Law on Sales

Article 1458 of the Civil Code de? nes “sale” as a contract whereby one of the contracting parties (Seller) obligates himself to transfer the ownership, and to deliver the possession, of a determinate thing; and the other party (Buyer) obligates himself to pay therefor a price certain in money or its equivalent. 1 The Roman Law concept embodied in the old Civil Code2 that treated delivery of tangible property as the sole purpose of sale has been modi? d under the present Article 1458, which applies the common law concept of requiring the obligation to transfer the ownership of the subject matter of the sale as a principal obligation of the seller. 1. Nature of Obligations Created in a Sale The de? nition of the contract of sale under Article 1458 provides that its perfection brings about the creation of two sets of obligations: (a) Two OBLIGATIONS of the SELLER to: (i) Transfer the Ownership,3 and 1 Alfredo v. Borras, 404 SCRA 145 (2003); Cruz v. Fernando, 477 SCRA 173 (2005); Roberts v. Papio, 515 SCRA 346 (2007). 2 Art. 445 of the old Civil Code. 3 Flancia v. Court of Appeals, 457 SCRA 224, 231 (2005), de? nes “ownership” as “the independent and general power of a person over a thing for purposes recognized by law and within the limits established thereby — aside form the jus utendi and the jus abutendi inherent in the right to enjoy the thing, the right to dispose, or the jus disponendi, is the power of the owner to alienate, encumber, transform and even destroy the thing owned. ” 1 2 LAW ON SALES (ii) Deliver the Possession, of the SUBJECT MATTER; (b) An OBLIGATION for the BUYER to: (i) Pay the PRICE

. Both sets of obligations, are real obligations or obligations “to give,” as contrasted from personal obligations “to do” and “not to do,” and can be the proper subject of actions for speci? c performance. 5 In contrast, obligations to do or not to do, cannot be enforced through actions for speci? c performance because of the public policy against involuntary servitude;6 although the creditor can have the same executed by another at the cost of the obligor,7 and the obligor’s refusal to comply can be the basis for claims for damages. To illustrate, Article 1480 of the Civil Code, which crossrefers to Article 1165 thereof, provides that when what is to be delivered is a determinate thing, the buyer, in addition to the right to recover damages, may compel the seller to make the delivery. In other words, a defaulting party in a sale cannot insist on just paying damages when the non-defaulting party demands performance. 2. Subject Matter of Sale Although Article 1458, in de? ning sale, uses the word “determinate” to describe the subject matter of the sale, the present Law on Sales has expanded the coverage to include generic objects which are at least “determinable. Article 1460 states that the “requisite that the thing be determinate is satis? ed if at the time the contract is entered into, the thing is capable of 4 Acap v. Court of Appeals, 251 SCRA 30 (1995); Velarde v. Court of Appeals, 361 SCRA 56 (2001). 5 Art. 1165 of the Civil Code: “When what is to be delivered is a determinate thing, the creditor . . . may compel the debtor to make the delivery. If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor. 6 Sec. 18(2), Art. III, 1987 Constitution. 7 Art. 1167, Civil Code. 8 Art. 1170, Civil Code. NATURE OF SALE 3 being made determinate without the necessity of a new or further agreement between the parties,” which includes “determinable” albeit generic objects as valid subject matters of sale. Nonetheless, the use of the word “determinate” in the de? nition of sale under Article 1458 seems accurate since it pertains to the performance of the obligations of the seller to transfer ownership and to deliver possession.

This would require that even if the subject matter of the sale was generic (determinable), the performance of the seller’s obligation would require necessarily its physical segregation or particular designation, making the subject matter determinate at the point of performance. The use of the word “determinate” to describe the subject matter emphasizes more speci? cally the fact that the obligation to deliver and transfer ownership can be performed only with the subject matter becoming speci? or determinate, and is not meant to exclude certain generic things from validly becoming the proper subject matter of sale, at the point of perfection. 3. Elements of Contract of Sale Coronel v. Court of Appeals,9 enumerates the essential elements of a valid contract of sale to consist of the following: (a) CONSENT, or meeting of the minds to transfer ownership in exchange for the price; (b) SUBJECT MATTER; and (c) PRICE, certain in money or its equivalent. 10 263 SCRA 15 (1996). See also Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160 (1997); Quijada v.

Court of Appeals, 299 SCRA 695 (1998); Co v. Court of Appeals, 312 SCRA 528 (1999); Heirs of San Andres v. Rodriguez, 332 SCRA 769 (2000); Roble v. Arbasa, 362 SCRA 69 (2001); Penalosa v. Santos, 363 SCRA 545 (2001); Polytechnic University of the Philippines v. Court of Appeals, 368 SCRA 691 (2001); Katipunan v. Katipunan, 375 SCRA 199 (2002); Londres v. Court of Appeals, 394 SCRA 133 (2002); Manongsong v. Estimo, 404 SCRA 683 (2003); Jimenez, Jr. v. Jordana, 444 SCRA 250 (2004); San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005); Yason v. Arciaga, 449 SCRA 458 (2005); Roberts v.

Papio, 515 SCRA 346 (2007); Navarra v. Planters Dev. Bank, 527 SCRA 562 (2007); Republic v. Florendo, 549 SCRA 527 (2008). 10 9 4 LAW ON SALES When all three elements are present, there being a meeting of the minds, then a perfected contract of sale arises, and its validity is not affected by the fact that previously a ? ctitious deed of sale was executed by the parties,11 or by the fact of nonperformance of the obligations thereafter. Unfortunately, the Supreme Court has considered in a number of decisions that the resulting sale is “void” when some of the essential requisites are not present. 2 To the author, the more appropriate term to use when an essential element is not present at meeting of the mind is to declare a “no contract” situation. To illustrate, Dizon v. Court of Appeals,13 holds that all three elements of consent, subject matter and consideration must be present for a valid sale to exist; and that in a situation where any of the elements is not present, “[t]there was no perfected contract of sale,”14 and that “the absence of any of these essential elements negates the existence of a perfected contract of sale,”15 rather than using the technical term “void. In Manila Container Corp. v. PNB,16 the Court held that absence of the concurrence of all the essential elements, the giving of earnest money cannot establish the existence of a perfected contract of sale. On the other hand, when all three elements are present, but there is defect or illegality constituting any of such elements, the resulting contract is either voidable when the defect constitutes a vitiation of consent, or void as mandated under Article 1409 of the Civil Code. Penalosa v. Santos, 363 SCRA 545 (2001). Mapalo v. Mapalo, 17 SCRA 114 (1966) and Rongavilla v.

Court of Appeals, 294 SCRA 289 (1998), both consider the contract “void” even when they agreed that there was no meeting of the minds on the price stated in the underlying instrument of sale. Bagnas v. Court of Appeals, 176 SCRA 159 (1989), considers a simulated price or a nominal price to give rise to a “void” contract of sale. Cabotaje v. Pudunan, 436 SCRA 423 (2004), considers the lack of consent by the owner of the property to bring about a “void” sale. 13 302 SCRA 288 (1999). 14 Ibid, at p. 301. 15 Ibid, at p. 302. Reiterated in Firme v. Bukal Enterprises and Dev. Corp. , 414 SCRA 190 (2003). 16 511 SCRA 444 (2006). 2 11 NATURE OF SALE 5 4. Stages in the Life of Sale Strictly speaking, there are only two stages in the “life” of a contract of sale, i. e. , perfection and consummation, since it is only at perfection that sale as a contract begins to exist in the legal world. Until sale is perfected, it cannot serve as an independent source of obligation, nor as a binding juridical relation between the parties. 17 Nevertheless, the Supreme Court18 has considered the following to be the stages in the life of a sale: (a) POLICITACION, negotiation, or preparation stage; (b) PERFECTION, conception or “birth”; and (c) CONSUMMATION or “death. Policitacion or negotiation covers the period from the time the prospective contracting parties indicate their interests in the contract to the time the contract is perfected; perfection takes place upon the concurrence of the essential elements of the sale which are the meeting of the minds of the parties as to the object of the contract and upon the price; and consummation begins when the parties perform their respective undertaking under the contract of sale, culminating in the extinguishment thereof. 19 ESSENTIAL CHARACTERISTICS OF SALE

Before dissecting sale as a contract, it would be useful to look at sale from a general point of view, by analyzing its essential characteristics. 17 Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160, 164 (1997); Dizon v. Court of Appeals, 302 SCRA 288 (1999); Platinum Plans Phil. , Inc. v. Cucueco, 488 SCRA 156 (2006); Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006); Roberts v. Papio, 515 SCRA 346 (2007). 18 Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994); Toyota Shaw, Inc. v. Court of Appeals, 244 SCRA 320 (1995); Limketkai Sons Milling, Inc. . Court of Appeals, 250 SCRA 523 (1995); Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160 (1997); Province of Cebu v. Heirs of Ru? na Morales, 546 SCRA 315 (2008). 19 San Miguel Properties Philippines v. Huang, 336 SCRA 737, 743 (2000). 6 LAW ON SALES 1. Nominate and Principal Sale is a nominate contract since it has been given a particular name by law;20 more importantly, its nature and consequences are governed by a set of rules in the Civil Code, which euphemistically we refer to as the “Law on Sales. Sale is a principal contract, as contrasted from accessory or preparatory contracts, because it can stand on its own, and does not depend on another contract for its validity or existence; more importantly, that parties enter into sale to achieve within its essence the objectives of the transaction, and simply not in preparation for another contract. The “nominate and principal” characteristics of sale leads to the doctrine held by the Supreme Court that in determining the real character of the contract, the title given to it by the parties is not as signi? ant as its substance. 21 In one case,22 the Court held that in determining the nature of a contract, the courts look at the intent of the parties and not at the nomenclature used to describe it, and that pivotal to deciding such issue is the true aim and purpose of the contracting parties as shown by the terminology used in the covenant, as well as “by their conduct, words, actions and deeds prior to, during and immediately after executing the agreement. ” In another case,23 the Court held that contracts are not de? ed by the parties thereto but by the principles of law; and that in determining the nature of a contract, the courts are not bound by the name or title given to it by the contracting parties. The other doctrinal signi? cance of the “nominate and principal” characteristics of sale is that all other contracts which have for their objective the transfer of ownership and delivery of possession of a determinate subject matter for a valuable consideration, are governed necessarily by the Law on Sales. 24 Art. 1458, Civil Code. Bowe v. Court of Appeals, 220 SCRA 158 (1993); Romero v.

