not applicable. See Article
1544 (double sale).
Q: What if the person filed an action for
damages against both principal and agent, who
will be liable?
A: G.R.: The principal
EXC.: If agent acted in bad faith
(incompatible contracts)
MODES OF EXTINGUISHING AGENCY
E xpiration of the period
D eath, civil interdiction, insanity
W ithdrawal
A ccomplishment of purpose
R evocation
D issolution of the entity
Q: Is this enumeration exclusive?
A: No, the other modes of extinguishing obligations
are equally applicable to agency. Example: mutual
dissent, loss of the thing due to fortuitous event.
BE: Ariel authorized Jessica to sell a pendant
with a diamond valued at 5k. While Jessica was
on her way home, 2 persons snatched the bag
containing the pendant. Thus, Jessica was not
able to sell the pendant. Ariel sued Jessica.
Jessica raised the defense that robbery is a
fortuitous event and therefore he cannot be
held liable for the loss of the pendant. Ariel
claimed that before Jessica could invoke
fortuitous event, there has to be conviction of
the perpetrators of the crime and even though
this is a fortuitous event, there was negligence
on the part of Jessica in walking alone with
that pendant. Decide.
A: The case is identical to Austria vs. CA. As to
the contention of Ariel, conviction is not required.
Preponderance of evidence is sufficient. Jessica
Page 55
November 2008
cannot be held liable because walking alone is not
a negligent act.
Atty. Uribes Comment: The answer is erroneous.
In the case of Austria which was decided on June
10, 1971, the incident happened in the 60s. The
SC said, we cannot consider the agent negligent in
going home alone. SC said that if the incident
happened today (referring to year 1971), the agent
can be held liable for concurring negligence,
considering the crime rate.
Problem Areas in Extinguishment
BE: What is the effect of the death of the
agent?
A: G.R.: The agency is extinguished (Article 1919).
EXC.: Article 1930 if the agency was constituted
for the benefit of both parties or for the benefit of a
third person who accepted the benefit, then that
agency shall continue even after the death of the
agent.
BE: P authorized A to sell a land (14 hectares).
In 1950, before A could sell, P died. After P
died, in 1954, the heirs sold the land to X. In
1956, A sold it to Y. Who has a better right?
A: If A has no SPA, this sale is void under Article
1874. X would have a better right. If there was a
SPA, it depends if A has knowledge of the death of
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
(he knows of the death of P), X has a better right.
Under Article 1931, the act of an agent after the
death of the principal will be valid if he had no
knowledge of the death of the principal and the
third person is in good faith.
Q: What if A has no knowledge and Y is in good
faith?
A: This will be incompatible contracts. Apply Article
1544.
Rallos vs. Felix
Facts: The agent was a brother of his two sisters.
He was authorized to sell the land. The brother
sold the land only after the death of one of the
sisters. He sold it to Felix. The administrator of his
sister filed an action to recover the property.
Issue: What is the effect of the death of one of the
principals?
Held: As to the surviving sisters portion, it is valid
and binding. But as to the deceased sister (Article
1919), the authority of agent was terminated after
the death. But if agent has no knowledge of the
death it is valid. But obviously, the brother had
knowledge of the death of her sister.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan

Note: Civil interdiction accessory penalty (more
than 12 years penalty)
Revocation
It is an act of the principal. The principal can
revoke the authority of the agent at will at any time.
Q: Would this be correct if the parties agreed
for the period of agency? Can the agent hold
the principal liable for breach of contract?
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.
contracts are considered agency coupled with
interest.
Note: The SC said that for an agent to claim that
the agency is coupled with interest and hence
cannot be revoked by the principal, the interest
must not be the usual compensation of the agent
which is commission and must be stated in the
SPA.
Q: If agency coupled with interest possible
that it could be revoked?
A: SC said in Collongco Yes, if the revocation
was with a just cause. In the case of Collongco,
there was a just cause because the agent
committed acts contrary to the interest of the
principal. Collongco attempted to ask the
superintendent of the factory to destroy the
machinery by pouring acid. Agent also sent
derogatory letters to banks where Claparol applied
for a loan. The agents motive is because he had
an agreement with another person (Mr. So) that
they wanted to take over the business of Claparol.

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 5 th
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.
Facts: Claparol was the owner of a nail factory and
he needed additional capital. Collongco offered to
advance the money needed by Claparol only on
the condition that he will be constituted as agent
for some aspects of the business (example: agent
for advertisement).
Held: From that arrangement, it is clear that a
bilateral contract depends upon the agency.
Bilateral contract which is the contract of loan. He
would not have advanced that money, had he not
been constituted as an agent by Claparol. These

