PERFORMANCE OR

CHAPTER 6 -

CONSUMMATION OF SALE
OBLIGATIONS OF SELLER
1. To Preserve the Subject Matter
Article 1163, CC: Every person obliged to give a
determinate thing is also obliged to take care of it with the
proper diligence of a good father of a family, unless the law or
the stipulation of the parties requires another standard of care.
Sale of a specific or determinate object: upon perfection
and even prior to delivery, and although the seller still owns the
subject matter, he is already obliged to take care of the subject
matter with the diligence of a good father of a family;
Otherwise: becomes liable for breach of such
obligation (i.e. the thing deteriorates or is lost through
sellers fault)
Ancillary obligation to preserve the subject matter of the
sale = to do (personal obligation)

2. To Deliver the Subject Matter

Article 1495, CC: The seller is bound: (a) to transfer the
ownership of, and (b) to deliver the thing, which is the object of
the sale to the buyer.

Article 1458: Sale covers the twin-obligations of the seller

to transfer the ownership of and to deliver a determinate thing.

the means by which the seller can transfer the

ownership of the subject matter is by the mode of tradition
or delivery, whether actual or constructive.

Kuenzle & Streiff v. Watson & Co.: Where there is no

express provision that the title shall not pass until payment of
the price, and the thing sold has been delivered, title passes
from the moment the thing sold is placed in the possession and
control of the buyer. In spite of the reciprocal nature of a sale, it
is not the prior payment of price that determines the effects of
delivery of the subject matter.
Ocejo, Perez & Co. v. International Banking Corp.: Delivery
produces its natural effects in law, the principal and most
important of which being the conveyance of ownership, without
prejudice to the right of the seller to claim payment of the price.

As a consequence of a valid sale, the delivery of

the subject matter ipso jure transfers its ownership to the
buyer.

3. To Deliver the Fruits and Accessories

Article 1164: (Re: obligation to deliver a determinate thing)
The transferee has a right to the fruits of the thing from the time
the obligation to deliver it arises; however, he shall acquire no
real right over them until the same has been delivered to him.
Article 1537: The seller is bound to deliver the thing sold
and its accessions and accessories in the condition in which
they were upon the perfection of the contract, and all the fruits
shall pertain to the buyer from the day on which the contract
was perfected.

Res perit domino: It is the owner of the thing who bears the
risk of loss and benefits from the fruits of the thing owned;

Sale of a determinate subject matter: Even prior to delivery

and transfer of ownership thereof to the buyer, the buyer
already has certain rights enforceable against the seller,
pertaining to the subject matter.

Accessories always follow the principal.

4. To Warrant the Subject Matter

Article 1495, CC: The seller is obliged to warrant the thing
which is the object of the sale.

TRADITION AS A CONSEQUENCE OF A VALID SALE

 1. Essence of Tradition
Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc.:
Ownership of the thing sold is a real right, which the buyer
acquires only upon delivery of the thing to him This right is
transferred, not merely by contract, but also by tradition or
delivery.
And there is said to be delivery if and when the
thing sold is placed in the control and possession of the
vendee.
Delivery is a composite act, in which both parties
must join and the minds of both parties concur; it is an act
by which one party parts with the title to and the
possession of the property, and the other acquires the right
to and the possession of the same.

Nemo dat quod non habet: one cannot give what one does
not have.
Santos v. Santos: The critical factor in the different modes
of effecting delivery, which gives legal effect to the act is the
actual intention of the vendor to deliver, and its acceptance by
the vendee. Without that intention, there is no tradition.

The principle on tradition based on two factors:

(a) Acceptance, although an obligation on the

part of the buyer, is not essential for
delivery by the seller to achieve its legal
effects; and
(b) An express intention on the matter by the
parties to a sale, at the point of delivery is
not essential for tradition to produce its
legal consequences.

Test: Was there mutual intention and agreement to transfer

the ownership of the subject matter:
Affirmative: There is a valid sale;
Negative: Simulated sale = void ab initio.
 Equatorial Realty and Santos rulings: Tradition produces its
legal consequences from the fact that delivery is effected
pursuant to a valid sale.
When the auction sale of the subject properties to the bank
was void, no valid title passed in its favor;

a. Types of Delivery
(a) actual or physical delivery; and
(b) constructive delivery.
Froilan v. Pan Oriental Shipping Co.: In the absence of
stipulation to the contrary, the ownership of the thing sold
passes to the buyer upon the actual or constructive delivery
thereof.
Alfredo v. Borras: It is not necessary that the seller himself
delivers title of the property to the buyer because the thing sold
is understood as delivered when it is placed in the control and
possession of the buyer.

1. Actual Delivery
Article 1497, CC: There is actual or physical delivery when
the thing sold is placed in the control and possession of the
buyer.
Although possession is the best gauge when there
is control, nonetheless control can take other forms other
than actual physical possession.
Power Commercial and Industrial Corp. v. Court of
Appeals: For both actual or constructive delivery [t]he key word
is control, not possession, in determining the legal effect of
tradition.