Court of Appeals, 250 SCRA 223 (1995); Santos v. Court of Appeals, 337 SCRA 67 (2000). 22 Lao v. Court of Appeals, 275 SCRA 237, 250 (1997). 23 Cavite Dev. Bank v. Lim, 324 SCRA 346 (2000). 24 In-depth discussions of this doctrinal signi? cance are found in Chapter 3. 21 20 NATURE OF SALE 7 2. Consensual Sale is consensual contract (as contrasted from solemn and real contracts), since it is perfected by mere consent, at the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the price. 25 Buenaventura v.

Court of Appeals,26 held that a sale over a subject matter is not a real contract, but a consensual contract, which becomes a valid and binding contract upon the meeting of the minds as to the price. Once there is a meeting of the minds as to the price, the sale is valid, despite the manner of its actual payment, or even when there has been breach thereof. If the real price is not stated in the contract, then the sale is valid but subject to reformation; if there is no meeting of the minds as to the price, because the price stipulated is simulated, then the contract is void. 7 Under Article 1475 of the Civil Code, from the moment of perfection of the sale, the parties may reciprocally demand performance, even when the parties have not af? xed their signatures to the written form of such sale,28 but subject to the provisions of the law governing the form of contracts. 29 Consequently, the actual delivery of the subject matter or payment of the price agreed upon are not necessary components to establish the existence of a valid sale;30 and their non25 Art. 1475, Civil Code. Balatbat v. Court of Appeals, 261 SCRA 128 (1996); Coronel v. Court of Appeals, 263 SCRA 15 (1996); Xentrex Automotive, Inc. . Court of Appeals, 291 SCRA 66 (1998); Laforteza v. Machuca, 333 SCRA 643 (2000); Londres v. Court of Appeals, 394 SCRA 133 (2002); San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005); Yason v. Arciaga, 449 SCRA 458 (2005); Ainza v. Padua, 462 SCRA 614 (2005); Cruz v. Fernando, 477 SCRA 173 (2005); Marnelgo v. Banco Filipino Savings and Mortgage Bank, 480 SCRA 399 (2006); MCC Industries Sales Corp. v. Ssanyong Corp. , 536 SCRA 408 (2007); Castillo v. Reyes, 539 SCRA 193 (2007); Roberts v. Papio, 515 SCRA 346 (2007). 26 416 SCRA 263 (2003). 27 Ibid, at p. 271, citing VILLANUEVA, PHILIPPINE LAW ON SALES, p. 4 (1998). 28 Gabelo v. Court of Appeals, 316 SCRA 386 (1999); Province of Cebu v. Heirs of Ru? na Morales, 546 SCRA 315 (2008). 29 Co v. Court of Appeals, 312 SCRA 528 (1999). Also City of Cebu v. Heirs of Candido Rubi, 306 SCRA 408 (1999); San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005). 30 Alcantara-Daus v. de Leon, 404 SCRA 74 (2003); Buenaventura v. Court of Appeals, 416 SCRA 263 (2003). 8 LAW ON SALES performance do not also invalidate or render “void” a sale that has began to exist as a valid contract at perfection; non-performance, merely becomes the legal basis for the remedies of either speci? performance or rescission, with damages in either case. 31 The binding effect of a deed of sale on the parties is based on the principle that the obligations arising therefrom have the force of law between them. 32 In Fule v. Court of Appeals,33 the Court summarized the doctrines pertaining to sale being a consensual contract, thus: A contract of sale is perfected at the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the price. 4 Being consensual, a contract of sale has the force of law between the contracting parties and they are expected to abide in good faith by their respective contractual commitments. Article 1358 of the Civil Code which requires the embodiment of certain contracts in a public instrument, is only for convenience,35 and registration of the instrument only adversely affects third parties. 36 Formal requirements are, therefore, for the bene? t of third parties. Non-compliance therewith does not adversely affect the validity of the contract nor the contractual rights and obligations of the parties thereunder. 7 Since sale is a consensual contract, the party who alleges it must show its existence by competent proof, as well as of the 31 Gabelo v. Court of Appeals, 316 SCRA 386 (1999); Alcantara-Daus v. de Leon, 404 SCRA 74 (2003); Buenaventura v. Court of Appeals, 416 SCRA 263 (2003), citing this particular passage in VILLANUEVA, PHILIPPINE LAW ON SALES, p. 54 (1998). 32 Veterans Federation of the Philippines v. Court of Appeals, 345 SCRA 348 (2000). 33 286 SCRA 698 (1998). 34 Citing Art. 1475, Civil Code; Romero v.

Court of Appeals, 250 SCRA 223 (1995). 35 Citing Aspi v. Court of Appeals, 236 SCRA 94 (1994). 36 Citing Olegario v. Court of Appeals, 238 SCRA 96 (1994). 37 286 SCRA 698, 712-713 (1998). Reiterated in Quijada v. Court of Appeals, 299 SCRA 695 (1998); Agasen v. Court of Appeals, 325 SCRA 504 (2000). NATURE OF SALE 9 essential elements thereof. 38 However, when all three elements of a sale are present, there being a meeting of the minds, then a perfected contract of sale arises, and its validity is not affected by the fact that previously a ? titious deed of sale was executed by the parties;39 and at that point the burden is on the other party to prove the contrary. 40 Despite the consensual character of a sale, under Article 1332 of the Civil Code, when one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former. 41 a.

Modalities That Affect the Characteristic of Consensuality The consensual characteristic of sale can be affected by modalities that by stipulation may be added into the contractual relationship, such as a suspensive term or condition. Binan Steel Corp. v. Court of Appeals,42 reminds us that “even if consensual, not all contracts of sale become automatically and immediately effective. . . In sales with assumption of mortgage, the assumption of mortgage is a condition precedent to the seller’s consent and therefore, without approval of the mortgagee, the sale is not perfected. ” On the other hand, National Housing Authority v.

Grace Baptist Church,43 demonstrates clearly that even the delivery and taking possession of the subject matter by the buyer with the knowledge or consent of the seller, would not bring about the perfection and binding effect of the sale, when the meeting of the minds is incomplete, there being no agreement yet on the ? nal price. 38 Villanueva v. Court of Appeals, 267 SCRA 89 (1997); Roberts v. Papio, 515 SCRA 346 (2007). 39 Penalosa v. Santos, 363 SCRA 545 (2001). 40 Heirs of Ernesto Biona v. Court of Appeals, 362 SCRA 29 (2001). 41 Vda. de Ape v. Court of Appeals, 456 SCRA 193 (2005). 2 391 SCRA 90 (2002). 43 424 SCRA 147 (2004). 10 LAW ON SALES 3. Bilateral and Reciprocal Sale is a bilateral contract embodying reciprocal obligations, as distinguished from a unilateral contract, because it imposes obligations on both parties to the relationship,44 and whereby the obligation or promise of each party is the cause or consideration for the obligation or promise of the other. 45 Reciprocal obligations are “those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other.

They are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous ful? llment of the other. ”46 The legal effects and consequences of sale being a bilateral contract composed of reciprocal obligations are as follows: (a) The power to rescind is implied, and such power need not be stipulated in the contract in order for the innocent party to invoke the remedy;47 (b) Neither party incurs delay if the other party does not comply, or is not ready to comply in a proper manner, with what is incumbent upon him;48 and (c) From the moment one of the parties ful? ls his obligation, the default by the other begins,49 without the need of prior demand. 50 Since both parties in a sale are bound by their respective obligations which are reciprocal in nature, then a party cannot Art. 1458, Civil Code; People v. Tan, 338 SCRA 330 (2000). Art. 1191, Civil Code; see also Vda. De Quirino v. Palarca, 29 SCRA 1 (1969). 46 Agro Conglomerates, Inc. v. Court of Appeals, 348 SCRA 450 (2000). See also Ong v. Court of Appeals, 310 SCRA 1 (1999); Mortel v. KASSCO, 348 SCRA 391 (2000); Carrascoso, Jr. v. Court of Appeals, 477 SCRA 666 (2005).

See also Vda. De Quirino v. Palarca, 29 SCRA 1 (1969) as it pertains to an option contract. 47 Art. 1191, Civil Code. 48 Art. 1168, last paragraph, Civil Code; Almocera v. Ong, 546 SCRA 164 (2008). 49 Ibid. 50 Art. 1191, Civil Code. 45 44 NATURE OF SALE 11 simply choose not to proceed with the sale by offering also the other party not to be bound by his own obligation; that each party has the remedy of speci? c performance; and that rescission or resolution cannot be enforced by defaulting party upon the other party who is ready and willing to proceed with the ful? lment of his obligation. 51 Polytechnic University of the Philippines v. Court of Appeals,52 summed up the reciprocal and nominate nature of sale, thus: “It is therefore a general requisite for the existence of a valid and enforceable contract of sale that it be mutually obligatory, i. e. , there should be a concurrence of the promise of the vendor to sell a determinate thing and the promise of the vendee to receive and pay for the property so delivered and transferred. ”53 Consequently, Carrascoso, Jr. . Court of Appeals,54 held that since a sale is constituted of reciprocal obligations, then “[t]he right of rescission of a party to an obligation under Article 1191 is predicated on a breach of faith by the other party who violates the reciprocity between them. ” 4. Onerous Sale is an onerous contract, as distinguished from a gratuitous contract, because it imposes a valuable consideration as a prestation, which ideally is a price certain in money or its equivalent. 55 In Gaite v.

Fonacier,56 the Court ruled that the stipulation in a contract of sale on the payment of the balance of the purchase price must be deemed to cover a suspensive period rather than a condition since “there can be no question that greater reciprocity obtains if the buyer’s obligation is deemed to be actually existing, with only its maturity (due date) postponed or deferred, than if such obligation were viewed as non-existing or not binding until 51 52 Almira v. Court of Appeals, 399 SCRA 351 (2003). 368 SCRA 691 (2001). 3 Ibid, at p. 705. 54 477 SCRA 666, 686 (2005). 55 Art. 1458, Civil Code. 56 2 SCRA 831 (1961). 12 LAW ON SALES the ore was sold. ”57 The Court held that the rules of interpretation would incline the scales in favor of “the greater reciprocity of interests,” since sale is essentially an onerous contract. 5. Commutative Sale is a commutative contract, as distinguished from an aleatory contract, because a thing of value is exchanged for equal value, i. e. , ideally the value of the subject matter is equivalent to the price paid.