Page 56 Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
November 2008
 Partnership
BE: Chato, using all his savings in the total
amount of 2,000, decided to establish a
restaurant. Faye, however, gave 4,000 as
financial assistance with the agreement that
Faye will have 22% share of the profits of the
business. After 22 years, Faye filed an action to
compel Chato to deliver to her the share in the
profits claiming that she was a partner. Chato
denied that Faye was her partner. Is Faye a
partner of Chato?
A: Yes, Faye was a partner in the business
because there was a contribution of money to a
common fund and there was an agreement to
divide the profit among themselves.
Atty. Uribes Comment: I do not agree with the
answer. Id rather agree with the alternative
answer. WHY? In the alternative answer as can be
seen from the facts, Faye gave 4,000 only as a
financial assistance. It was not a contribution to a
common fund. As such, she actually became a
creditor of Chato. Therefore, she did not contribute
to a common fund.
Q: What about the stipulation that Faye will
have 22% share of the profits?
A: The law on partnership is very clear that a
sharing in the profits does not necessarily result in
a partnership contract because the sharing of the
profits may only be a way of compensating the
other person, in fact that can be a mode of
payment of the loan. Kasi yung loan, supposedly
pwede payable every month with a fixed amount.
But mas maganda ang agreement na ito, 22% of
the profits, so that if walang profit sa isang taon,
wala munang bayad. Di ba thats reasonable
agreement. Only kung may profit, saka lang
babayaran. Kumbaga, friendly loan ito. The sharing
in the profits as expressly provided by law does not
necessarily result in a partnership contract. Thus, it
can be said that really Faye was not a partner but
is actually a creditor of Chato.
DEFINITION OF PARTNERSHIP
Q: What if two or more persons agreed to put
up a partnership but they never intended to
divide the profits among themselves, would
that still be considered a valid partnership
contract?
A: Yes, under the second paragraph of the article,
two or more persons can form a partnership for the
exercise of a profession.
Partnership vs. Co-ownership
Consider the essential features:
Creation:
Page 57
November 2008
Partnership is obviously created by agreement. Co-
ownership may be created by agreement, but it
may also be created by operation of law. In fact, by
express provision of the law, the fact that there is
co-ownership does not necessarily mean that there
is a partnership existing between two persons.
Example: Two persons may inherit a property from
their father or mother, and under the law, they may
be considered as co-owners of the same property.
Purpose:
Partnership: either to divide profits or exercise a
profession.
Co-ownership: Common enjoyment of the thing or
right owned in common; merely to enjoy the
property, thus they may have different purposes.
A very important feature of partnership in relation to
co-ownership: it has a juridical personality,
separate and distinct from the individual partner
which is obviously not present in co-ownership. In
co-ownership, they have their respective
personalities and no new personality will be
created.
Powers of the Members:
Partnership: Unless otherwise agreed upon, each
partner is an agent of the other partners and of the
partnership.
Co-ownership: As a rule, a co-owner cannot act as
an agent of the other co-owners unless otherwise
agreed upon between the co-owners.
PROFITS:
Co-owner: Mas malaki ang profits, mas malaki ang
interest. But not necessarily in partnership,
because the sharing in the profits may be
stipulated upon by the parties. Pero kung walang
stipulation, it may be based on the capital
contribution.
Q: Will death extinguish co-ownership?
A: No, Kapag namatay ang isang co-owner, his
heirs will be the co-owners of the surviving co-
owners at pwedeng tulou-tuloy lang yan. However
in partnership, if it is a general partnership, if one
of the partners dies, the partnership is dissolved.
ESSENTIAL ELEMENTS OF PARTNERSHIP
Like any other contract, it should have the three
essential requisites:
1.) Consent
2.) Object: to engage to a lawful activity,
whether a business or profession.
3.) Cause or consideration: the promise of
each partner to contribute money, property
or industry
Note: From the definition alone, it can be known
that a contract of partnership is essentially
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
onerous-each partner has to contribute either
property, money or industry. Walang free rider sa
partnership.
1. Consent of the contracting parties:
The rules in contract would be equally applicable
but, just like in sales and lease, there are persons
who are prohibited from entering into a contract of
partnership:
1.) Spouses:
BE: May the spouses enter into a limited
partnership to engage in a realty business, with
the wife as a limited partner?
A: Yes, because spouses are only prohibited,
under the New Civil Code, to enter into a universal
partnership. Therefore, if they form a limited
partnership, they can constitute only Php100,000
each, and that will not be a universal partnership
because that would be a particular partnership.
2.) Corporations:
BE: Can a corporation enter into a contract of
partnership with an individual? Can a
corporation enter into a contract of partnership
with another corporation?
A: To these two questions, the answer is no.
Ruled by the Supreme Court in the Case
of Tuazon, while a corporation may enter into a
joint venture, it cannot validly enter into a contract
of partnership. Under the Corporation Code, the
business of the corporation is supposed to be
governed by the board of directors, and if such a
corporation will enter into a contract of partnership,
the other partners may bind the corporation in
certain activities without the consent of the board of
directors. Another reason is that the properties r
investments of the stockholders may be exposed to
a risk not contemplated by the stockholders.
3.) Those persons who are prohibited from
giving each other any donation or advantage
cannot enter into a UNIVERSAL partnership:
a.) those guilty of adultery or concubinage
at the time of the execution of the contract because
it would be easy to circumvent the provision on
donation if they would enter into a universal
partnership, kasi pwedeng yung paramour ang na-
contribute lang Php10.00, while yung isa ang na-
contribute Php10 Million, however, pagdating ng
sharing, kabaligtaran. Yung paramour, 90%, while
yung nag-contribute ng Php10 Million, 10% lang ng
profit. In fact, sa dissolution, pwedeng ganun din
ang agreement. That would be a circumvention of
the provision on donation.
Other persons prohibited are those
mentioned in Art. 1739, those persons mentioned
in the law on donation.
Page 58
November 2008
2. Object of Partnership:
To engage in a lawful activity.
Q: If the object is to engage in a lawful activity,
necessarily the partnership is valid?
A: No. There are specific business activities
wherein the law would require particular business
organization which may engage in such business
activity, specifically the Corporation Code which
provides that only corporation may engage in
insurance and banking business, therefore there
can be no partnership engaging in such business:
banking and insurance.
3. Cause of Partnership
The promise of each partner to contribute either
money, property or industry.
Q: What would be the effect if either the cause
or the object of the partnership is illegal or if
the partnership has an unlawful cause or
object?
A: The contract of partnership is void and under the
law, when the contract is void, it produces no legal
effects whatsoever, therefore, action to compel a
party to the contract to distribute the profits will
never prosper. In fact, under the law on
partnership, the State will confiscate the profits of
such illegal partnership.
Q: Will an action to compel a partner to render
an accounting prosper?
A: No. Any action to enforce a void contract will
never prosper.
Q: May a party to such void contract at least be
able to recover what he contributed or
delivered pursuant to that void contract?
A: As a rule, no, because of the in pari delicto rule
under Article 1411.
EXCEPTIONS: Article 1411, 1412, 1414,1415 and
1416. Under these circumstances, a party to a void
contract may be able to recover what he
contributed.
Atty. Uribe: I would always consider one of these
provisions as a very practical one:
In a contract that is void, it is so provided that a
party to such contract may recover what
contributed if he repudiated the contract before the
consummation of the contract and before damage
is incurred by a third person.
FORMALITIES:
Q: If the agreement of the parties to a contract
of partnership was only a verbal agreement,
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
would that be a valid and binding contract?
Will there be a juridical personality created?
A: As a rule, yes. Even if under Art. 1772, the law
provides that every contract of partnership, having
a capital of more than Php3,000 or more, shall be
in a public instrument and must be registered with
the SEC.
The 2nd paragraph of Art. 1772 provides
that despite failure to comply with the requirements
in the preceding paragraph, this is without
prejudice to the liability of the partnership and the
individual partners to third persons. From that
article alone, it is clear that despite non-compliance
with the requirements of the law as to form, there is
a partnership created, because this is without
prejudice to the liability of the partnership (kung
may partnership). But more directly, Art. 1768, the
law provides, the partnership has a juridical
personality separate and distinct from that of each
if the partners, even in case of failure to comply
with the requirements of Art. 1772, par.1.
After all, a verbal partnership contract is valid and
binding between the parties.
Q: Is there a partnership agreement which
would require a particular form for the validity
of the partnership agreement?
A: Yes. There is only one scenario here: if one of
the contracting parties promised to contribute an
immovable, there has to be an inventory of such
immovable and signed by the contracting parties. If
there is no inventory, the law is very clear, the
partnership is void.
Q: What if there was an agreement to
contribute an immovable and there was an
inventory signed by all the partners, however,
the partnership agreement itself was not put
into writing, what is the status of that
partnership contract?
Atty. Uribe: I agree with the position of Professors
Agbayani and Bautista that, despite Art. 1771, as
long as there is an inventory of such immovable,
the partnership agreement is valid and binding and
the juridical personality will be created.
Why?: As ruled by the SC consistently, like in the
case of Dauden-Hernaez vs. delos Angeles, for a
contract to be void for non-compliance with the
requirements of the law as to form, the law itself
must provide for the nullity of the contract. If the
law only required a form, but the law itself did not