2. Constructive Delivery
Article 1496, CC: The essence of most forms of
constructive delivery is the existence of an agreement between
the seller and the buyer, and that the latter is understood to
have control of the subject matter of sale.
 a. Execution of Public Instrument
Article 1498, CC: (Re: both movables and immovable)
When the sale is made through a public instrument, the
execution thereof shall be equivalent to the delivery of the
subject matter of sale, if from the deed the contrary does not
appear or cannot clearly be inferred.
Notarized deed of sale has two functions:
(a) It operates as a formal or symbolic delivery of
the property sold; and
(b) It authorizes the buyer to use the document
as proof of ownership.
GR: The execution of a public instrument has the same
legal effects as actual or physical delivery.
Applicability: To a public instrument that evidences
a valid sale.

Torcuator v. Bernabe: A special power of attorney

authorizing the agents to execute a deed of sale over the
property can by no means be interpreted as delivery or
conveyance of ownership over said property. of property
arrangements, such as a contract of lease or a joint
venture.

(1) Constructive Delivery Has the Same Legal Effect

as Actual or Physical Delivery
Municipality of Victorias v. Court of Appeals: The legal
effects and consequences of actual or physical delivery, also
apply equally to constructive delivery.
Sabio v. International Corporate Bank: Under Article 1498 ...
the mere execution of the deed of conveyance in a public instrument is
equivalent to the delivery of the property. ... prior physical delivery or
possession is not legally required.

Exception: Ten Forty Realty and Dev. Corp. v. Cruz:

Nowhere in the Civil Code is it provided that the execution
of a Deed of Sale is a conclusive presumption of delivery of
possession of a piece of real estate.
The execution of a public instrument gives rise
only to a prima facie presumption of delivery. Such
 presumption is destroyed when the delivery is not
effected because of legal impediment ... negated by the
failure of the vendee to take actual possession of the
land sold.

(2) When Execution of Public Instrument

Does Not Produce Effects of Delivery
1. When in the execution of a public instrument, there is a
stipulation to the contrary.
Phil. Suburban Dev. v. Auditor: Express reservation
or contrary inference would be present when:
(a) A certain date is fixed for the purchaser to
take possession of the property subject of
the conveyance;
(b) In case of sale by installments, it is
stipulated that until the last installment is
made, the title to the property should
remain with the seller;
(c) When the seller reserves the right to use
and enjoy the property until the gathering
of the pending crops; or
(d) Where the seller has no control over the
thing sold at the moment of the sale, and,
therefore, its material delivery could not
have been made.
In the absence of an express stipulation to the contrary, the
payment of the purchase price of the goods is not a condition
precedent to the transfer of title to the buyer, but title passes by
the delivery.
(In contrast) Heirs of Severina San Miguel v. Court of
Appeals: In a contract of sale, title only passes to the vendee
upon full payment of the stipulated consideration, or upon
delivery of the thing sold.
Balatbat v. Court of Appeals: Devoid of stipulation that
ownership in the thing shall not pass to the purchaser until he
has fully paid the price, ownership in the thing shall pass from
the seller to the buyer upon actual or constructive delivery of the
thing sold even if the purchase price has not yet been fully paid.
 Fortune Tobacco Corp. v. NLRC: The execution of the
deed of conditional sale with provision that the final deed of sale
was to be executed only upon full payment, did not transfer
ownership of the subject matter by the delivery thereof.

2. When at the time of the execution of the public

instrument, the subject matter was not subject to the control of
the seller, then the legal effects of delivery would not happen.
Addison v. Felix: It is the duty of the seller to deliver the
thing sold, and that symbolic delivery by the execution of a
public instrument is equivalent to actual delivery only when the
thing sold is subject to the control of the seller, so that at the
moment of sale, its material delivery could have been made,
which talks of capacity rather than an actual physical delivery.

However, if the sale had been made under the

express agreement of imposing upon the purchaser the
obligation to take the necessary steps to obtain the
material possession of the thing sold, and it were proven
that she knew that the thing was in the possession of a
third person claiming to have property rights therein, such
agreement would perfectly be valid, and there would have
been full compliance by the seller of his obligations under
the sale, by the mere execution of the public instrument.
Power Commercial and Industrial Corp. v. Court of
Appeals: The operative word in the doctrine is not possession
but control.