Nevertheless, there is no requirement that the price be equal to the exact value of the subject matter; all that is required is for the seller to believe that what was received was of the commutative value of what he gave. 58 Again Gaite held that a sale is “normally commutative and onerous: not only does each one of the parties assume a correlative obligation (the seller to deliver and transfer ownership of the thing sold, and the buyer to pay the price), but each party anticipates performance by the other from the very start. 59 Gaite recognized that although in a sale “the obligation of one party can be lawfully subordinated to an uncertain event, so that the other understands that he assumes the risk of receiving nothing for what he gives (as in the case of a sale of hope or expectancy, emptio spei), it is not in the usual course of business to do so; hence, the contingent character of the obligation must clearly appear. 60 Gaite therefore acknowledged that obligations in a sale can be subordinated to a suspensive condition with the party fully aware that “he assumes the risk of receiving nothing for what he gives,” although such stipulation may seem to be contrary to the commutative nature of a sale. This con? rms the view that although “commutativeness” is an essential characteristic of a sale, the test for compliance therewith is not objective but rather subjective; i. e. , so long as the party believes in all honesty that he is receiving good value for what he transferred, then it complies 57 58

Ibid, at p. 838. Buenaventura v. Court of Appeals, 416 SCRA 263 (2003). 59 2 SCRA 831, 837 (1961). 60 Ibid. NATURE OF SALE 13 with the commutative character of a sale, and would not be deemed a donation nor an aleatory contract. Take the example of a seller, selling his old car for only 5200,000. 00, when a more objective review of the prevailing market price for the particular model shows that its correct selling value would be 5500,000. 00. Under those circumstances, the contract perfected with the buyer would still be a sale, because by agreeing to receive a price of only 5200,000. 0, the seller believes honestly that he is receiving appropriate value for the car he is selling. Likewise, the consequences of negotiations and bargaining, such as being able to obtain a large discount, do not destroy the commutative nature of the sale, since in the end the test would be that the parties to the sale believe that they have each received the proper and appropriate value for what they each in turn gave up. However, the point of discussion pertaining to the subjective test of the commutative nature of sale cannot, and should not, be pushed to absurdity.

Take a situation, where the same seller, knowing fully well that the going price for his car is 5200,000. 00, sells it for only 5100. 00 to the buyer. Even if the seller, is satis? ed in receiving only 5100. 00 for the car, the resulting contract, from a strictly legal standpoint, is not a sale, but more of a donation, and the law will presume that the underlying consideration must have been liberality. Therefore, the tax authorities may insist that the gift tax be paid on the transaction.

This is all academic discussions, of course, since if no third party complains, the nature of the contract would never be at issue, and in all probability the contracting parties themselves would be bound by their characterization of the contract under the principle of estoppel. The subjective test of the commutative nature of sale is further bolstered by the principle that inadequacy of price does not affect ordinary sale. 61 Inadequacy of price may be a ground for setting aside an execution sale but is not a suf? cient ground for the cancellation of a voluntary contract of sale otherwise free 61 Arts. 355 and 1470, Civil Code; Ereneta v. Bezore, 54 SCRA 13 (1973). 14 LAW ON SALES from invalidating effects. 62 Inadequacy of price may show vice in consent, in which case the sale may be annulled, but such annulment is not for inadequacy of price, but rather for vitiation in consent. 63 Only recently Buenaventura v. Court of Appeals,64 held that: “Indeed, there is no requirement that the price be equal to the exact value of the subject matter of sale; all that sellers believed was that they received the commutative value of what they gave. All the respondents believed that they received the commutative value of what they gave. 65 6. Sale Is Title and Not Mode The perfection of a sale gives rise to the obligation on the part of the seller to transfer ownership and deliver possession of the subject matter; nevertheless, it would be delivery or tradition that is the mode to transfer ownership and possession to the buyer. Although in one case the Court de? ned a “sale” as a “contract transferring dominion and other real rights in the thing sold,”66 sale is merely title that creates the obligation on the part of the seller to transfer ownership and deliver possession, but on its own sale is not a mode that transfers ownership. 7 Thus, Alcantara-Daus v. de Leon,68 held that while a sale is perfected by mere consent, ownership of the thing sold is acquired only upon its delivery to the buyer. Upon the perfection of the sale, the seller assumes the obligation to transfer ownership and to deliver the thing sold, but the real right of ownership is transferred only “by tradition” or delivery thereof to the buyer. In Acap v. Court of Appeals,69 the Court held that an asserted right or claim to ownership, or a real right over a thing arising from Alarcon v. Kasilag, 40 O. G. Supp. 15, p. 203 (1940). Art. 1470, Civil Code. 4 416 SCRA 263 (2003). 65 Ibid, at p. 272. 66 Titong v. Court of Appeals, 287 SCRA 102 (1998). 67 Equatorial Realty Dev. , Inc. v. Mayfair Theater, Inc. , 370 SCRA 56 (2001); Alcantara-Daus v. de Leon, 404 SCRA 74 (2003). 68 404 SCRA 74 (2003). 69 251 SCRA 30, 38 (1995). 63 62 NATURE OF SALE 15 a juridical act, is not per se suf? cient to give rise to ownership over the thing; that right or title must be completed by ful? lling certain conditions imposed by law: “Hence, ownership and real rights are acquired only pursuant to a legal mode or process. While title (such as sale) is the juridical justi? ation, mode (like delivery) is the actual process of acquisition or transfer of ownership over a thing. ” Acap held that the “Declaration of Heirship and Waiver of Rights” executed by the heirs waiving their inheritance rights in favor of a non-heir cannot be deemed a proper mode to affect title to the land involved because waiver of inheritance right can only be done in favor of another heir; whereas, it could not also be considered a sale contract because the document did not provide for the element of price, which is required for a valid sale under Article 1458 of the Civil Code.

Manongsong v. Estimo,70 emphasized that once a sale has been duly perfected, its validity “cannot be challenged on the ground of the non-transfer of ownership of the property sold at that time of the perfection of the contract, since it is consummated upon delivery of the property to the vendee. It is through tradition or delivery that the buyer acquires ownership of the property sold. ” Consequently, the proper remedy was not annulment, but rescission. Mode is the legal means by which dominion or ownership is created, transferred or destroyed (e. . , succession, donation, discovery, intellectual creation, etc. );71 title only constitutes the legal basis by which to affect dominion or ownership. Therefore, sale by itself does not transfer or affect ownership;72 the most that sale does is to create the obligation to transfer ownership; it is tradition or delivery, as a consequence of sale, that actually transfers ownership. 73 404 SCRA 683 (2003). Cited in San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99, 113 (2005). 72 Quoted or used verbatim in San Lorenzo Dev. Corp. v.

Court of Appeals, 449 SCRA 99, 113 (2005) without acknowledgment given to the author. 73 Equatorial Realty Dev. , Inc. v. Mayfair Theater, Inc. , 370 SCRA 56 (2001). The passage was quoted or used verbatim in San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99, 114 (2005) without acknowledgment given to the author. 71 70 16 LAW ON SALES The Roman Law concept of sale encompassing only the obligation of the seller to deliver the property is actually consistent with the treatment of sale as merely a title, and by its perfection does not affect the ownership nor effect the transfer thereof to the buyer.

Since it is tradition or delivery as the mode by which ownership over the subject matter is transferred to the buyer, the Roman Law concept of mandating delivery of possession of the subject matter as the essence of the sale contract would be logical. This is in stark contrast to the common law concept that the perfection of a sale over a determinate subject matter which is ready for delivery would legally transfer ownership to the buyer, even when there has been no actual or constructive delivery thereof by the seller.

SALE DISTINGUISHED FROM OTHER SIMILAR CONTRACTS The other manner by which to “recognize” a sale is to know how to differentiate it from other contracts which may happen to have some characteristics similar to sale. The other contracts by which clear distinctions had to be made by the Supreme Court involved basically obligations to transfer ownership and deliver possession of a subject matter. In determining the nature or essential characteristic of a contract purported to be a sale, the Court has held that the title given to it by the parties is not as much signi? ant as its substance;74 that courts look at the intent of the parties and the elements of the contractual relationship and not at the nomenclature used to describe it. 75 Pivotal to deciding this issue is the true aim and purpose of the contracting parties as shown by the terminology used in the covenant, as well as “by their conduct, words, actions and deeds prior to, during and immediately after executing the agreement. ”76 74 Romero v. Court of Appeals, 250 SCRA 223 (1995); Lao v. Court of Appeals, 275 SCRA 237 (1997); Cavite Dev. Bank v. Spouses Cyrus Lim, 324 SCRA 346 (2000); Santos v.

Court of Appeals, 337 SCRA 67 (2000). 75 Santos v. Court of Appeals, 337 SCRA 67 (2000). 76 Lao v. Court of Appeals, 275 SCRA 237 (1997). NATURE OF SALE 17 In one case,77 the Court held that “[A] contract is what the law de? nes it to be, taking into consideration its essential elements, and not what the contracting parties call it. The transfer of ownership in exchange for a price paid or promised is the very essence of a contract of sale. ” 1. From Donation Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another person, who accepts it. 8 Sale is essentially an onerous contract, whereas donation is a gratuitous contract. 79 A sale is perfected by mere consent,80 whereas donation, being a solemn contract, although consent is also required, must comply with the formalities mandated by law for its validity. 81 Knowing the distinctions between sale and donation is important in situations where the consideration for the transfer or alienation of a subject matter is not certain as to ensure that it is valuable consideration to constitute a valid sale. As observed in Manongsong v.

Estimo,82 unlike in a donation by the decedent, a valid sale cannot have the legal effect of depriving the compulsory heirs of their legitimes: “As opposed to a disposition inter vivos by lucrative or gratuitous title, a valid sale for valuable consideration does not diminish the estate of the seller. When the disposition is for valuable consideration, there is no diminution of the estate but merely substitution of values, that is, the property sold is replaced by the equivalent monetary consideration. ”83 Santos v. Court of Appeals, 337 SCRA 67 (2000). Art. 725, Civil Code. 9 Art. 725, Civil Code. 80 Art. 1457, Civil Code. 81 Arts. 745 to 749, Civil Code. For example, in the donation of movable, Article 748 allows an oral donation provided that there is a simultaneous delivery of the thing or of the document representing the right donated; and if the value of the movable exceeds 55,000. 00, then the acceptance must be in writing, otherwise the donation is void. Under Article 749, the donation of an immovable must be in a public document, and the acceptance may be in the same instrument or a separate public document, otherwise the donation is void. 2 404 SCRA 683 (2003). 83 Ibid, at p. 695. 78 77 18 LAW ON SALES Under Article 1471 of the Civil Code, when the price of a sale is simulated, the sale itself may be void, “but the act may be shown to have been in reality a donation or some other act or contract. ” In other words, a contract may be entered into in the form of a “sale” and may end up being governed by the Law on Donations, even when there may be a formal price agreed upon, if it is simulated, and the real intention is that the subject matter is being donated to the supposed “buyer. In such a case, the governing rule on perfection of sale by mere consent does not resolve whether the real contract is valid, since being a donation, the formality for donation should also have been complied with for the transaction to be considered valid. On the other hand, a purported donation may have been executed by the parties, but it is not mere liberality that permeates the contract as the only consideration, because other consideration or burdens are placed upon the donee. In such a case, the issue of what is the applicable rule (i. . , Law or Sales or Law on Donation) becomes critical in determining the validity and enforceability of the contract. Under Article 726 of the Civil Code, even when the donor imposes upon the donee a burden, but which is less than the value of the thing given, there is still a donation. The legal implication under said article is clear: when the value of the burden placed upon the donee is more than the value of the thing given, it becomes an “onerous” donation, as either a barter or sale, which are both governed by the Law on Sales. 4 In such cases, the solemnities provided for by the Law on Donations are wholly irrelevant, even if the contract is called a “donation”; and since the relationship is governed by the Law on Sales, the perfection and enforceability of the contract happen upon consent. 85 2. From Barter By barter or exchange, one of the parties binds himself to give one thing in consideration of the other’s promise to give Art. 1641, Civil Code. Application of these principles may be seen in Carloz v. Romil, 20 Phil. 183 (1911), and Manalo v. De Mesa, 20 Phil. 496 (1911). 85 84 NATURE OF SALE 19 nother thing;86 whereas, by sale, one of the parties binds himself to deliver a thing in consideration of the other’s undertaking to pay the price in money or its equivalent. 87 It is interesting to note that in Delpher Trades Corp. v. IAC,88 in somewhat a complete de? ance of the doctrine of separate juridical personality of a corporation from its stockholders, the Court held that an assignment of property to the corporation by controlling shareholders in exchange for shares is not a sale nor barter because the corporation cannot be considered a third party when it would be controlled by the transferor as part of estate planning. a.