provide for the nullity of the contract, if the parties
failed to comply with that form, then that form is not
necessary for the validity. It may be necessary for
the enforceability of the contract or greater efficacy
of that contract. Thus, in partnership, it is said that
this requirement as to form will only be necessary
for the greater efficacy, kasi kailangan naka-
Page 59
November 2008
register sa SEC. That is apparently the only reason
why the law would require a particular form in
partnership where there is an immovable
contributed by one of the contracting parties.
Atty. Uribe: The position of Prof. Agbayani is well-
supported by the SC.
A partnership has a juridical personality
which is separate and distinct. This is consistent
with the legal person theory, as opposed to the
partnership in the United States which adheres to
the aggregate theory which states that their
partnership has n juridical personality separate and
distinct from the contracting parties.
Consequences: separate and distinct
personality
1.) It can own its properties;
2.) It can sue and be sued;
3.) It may be found guilty of an act of
insolvency;
4.) It may be dissolved for committing an
act of insolvency.
Concretely, in the case of Campos-Rueda vs.
Pacific Commercial
Facts: The partnership here filed a petition for the
dissolution of the partnership, but one of the
creditors opposed the petition for dissolution on the
ground that there was no showing that the
individual partners are already insolvent.
Held: The solvency or insolvency of the individual
partners is irrelevant as to the petition of the
dissolution of the partnership. The partnership
itself, having a separate and distinct personality
may be dissolved or may commit acts of insolvency
regardless of the solvency or insolvency of the
partners.
Actually, if one of the partners in a general
partnership is insolvent, there is already dissolution
of the partnership by operation of law, if the same
be proven.
CLASSIFICATION OF PARTNERSHIP:
As to the object of the partnership is only to
determine whether a person may enter such
partnership, there is a need to distinguish whether
a partnership is a UNIVERSAL or PARTICULAR
partnership.
2 Kinds of Universal Partnership:
1.) Universal Partnership of Property
2.) Universal Partnership of Profit
Under the law, if the partners agreed to form a
universal partnership, however, they failed to state
what kind of universal partnership, it shall be
treated merely as a universal partnership of profit,
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
meaning, it shall comprise only the result of their
work and industry. In universal partnership of
property, the partners are deemed to have
contributed all their property, not literally all, for
there some properties which are exempt from
execution and under the law may not be
considered as having been contributed by the
partners.
TERM OF PARTNERSHIP
Q: If the partners failed to fix a period, does it
mean that the partners agreed a partnership at
will and may be dissolved at any time without
any liability so long as they acted in good
faith?
A: No, because a partnership may be a partnership
for a particular undertaking even if no period was
fixed by the parties.
In one case, a partner, dissolved a
partnership, claiming it to be a partnership at will,
the partnership being involved in a bowling
business. The SC ruled that even if the partners
failed to fix a period, the partnership cannot be
considered as a partnership at will because there
was a stipulation in the partnership agreement that
the debt of the partnership shall paid out of the
profits that will be obtained by the bowling
business. Thus, after all, it cannot be dissolved at
will, for the debts will have to be paid. Therefore,
the SC ruled that the said partnership is a
partnership for a particular undertaking.
CLASSIFICATION OF PARTNERS:
According to the liability of the partners:
1.) General
2.) Limited
This classification is relevant only in limited
partnership.
In general partnership, partners are
general partners and they are liable for partnership
obligations up to their personal property. Each one
of them has the right to participate in the
management of the partnership unless otherwise
agreed upon by the partners.
In limited partnership, while a limited
partner cannot be held liable up to his personal
property, the liability of a limited partner will only be
up to his capital contribution. He also would not
have the right to participate in the management of
the business of the partnership.
G.R.: A limited partner cannot be held personally
liable for partnership obligations.
EXC: Instances when a limited partner may be
held liable up to his personal property:
Page 60
November 2008
1.) If he participates in the management of
the business of the partnership.
2.) If his surname appears in the firm name.
Except: a.) even if a limited partners
name appears in the firm name, if the
surname of a general partner is the same
as that of the limited partner. b.) such
surname was already in the firm name
prior to his entry in the partnership.
3.) When he is a general partner and a limited
partner in the same partnership at the
same time.
Who? A person who is both a general and
limited partner at the same time and in the
same partnership would have all the rights
and obligations of a general partner,
however, he would have a right as to his
contribution as against the other partners,
which he would not have, had he not been
a limited partner. When it comes to
division of assets upon dissolution he has
the priority as a limited partner. That is the
only edge, otherwise, he has all the rights
and obligations of the general partner.
4.) When there is failure to comply
substantially as to the formalities
prescribed by law in the formation of a
limited partnership.
Under the law, if there is a failure
to comply substantially with the formalities
for the creation of a limited partnership,
that agreement will be valid among the
partners, however, all of them can be
treated as general partners by third
persons. Therefore, a third person, in this
scenario, can hold a limited partner liable
up to his personal properties. The limited
partners remedy is to seek
reimbursement from his other partners.
As to the contribution:
1.) Capitalist
2.) Industrial
Q: An industrial partner, may be a general
partner?
A: Yes. A capitalist partner may either be an
industrial or general partner.
Q: May an industrial partner be a limited
partner?
A: No. A limited partner can only contribute money
or property. He cannot contribute service.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
Q: But can a partner be both capitalist and
industrial?
A: Yes, he can contribute both money and industry.
He can be both capitalist and industrial and there
will be consequences to that.
BE: A and B formed a partnership to operate a
car repair shop. A contributed money, B
contributed industry. While the car repair shop
was already in operation, A operated a coffee
shop beside the car repair shop. B also
operated a car accessories store on the other
side of the shop. May these partners engage in
those business activities?
A: As far as A is concerned, he can validly engage
in such business because the law would only
prohibit him from engaging in a similar activity. As
far as B, an industrial partner, is concerned, he
cannot engage in any business activity without any
express authority or grant by the partnership for
him to engage in such business. Thus, if A did not
give his consent, B cannot validly engage in ANY
business, not only similar business, for B, as
industrial partner, is supposed to give his time in
the said partnership business.
Incoming Partner:
Q: ABC Partnership is composed of A, B and C.
Thereafter, D became a member of the
partnership. Six months after Ds entry as a
member, a certain obligation, 3 Million became
due and demandable. For this partnership
obligation, can D be held liable?
A: As was provided in the facts, the 3 Million
became due and demandable. Thus, this obligation
may have been incurred after Ds entry or before
his entry, although it became due after his entry or
admission to the partnership.
If the obligation is incurred after his entry,
there is no question that, if he is a general partner,
he can be held liable up to his personal properties.
Q: If this obligation is incurred prior to his
entry as a partner, can he be held liable?
A: Yes. As a rule, he may be held liable, but only to
the extent of partnership property which would
include his capital contribution, unless there is a
stipulation to the contrary. Even if the obligation
was incurred prior to his entry, however, if in the
partnership agreement, he agreed to be bound by
those obligations, then he can be held liable even
to the extent of his personal property, though he is
a new partner.
Q: X is indebted to ABC Partnership which may
be limited. The same debtor of the partnership
is also a debtor of one of the partners. The debt
to the partnership is 100,000, while the debt to
Page 61
November 2008
the partner is 50,000. X delivered 30,000 to A.
Should this 30,000 be distributed in proportion
to the debts to the partnership and to A,
meaning, 20,000 will go to the partnership and
10,000 will go to A.
A: If A is a limited partner, there shall be no
distribution in proportion to the credit of these two
creditors. The law which requires that payment be
distributed in proportion to the two credits will only
apply if the partner to whom the amount is
delivered is a managing partner. If he is a limited
partner, normally, he would not have any
participation in the management of the partnership
business. Thus, if he is a limited partner, then he
can have the right t receive everything he received.
Q: Assuming that A is in fact a managing
partner and he received the 30,000 from X, is it
possible still for A to retain everything which
he received?
A.: Yes, if this debt is already due and
demandable. In this scenario, the debt is not yet
due and demandable. Such debt MUST be due
and demandable in order for the law on the
proportional distribution to apply to both debts.
Q: A is a managing partner and both debts are
due and demandable. 30,000 was delivered to
A. Is it possible for the partnership to have the
right to the entire 30,000?
A: If A receipted the amount in the name of the
partnership. By specific provision of the law, if the
managing partner who received such amount,
receipted the same in the name of the partnership,
the partnership will be entitled to the entire amount.
Q: If A, as managing partner, and both debts
being due and demandable, he received the
amount of Php30,000 and receipted the same in
his own name, may he be entitled to retain
everything?
A: Yes, if Xs debt to A is more onerous and X
chose to have this amount paid to this debt. Under
the law, the debtor has the right to choose to pay
the debt which is more onerous. Again, the premise
is the debt to A is more onerous than the debt to
the partnership.
If A, as managing partner, received the same
amount, receipted in the name of the partnership,
both debts are due and demandable and are of the