Traditio longa manu and other forms of symbolic delivery

involve a mere agreement that buyer is now the owner and
possessor of the subject matter.
3. In order that the execution of public instrument to
produce the effect of tradition, not only must the seller have
actual control of the object of the sale at the execution of the
instrument, but that such control or ability to transfer physical
possession and enjoyment must subsist for a reasonable length
of time after the instruments execution. (Pasagui v. Villablanca)
Without the other requisites mandated by jurisprudence,
the mere execution of a public instrument does not create a
conclusive presumption of delivery can be rebutted by clear
and convincing evidence.
 (3) Special Variation to Addison Doctrine
Dy, Jr. v. Court of Appeals: ISSUE: Whether the execution
effected upon the tractor to enforce the brother-sellers
judgment debt was still valid, since the tractor was already sold
to the brother-buyer.
HELD: The mortgagor who gave the property as security
under a chattel mortgage did not part with the ownership over
the same. He had a right to sell it although he was under
obligation to secure the written consent of the mortgagor.

b. Symbolic Delivery
Movables: Constructive delivery may also be made by the
delivery of the keys of the place or depository where the
movable is stored or kept.
Symbolic delivery must involve or cover the subject matter,
and cannot take a form relating to the payment of the purchase
price.

Lorenzo Dev. Corp. v. Court of Appeals: The issuance of

an acknowledgment receipt of the partial payment for the
property bought cannot be taken to mean a transfer of
ownership thereof to the buyer because no constructive
delivery of the real property could have been effected by virtue
thereof.

c. Constitutum Possessorium
- takes effect when at the time of the perfection of the sale,
the seller held possession of the subject matter in the concept
of owner, and pursuant to the contract, the seller continues to
hold physical possession thereof no longer in the concept of an
owner, but as a lessee or any other form of possession other
than in the concept of owner.

d. Traditio Brevi Manu

- before the sale, the would-be buyer was already in
possession of the would-be subject matter of the sale, say as a
lessee, and pursuant to sale, he would now hold possession in
the concept of an owner.
 e. Traditio Longa Manu
- delivery of a thing merely by agreement;

Ex: When the seller points the property subject matter of

the sale by way of delivery without need of actually
delivering physical possession thereof.

Article 1499, CC: The delivery of movable property may be

made by the mere consent or agreement of the contracting
parties, if the thing sold cannot be transferred to the possession
of the buyer at the time of the sale.

f. Delivery of Incorporeal Property

An incorporeal property having no physical existence, its
delivery can only be effected by constructive delivery.
Article 1501, CC: Three (3) types of constructive delivery
specifically applicable to incorporeal property:
(a) When the sale is made through a public
instrument: execution = delivery of the
thing, if from the deed the contrary does
not appear or cannot clearly be inferred;
(b) By the placing of the titles of ownership in
the possession of the buyer; or
(c) The use and enjoyment by the buyer of the
rights pertaining to the incorporeal
property, with the sellers consent.

g. Delivery by Negotiable Document of Title

A person to whom a negotiable document of title has been
duly negotiated acquires such title to the goods as transferor
had or had ability to convey to a purchaser in good faith for
value, and also the title of the persons to whom the documents
was originally.
The buyer of the goods can by the process of
negotiation of the covering document have a title better
than that of his immediate seller.
The buyer to whom a document of title has been
transferred by assignment, acquires only his transferors title to
the goods;
 Always subject to the terms of any agreement with
the transferor.
Invoice is not a negotiable document of title: issuance
thereof would NOT constitute constructive delivery.

h. Delivery Through Carrier

Pertains only to a sale of goods.
GR: Delivery to carrier is deemed delivery to the buyer
Premise: The carrier acts as an agent of the buyer.
(in the absence of stipulation or circumstances to the
contrary)
Article 1523, CC: If in pursuance of a sale, the seller is
authorized or required to send the goods to the buyer, delivery
of the goods to a carrier, whether named by the buyer or not, for
the purpose of transmission to the buyer is deemed to be a
delivery of the goods to the buyer, unless a contrary intent
appears.
Unless otherwise authorized by the buyer / agreed:
(a) the seller must make such contract with the carrier on
behalf of the buyer as may be reasonable, having
regard to the nature of the goods and the other
circumstances of the case.
(b) where goods are sent by the seller to the buyer under
circumstances in which the seller knows or ought to
know that it is usual to insure, the seller must give such
notice to the buyer as may enable him to insure them
during their transit, and if the seller fails to do so, the
goods shall be deemed to be at his risk during such
transit.
(1) F.A.S. Sales
- the seller pays all charges and is subject to risk until the
goods are placed alongside the vessel.

- delivery of the goods alongside the vessel completes the

effect of tradition.
 (2) F.O.B. Sales
- free on board
- the seller shall bear all expenses until the goods are
delivered, depending on whether the goods are to be delivered
at the point of shipment or at the point of destination.
f.o.b., shipping point arrangement: Delivery of the goods
to the carrier is equivalent to delivery to the buyer, and at that
point the risk of loss pertains to the buyer.
f.o.b., destination arrangement: Only when the vessel has
arrived at the point of destination would there be delivery to the
buyer and prior to that point in time, the risk of loss over the
subject matter of the sale will be borne by the seller.