Rules to Determine Whether Contract Is Sale or Barter Article 1468 of the Civil Code provides for the following rules in cases of dispute whether the contract is a sale or a barter, especially when the consideration agreed upon is partly in money and partly in another thing: (a) Manifest Intention of the Parties – Even if the acquisition of a thing is paid for by another object of greater value than the money component, it may still be a sale and not a barter, when such was the intention of the parties; (b) When Intention Does Not Appear and Consideration Consists Partly in Money and Partly in Another Thing: (i) It is a barter, where the value of the thing given as part of the consideration exceeds the amount of money given or its equivalent; (ii) It is a sale, where the value of the thing given as part of the consideration equals or is less than the amount of money given. 86 87 Art. 1638, Civil Code. Art. 1458, Civil Code. 88 157 SCRA 349 (1988). 20 LAW ON SALES The distinctions between sale and barter are merely academic, since aside from two separate rules applicable to barter, as to all matters not speci? cally provided for, Article 1641 provides that barter shall be governed by the Law on Sales. The two rules speci? ally provided for barter contracts, but which are similar anyway to the rules on warranty against eviction applicable to sale, are as follows: (a) If one of the contracting parties, having received the thing promised in barter, should prove that it did not belong to the person who gave it, he cannot be compelled to deliver that which he offered in exchange, but he shall be entitled to damages;89 and (b) One who loses by eviction the thing received in barter may recover that which he gave in exchange with a right to damages, or he can only make use of the right to recover the thing which he has delivered while the same remains in the possession of the other party, but without prejudice to the rights acquired in good faith by a third person. 90 Nonetheless, there are a few instances when the difference between the two types of contracts is critical. Firstly, the rules on the Statute of Frauds,91 which apply to the sale of real property, and personal property bought at 5500. 0 or more, do not apply to barter. Secondly, the right of legal redemption granted by law to an adjoining owner of an urban land,92 covers only “resale” and does not cover exchanges of properties. 93 3. From Contract for a Piece-of-Work By the contract for a piece-of-work, the contractor binds himself to execute a piece of work for the employer, in consi89 90 Art. 1639, Civil Code. Art. 1640, Civil Code. 91 Art. 1403, Civil Code. 92 Art. 1622, Civil Code. 93 De Santos v. City of Manila, 45 SCRA 409 (1972). NATURE OF SALE 21 deration of a certain price or compensation; the contractor may either employ only his labor or skill, or also furnish the material. 94 The similarity etween a sale and a contract for a piece of work has been recognized in Commissioner of Internal Revenue v. Court of Appeals and Ateneo de Manila University. 95 The Court held that the research output delivered by the Institute of Philippine Culture of the Ateneo de Manila University pursuant to an endowment or grant given by sponsors cannot be considered a sale nor a contract for a piece-of-work, since: “Transfer of title or an agreement to transfer it for a price paid or promised to be paid is the essence of sale. 96 Ineluctably, whether the contract be one of sale or one for a piece of work, a transfer of ownership is involved and a party necessarily walks away with an object. ”97 There may be situations where it is dif? ult to determine whether the contract in dispute is a sale or a contract for a pieceof-work, because essentially, in both instances, the client or customer walks away from the transaction bringing with him an object. 98 For example, one may buy a painting from an art gallery, under a sale, or he may request the artist himself to execute the painting for a price certain, which is a contract for a piece-of-work. In both cases, the resulting object and the price or consideration paid may be the same. The foregoing illustrations are rather easy, and by their simple facts, one can determine the nature of the contract involved. More complicated situations have, however, arisen, and covered by rulings of the Supreme Court. a. Statutory Rule on Distinguishing Sale from Contract for a Piece-of-Work In the early case of Inchausti & Co. v.

Cromwell,99 the issue was whether the seller could be made liable for sales tax on the Art. 1713, Civil Code. 271 SCRA 605 (1997). 96 Quoting from TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES, Vol. V, pp. 1-2 (1992). 97 271 SCRA 605, 618, citing VILLANUEVA, PHILIPPINE LAW ON SALES, pp. 7-9 (1995). 98 Cited in Commissioner of Internal Revenue v. Court of Appeals and Ateneo de Manila University, 271 SCRA 605, 618. 99 20 Phil. 345 (1911). 95 94 22 LAW ON SALES price it received from bailing the hemp that it sold to its customers. The seller contended that the charge for bailing is to be treated not as part of the sale but as a charge for the service of bailing the hemp. Inchausti & Co. eld that the distinction between a sale and a contract for work, labor, and materials is tested by the inquiry of whether the thing transferred is one not in existence and which never would have existed but for the order of the party desiring to acquire it, or a thing which would have existed and been the subject of sale to some other person, even if the order had not been given. In that case, the Court held that the hemp was in existence in baled form before the agreements of sale were made, or, at least, would have been in existence even if none of the individual sales in question had been consummated; and that it would have been baled, nevertheless, for sale to someone else, since it was proven customary to sell hemp in bales.

Subsequently, Article 1467 of the Civil Code gave the statutory rules in distinguishing a sale from a contract for a pieceof-work, employing language similar to the Inchausti & Co. ruling, thus: ART. 1467. A contract for the delivery at a certain price of an article which the vendor in the ordinary course of his business manufactures or procures for the general market whether the same is on hand at the time or not, is a contract of sale, but if the goods are to be manufactured specially for the customer and upon his special order, and not for the general market, it is a contract for a piece of work. (n) which gives two tests for distinction: (a) Manufacturing in the ordinary course of business to cover sales contracts; and (b) Manufacturing upon special order of customers, to cover contracts for piece-of-work.

The jurisprudential doctrine that became the basis of Article 1467 therefore indicated that the term “upon special order” is NATURE OF SALE 23 really based on the ability of the producer to manufacture the goods in the condition that they customarily are without having to wait for speci? c orders from customers. In Celestino Co v. Collector of Internal Revenue,100 a duly registered co-partnership did business under the trade name “Oriental Sash Factory. ” Although in previous years it paid the higher sales taxes on the gross receipts of its sash, door and window factory as a manufacturer-seller (i. e. , sales tax), in 1952 it began to claim tax liability only to the lower contractor’s tax (i. e. , for a piece-of-work).

The company averred and adduced evidence to show that since it manufactured sash, windows and doors only for special customers and upon their special orders and in accordance with the desired speci? cations and not for the general public, its contractual relations with its customers was that of a contract for a piece-of-work. Notice that in Celestino Co the thrust of the taxpayer position in the implementation of the “upon special order” test was more of timing, rather than by necessity: that if the manufacture of goods is made always upon or after the orders of customers and on the basis of their speci? cations, the underlying relationship would be that of a contract for a piece-ofwork.

The Court held that the company could not claim the lower contractor’s tax, and that it was actually a manufacturer, with its sales subject to the higher sales tax, taking into consideration the following: (a) The Company habitually made sash, windows and doors, as it had represented itself as manufacturer (factory) in its stationery and in advertisements to the public; (b) That the products were made only when customers placed their orders, did not alter the nature of the establishment, for it was obvious that ful? lling the order, only required the employment of such materialsmoldings, frames, panels as it ordinarily 100 99 Phil. 841 (1956). 24 LAW ON SALES manufactured or was in a position to habitually manufacture; and (c) The nature of the products manufactured was such that “[a]ny builder or homeowner, with suf? cient money, may order windows or doors of the kind manufactured,” and it was not true that it served special customers only or con? ned its services to them alone, and that it was possible for the company to “easily duplicate or even mass-produce the same doors – it is mechanically equipped to do so. Celestino Co recognized that the essence of a contract for a piece-of-work is the “sale of service” unlike in a sale where the essence is the sale of an object. It also conceded that if the company “accepts a job that requires the use of extraordinary or additional equipment, or involves services not generally performed by it — it thereby contracts for a piece of work — ? lling special orders within the meaning of Article 1467. ” In that case, however the Court found that the orders exhibited were not shown to be special: “They were merely orders for work — nothing is shown to call them special requiring extraordinary service of the factory. 101 Celestino Co implies that the test of “special orders” under Article 1467 of the Civil Code is not one of timing, or habit, but actually must be drawn from the nature of the work to be performed and the products to be made: it must be of the nature that the products are not ordinary products of the manufacturer, and they would require the use of extraordinary skills or equipment, if to be performed by a manufacturer. The principles of Celestino Co were reiterated in the later decision in Commissioner of Internal Revenue v. Arnoldus Carpentry Shop, Inc. 102 101 102 Ibid, at p. 846. 159 SCRA 199 (1988). NATURE OF SALE 25 In Commissioner of Internal Revenue v.