same burden, there will be a proportional
distribution of the amount, 20,000 will go to the
partnership, and 10,000 will go to A, the debt to the
partnership being 100,000 and the debt to A being
50,000.
PROPERTY RIGHTS
3 Major property rights of a partner:
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
1.) Right in specific partnership property;
2.) Interest in the partnership; and
3.) The right of the partner to participate in the
management of the business of the partnership.
Property rights considered as minor:
1.) Right to have access to the books of the
partnership;
2.) Rght to demand for a formal accounting.
Q: Can a partner demand for a formal
accounting at any time?
A: No. The law will only give a right to a formal
accounting under very specific circumstances.
Why? Because a partner already has access to
the books, thus, it may be unnecessary to demand
for a formal accounting at any time.
Right in specific partnership property:
Under the law, a partner is a co-owner
with the other partners as to specific partnership
property. Again, he is a co-owner with his partners
and NOT with the partnership over specific
partnership properties.
Q: How could a person be a co-owner of a
property owned by another if he is not a co-
owner of that other person? The owner is the
partnership. How can a partner be a co-owner
of that property if he is not a co-owner with the
partnership?
A: Other authors would say that the problem with
this provision is that it was copied from the Uniform
Partnership Act of the United States, where a
partnership has no separate and distinct
personality, thus making them merely co-owners.
But, in fairness with the Code commission,
the 2nd sentence would tell you that this co-
ownership has its own incidence. In other words,
this is no ordinary co-ownership under the property
law. Thats why some authors would call it co-
ownership sui generis.
Q: Concretely, in property law, if two persons
are co-owners of a parcel of land, can a co-
owner sell his interest over the parcel of land
without the consent or even knowledge of the
other co-owner? Would that be a valid
assignment of interest?
A: Yes. However, in specific partnership property,
there can be no valid assignment of interest by one
partner. The assignment of interest of a specific
partnership property would only be valid if all the
partners would likewise assign their interests.
Q: May a creditor of a co-owner of a parcel of
land levy upon such portion of the land interest
over that land owned by the debtor / co-owner?
Page 62
November 2008
A: Yes, there can be such valid levy.
Q: In partnership, can a creditor of a partner
levy upon the rights of the partner over a
specific partnership property?
A: That is not possible. Only partnership creditors
can levy upon partnership assets or partnership
property. This is different in the partners interest in
the partnership for this interest in the partnership
can be validly assigned by one of the partners
even without the consent or knowledge of the other
partners.
Interest in the Partnership
Simply put, this is a partners share in the profit
and surplus. Whatever is his share in the profit or
surplus is his interest in the partnership.
Q: What would be the share of a partner in a
partnership?
1.) Stipulation. For instance, in a partnership
of 3 persons, they can agree that one
may have 95% of the profits, while the 2
other partners may have 5% of the same
respectively.
Q: What if, in such agreement, one of the
partners was excluded in sharing in the
profits?
A: Such stipulation is void. Take note that only such
stipulation is void and not the whole partnership
agreement.
Q: Thus, if the stipulation as to the sharing of
the profits is void, or that there is no
stipulation with this regard, what would be the
sharing in the profits of the partners?
A: It will depend on their capital contribution.
Q: What if one of the partners is an industrial
partner?
A: By express provision of the law, he shall be
given his share by determining the value of the
service rendered. Thus, determine first the value of
the service rendered, give the same to the
industrial partners, then the balance will be
distributed to the capitalist partners in accordance
to their capital contribution.
BE: A, B and C are partners. In their
partnership agreement, they agreed in the
equal sharing of the profits. Thereafter, C
assigned his whole interest in the partnership
to X. X now demanded that he be allowed to
participate in the management of the business
of the partnership and also his share in the
profits in the business of the partnership. Are
the claims f X valid?
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
A: As to Xs claim t participate in the management
of the business, he has no such right as an
assignee. By express provision of the law, an
assignee has no right to participate in the
management of the business of the partnership,
unless otherwise agreed upon. He will not even
have the access to the books of the partnership.
His only right would be to receive whatever the
assigning partner may receive as share in the
profits and in the surplus.
Q: If profits were declared, for instance, in the
amount of 360,000, would the assignee have
the right to share in the profits?
A: Yes. X is entitled to share of Php120,000, since
the agreement is equal sharing of profits.
Right to participate in the management of the
business of the partnership
BE: W, X, Y and Z formed a partnership. W and
X contributed industry; Y contributed 50,000; Z
contributed 20,000. In a meeting, the partners
unanimously agreed to designate W and X as
managing partners, such appointment having
no stipulation as to their respective duties nor
was there any statement that neither can act
without the consent of the other. Thereafter, 2
persons applied for two positions: 1.) as
secretary; and 2.) as an accountant. As far as
the secretary is concerned, it was W and X who
appointed the secretary, opposed by W and Z.
The accountant was appointed by W concurred
by Z, which was opposed by X and Y. Whose
appointment would bind the partnership?
A: This management arrangement is known as
joint management. Any managing partner may
execute acts which are merely acts of
administration even if opposed by all the other
partners, kung mag-isa lang sya. But, if there are
two or more managing partners, they have to
decide by a majority vote.
Q: Is the appointment of the secretary an act of
administration?
A: Yes.
Q: Would it bind the partnership?
A: Yes, even if opposed by the other partners, the
capitalist partners, the latter would not have any
right for this is merely an act of administration well-
within the powers of a managing partner.
Q: With regard to the accountant, take note that
the appointment by W was opposed by another
managing partner. How will this tie be
resolved?
Page 63
November 2008
A: Under the law, this will be resolved by all the
partners with the controlling interest. The partners
with controlling interest will prevail.
Q: In this case, who has the controlling
interest?
A: Y. The determination as to who has controlling
interest depends on the capital contribution. Thus,
an industrial partner is excluded in such cases. In
this case, it is obvious that 50,000 is more than the
capital contribution, and because Y opposed to the
appointment, such appointment will not bind the
partnership.
Other management arrangements are provided in
Articles 1800, 1801, 1802, 1803.
TYPES OF MANAGEMENT:
1.) Solidary Management:
-without specification as to each others
duties or without stipulation that one of them shall
act without the consent of all.
2.) Joint Management:
-two or more managing partners with the
stipulation that none of them shall act without the
consent of all others. The incapacity of one of the
partners, or his absence will not be a valid ground
not to obtain his consent to a contract. It has to be
by unanimous consent, unless, in obtaining his
consent (he is absent or incapacitated) it would
result in irreparable damage to the partnership,
then the consent of the absent or incapacitated
managing partner may be dispensed with. This is
also known as management by consensus.
3.) If there was management arrangement
agreed upon between the partners, each partner is
considered as an agent of the partnership.
Into these arrangements, if only one partner is
appointed as a manager, he can execute any acts
of administration even if opposed by all the other
partners.
Q: In a partnership of which the business is
into buying and selling cars, the managing
partner decided to buy a vintage Mercedes
Benz, to the opposition of the other partners
for they consider it bad investment, will the
decision or the act of the managing partner in
buying the said car bind the partnership?
A: Yes, because such act is merely an act of
administration. The problem is, if the managing
partner continues to not consider the sentiments of
the other partners, he may be removed as a
managing partner.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
Q: The question now is, can he be easily be
removed?
A: No. The requirements for the removal of a
managing partner would depend on whether he
was constituted as such in the articles of
partnership or he was merely appointed as
managing partners after the constitution of the
partnership.
If he was constituted as a managing
partner in the articles f partnership, he can only be
validly removed under two conditions:
1.) There has to be just cause; and
2.) by those partners having controlling
interests.
Absent one of these conditions, he cannot be
validly removed. In fact, even if there is just cause,
if the managing partner controls 51% of the
partnership, he can never be removed.
However, if he was appointed as a
managing partner only after the constitution of the
partnership, he can be validly removed even
without just cause, so long as it was done by those
partners having controlling interests.
OBLIGATIONS OF THE PARTNERS AMONG
THEMSELVES AND AS TO THE PARTNERSHIP
AND IN CASE OF NON-PERFORMANCE OF
THE OBLIGATION
3 Obligations of the partners:
1.) To make good his promised contribution;
2.) Fiduciary duties; and
3.) To participate in the losses incurred by the
partnership business.
1. To make good his promised contribution:
A. Money:
In order to know the remedies that may be
availed of by the non-defaulting partners and the
partnership, it must be known first what was
promised by the partner, whether he promised to
contribute money, property or industry.
If the partner promised to contribute
money, for instance, the partners agreed to
contribute 1 Million with 4 partners, without an
agreement as to respective amount to be
contributed, the law provides that they will have to
share equally. Thus, in this example, 1 Million will
have to be divided into 4 or the respective
contribution will be 250,000. If one partner failed to
make good his promised contribution which is a
sum of money, he can be held liable by the non-
defaulting partners up to the amount promised plus
interest. If no rate was stipulated by the parties, it
will be the legal rate of 12%, because this is
Page 64
November 2008