(3) C.I.F. Sales

- Costs, insurance, and freight;
- the price fixed covers not only the costs of the goods,
but the expense of freight and insurance to be paid by
the seller.
- the amount quoted by the seller and agreed to by the
buyer, covers not only the cost of the merchandise (i.e.,
the price) but also the cost of insurance and freight.
Two schools of thought:
1. Since in a c.i.f. arrangement, the costs of insurance
and freight are ultimately to be borne by the buyer, as
part of the price he has obligated himself to pay, then it
would mean that the carrier acts as an agent of the
buyer who pays the freight, and therefore delivery to
the carrier is delivery to the buyer.
a. Since the insurance over the goods shipped is
for the account of the buyer, then clearly the
buyer has obtained ownership over the goods
during the shipment period since this is required
under the insurance law for the buyer to have
insurable interest.
2. In quoting a c.i.f. price, both parties agree that the
seller takes on the responsibility of insuring the goods
and providing for their shipment to the buyer, and for
which responsibility he gets a package price.
 a. Delivery by the seller of the goods to the carrier
is not equivalent to delivery to the buyer, and
the seller must continue to bear the risk of loss
during the shipment period since this is an
integral part of his obligation under the agreed
terms of the sale.
Behn, Meyer & Co. v. Yangco: If the contract be silent as to
the person or mode by which the goods are to be sent, delivery
by the vendor to a common carrier, in the usual and ordinary
course of business, transfers the property to the vendee.
A c.i.f. arrangement signifies that the price fixed
covers not only the costs of the goods, but the expense of
freight and insurance to be paid by the seller, and
therefore seller bears the risk of loss during shipment.
A specification in a contract relative to the payment
of freight can be taken to indicate the intention of the
parties in regard to the place of delivery.
Buyer to pay the freight, pressumption: the
goods become his(buyer) at the point of shipment.
Seller is to pay the freight: The duty of the seller
is to have the goods transported to their ultimate
destination and that title to property does not pass until
the goods have reached their destination.

Since c.i.f. includes both insurance and freight

expenses to be paid by the seller, ordinarily therefore, in a
c.i.f. arrangement, the risk of loss for the account of the
buyer arises only when the vessel arrives at the point of
destination.
Pacific Vegetable Oil Corp. v. Singzon: Under an
arrangement c.i.f., the vendor is to pay not only the cost of the
goods, but also the freight and insurance expenses, and, as it
was judicially interpreted, this is taken to indicate that the
delivery is to be made at the port of destination.
General Foods v. NACOCO: Although it is the seller who
may make the arrangement for the insurance coverage and
freightage of the goods, he does this for the account and benefit
of the buyer, who has agreed to pay for such amounts.
The shipping arrangements in a sale create, by commercial
usage, certain presumptive effects;
 stipulations or indications in the agreement to find the true
intentions of the parties as to the transfer of the risk of loss
before they would apply the presumptive effects of such
acronyms.

EFFECTS AND COMPLETENESS OF DELIVERY

Requisites to effect tradition (transferring ownership and
effecting the fulfillment of the primary obligations of the seller):
(a) Delivery must be made pursuant to a valid sale;
and
(b) Delivery must be effected when seller has
ownership over the subject matter of sale so
delivered.
a. Delivery Must Be Made Pursuant to a Valid Sale
Presumption: There has been a valid passage through
perfection stage that has given rise to a valid and binding sale
that is capable of performance.
Fictitious sale (void and inexistent): There was no
consideration for the same, no title over the subject matter of
the sale can be conveyed.

Nemo potest nisi quod de jure potest No man

can do anything except what he can do lawfully.

b. Delivery Must Be Made By Seller Who Has

Ownership over the Subject Matter
Delivery would produce the effect of transferring ownership
only if at the time of delivery the seller still had ownership over
the subject matter.
Nemo dat quod non habet. - No man can dispose of that
which does not belong to him.

c. To Whom Delivery Must Be Made

Lagoon v. Hooven Comalco Industries, Inc.: Where it is
stipulated that deliveries must be made to the buyer or his duly
authorized representative named in the contracts, the seller is
bound to deliver in such manner only, unless the buyer
specifically designated someone to receive delivery.
 d. When Buyer Refuses to Accept
Acceptance of the subject matter by the buyer is not a
condition for the completeness of delivery.
Even with such refusal of acceptance, delivery, whether
actual or constructive, will produce its legal effects (i.e.
transferring the risk of loss.
Article 1588, CC: When the buyers refusal to accept the
goods is without just cause, the title thereto passes to him from
the moment they are placed at his disposal. However, even
under such circumstances, the seller is still legally obliged to
take certain steps as not to be held liable for consequent loss or
damage to the goods.