Engineering Equipment and Supply Company,103 the Engineering Equipment and Supply Company (EEI), which was engaged in the design and installation of central type air-conditioning system, was assessed the advance sales tax for its importation of parts and materials as a manufacturer and seller of the central airconditioning system, instead of the compensating tax it paid as a contractor. In countering the assessment, EEI claimed that it is not a manufacturer and seller of air-conditioning units and spare parts or accessories thereof, but a contractor engaged in the design, supply and installation of the central type of airconditioning system, “which is essentially a tax on the sale of service or labor of a contractor rather than on the sale of articles subject. In resolving that EEI was a contractor and therefore subject only to the lower compensating tax, the Court held that “[t]he distinction between a contract of sale and one for work, labor and materials is tested by the inquiry whether the thing transferred is one not in existence and which never would have existed but for the order of the party desiring to acquire it, or a thing which would have existed and has been the subject of sale to some other person even if the order had not been given. ”104 It further explained the test to mean: “If the article ordered by the purchaser is exactly such as the plaintiff makes and keeps on hand for sale to anyone, and no change or modi? cation of it is made at defendant’s request, it is a contract of sale, even though it may be entirely made after, and in consequence of, the defendants order for it. 105 By the foregoing test, Engineering Equipment con? rms the abandonment of the timing application of the “upon special order” test under Article 1467, and that just because the thing came into existence after, and was motivated to be produced by reason of, a speci? c order, does not necessarily qualify the underlying transaction to be a contract for a piece-of-work. 103 104 64 SCRA 590 (1975). Ibid, at p. 597. 105 Ibid. 26 LAW ON SALES The crucial application of the “upon special order” test under Article 1467 in Engineering Equipment was the “nature of the object” or “the test of necessity,” when it took into consideration the nature of execution of each order.

The Court noted that EEI undertook negotiations and execution of individual contracts for the design, supply and installation, “taking into consideration in the process such factors as the area of the space to be air conditioned; the number of persons occupying or would be occupying the premises; the purpose for which the various air conditioning areas are to be used; and the sources of heat gain or cooling load on the plant such as sun load, lighting, and other electrical appliances which are or may be in the plan. ”106 The Court determined that EEI “designed and engineered completely each particular plant and that no two plants were identical but each had to be engineered separately. ” It also found that even if EEI wanted to mass-produce the central air-conditioning system or to produce them ahead of any order of a client, it could not do so because of the variable factors that had to be taken into consideration.

Taken together, both Celestino Co and Engineering Equipment established the proper application of the “upon special order” test under Article 1467, as not merely one of timing of the ? ow of the transactions, but one that goes into the nature of the product involved when it was possible for the manufacturer or producer to be able to produce the product ahead of any special order given by a customer or client. In addition, by looking at the other facts in Engineering Equipment, we are also able to deduce that some of the other tests, including the statutory ones, to determine whether the contract is a sale or for a piece-of-work, do not prevail. Take for example, the habituality test enunciated in Celestino Co.

In that case it was held that when the manufacturer engages in the same activity in the ordinary course of business, and does not need to employ extraordinary skills and equipment, that would classify the underlying transaction as a sale. And yet, if we look 106 Ibid, at p. 598. NATURE OF SALE 27 at the activity of EEI in Engineering Equipment, the fabrication of central air-conditioning system, was as a matter-of-course, a staple undertaking, one which could be considered ordinary and usual in its operations; and although each time it serviced an order it had to take various factors into consideration, EEI really did not need to employ extraordinary skills or equipment each time it had to execute an order. The core test in Engineering Equipment was that each product or system executed by it had, by its nature, o be unique and always different from other orders it had to service in the past, and that even if it wanted to, EEI could not stockpile or even mass-produce the products because of their very nature. 107 The large quantity of the products to be delivered do not also indicate that the underlying contract is one of sale. Thus, in Dino v. Court of Appeals,108 it was held that in a sale for the manufacture of 20,000 pieces of vinyl frogs and 20,000 copies of vinyl mooseheads according to the special samples speci? ed and approved by the “buyer” and which the “seller” manufactured not in the ordinary course of its business, the contract executed was clearly one of piece-of-work.

The consistent theme in the decisions of the Supreme Court on the matter is that the main distinguishing factor between a sale and a contract for a piece-of-work is the essence of why the parties enter into it: if the essence is the object, irrespective of the party giving or executing it, the contract is sale; if the essence is the service, knowledge or even reputation of the person who executes or manufactures the object, the contract is for piece of work, which is essentially the sale of service or labor. Thus, Engineering & Machinery Corp. v. Court of Appeals,109 took into account the position of a learned author: To Tolentino, the distinction between the two contracts depends on the intention of the parties. Thus, if the parties intended that at some future date an object has 107 Reiterated in Engineering & Machinery Corp. v. Court of Appeals, 252 SCRA 156 359 SCRA 91 (2001). 252 SCRA 156 (1996). (1996). 108 109 28 LAW ON SALES o be delivered, without considering the work or labor of the party bound to deliver, the contract is one of sale. But if one of the parties accepts the undertaking on the basis of some plan, taking into account the work he will employ personally or through another, there is a contract for a piece of work. 110 b. Practical Needs for Being Able to Distinguish From the point of view of warranty of the contractor on the product, a contract for a piece-of-work is not much different from a sale. Pursuant to Article 1714, a contract for a piece-of-work shall be governed “by pertinent provisions on warranty of title and against hidden defects and the payment of price in a contract of sale. 111 On a more practical basis, however, apart from the issue of the tax provisions applicable to the transactions, there are still key areas where it would be important to determine the proper characterization of a contract, whether it is a sale or one for a piece-of-work, because of the different sets of laws governing each type of contract. Sale is constituted of real obligations and would be the proper subject of an action for speci? c performance. On the other hand, a contract for a piece-of-work, where the main subject matter is the service to be rendered (obligation to do), would not allow an action for speci? c performance in case the contractor refuses to comply with his obligation.

Instead, Article 1715 provides that “[S]hould the work be not of such quality, the employer may require that the contractor remove the defect or execute another work. If the contractor fails or refuses to comply with this obligation, the employer may have the defect removed or another work executed at the contractor’s cost. ” In a sale, only when the subject matter is indeterminate or generic (i. e. , determinable) is the buyer granted the remedy under Article 1165 to have the subject matter done by a third party with cost chargeable to the seller. 110 111 Ibid, at p. 165. Dino v. Court of Appeals, 359 SCRA 91 (2001). NATURE OF SALE 29 Finally a contract for a piece-of-work, unlike a sale, is not governed by the Statute of Frauds. 4. From Agency to Sell or to Buy By the contract of gency, a person binds himself to render some service or to do something in representation or on behalf of the principal, with the consent or authority of the latter. 112 a. Distinguishing Sale and Agency to Sell/Buy A contract of agency is one that essentially establishes a representative capacity in the person of the agent on behalf of the principal, and one characterized as highly ? duciary. Involving obligations to do (i. e. , to represent the principal), contracts of agency to sell or to buy are essentially different from sales. Nevertheless, because the object of the agency arrangement is the purchase or sell of a determinate object, there is a tendency to confuse one with the other.

From its very nature, sale is not unilaterally revocable; whereas, a contract of agency to sell, because it covers an underlying ? duciary relationship, is essentially revocable,113 even in the presence of an irrevocability clause. In sale, the buyer himself pays for the price of the object, which constitutes his main obligation; in an agency to sell, the agent is not obliged to pay the price, and is merely obliged to deliver the price which he may receive from the buyer. 114 In sale, the buyer, after delivery, becomes the owner of the subject matter; in an agency to buy, the agent does not become the owner of the thing subject of the agency, even if the object is delivered to him.

In sale, the seller warrants; in an agency, the agent who effects the sale assumes no personal liability as long as he acts within his authority and in the name of the principal. 115 However, 112 113 Art. 1868, Civil Code. Arts. 1919 and 1920, Civil Code. 114 Arts. 1891 and 1897, Civil Code. 115 Art. 1897, Civil Code. 30 LAW ON SALES it is legally possible for an agent or a broker to voluntarily bind himself to the warranties of the seller. 116 Finally, because of the ? duciary nature of the relationship, in an agency to sell, the agent is disquali? ed from receiving any personal pro? t from the transaction covered by the agency, and any pro? received should pertain to the principal. 117 b. Statutory Rule Article 1466 of the Civil Code provides that “[i]n construing a contract containing provisions characteristic of both the sale and of the contract of agency to sell, the essential clauses of the whole instrument shall be considered. ” The Supreme Court has identi? ed what constitute the “essential clauses” to warrant a conclusion as to the proper nature of the contract in issue. In Quiroga v. Parsons,118 plaintiff Quiroga granted to defendant Parsons the right to sell as an “agent” the “Quiroga beds” in the Visayas. Parsons was obliged under the contract to pay for the beds within a speci? d period after delivery even when not yet sold, at a discount of 25% as commission for the sales. Quiroga subsequently sought the rescission of the agreement claiming that Parsons, as agent, had violated its obligation not to sell the beds at higher prices than those of the invoices; to open an establishment in Iloilo; to keep the beds on public exhibition, and to pay for the advertisement expenses incurred; and to order the beds in dozen and in no other manner. Except for the ordering the beds in dozens, none of the other obligations imputed to Parsons were expressly set forth in the contract to serve as a basis for rescission based on substantial breach.

However, Quiroga insisted that Parsons was his agent, and that said obligations were implied from the commercial agency or at least were instructed and disobeyed; in other words, he invoked the essential revocability of agency as his legal basis to rescind the agreement. 116 117 Schmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493 (1988). Art. 1891, Civil Code. 118 38 Phil. 501 (1918). NATURE OF SALE 31 Whether Quiroga could rescind (i. e. , revoke) the contract therefore depended on whether it was one of sale or agency to sell. The Court found the arrangement to be one of sale since the essential clause provides that “[p]ayment was to be made at the end of sixty days, or before, at the plaintiff’s request, or in cash, if the defendant so preferred, and in these last two cases an additional discount was to be allowed for prompt payment. These conditions to the Court were “precisely the essential features of a contract of purchase and sale” because there was the obligation on the part of the plaintiff to supply the beds, and, on the part of the defendant, to pay their price, thus: These features exclude the legal conception of an agency or order to sell whereby the mandatory or agent received the thing to sell it, and does not pay its price, but delivers to the principal the price he obtains from the sale of the thing to a third person, and if he does not succeed in selling it, he returns it. By virtue of the contract between the plaintiff and the defendant, the latter, on receiving the beds, was necessarily obliged to pay their price within the term ? xed, without any other consideration and regardless as to whether he had or had not sold the beds. 119 The Court also noted that merely because by their contract, the parties designated the arrangement as an agency did not mean the characterization to be conclusive, “[b]ut it must be understood that a contract is what the law de? es it to be, and not what it is called by the contracting parties. ”120 In Gonzalo Puyat & Sons, Inc. v. Arco Amusement Company,121 Arco Amusement Company had engaged the services of Gonzalo Puyat & Sons to purchase from the Starr Piano Company in the United States speci? ed sound reproducing equipment. Later, when Arco found out that Puyat had quoted to Arco not the net price but the list price, and that Puyat had received a discount from Starr Piano Company, it sought to 119 Ibid, at p. 505. Ibid, at p. 506. 121 72 Phil. 402 (1941). 120 32 LAW ON SALES recover the same under the premise that being only its agent, any bene? t or pro? t received from the transaction must inure to Arco, as the principal. 122