forbearance in money. Aside from paying the
interest, which is unusual, not only will that
defaulting party be held liable to pay interest, he
will also be liable to pay damages.
Normally, in obligations involving money,
in case of damage incurred by another party, the
liability will only be payment of interest. In
partnership, not only will he be liable to pay
interest, but also of damages.
Remedies that may be invoked by the non-
defaulting partners:
1.) Specific performance - the other partners
can compel him to make good his
promised contribution.
2.) Dissolution - may be an option by the
non-defaulting partners, if that is the only
amount that they are expecting for the
partnership.
Q: Can a non-defaulting partner rescind the
partnership agreement?
A: In a SC decision, it held that rescission is not a
remedy of the non-defaulting partners. Under the
law, the defaulting partners are treated as a debtor
of the partnership by specific provision of the law.
Therefore, the SC held that provision prevails over
the general rule in obligations and contracts under
Art. 1191, wherein rescission may be a remedy in
case of serious breach.
B. Property:
If a partner promised to contribute
property, it must be determined as to what was
really contributed: was it the property itself or the
use of the property.
If it was the ownership of the property that
was contributed then he would have the obligation
to deliver and transfer ownership, aside from that,
under the law, he would have the obligation to
warrant the thing.
Before the delivery of the thing to the
partnership, who will bear the loss? The partner
will bear the loss. The partnership will bear the loss
when the thing is already in its possession
If what was contributed was merely the
use of the property, the risk of loss will be with the
contributing partner for there was no transfer of
ownership in this case. Under the res perit domino
rule, even if possession of the thing is with the
partnership, so long as there is no fault on the part
of the partnership, then the contributing partner-
owner will bear the loss.
EXCEPTIONS:
1.) When the thing contributed is fungible;
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
 2.) or it cannot be kept without
deteriorating;
3.) If contributed by the partner to be sold;
and
4.) When it has an appraised value of such
property.
In all these circumstances, it is the partnership
which will bear the loss if the thing was lost or
destroyed while in the possession of the
partnership.
Again, if the contributing partners fails to make
good his promise to contribute property, he will be
treated as a debtor of the partnership, thus specific
performance will likewise be a remedy.
C. Industry
If a partner fails to render service as
promised, will specific performance be a remedy?
Ans.: Definitely not. It would be a violation of his
rights against involuntary servitude. The remedy
would be to demand for the value of the service
plus damages. It can be easily done because there
is an industry rate.
2. Fiduciary Duties:
The duty to observe utmost good faith, honesty,
fairness, integrity in being with each other. This
duty commences even during the negotiation
stage.
Test to determine whether there was a violation
of this duty:
Whether the partner has an advantage himself at
the expense of the partnership. If he has such
advantage at the expense of the partnership, then
there is a breach of the fiduciary duty. There need
not be a proof of evil motive so long as he has this
advantage at the expense of the partnership.
This duty lasts, normally, until the
termination of the partnership.
Q: May a partner may be held liable for breach
of fiduciary duty even after the termination of
the partnership?
A: Yes. The SC held that even if the act of a
partner was made after the termination of the
partnership, if the foundation of that act was made
during the existence of the partnership that can still
be considered as a breach of fiduciary duty. In
other words, pinaghandaan na nya yun act during
the existence of the partnership, however, it was
executed only after the termination of the
partnership.
3. Participate in the Losses:
Page 65
November 2008
Q: What will be the share of the partner in the
losses incurred in the partnership?
A: Consider first whether there was a stipulation as
to losses or there was no stipulation.
If there was a stipulation as to losses, the
first scenario would pertain to, for instance, A, B
and C agreed to share 50%, 30% and 20% of the
losses. This will be a valid and binding stipulation
among the partners.
Q: Would this still be a valid stipulation if one
of them is an industrial partner?
Atty. Uribe: Yes, this would still be a valid
stipulation. If the industrial partner agreed to share
in the losses, then who are we to deny him that?
Q: What if in the stipulation regarding losses,
one or more of the partners is excluded in
sharing with the same, what will be the status
of the stipulation?
A: It depends on who was excluded. If the
excluded partner is a capitalist partner, that
stipulation is definitely void, 100%.
If the partner excluded is an industrial
partner, it depends. As among the partners, this
stipulation is valid, however, this is void among
third persons. In other words, despite the
stipulation among partners, in excluding the
industrial partner in sharing in the losses, the
creditors of the partnership can still hold such
industrial partner liable for his contractual
obligations. The remedy of the industrial partner, if
held liable, is to go after his partners, for the
agreement is valid among themselves.
Q: What if there is no stipulation as to the
sharing of the losses, or that the stipulation in
void?
The first scenario is, there is an
agreement as to profits. If there is an agreement as
to profits, then the sharing in the profits will be the
same basis in the sharing of the losses which is a
very reasonable rule. Thus, for instance, if A, in the
agreement, is entitled to 90%, B-% and C-5%,
then it would also be reasonable that A share 90%
of the loss, B&C 5% of the loss respectively.
The last scenario, there is no stipulation as to
losses and there is also no stipulation as to profits.
In this case, it would depend on their capital
contribution. Their share in the losses would
depend on their capital contribution.
Thus, in this scenario, would the industrial
partner share in the losses?
A: Wala, kasi wala syang capital contribution.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
Note: Under Art. 1816, even if he is excluded by
the partners/partnership in sharing in the losses,
that is a void stipulation as to third persons and
can still hold the industrial partner liable as to the
contractual obligation of the partnership.
Q: If indeed a partner, assuming that the assets
of the partnership are not sufficient to cover
the obligations of the partnership, what would
be the nature of the obligation of the partner?
Would the partners be held solidarily liable? Or
would they only be held jointly liable?
A: It would depend on the nature of the liability. For
contractual obligations, as a rule, the partners
would only be jointly liable, unless they bound
themselves solidarily, for contractual obligations.
However, under Art. 1824, if the obligation arose
from a tortuous act or a wrongful act under Arts.
1822 and 1823, for example, while in the
performance of his obligation, a partner received a
sum of money from one of its clients which sum of
money was misappropriated that partner, such
partner will be held solidarily liable with his partners
and with the partnership. Also, if a sum of money
was delivered, even if it was delivered to the
partnership, however, one of the partners
misappropriated the same, all the partners will be
considered solidarily liable among themselves and
with the partnership.
In the United Pioneers General
Construction Case, the creditor filed a collection
suit impleading the 5 general partners. During the
pendency of the case, the creditor asked for the
dismissal of the action as against one of the
partners. Ultimately, the court decided in favor of
the plaintiff. Assuming the amount which was found
to be the liability of the partnership was
Php100,000, the court ruled that the partnership
will have to pay the said amount and in case that
the assets of the partnership will not be sufficient to
cover this indebtedness, the partners will be liable
to pay equally. So, naging issue yung equally,
meaning silang apat na lang? for the case as
against one of the partners was dismissed. If the
amount of the obligation is 100,000, should they be
liable 25,000 each or 20,000 each including the 5 th
partner?
The SC ultimately held, in this case, that
the liability of the partners is only joint, therefore,
the condonation of the liability of one partner will
not increase the liability of the other partners. Even
if the partnership has no assets remaining, each
partner shall only be held liable up to his share in
the partnership indebtedness. Thus, if the debt is
100,000 and there is no agreement as the share in
the losses, they have to share in the losses,
equally into 20,000, yung apat na lang na
Page 66
November 2008
defendants, kasi yung isa, condoned na yung
obligation.
OBLIGATIONS OF PARTNER RE: 3RD PERSONS
Q: When would a contract entered into by a
partner bind the partnership?
Ex.: If a partner went to a furniture shop to buy
furniture the of which is Php100,000, and such
amount remained unpaid, can the seller
demand payment from the partnership?
A: It depends as to whether the contract was
entered into in the name of the partnership, for the
account of the partnership, under its signature, by
a partner who is authorized to enter into that
contract to bind the partnership. Thus, in this
example, if in the agreement the buyer was the
partner himself and not the partnership, that
partner should be held liable, for the furniture was
not bought in the name of the partnership.
The problem, if the contract would be binding in the
partnership, then would be, whether the partner
who represented the partnership had the authority
to bind the partnership.
Normally, if a partner would enter into a
contract, a partnership resolution is not necessary.
Whether or not a contract would bind the
partnership would depend on the nature of the act
of such partner and the nature of the business of
the partnership.
Q: Concretely, if a partner bought a complete
set of SCRA in the name of the partnership and
signed by that partner, would that contract bind
the partnership for the set was bought in the
name of the partnership?
A: It would depend on the nature of the act and the
nature of the business of the partnership. In this
example, the partner bought the set of SCRA, pero
naman, and business ng partnership ay restaurant,
hindi naman ata na i-bind nya ang partnership to
such contract, ang negosyo nila restaurant.
Q: But the seller would raise the defense,
hindi ko naman alam na restaurant yung
business, e ang nagrepresent ng partnership si
Atty. ABC, so akala law firm. Is that a valid
defense?
A: No. The SC would tell that the third party
contracting with the partnership has the obligation