1. Rules on Effects of Delivery for Movables

Article 1522, CC: Rules on the delivery of goods
(a) Where the seller delivers to the buyer a
quantity of goods less than what he
contracted to sell, the buyer may reject
them; but if the buyer accepts or retains
the goods so delivered, knowing that the
seller is not going to perform the contract
in full, he must pay for them at the contract
rate;
(b) If, however, the buyer has used or
disposed of the goods delivered before he
knows that the seller is not going to
perform his contract in full, the buyer shall
not be liable for more than the fair value to
him of the goods so received;
(c) Where the seller delivers to the buyer a
quantity of goods larger than what he
contracted to sell, the buyer may accept
the goods covered in the contract and
reject the rest; if the buyer accepts the
whole of the goods so delivered he must
pay for them at the contract rate; if the
subject matter is indivisible, the buyer may
reject the whole of the goods; or
 (d) Where the seller delivers to the buyer the
goods contracted but mixed with goods of
a different description, the buyer may
accept the contracted goods and reject the
rest; if the subject matter is indivisible, the
buyer may reject the goods entirely.

a. When Goods Held by Third Party

The seller has not fulfilled his obligation to deliver to the
buyer unless and until such third person acknowledges to the
buyer that he holds the goods on the buyers behalf.

b. Reservation of Ownership
Express reservation: Despite delivery, ownership will not
transfer to the buyer.
Article 1503, CC: Instances when there is an implied
reservation of ownership:
(a) Where goods are shipped, and by the bill
of lading the goods are deliverable to the
seller or his agent, the seller thereby
reserves the ownership in the goods.
But, if except from the form of the bill of
lading, ownership would have passed to
the buyer on shipment of the goods, the
sellers property in the goods shall be
deemed to be only for purpose of securing
performance of the buyers obligations, in
which case the buyer bears the risk of
loss;
(b) Where goods are shipped, and by the bill
of lading the goods are deliverable to the
order of the buyer or of his agent, but
possession of the bill of lading is retained
by the seller or his agent, the seller
thereby reserves a right to the possession
of the goods as against the buyer, and
ownership is still transferred to the buyer;
(c) Where the seller of goods draws on the
buyer for the price and transmits the bill of
 exchange and bill of lading together to the
buyer to secure acceptance or payment of
the bill of exchange, the buyer is bound to
return the bill of lading if he does not honor
the bill of exchange, and if he wrongfully
retains the bill of lading he acquires no
added right thereby.
c. Obligation as to Accessories and Accessions
Sale of movables: The seller must deliver:

- accessories and accessions in the condition in which they

were upon the perfection of the contract, and

- a quantity of goods that should not be less than what he

contracted to sell, otherwise the buyer may reject them.

d. Sale in Mass of Movables

Article 1522 of the NCC: Sale of movables;
Article. 1480: Sale of specific mass - sale of fungible
things, made independently and for a single price, or without
consideration of their weight, number, or measure.
Gaite v. Fonacier: If there is no provision in the contract for
the measuring or weighing of the fungible movables sold in
order to complete or perfect the sale, nor is the price agreed
upon by the parties to be based upon such measurement, then
the subject matter of the sale is, therefore, a determinate object
the mass, and not the actual number of units or tons
contained therein.
e. Sale by Description and/or Sample
Sale may be rescinded if the bulk of the goods delivered do
not correspond with the description or the sample, and if the
contract be by sample as well as by description.
Sales of goods by sample and/or description should allow
the buyer a reasonable opportunity of inspection or of
comparing the bulk with the sample or the description before
accepting their delivery.
Mendoza v. David: To constitute a sale by sample, it must
appear that the parties treated the sample as the standard of
quality and that they contracted with reference to the sample
with the understanding that the product to be delivered would
correspond with the sample.
Sale of goods by description: one where the buyer
has not seen the article sold and relies on the description
given to him by the seller, or has seen the goods, but the
want of identity is not apparent on inspection.
Sale by sample does not include an agreement to
manufacture goods to correspond with the pattern.
Engel v. Mariano Velasco & Co.: Even in sales by
description and/or sample, the purchaser will not be released
from his obligation to accept and pay for the goods by
deviations on the part of the seller from the exact terms of the
contract, if the purchaser had acquiesced to such deviations
after due notice thereof.
Pacific Commercial Co. v. Ermita Market & Cold Stores:
When the machine delivered by the seller is in accordance with
the description stated in the sales contract, the buyer cannot
refuse to pay the balance of the purchase price and the cost of
installation even if it proves that the machine cannot be used
satisfactorily for the purposes for which he bought it when such
purpose was not made known to the seller.
f. On Sale or Return
Article 1502, NCC: When goods are delivered to the buyer
on sale or return to give the buyer an option to return the
goods instead of paying the price, the ownership passes to the
buyer on delivery, but he may revest the ownership in the seller
by returning or tendering the goods within the time fixed in the
contract, or, if no time has been fixed, within a reasonable time.

g. Sale on Approval, Trial, Satisfaction, or

Acceptance
Article 1502: When goods are delivered to the buyer on
approval or on trial or on satisfaction, or other similar terms, the
ownership therein passes to the buyer only:
(a) when he signifies his approval or acceptance to
the seller or does any other act adopting the transaction; or
(b) if the buyer does not signify his approval or
acceptance, but retains the goods without giving notice of
rejection, then if a time has been fixed for the return of the
 goods, on the expiration of such time, and, if no time has
been fixed, on the expiration of a reasonable time.
Vallarta v. Court of Appeals: When the sale of a movable is
sale on acceptance, no ownership could have been
transferred to the buyer although he took possession thereof,
because delivery, or tradition, as a mode of acquiring ownership
must be in consequence of a contract ..., e.g., sale.