In construing that the underlying contract between Arco and Puyat was not an agency to buy, but rather a sale, the Court looked into the provisions of their contract, and found that the letters between the parties clearly stipulated for ? xed prices on the equipment ordered, which “admitted no other interpretation than that the respondent agreed to purchase from the petitioner the equipment in question at the prices indicated which are ? xed and determinate. ”123 The Court held that “whatever unforeseen events might have taken place unfavorable to the defendant (petitioner), such as change in prices, mistake in their quotation, loss of the goods not covered by insurance or failure of the Starr Piano Company to properly ? ll the orders as per speci? cations, the plaintiff (respondent) might still legally hold the defendant (petitioner) to the prices ? xed. 124 The Court held that such stipulation “is incompatible with the pretended relation of agency between the petitioner and the respondent, because in agency, the agent is exempted from all liability in the discharge of his commission provided he acts in accordance with the instructions received from his principal. ”125 Although under their agreement, Gonzalo Puyat & Sons was entitled to receive 10% commission, the same did not necessarily make it an agent, as the provision is only an additional price which Arco bound itself to pay, and which stipulation was not incompatible with the contract of purchase and sale. Being a contract of sale and purchase, the Court also did not sustain the allegation of fraud by Gonzalo Puyat & Sons against Arco. Firstly, it held that “the contract is the law between the parties and should include all the things they are 122 Art. 891 of the Civil Code provides: “. . . Every agent is bound to render an account of his transactions and to deliver to the principal whatever he may have received by virtue of the agency, even though it may not be owing to the principal. Every stipulation exempting the agent from the obligation to render an account shall be void. ” 123 72 Phil. 402, 407 (1941). 124 Ibid. 125 Ibid. NATURE OF SALE 33 supposed to have agreed upon. What does not appear on the face of the contract should be regarded merely as ‘dealer’s’ or ‘trader’s talk,’ which can not bind either party. ”126 Secondly, it held that the fact that Gonzalo Puyat & Sons obtained more or less pro? than the respondent calculated before entering into the arrangement, was no ground for rescinding the contract or reducing the price agreed upon between them: “Not every concealment is fraud; and short of fraud, it were better that, within certain limits, business acumen permit of the loosening of the sleeves and of the sharpening of the intellect of men and women in the business world. ”127 In Ker & Co. , Ltd. v. Lingad,128 the company entered into a contract with an American company, whereby Ker & Co. , speci? cally designated as “Distributor,” would receive products from the American company by way of consignment, for sale in the Philippines. It was speci? ally stipulated in the contract that “all goods on consignment shall remain the property of the Company until sold by the Distributor to the purchaser or purchasers, but all sales made by the Distributor shall be in his name. ” It was further stipulated that the contract “does not constitute the Distributor the agent or legal representative of the Company for any purpose whatsoever. Distributor is not granted any right or authority to assume or to create any obligation or responsibility, express or implied in behalf of or in the name of the Company, or to bind the Company in any manner or thing whatsoever. ” The Commissioner of Internal Revenue assessed Ker & Co. liable as commercial broker under the agreement. In ? nding for the Commissioner, the Court held that in spite of the disclaimer in the agreement, it was still an agent of the American company.

The decisive test for the Court was “the retention of the ownership of the goods delivered to the possession of the dealer, like herein petitioner, for resale to customers, the price and terms remaining subject to the control of the ? rm consigning such goods. ”129 It also found signi? cant the stipulation in the agreement that 126 127 Ibid, at p. 406. Ibid, at p. 409. 128 38 SCRA 524 (1971). 129 Ibid, at p. 525. 34 LAW ON SALES the American company “at its own expense, was to keep the consigned stock fully insured against loss or damage by ? re or as a result of ? re, the policy of such insurance to be payable to it in the event of loss. ” Since insurable interest remained with the American company, it clearly showed that ownership over the goods was never transferred to Ker & Co. thus: The transfer of title or agreement to transfer it for a price paid or promised is the essence of sale. If such transfer puts the transferee in the attitude or position of an owner and makes him liable to the transferor as a debtor for the agreed price, and not merely as an agent who must account for the proceeds of a resale, the transaction is a sale; while the essence of an agency to sell is the delivery to an agent, not as his property, but as the property of the principal, who remains the owner and has the right to control the sale, ? x the price, and terms, demand and receive the proceeds less the agent’s commission upon sales made. 130 Finally, in Victorias Milling Co. v.

Court of Appeals,131 the Court held that one of the factors that most clearly distinguishes agency from other legal concepts, including sale, “is control; one person — the agent — agrees to act under the control of direction of another — the principal. ” In that decision, it was held that when an entity purchases sugar under a Shipping List/Delivery Receipt from the original owner to the buyer, “for and in our behalf,” in order to authorize the buyer to withdraw part of the merchandise from the bailee, such did not establish an agency, since the letter to the bailee of the original owner used clearly the words “sold and endorsed” for the document of title, which meant clearly to cover a sale, not an agency to sell. c.

Other Practical Value of Being Able to Distinguish Knowing whether the contract is one of sale or an agency to sell is also important in considering the applicability of the Statute of Frauds. 130 131 Ibid, at p. 530. 333 SCRA 663, (2000). NATURE OF SALE 35 Lim v. Court of Appeals,132 held that an agency to sell on commission basis does not belong to any of the contracts covered by Articles 1357 and 1358 requiring them to be in a particular form, and not one enumerated under the Statutes of Frauds in Article 1403. Hence, unlike a sale contract which must comply with the Statute of Frauds for enforceability, a contract of agency to sell is valid and enforceable in whatever form it may be entered into.

By way of exception, under Article 1874 of the Civil Code, when the sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing, otherwise, the sale shall be void. 5. From Dacion En Pago Dation in payment is one whereby property is alienated to the creditor in full satisfaction of a debt in money;133 it constitutes “the delivery and transmission of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. ”134 By express provision of law, dation in payment is governed by the Law on Sales,135 since it essentially involves the transfer of ownership of a subject matter. In Vda. De Jayme v.

Court of Appeals,136 the Court observed that in its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale while the debt is considered as the purchase price; that is why the elements of sale must be present, including a clear agreement that the things offered is accepted for the extinguishment of the debt. 137 254 SCRA 170 (1996). Art. 1245, Civil Code. 134 Philippine Lawin Bus Co. v. Court of Appeals, 374 SCRA 332 (2002); Yuson v. Viton, 496 SCRA 540 (2007); Social Security System v. Atlantic Gulf and Paci? c Co. of Manila, 553 SCRA 677 (2008). 135 Art. 1245, Civil Code. 136 390 SCRA 380 (2002). 137 Reiterated in Technogas Phils. Mfg. Corp. v.

PNB, 551 SCRA 183 (2008); Social 133 132 36 LAW ON SALES It must be emphasized, however, that dacion en pago considerations are not in the realm of perfection of contract, but rather in the stage of consummation, for indeed dacion en pago is by de? nition a special mode of payment, whereby the debtor offers another thing to the creditor who accepts it as equivalent of payment of an outstanding debt. Consequently, prior to delivery of the subject matter to constitute the dation in payment, the agreement does not necessarily constitute a separate contract, but only an arrangement by which an existing obligation may be extinguished. Lo v. KJS Eco-Formwork System Phil. , Inc. 138 holds that in order that there be a valid dation in payment, there must be: (a) Performance of the prestation in lieu of payment (animo solvendi) which may consist in the delivery of a corporeal thing or a real right or a credit against the third person; (b) Some difference between the prestation due and that which is given in substitution (aliud pro alio); and (c) An agreement between the creditor and debtor that the obligation is immediately extinguished by reason of the performance of a presentation different from that due. 139 Lo also holds that in dacion en pago “[t]he undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtor’s debt. As such, the vendor in good faith shall be responsible, for the existence and legality of the credit at the time of the sale but not for the solvency of the debtor, in speci? ed circumstances. ”140 The ? rst requisite of actual delivery is demonstrated in Philippine National Bank v. Pineda,141 which held that dation in Security System v. Atlantic Gulf and Paci? c Co. f Manila, 553 SCRA 677 (2008). 138 413 SCRA 182 (2003). 139 Reiterated in Aquintey v. Tibong, 511 SCRA 414 (2006). 140 413 SCRA 182, 187 (2003). 141 197 SCRA 1 (1991). NATURE OF SALE 37 payment requires delivery and transmission of ownership of a thing to the creditor as an accepted equivalent of the performance of the obligation. When there is no such transfer of ownership in favor of the creditor, as when re-possession of the subject matter of a trust receipt is only by way of security, there is no dacion. The third requisite that there must be an agreement that the delivery of the property is in lieu of payment is best demonstrated in Philippine Lawin Bus Co. v.

Court of Appeals,142 where the Court held that a transfer of property between debtor and creditor does not automatically amount to a dacion en pago, since it is essential that the transfer must be accompanied by a “meeting of the minds between the parties on whether the loan … would be extinguished by dacion en pago. ”143 The legal effects of a dacion en pago come into effect only when both the debtor and creditor agree to the terms thereof, for consent to dacion is an essential elements. 144 But once the creditor agrees to a dacion, it ought to know, especially when it is a bank, and must abide by the legal consequence thereof; that the pre-existing obligation is thereby extinguished. 45 In one case,146 the Court held that the execution by the borrower-mortgagor of dacion en pago covering the mortgaged property in favor of the lender-mortgagee effectively constitutes a waiver by the mortgagor-transferor of the redemption period normally given a mortgagor. It must be noted that there is an implication in Social Security System v. Atlantic Gulf and Paci? c Company of Manila, Inc. ,147 that would consider the mere agreement to dacion en pago identifying a particular parcel of land as the means to extinguish an obligation as already constituting a new contract of sale that is subject to speci? c performance. Quoting from the earlier decision 374 SCRA 332 (2002). See also Filinvest Credit Corp. v. Philippine Acetylene Co. , Inc. , 111 SCRA 421 (1982); Vda. De Jayme v. Court of Appeals, 390 SCRA 380 (2002). 144 Bank of Philippine Islands v.