to know at least the nature of the business of the
partnership. In fact, he can demand for the
presentation of the articles of partnership in order
for the third party to know the nature of the
business of the partnership. For, if this time, the
partnership is a law office, and the partner bought
a set of SCRA, that act of buying a set of SCRA will
be considered apparently for carrying the business
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
of the partnership the usual way. Therefore, that
contract will bind the partnership.
Q: Even if he had no authority from the
partners?
A: Yes.
Q: Even if there was a resolution among
partners that he should not be the one who will
enter into the contract? For instance, A,B,C,D,
and E did decide to buy the set, but designated
A to buy the same and not E, but the E bought
the SCRA, would that contract bind the
partnership?
A: Yes, as long as the third person was not aware
of that agreement of the partnership because such
act is an act apparently for carrying on the
business of the partnership the usual way. So, if
the partnership is a law office, but the partner
bought certain things for a restaurant, then such
act is not apparently for carrying on the business
the usual way, thus such act would require the
consent of the partners in order to bind the
partners.
Under Article 1818, there are certain acts which
law requires the unanimous consent of the
partners for such a contract or act to bind the
partnership, like, disposing the goodwill of the
partnership or to contest a judgment against the
partnership or renounce a claim of the partnership.
DISSOLUTION, WINDING UP AND
TERMINATION
These are three different concepts. Upon
dissolution of the partnership, it is NOT DEEMED
dissolved. It will still have to go through the process
of winding up of the affairs of the business of the
partnership before the partnership itself will be
terminated.
Q: When would there be a dissolution of a
partnership?
A: Under the law, there will be a dissolution if there
is a change in the relation of the partners caused
by any of the partners ceasing to be associated in
the carrying on of the business of the partnership.
That will result in the dissolution of the partnership.
Again, if one of the partners ceased to be
associated in the carrying on of the business of the
partnership, that will result in the dissolution of the
partnership.
Q: May there be a dissolution even if none of
the partners ceased to be associated with the
carrying on of the business of the partnership
despite the definition of dissolution under Art.
1828?
Page 67
November 2008
A: Yes. One scenario is the admission of a new
partner. With the admission of a new partner, under
Art. 1840, the partnership is dissolved.
Q: What is the effect of the dissolution?
A: Again, it will not result in the termination, it will
only start the winding up process, effectively, this
will terminate the authority of all partners to bind
the partnership, EXCEPT, if that act is necessary
for the winding up of the partnership or necessary
to complete a business which was then began but
was not yet finished at the time of the dissolution of
the partnership.
CAUSES OF THE DISSOLUTION
1.) Extrajudicial;
2.) Judicial.
Extrajudicial causes:
1.) Voluntary;
2.) Involuntary.
Judicial causes are necessarily voluntary because
it is by application.
Under voluntary causes would fall, the
cause of the dissolution may result on the violation
of the agreement or it may be without violation of
the partnership agreement. Concretely, the
expiration of the period would be voluntary,
extrajudicial but without violation of the agreement.
The fixing of the term is an agreement of the
parties therefore, it is voluntary.
Termination of a definite term or a
particular undertaking: voluntary but without
violation.
By the will of one of the partners: the
partnership may be dissolved without liability on
the part of the partner, if the partnership is a
partnership at will and he dissolved the partnership
in good faith. Those are the two requirements, in
order for a partner to be able to dissolve the
partnership without liability on his part. Again, in an
express will of any partner who acted in good faith,
when no definite term or particular undertaking is
specified, which means, again that a partnership is
a partnership at will.
BE: A, B and C agreed to form a partnership for
a period of five years. After 2 years of
business, C assigned his whole interests to
Philip. The two other partners, realizing that
they would not be able to deal with Philip,
decided to dissolve the partnership. Philip, not
knowing of the dissolution done by the 2
partners, filed a petition for the dissolution of
the partnership with the court. Was the
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
partnership dissolved by the act of the two
partners? May the action filed by Philip to
dissolve the partnership prosper?
A: As already mentioned, by the express will of all
the partners who have not assigned their interest is
a cause for the dissolution of the partnership.
Therefore, the 2 partners validly dissolved the
partnership by mere will of the partners.
Q: As far as Philip was concerned, will his
petition prosper, even assuming that no
dissolution was made by the 2 partners?
A: No. With the assignment of the interest of a
partner to another person that does make the
assignee a partner of the partnership without the
consent of the other partners, therefore, he has no
personality to file a petition for the dissolution of
the partnership.
Expulsion of any partner in good faith, it
maybe because the grounds for expulsion was
agreed upon by the partners and one of the
partners violated such agreement, thus he may be
expelled in good faith, therefore it may be voluntary
and without violation.
In contravention, because one of the
partners may dissolve a partnership, even if the
partnership has a fixed period or it is a partnership
for a particular undertaking and that particular
undertaking has not yet been completed, that
would be in contravention of the agreement of the
partners.
INVOLUNTARY CAUSES:
Q: If one of the partners in a partnership was
elected a Senator, would this dissolve the
partnership by operation of law?
A: No.
Q: Even if it is a partnership of lawyers or a law
office?
A: No.
Under the Constitution, these elected officials are
prohibited only from appearing before tribunals and
not from private pratice.
Q: If a lawyer was appointed in the cabinet, for
instance as Presidential Legal Counsel, would
that result in the dissolution of the partnership
by operation of law?
A: Yes. Under the Constitution, Cabinet Secretaries
are prohibited from private practice of their
profession.
Classic ex.: The Firm (Carpio Villaraza Cruz Law)
This also includes appointment in the judiciary.
Page 68
November 2008
Q: What if the law partner was elected as
governor of his province will it result in the
dissolution of the partnership?
A: Yes. Under the Local Government Code, chief
executives are also prohibited from the private
practice of their profession.
Q: What if the partner who died is a partner in a
limited partnership? Would that dissolve
automatically the partnership?
A: It depends as to who is the partner.
If he is a general partner, as a rule, it
dissolves the partnership, unless there was an
agreement in the articles of partnership that they
would continue with business of the partnership
even after the death of the partner. Or even without
such agreement in the articles of partnership, if the
surviving partners decide to continue with the
business of the partnership, then the partnership is
not deemed dissolved even if the partner who died
is a general partner.
If the partner who died is a limited partner,
that does not result in the dissolution of the
partnership. In fact, the executor or administrator of
the estate of the deceased limited partner will the
right to choose or to appoint a substitute limited
partner in the said partnership.
Insolvency or civil interdiction of any partner will
result in the dissolution of the partnership.
Judicial Causes: Grounds:
1.) Insanity or incapacity:
-The courts require that it should be
permanent in character; and
-such incapacity or insanity must affect the
performance of such partner of his obligations
with respect to the partnership business. In
other words, kung wala syang pakialam sa
management ng business ng partnership,
insanity or incapacity is not a valid ground.
2.) Gross misconduct:
a.) wrongful expulsion;
b.) if one partner would refuse to allow
another partner in the management of the
partnership business, if he has such right to
participate in the management ;
c.) if the managing partner would refuse to
distribute the profits of the partnership when there
is such obligation to distribute the profits;
d.) misappropriation of the income of the
partnership business.
Note: If a limited partner becomes a limited partner
in another partnership, that is not a valid ground to
file a petition for the dissolution of the partnership.
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
Limited partners has nothing to do with the
management of the partnership business, thus,
there is no conflict of interest.
Note: The fact that the partnership incurred losses
for the past three years is not necessarily a ground
for dissolution.
However, even if the partnership incurred
losses once and it can be shown by the partners
that there is no prospect for recovery, it can be a
valid ground for the filing of the petition for the
dissolution of the partnership.
Q: Quarrels among partners, valid ground?
A: Normally, no. However, if such quarrels give rise
to dissension among the partners, affecting the
conduct of the business of the partnership, this can
also be a valid ground, falling under other
circumstances which would render the dissolution
equitable.
Q: Upon the dissolution of the partnership, and
there were assets left, how will these be
distributed? To whom these assets be given?
A: As far as partnership assets are concerned:
1.) Partnership creditors who are not
partners.
2.) Partnership creditors
3.) If there are remaining assets, to the
capitalist partners;
4.) Excess - profits based on their agreement
as to profits.
A.: It should be given to the separate creditors of
the individual partner.
For a limited partnership to be formed, there has to
be at least one limited partner and one general
partner.
For the establishment of a limited
partnership, the law requires certain formalities.
Concretely, under Art. 1844, there has to be a
certificate signed and sworn to by the contracting
parties which has to be filed with the SEC. So long
as there was substantial compliance with the
formalities required by law, a limited partnership
will be valid and binding.
Q: What if there was no substantial compliance
as to these formalities?
A: Even if there was no substantial compliance, the
agreement will be valid and binding among
themselves. As to third persons, all of them may be
held liable as general partners, as if all of them are
general partners. Thus, even a limited partner may
be held liable even up to his personal properties.