h. Form of Such Special Sales

Industrial Textile Manufacturing Co. v. LPJ Enterprises,
Inc.: For a sale to be considered and construed as a
sale or return or a sale on approval, there must be a clear
agreement to either of such effect
i. Written Proof of Delivery
Lao v. Court of Appeals: In case of goods, delivery is
generally evidenced by a written acknowledgment of a person
receiving the goods, under the following rules:
(a) A bill of lading (a written acknowledgment
of receipt of the goods by the carrier and
an agreement to transport and deliver
them at a specific place to a person named
or upon his order) cannot substitute for a
delivery receipt; and
(b) A factory consignment invoice (a detailed
statement of the nature, quantity and cost
of the thing sold) is not evidence of actual
delivery of the goods.

j. Time and Place of Delivery

Place:
depending in each case on the contract, express or
implied, between the parties.
Apart from such contract, express or implied, or usage of
trade to the contrary, the place of delivery is sellers place of
business, if he has one, and if not, his residence.
Sale of specific goods, which to the knowledge of the
parties when the contract or the sale was made were in some
other place, then that place is the place of delivery.
 Time:
Where by a sale the seller is bound to send the goods to
the buyer, but no time for sending them is fixed, the seller is
bound to send them within a reasonable time.
Demand or tender of delivery may be treated as ineffectual
unless made at a reasonable hour a question of fact.

k. Seller Shall Pay Expenses of Delivery

GR: The expenses in putting the goods into a deliverable
state must be borne by the seller.

Exc: Unless otherwise agreed.

2. Rules on Effects of Delivery for Immovables (to

determine completeness of delivery):

a. Where Immovables Sold Per Unit or Number

The seller is obliged to deliver to the buyer, if the latter
should demand it, all that may have been stated in the contract.
If impossible: The buyer may choose between a
proportional reduction of the price, or the rescission of the
contract when in the latter case, the lack of area be not less
than one-tenth (1/10) of that stated.
Rudolf Lietz, Inc. v. Court of Appeals: The statement of the
area of the immovable is not conclusive and the price may be
reduced or increased depending on the area actually delivered.
Smaller area or inferiority of quality: If the buyer would not
have bought the immovable had he known of its smaller area or
inferior quality, he may rescind the sale.
Greater area or number: The buyer may accept the area
included in the contract and reject the rest. If he accepts the
whole area, he must pay for the same at the contract rate.
Applicable to judicial sales.
 b. Where Immovables Sold for a Lump Sum
There shall be no increase or decrease of the price,
although there be a greater or lesser area or number than that
stated in the contract;
Use of qualifying words of more or less in describing the
area.
The same rule applies when two or more immovables are
sold for a single price;

If, besides mentioning the boundaries which is

indispensable in every conveyance of real estate, its area or
number should be designated in the contract, the vendor shall
be bound to deliver all that is included within said boundaries,
even when it exceeds the area or number specified in the
contract;

Consequence of failure: Vendor shall suffer a

reduction in the price, in proportion to what is lacking in the
area or number, unless the contract is rescinded.

Asiain v. Jalandoni and Roble v. Arbasa: Although under

Article 1542, in the sale of real estate by lump sum, there shall
be no increase or decrease of the price although there be a
greater or lesser area or number than that stated in the contract,
the rule admits of exception because the sale of land under
description more or less or similar words in designating
quantity covers only a reasonable excess or deficiency.
c. Lump Sum Sale versus Sale by Unit
of Measure or Number
Santa Ana v. Hernandez: If the price per unit of measure or
number is not expressly provided for in the contract, the rules of
lump sum sale shall prevail in the sale of real property.
Balantakbo v. Court of Appeals: What really defines a piece
of land is not the area calculated with more or less certainty
mentioned in the description but the boundaries therein laid
down as enclosing the land and indicating its limits: where the
land is sold for a lump sum and not so much per unit of
measure or number, the boundaries of the land stated in the
contract determine the effects and scope of the sale not the
area thereof.
 Esguerra v. Trinidad: Under Article 1542, what is controlling is
the entire land included within the boundaries, regardless of
whether the real area should be greater or smaller than that
recited in the deed.

A caveat is in order, however, the use of more or less or

similar words in designating quantify covers only a reasonable
excess or deficiency.