SEC, 541 SCRA 294 (2007). 145 Estanislao v. East West Banking Corp. , 544 SCRA 369 (2008). 146 First Global Realty v. San Agustin, 377 SCRA 341 (2002). 147 553 SCRA 677 (2008). 143 142 38 LAW ON SALES in Vda. De Jayme v. Court of Appeals,148 Atlantic Gulf which part held: … In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the purchase price. In any case, common consent if an essential prerequisite, be it sale or novation, to have the effect of totally extinguishing the debt or obligation. 149

The Court in Atlantic Gulf went on to rule that “This statement unequivocally evinces its consent to the dacion en pago … The controversy, instead, lies in the non-implementation of the approved and agreed dacion en pago on the part of the SSS. As such, respondents ? led a suit to obtain its enforcement which is, doubtless, a suit for speci? c performance and one incapable of pecuniary estimation beyond the competence of the Commission. ”150 It should be noted that Atlantic Gulf did not categorically rule that a mere agreement to effect a dacion en pago which has not been implemented can successfully be the subject of an action for speci? c performance, since the ruling only centered around which tribunal had jurisdiction on such cause of action. 6.

From Lease In a contract of lease, the lessor binds himself to give to another (the lessee) the enjoyment or use of a thing for a price certain, and for a period which may be de? nite or inde? nite. 151 A conditional sale may be made in the form of a “lease with option to buy” as a device to circumvent the provisions of the Recto Law governing the sale of personal property on installments. 152 It may be stipulated in such contract that the lessee has the option 148 149 390 SCRA 380 (2002). 553 SCRA 677, at p. 686; underscoring supplied. 150 553 SCRA 677, at pp. 686-687. 151 Art. 1643, Civil Code. 152 Arts. 1484 and 1485, Civil Code. NATURE OF SALE 39 o buy the leased property for a small consideration at the end of the term of the lease, provided that the rent has been duly paid; or if the rent throughout the term had been paid, title shall vest in the lessee. Such contract are really conditional sales and are deemed leases in name only. Filinvest Credit Corp. v. Court of Appeals,153 holds that when a “lease” clearly shows that the rentals are meant to be installment payments to a sale contract, despite the nomenclature given by the parties, it is a sale by installments. The importance of distinguishing a true lease from a sale on installments is considered in Chapter 10 on discussions in the Recto Law. —oOo— 153 178 SCRA 188 (1989). 40 LAW ON SALES CHAPTER 2 PARTIES OF SALE

Discussions on the capacities of the parties to a sale tackle the essential element of “consent” in contracts of sale. But unlike discussions of consent as a “meeting of minds” that brings about the perfection of a sale, the chapter focuses on the “integrity” or “quality” of the consent of the parties to a sale, and thereby leads into discussions on vitiation of consent, and the absolute and relative incapacities of the parties to enter into a contract of sale. GENERAL RULE ON CAPACITY OF PARTIES When it comes to the issue as to who can be the proper parties to a sale, the general rule is that any person who has “capacity to act,” or “the power to do acts with legal effects,”1 or more speci? ally with the power to obligate himself, may enter into a contract of sale,2 whether as seller or as buyer. For natural persons or individuals, the age of majority begins at 18 years,3 upon which age they have the capacity to act. For juridical persons, such as corporations, partnerships, associations and cooperatives, a juridical personality separate and distinct from that of the shareholders, partners or members, is expressly recognized by law,4 with full “juridical capacity”5 to obligate themselves and enter into valid contracts. 6 Art. 37, Civil Code. Art. 1489, Civil Code. 3 Art. 234, Family Code, as amended by Rep. Act No. 6809. 4 Art. 44(3), Civil Code. 5 Art. 7, Civil Code, de? nes “juridical capacity” as “the ? tness to be the subject of legal relations. ” 6 Under Art. 46 of the Civil Code, juridical persons may acquire and possess property of all kinds. Under Sec. 36(6) of the Corporation Code, all corporations are granted the express power to purchase, receive, take or grant, hold, convey, sell and otherwise deal with real and personal properties. 2 1 40 PARTIES OF A SALE 41 MINORS, INSANE OR DEMENTED PERSONS, AND DEAF-MUTES Generally, minors, insane and demented persons, and deafmutes who do not know how to write, have no legal capacity to contract,7 and therefore are disquali? ed from being parties to a sale. Nonetheless, contracts entered into by such legally incapacitated persons are not void, but merely voidable, subject to annulment or rati? cation. 9 The action for annulment cannot be instituted by the person who is capacitated since he is disquali? ed from alleging the incapacity of the person with whom he contracts. 10 Contracts entered into during lucid intervals by insane or demented persons are generally valid;11 whereas, those entered into in a state of drunkenness, or during a hypnotic spell, are merely voidable. 12 When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution, except insofar as he has been bene? ted by the thing or price received by him. 13 1.

Necessaries A minor is without legal capacity to give consent to a sale, and since consent is an essential requisite of every contract, the absence thereof cannot give rise to a valid sale;14 nonetheless, the defective consent gives rise to a voidable sale, meaning “valid until annulled. ” The Title on Sales in the Civil Code speci? cally provides that although a minor is not capacitated to validly enter into a sale, “[w]here necessaries are sold and delivered to a minor or other person without capacity to act, he must pay a reasonable 7 8 Art. 1327, Civil Code. Labagala v. Santiago, 371 SCRA 360 (2001). 9 Art. 1393, Civil Code. 10 Art. 1397, Civil Code. 11 Art. 1328, Civil Code. 12 Art. 128, Civil Code, emphasis supplied. 13 Art. 1399, Civil Code. 14 Labagala v. Santiago, 371 SCRA 360 (2001). 42 LAW ON SALES price therefore,”15 and the resulting sale is valid, and not merely voidable. “Necessaries,” are now de? ned by Article 194 of the Family Code to cover “everything indispensable for sustenance, dwelling, clothing, medical attendance, education and transportation, in keeping with the ? nancial capacity of the family … [and education] include[s] his schooling or training for some profession, trade or vocation, even beyond the age of majority. Transportation shall include expenses in going to and from school, or to and from place of work. Since sales cover only the obligation to deliver a thing, the sale of “necessaries” considered valid under Article 1489 can only cover sales pertaining to sustenance, dwelling, and clothing, and perhaps medicine and educational books and materials. In order for the sale of necessaries to minors to be valid, and not merely voidable, two elements need to be present: (a) perfection of the sale; and (b) delivery of the subject necessaries. If there is only perfection at the time the case reaches litigation, the sale of course is not void, but voidable for vice in consent, and the rules on voidable contracts apply. 2. Emancipation The rules on emancipation under Articles 234 to 236 of the Family Code, have been rendered moot by Rep. Act No. 6809, which has lowered the age of majority to 18 years of age.

Consequently, the issue on the validity of sales entered into by emancipated minors no longer exists. Previously, under the Family Code, “emancipation takes place by the attainment of majority … [which] commences at the age of twenty-one years. ”16 In addition, it was provided that emancipation also took place “(1) By marriage of the minor; or (2) By the voluntarily emancipation by recording in the Civil Register of an agreement in a public instrument executed by the parent exercising parental authority and the minor at least eighteen 15 16 Art. 1489, Civil Code. Art. 234, Family Code. PARTIES OF A SALE 43 years of age. ”17 Emancipation would terminate parental authority over the person and property of the minor, who shall then be quali? d and responsible for all acts of civil life,18 including validly entering into contracts of sale. Under the present Family Code, marriages entered into below eighteen years of age are void,19 rendering emancipation by marriage at the age of 18 years inutile, since by merely reaching 18 years of age, even without marrying, one is already of legal age. Voluntary emancipation by registration of the public instrument requires that the minor be at least 18 years old, which is now legally impossible, because at eighteen years of age there is no longer a minor who may be voluntarily emancipated. 3. Senility and Serious Illness The effects of senility and serious illness of the seller on the validity of a sale was covered in Domingo v.

Court of Appeals,20 where the main issue was whether the proponents were able to establish the existence and due execution of a deed of sale with the only evidence adduced being a carbon copy of the alleged original deed where the signature of the alleged seller was a thumb mark made while sick on the hospital bed. Domingo agreed with the trial court’s ruling that sale was “null and void ab initio” on ? ndings that the “consideration for the nine (9) parcels of land including the house and bodega is grossly and shockingly inadequate,” but also on the ? ndings of the Court that — … at the time of the execution of the alleged contract, Paulina Rigonan was already of advanced age and senile. She died an octogenarian … barely over a year when the deed was allegedly executed … , but before copies of the deed were entered in the registry allegedly [much later]. … The unrebutted testimony .. shows that at the time of the alleged execution of the 17 18 Art. 234, Family Code. Art. 236, Family Code, which was repealed by Rep. Act No. 6809. 19 Arts. 2 and 5, Family Code. 20 367 SCRA 368 (2001). 44 LAW ON SALES deed, Paulina was already incapacitated physically and mentally… that Paulina played with her waste and urinated in bed… 21 Domingo held that although “[t]he general rule is that a person is not incompetent to contract merely because of advanced years or by reason of physical in? rmities. However, when such age or in? rmities have impaired the mental faculties so as to prevent the person from properly, intelligently, and ? mly protecting her property rights then she is undeniably incapacitated. Given these circumstances, there is in our view suf? cient reason to seriously doubt that she consented to the sale of and the price for the parcels of land. Moreover, there is no receipt to show that said price was paid to and received by her. Thus, we are in agreement with the trial court’s ? nding and conclusion on the matter. ”22 The author posits that the essence of the Domingo ruling for declaring the sale void was that the circumstances showed that there was never any meeting of minds since there was no real consideration agreed upon, and that the deed was merely forged.

It is unfortunate for Domingo to have declared the sale “void ab initio” on grounds that legally do not render it so, namely: (a) Incapacity to give consent (senility, advanced age, and serious illness), which constitute only vice in consent, and would render the contract merely voidable; (b) That “price was never paid to and received,” which gives rise only to an action for rescission or speci? c performance; and (c) That the consideration was “grossly and shockingly inadequate,” which under Article 1470 of the Civil Code “does not affect a contract of sale, except as it may indicate a defect in the consent, or that the parties 21 22 Ibid, at p. 380. Ibid, at p. 380. PARTIES OF A SALE 45 really intended a donation or some other act or contract. ” The decision in Paragas v. Heirs of Dominador Balacano,23 which invoked Domingo, again took the unusual step to declare a sale executed by one who is already of advanced age and senile to be “null and void,” instead of being merely voidable.