Q: What if, in their agreement, Partner A

contributed 100,000; Partner B, 50,000; Partner
C, industrial partner. The total assets of the
partnership is 1 Million at the time of
dissolution, however, there were partnership
creditors obligation of which amounted to
900,000. Would the industrial partner have a
share in that 1 Million asset?
A.: No. Since the amount of the obligation is
Php900,000, the remaining Php100,000 should be
given back to the capitalist partners for their capital
contribution.

Q: Assuming that there was no agreement as

their share in the losses, also there was no
agreement as to their share in the profits, what
if one of the partners became insolvent, will the
other partners liability be increased?
A: No, because their liability is JOINT.

Q: For instance A, a partner is insolvent, his

assets being 100,000. A is indebted X and Y.
The partnership also has its creditors. To
whom shall this 100,000 be given?
TRUST
Page 69 Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
November 2008
2 KINDS:
1.) Express;
2.) Implied.
Implied Trust: 2 Kinds:
1.) Resulting trust;
2.) Constructive trust
The classification of trust into two kinds
(express and implied) and implied trust into two
kinds (resulting and constructive) would be relevant
in two concepts:
1.) Applicability of the parole evidence
rule; and
2.) Prescription, specifically, acquisitive
prescription.
Note: An express trust over an immovable may not
be proven by parole evidence. This means that
implied trust over an immovable may be proven by
parole evidence or express trust over a movable,
may be proved by parole evidence.
EXPRESS TRUST
Q: May an express trust over an immovable be
proven by mere testimony of the witness?
A;Yes, if the lawyer of the other party did not object
to the presentation of the witness.
BE: In an agreement between A and B, a
property of A was to be registered in the name
of B, with an agreement the B will reconvey the
property to As son upon the graduation of the
said son (As son). This agreement was entered
into in 1980. The property was in fact
registered in the name of B the following yea,
1981. In 1982, A died. In 1983, As 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.
Page 70
November 2008
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?
What would be the remedy of B?
A: This question clearly pertains to a resulting trust.
This is specifically, Art. 1451 of the NCC.
B cannot recover the land from the buyer.
As discussed in Sales, a buyer who had bought the
property from a seller who has no right to sell, but
he has apparent authority to sell, who appears to
be the owner and the buyer bought the property in
good faith, he will acquire ownership over the thing
even if the seller has no right to sell.
Bs remedy would be to go after her
brother for breach of trust in selling the property
without her consent.
BE: A property was bought by a father and was
registered in the name of his illegitimate
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:
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
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: Lets assume that the remedy here is

conveyance, the cousin has not yet been able
to sell the property to the 3 rd 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
property in the name of another person. Pero sa
constructive trust, itong pinsan at yung abogado in
one case, would be claiming ownership over the
property, right from the very start and therefore
without need of repudiation, yung prescriptive
period will start to run in a constructive trust.

Credit transactions
Q: Why credit transactions?
A: Because these transactions all involved credit
meaning there is a belief in the capacity of one of
the parties to perform his obligation in the future.