Numerical data are not of course the sole gauge of

unreasonableness of the excess of deficiency in area.

d. Where Immovables Sold in Mass

A judicial sale in mass of separate known lots or parcels:
valid

Exc: Unless it is made to appear that a larger sum could

have been realized from a sale in parcels or that a sale of less
than the whole would have been sufficient to satisfy the debt.

e. Expenses of Delivery and Registration

on Real Estate
Rules and effects of, tradition, whether actual or
constructive, vary greatly when the subject matter of a valid sale
is real property, especially so when it is registered land.
Reason: Effect of registration in good faith as the
operative act principle under the Torrens system and the
priority of registration in good faith to determine ownership
preference in double sales.
Chua v. Court of Appeals: Registration of the title of the
buyer over the purchased real estate is not an ingredient
necessary for tradition to have full effect.

The payment of the capital gains tax is not a pre-requisite

to the transfer of ownership to the buyer; the transfer of
ownership took effect upon the signing and notarization of the
deed of absolute sale.
Jose Clavano, Inc. v. HLURB: A judgment on a sale that
decrees the obligations of the seller to execute and deliver the
deed of absolute sale and the certificate of title, does not
necessarily include within its terms the obligation on the part of
the seller to pay for the expenses in notarizing the deed of sale
and in obtaining new certificate of title.
Vive Eagle Land, Inc. v. Court of Appeals: Under Article
1487 of the Civil Code, the expenses for the registration of the
sale should be shouldered by the seller unless there is a
stipulation to the contrary;

Under Article 1495, the seller is obliged to transfer title

over the property and deliver the same to the vendee.

The seller is not obligated to transfer in the name of the

buyer a new certificate of title, but rather to transfer ownership
of the real property.

There is a difference between transfer of the certificate

of title in the name of the buyer, and the transfer of ownership to
the buyer.

DOUBLE SALES
1. Rules on Double Sales Must Be Considered
as Rules on Tradition
Article 1544, CC:
Rules that pertain to the consummation stage in the life of
a sale;
Cover the effects and consequences of tradition in a
particular situation where the same seller has sold the same
subject property to two or more buyers who do not represent the
same interests.
Rules on double sales usually can only operate under the
same premise that tradition, whether actual or constructive, can
be made operative, that is:
(a) The conflicting sales are all valid and
demandable sales, pursuant to which
tradition was or could be effected; and
(b) The seller who effected multiple sales to
various buyers over the same subject
matter actually had ownership to convey.
Nevertheless, the rules on double sales,
although essentially applicable within the
 stage of consummation, have a way of
dictating or pre-empting the principles of
perfection.
2. Article 1544 as the Platform for Discussion
Article 1544, CC: If the same thing should have been sold
to different buyers, the ownership shall be given:
(a) When subject matter is movable, to the buyer:
Who may have first taken possession
thereof in good faith;
(b) When subject matter is immovable, to the buyer:
Who in good faith first recorded [the sale]
in the Registry of Property;
Should there be no inscription, ... to the
person who in good faith was first in the
possession of the subject matter;
[I]n the absence thereof, to the person
who presents the oldest title, provided
there is good faith.
Article 559, CC: The possession of movable property
acquired in good faith is equivalent to title, which may be good
even against the real owner of such movable.
Immovable properties: The execution of a private
document or the transfer of physical possession over real
property binds only the parties thereto, but that there must be
compliance with [f]ormal requirements ... for the benefit of third
parties;
A sale of land, once consummated, is valid
regardless of the form it may have been entered into:
Applicable to the contracting parties and in the event that
a third party ... disputes the ownership of the property.
The registration of that sale with the Registry of
Deeds is what binds registered land.
Article 1544: The buyer in good faith who is able to effect
registration of his purchase is preferred.
 Second rule: Preference to a buyer who first takes
possession of the immovable in good faith the sale, even
when it is valid and enforceable, is merely a title or the legal
justification to acquire ownership, but it is tradition that is the
mode by which ownership is transferred to a buyer.
The buyer who first obtains possession of the subject
matter in good faith is preferred against another claiming buyer
No man can receive from his seller what the latter no longer
has. (Nemo dat quod non habet)
In the absence of first inscription or first possession, both in
good faith: The first buyer, having the oldest title in good faith,
should be preferred. (prius tempore, potior jure - Article 1544)

3. Two Divergent Systems When It Comes to Land

Although registration of a sale occupies the highest
preference for determining who owns land and other real estate,
it has assumed two divergent paths in Philippine jurisdiction,
between registered land (which is covered by the Torrens
system) and unregistered land (not covered by the Torrens
system).
Registration under the Torrens system was previously
governed by Act No. 496 (The Public Land Act), but now
governed by Pres. Decree No. 1529 (The Property Registration
Decree). Annotation or registration of transactions over
unregistered land was governed by Act No. 3344, but is now
also provided for in Pres. Decree No. 1529. The doctrinal
difference between the two sets of registration systems for real
estate is quite stark.

a. The Case for Registered Land

Section 51 of Pres. Decree No. 1529 embodies the
registration in good faith as the operative act doctrine, thus

Sec. 51. Conveyance and other dealings by

registered owners. An owner of registered land
may convey, mortgage, lease, charge or otherwise
deal with the same in accordance with existing laws ...
But no deed, mortgage, lease, or other voluntary
instrument, except a will, purporting to convey or
affect registered land shall take effect as a
conveyance or bind the land, but shall operate only as
a contract between the parties and as evidence of
 authority to the Register of Deeds to make
registration.
The act of registration shall be the operative act to
convey or affect the land insofar as third persons are
concerned, and in all cases under this Decree, the
registration shall be made in the office of the Register
of Deeds for the province or city where the land lies.