In that case, the alleged seller, shown to have signed the Deed of Sale on his death bed in the hospital, “was an octogenarian at the time of the alleged execution of the contract and suffering from liver cirrhosis at that — circumstances which raise grave doubts on his physical and mental capacity to freely consent to the contract. ”24 In Paragas, the Court used the protective provisions of Article 24 of the Civil Code for ruling that the sale was void, i. e. , “[i]n all contractual, property or other relations, when one of the parties is at a disadvantage on account of his moral dependence, ignorance, mental weakness, tender age or other handicap, the courts must be vigilant for his protection. ” It does not seem logical for the Court to declare the sale void, when annulment of the contract by reason of vitiated consent, would have been the more logical remedy to apply. SALES BY AND BETWEEN SPOUSES 1.

Sales With Third Parties Before the enactment of the Family Code, the provisions of the Civil Code provided limitations on when the husband or the wife may deal with conjugal partnership property. For example, Heirs of Ignacia Aguilar-Reyes v. Mijares,25 recognized that under the regime of the Civil Code (as contrasted from the rule under the Family Code), the alienation or encumbrance of a conjugal real property requires the consent of the wife; that the absence of such consent rendered the transaction merely voidable and not void; and that the wife may, during the marriage and within 23 24 468 SCRA 717 (2005). Ibid, at p. 734. 25 410 SCRA 97 (2003). 46 LAW ON SALES en years from the questioned transaction, bring an action for the annulment of the contract on the entire property, and not just the one-half portion that pertains to her share. Under the present Family Code, common provisions apply equally to both spouses, not only because the default rule is the “absolute community of property regime,”26 but more so even when the spouses chose under their marriage settlements to be governed by the conjugal partnership of gains, the spouses would still have joint administration of the conjugal properties. 27 Under Article 73 of the Family Code, either spouse may exercise any legitimate profession, occupation, business or activity without the consent of the other; and the latter may object only on valid, serious and moral grounds.

In cases of disagreements, the courts shall decide whether or not the objection is proper, and make rulings on the bene? ts, depending on whether the bene? ts had accrued to the family prior to the objection or thereafter. The article also provides that if bene? ts accrued prior to the objection, the resulting obligation shall be enforced against the separate property of the spouse who has not obtained consent; otherwise, the same shall be chargeable against the community property, without prejudice to the creditors who acted in good faith. Under the Law on Sales, therefore, it would seem that a spouse may, without the consent of the other spouse, enter into sale transactions in the regular or normal pursuit of his or her profession, vocation or trade.

Nevertheless, under Articles 96 and 124 of the Family Code, the administration and enjoyment of the community property or the conjugal property, as the case may be, shall belong to both spouses jointly; and in case of disagreement, the husband’s decision shall prevail, subject to the wife seeking remedy from the courts, which must be availed of within ? ve (5) years from the date of the contract. In addition, the disposition or encumbrance of community property or conjugal property, as the case may be, shall be void without authority of the court or the written consent of the other spouse. In such a 26 27 Art. 75, Family Code. Art. 124, Family Code. PARTIES OF A SALE 47 case, the transaction shall be construed as a continuing offer on the part of the consenting spouse and the third person, and may be perfected as a binding contract upon the acceptance by the other spouse or authorization by the court before the offer is withdrawn by either or both offerors. 8 In one case,29 even when the property regime prevailing was the conjugal partnership of gains, the Court held that the sale by the husband of a conjugal property without the consent of the wife to be not merely voidable but void, under Article 124 of the Family Code, since the resulting contract lacked one of the essential elements of “full consent. ” In another case,30 the Court held that the sale by the husband of property belonging to the conjugal partnership without the consent of the wife when there was no showing that the latter was incapacitated, was held void ab initio because it was in contravention of the mandatory requirements of Article 166 of the Civil Code. However, it conceded that as an exception, the husband may dispose of conjugal property without the wife’s consent if such sale is necessary to answer for conjugal liabilities mentioned in Articles 161 and 162 of the Civil Code. 2.

Sales Between Spouses Under Article 1490 of the Civil Code, spouses cannot sell property to each other, except: (a) when a separation of property was agreed upon in the marriage settlements; or (b) when there has been a judicial decree for the separation of property. In addition, Article 1492 provides that the prohibition relating to spouses selling to one another is applicable even to sales in legal redemption, compromises and renunciations. a. Status of Prohibited Sales Between Spouses Contracts entered into in violation of Articles 1490 and 1492 are not merely voidable, but have been declared by the Supreme 28 Art. 96, Family Code. Guiang v. Court of Appeals, 291 SCRA 372 (1998). 30 Abalos v. Macatangay, Jr. , 439 SCRA 64 (2004). 29 48 LAW ON SALES Court as being null and void. 31 However, not anyone is given the right to assail the validity of the transaction.

For instance, the spouses themselves, since they are parties to an illegal act, cannot avail themselves of the illegality of the sale on the ground of pari delicto;32 the courts will generally leave them as they are. Also, the creditors who became such only after the transaction, cannot attack the validity of the sale, for it cannot be said that they have been prejudiced by the transaction. Practically, the only persons who can question the sale are the following: the heirs of either of the spouses who have been prejudiced; prior creditors;33 and the State when it comes to the payment of the proper taxes due on the transactions. 34 In Medina v. Collector of Internal Revenue,35 de? iency sales tax were sought to be collected against the sales of lumber products by the wife to the public, although when the husband previously sold the lumber products to the wife (of course at a lower price) he had already paid the sales tax thereon. Considering that only the ? rst and original sales were taxable under the then Tax Code, the spouses held that the second and subsequent sales by the wife to the public could not be subjected to further sales tax. In addition, the spouses alleged that the sales between them were valid since they were governed by the complete separation of property regime pursuant to a pre-nuptial agreement executed between them.

Aside from the fact that the records of the alleged pre-nuptial agreement were non-existent, the Court determined that at the time of their marriage, the spouses had no properties to have warranted them to execute a pre-nuptial agreement for complete separation of property. The Court considered the sales between the spouses as void and non-existent in violation of Article 1490, and considered the sales by the wife to the public as the ? rst and original sales subject to the sales tax. 31 Uy Sui Pin v. Cantollas, 70 Phil. 55 (1940); Medina v. Collector, 1 SCRA 302 (1961). 32 33 Modina v. Court of Appeals, 317 SCRA 696 (1999). Ibid. 34 Medina v. Collector of Internal Revenue, 1 SCRA 302 (1961). 35 1 SCRA 302 (1961). PARTIES OF A SALE 49 b.

Rationale for Prohibition Medina gave the rationale for the relative incapacity of spouses to sell properties to one another to be as follows: (a) To prevent a spouse defrauding his creditors by transferring his properties to the other spouse; (b) To avoid a situation where the dominant spouse would unduly take advantage of the weaker spouse, thereby effectively defrauding the latter; and (c) To avoid an indirect violation of the prohibition against donations between spouses under Article 133 of the Civil Code. Article 133 of the Civil Code, which declares void every donation between spouses during marriage, seeks to prevent the ? rst two evils enumerated above. 36 Article 133 has been replaced by Article 87 of the Family Code which added the provision “The prohibition shall also apply to persons living together as husband and wife without a valid marriage. ” Therefore, the evils sought to be avoided under Articles 133 and 1490 are the same.

But unlike Article 1490 which exempts from its prohibition sales between spouses governed by the complete separation of property regime, Article 133, and now Article 87 of the Family Code, do not make such exception in case of donations. One explanation for the difference in this aspect between Articles 133 and 1490 is that a donation between spouses governed by the complete separation of property regime, being a gratuitous contract, would necessarily reduce the estate of the donor and increase the estate of the donee; while a sale between such spouses, being an onerous and commutative contract, would result in the separate estates of the spouses being of the same value as before the sale and no fraud could result, either to the 36 Matabuena v. Cervantes, 38 SCRA 284 (1971). 50 LAW ON SALES spouses or to their creditors. 7 This position would also explain the reason why spouses governed by the absolute community of property regime cannot sell to one another because having the same estate between themselves, a sale is not possible because there simply cannot be a purchase of what a party-buyer already owns. The position however, does not explain why a sale between spouses of separate or paraphernal properties would not be allowed as an exception under Article 1490 when the spouses are governed by the conjugal partnership of gains. c. Rationale for Exceptions to Prohibition under Article 1490 If one were to take at face value the two exceptions to the prohibition of sales between spouses (i. e. sales between spouses governed by complete separation of property regime), it would seem that the evils sought to be avoided also pertain to such situations, and indeed, there is greater danger of undue in? uence or fraud in situations where the spouses are governed by the complete separation of property regime. For in a complete separation of property regime, where the spouses are bound only by their separate properties to their separate creditors and not to the creditors of the other spouses, there would seem to be greater risk that by allowing spouses to sell to one another, as the law allows, the separate creditors of the selling spouses could equally, if not with greater degree, be defrauded.

In addition, just because spouses have a complete separation of property regime does not necessarily discount that one spouse cannot exercise undue in? uence or pressure on the other spouse. Indeed, the fact that one has a weak personality and that the other has a dominant personality cannot be erased or altered by entering into a complete separation of property regime, or any other regime for that matter. In a complete separation of property regime, the dominant spouse may unduly in? uence the weaker spouse, and with greater impunity, legally get away with it. 37 Manonsong v. Estimo, 404 SCRA 683 (2003), used this same reasoning in distinguishing the difference in effect between a sale and donation on the legitimes of forced heirs. PARTIES OF A SALE 51

Finally, Article 133 which prohibits donations between spouses, does not make an exception to spouses governed by the complete separation of property regime, and therefore donations between such spouses would be void. By allowing under Article 1490 spouses governed by complete separation of property regime to sell to one another, the law would allow the circumvention of the prohibition against donations between spouses governed by the complete separation of property regime. If Article 1490 were meant to be a stop-gap measure to Article 133, why would it leave sales between spouses governed by the complete separation of property regime, outside its pale?

If the matter is considered more closely, it would seem that the exception under Article 1490 on the restriction of sales between spouses, should apply more to spouses governed by the absolute community of property regime, because the evils sought to be avoided by the law cannot for practical purposes happen in such regime, since no matter what undue in? uence is exercised by the dominant spouse, or attempt to defraud the creditor of a spouse, or attempt to circumvent the prohibition against donation, such attempts would prove futile because of the continued existence of the common fund on which both spouses (and their heirs and creditors) can continue to claim.

However, as discussed previously, a sale between spouses governed by the absolute community of property regime would be legally meaningless since they have the same estate and represent the same interest. The key element, it seems to the author, to the exceptions provided for the restrictions under Article 1490, lies in the psychology of the situation. Legally, there are only two ways by which a complete separation of property regime could exist between married spouses, namely, by the execution of a prenuptial agreement stipulating such property regime to apply, or by the spouses going to court to ask for the dissolution of the prevailing conjugal partnership of gains or absolute community of property regimes. In either case, the situation bespeaks clearly of hardness of heart on the part of the spouses, showing a business-like

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