Page 71 Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
November 2008
Note: Credit transactions ang tawag but they are
not all contracts. There can be legal relationship
even without an agreement examples legal
pledge, judicial deposit. But the others are
contracts there are contractual deposit and
pledge by agreement.
Transactions:
A. Kinds of Loans
1. Mutuum
2. Commadatum
B. Kind of Deposits
1. Judicial
2. Extrajudicial
C. Guaranty
D. Suretyship
E. Real Guaranty favorite in the bar exams
1. Pledge
2. Chattel Mortgage (CM)
3. Real Estate Mortgage (REM)
4. Antichresis
Focus on the following provisions:
1933, 1962, 2047, 2132, 2140
Obligations of the bailee 1942
Obligations of depositary - 1979
Right to demand for interest 1956
Requisites of pledge and mortgage - 2085
Pactum Commissorium 2088
Indivisibilty Principle
Right to recover the deficiency / excess 2115
Mutuum vs. Commodatum
1. C a thing is delivered to the bailee for the use
of the property and therefore ownership is not
transferred.
M a consumable thing is delivered and therefore
ownership thereof is transferred to the bailee or
borrower.
2. M only consumables are the object
C may be immovables (house, rice field)
Usufruct vs. Commodatum
1. U is a right to enjoy the property which means
that the usufructuary will not only have the right to
possess but he would have the right to the fruits of
the thing.
C no right to the fruits but only right to use the
thing but it may be expressly stipulated that he can
also use the fruits.
Consensual vs. Real Contracts
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
Page 72
November 2008
RC are perfected upon delivery of the thing which
is the object of the contract.
Examples of Real Contracts
1316 Commodatum, deposit and pledge
Mutuum (memorize these 4 examples)
Note: Perfection is subject to the formalities of the
law. Even if the contract has already been
perfected, the contract may be unenforceable
because it is not in the form prescribed by law for
the enforceability of the contract. Example
contract of sale (subject to the provisions of the
statute of frauds)
Note: There are different rules in mutuum and
commodatum. There are also different rules in
judicial and extrajudicial deposit. But all these are
principal contracts. All the other credit transactions
are accessory contracts guaranty, suretyship,
pledge, CM, REM, antichresis they depend on
other contracts for their existence or their validity.
(memorize)
Note: An accepted promise to loan is consensual.
Saura vs. DBP when the loan application of
Saura was accepted or approved by the bank,
there was already a perfected contract but it is not
mutuum. SC said, it is perfected consensual
contract of loan because the loan itself will only be
perfected upon the delivery of the amount to the
borrower. Until the amount is delivered, there is no
perfected mutuum rather there was only a
perfected consensual contract of loan. Thus, with
that perfected contract, the borrower can already
demand for the delivery of money. That is his right
but until then the mutuum itself will not yet be
perfected. Ganun din sa commodatum, ganun din
sa deposit.
Commodatum
It is essentially gratuitous contract. If there is
compensation, it is not commodatum. In the case
of Republic vs. Bagtas, SC said it is lease not
commodatum because there was an obligation to
pay breeding fee.
Loan
Loan is normally gratuitous (utang mo sa friend
mo) unless there is an express stipulation in
writing. Take note under Article 1956, a creditor in a
contract of mutuum cannot demand for interest
unless it was expressly stipulated in writing. Take
note that we are talking here a kind of interest
known as compensatory interest for the use of the
money. So if you borrowed money in January
payable at the end of the year, during that period,
the creditor may be entitled to an interest known as
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
compensatory interest but after the obligation
became due and there was demand for the
payment nonetheless the borrower failed to pay,
this time there will be a liability to pay interest by
way of damages not compensatory interest. And
this kind of interest (damages) need not be in
writing. This interest by way of damages is the
effect of delay because of the failure to pay despite
demand when the obligation was already due, he
will be liable for damages. In monetary obligations,
the liability for damages is in the form of interest.
In monetary obligations, if there was a stipulation
that there is liability to pay interest but the interest
rate was not fixed, it will be the legal rate that can
be invoked (12%) loan or forbearance of money.
If there is a stipulation like 6% per month or 72%
per annum, the SC ruled in Solamon vs. CA, that
although the usury law has already been
suspended and therefore apparently the parties
can stipulate any interest rate is not true. The
interest rate agreed upon may be unconscionable
and therefore the SC will strike down the stipulation
and the interest will be the legal rate. The SC had
struck down interest above 60% per annum. Below
50% per annum, the SC allowed this interest.
There is still no decision if what is the status if the
interest is between 50% to 60% per annum
Commodatum
In commodatum, the object is movable or
immovable. Usually, it is non-consumable because
the very thing borrowed should also be the very
thing that should be returned. If it is consumable it
will be consumed in accordance with its nature. But
the law provides for exception, if the purpose of the
commodatum is not for consumption examples
for display or exhibit then there can be a valid
commodatum over a consumable item. But it is non
fungible because it cannot be replaced with a
similar kind. The very thing borrowed should be the
same thing that should be returned.
BE: R upon request loaned his passenger
jeepney to F to enable to bring his wife from
Tarlac to PGH for treatment. On the way back
to Tarlac after leaving his wife in PGH, people
stopped the passenger jeepney and R allowed
them to ride accepting payments from them
just as in the case of ordinary passenger
jeepney. As he was crossing Bamban, Tarlac,
there was an on rush of lahar from Mt.
Pinatubo. The jeep was wrecked. What do you
call the contract that was entered into by R and
F? Is F obliged to pay R for the use? Is F liable
to R for the loss of the jeep?
SA: This is commadatum. In commadatum, it is
essentially gratuitous (no payment). Take note the
Page 73
November 2008
jeep was lost due to a fortuitous event. If you follow
the general rule under 1174, he should not be held
liable. But by express provision of the law in
commodatum, the borrower is liable. Under 1942,
when the borrower devotes the thing to other
purpose not agreed upon (the purpose is to bring
the wife to the hospital), the borrower is liable even
if the loss is due to fortuitous event.
Note: Bailor need not be the owner himself
because there is no obligation to transfer
ownership.
BE: M borrowed Bs truck. During a fire that
broke out in Ms garage, M had time to save
only 1 vehicle and M saved his car instead of
Bs truck. Is he liable for the loss of Bs struck?
SA: Yes. This is an exception to the res perit
domino rule. It would also fall under 1942 that he
chose to save his thing when he had the
opportunity to save one of two things, the other
being a borrowed item.
Yung iba if you kept it longer, it is consistent with
delay under 1165 - in an obligation to deliver a
determinate thing and the thing was lost due to a
fortuitous event, that debtor will still be liable for the
loss if he was in delay.
Republic vs. Bagtas
Held: Even if this is commadatum under Article
1942, it will be the bailee or the borrower who will
bear the loss.
Deposit
The same rule in deposit in deposit, ownership
does not pass to the depositary. Thus, under the
res perit domino rule, it will be the depositor who
will bear the loss if the thing was lost due to a
fortuitous event. In robbery, the depositor will bear
the loss unless there is negligence on the part of
the depositary or if it is stipulated that the
depositary will be liable. (If you are the depositary,
demand for a higher rental so you have money to
pay for insurance)
If he uses it without compensation, he will be liable
because in deposit the purpose of the delivery is
for safekeeping, the depositary is not supposed to
use the thing. So if he uses the thing, he will be
liable for the loss of the thing.
Loan
There is a special kind of commodatum known as
precarium. Precarium in this kind of
commodatum the bailor has the right to demand for
the return of the thing at will at any time.
Q: When would there be a precarium?
Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
A: There would be a precarium if there was no
stipulation as to duration nor the use of the thing
unless there is a custom. So no agreement as to
period or no agreement as to particular use then
the bailor would have the right to demand the thing
at any time or the use of the thing is merely
tolerated.
From this rule, you should be able to conclude that
even if commadatum is essentially gratuitous, if
there was a period agreed upon as a rule the bailor
should respect the period. He cannot demand for
the return of the thing just because there is no
payment. But there are exceptions:
1. Even if there was a period, he can
demand for the return if there is an urgent
need on the part of the bailor. But in that
scenario, the commadatum is not
extinguished, it is only suspended. After
the bailor have used the thing, he should
return the thing to the bailee so the latter
could finish the period.
2. When the bailee committed an act of
ingratitude. The grounds will be similar to
donation.
Deposit
Q: Are checking accounts, savings account,
dollar accounts irregular deposits?
A: No. They are not deposits under the law
because they are governed by the rules on
mutuum (loan). The bank is the debtor. SC called
these deposits in the nature of irregular deposits
but not irregular deposits because the banks use
the money that is why it is in the nature of irregular
deposits.
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 lenders
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.

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
CREDIT TRANSACTIONS
Quiz

1. Deposit is a real contract TRUE

Page 74 Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
November 2008
 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 75 Faye Marie C. Martinez Chato Cabigas Jessica A. Lopez Dian Rosapapan
November 2008