Abrigo v. De Vera,132 affirms that the rule in double sales

under Article 1544, whereby the buyer who is able to first
register the purchase in good faith is in full accord with Section
51 of PD 1529 which provides that no deed, mortgage, lease, or
other voluntary instrument except a will purporting to convey
or affect registered land, shall take effect as a conveyance or
bind the land until its registration.133

(1) Article 1544 Does Not Overcome the Priority Rules

Under P.D. No. 1529.
It should be emphasized that a clear distinction should be
drawn between the term registration which is the judicial or
administrative process by which a parcel of land is placed for
the first time within the coverage of the Torrens system, from the
term registration which is intended to cover the annotation or
inscription of a contract, transaction or legal process in the
Register of Deeds covering a property, which may or may not
be registered land. Only the second meaning of registration is
meant to be covered by the rules on double sales under Article
1544. More importantly, since the legal effect of registration
under Article 1544 pertains only to double sales, the coverage
and the effects of registration under Section 51 of Pres. Decree
No. 1459 cover not only sales contracts, but all other forms of
annotated voluntary contracts and transactions, like lease,
mortgage, options, agency designation, contracts to sell, etc. In
other words, the registration principle under Pres. Decree No.
1459 has a wider scope, and thereby a more pre-emptive effect,
than the narrow double sales application of Article 1544 of the
Civil Code.
A reading of the various decisions of the Supreme Court on
the matter clearly indicates that the rules of double sales under
Article 1544 do not overcome nor pre-empt the specific rules
under the Torrens system for registered land, which provide that
registration is the operative act by which dealings on
registered land, whether they be voluntary or involuntary, shall
be recognized as existing and binding upon third parties.
For example, Liao v. Court of Appeals,134 held that when
two certificates of title are issued to different persons covering
the same land in whole or in part, the rules on double sales
under Article 1544 cannot formally be applied, and instead the
particular doctrine under the Torrens System would apply, i.e.,
the person holding title which was issued of an earlier date must
prevail; and, in case of successive registrations, where more
than one certificate is issued over the same land, the person
holding a prior certificate is entitled to the land as against a
person who relies on a subsequent certificate. Liao applied the
principle under the Torrens system that a certificate is not
conclusive evidence of title if the same land had been registered
and an earlier certificate for the same is in existence.
Another example is the decision in Naawan Community
Rural Bank, Inc. v. Court of Appeals,135 where the Court held
that invoking the rules on double sales and priority in time
would be misplaced by a first buyer who bought the land not
within the Torrens system but under Act No. 3344, as against
the second buyer who bought the same property when it was
already registered under the Torrens System, thus: It is a well-
known rule in this jurisdiction that persons dealing with
registered land have the legal right to rely on the fact of the
Torrens Certificate of Title and to dispense with the need to
inquire further, except when the party concerned has actual
knowledge of facts and circumstances that would impel a
reasonably cautious man to make such inquiry. 136 In addition,
Naawan Community Rural Bank held that the formal registration
proceedings undertaken on the property and the subsequent
issuance of a title over the land under the Torrens system had
the legal effect of cleansing title on the property of all liens and
claims which were not annotated therein.
The ruling in Naawan Community Rural Bank was
reiterated in Abrigo v. De Vera,137 where the Court emphasized
that the legal priority of registration of sale under Pres. Decree
No. 1529 cannot be overcome by an earlier registration under
Act No. 3344 which is not effective form of registration under
Article 1544 of the Civil Code.
 b. The Case for Unregistered Land
If we consider that Act No. 3344 embodied the principle
that registration is without prejudice to a third party with a better
right, and that Sec. 113 of Pres. Decree No. 1529, now
provides that

Sec. 113. Recording of instruments relating to

unregistered lands No deed, conveyance,
mortgage, lease, or other voluntary instruments
affecting land not registered under the Torrens system
shall be valid, except as between the parties thereto,
unless such instrument shall have been recorded in
the manner prescribed in the office of the Register of
Deeds x x x. ... It shall be understood that any
recording made under this section shall be without
prejudice to a third party with a better right. x x x.

then we would must come to the conclusion that the first to

register in good faith rule under Article 1544 would be wholly
inapplicable to unregistered land. This is the main reason why in
many leading decisions, the Supreme Court has declared that
the rules on double sales under Article 1544 of the Civil Code
have no application to unregistered land.1 This sweeping
statement has led to much confusion on the applicable rule
when it comes to double sales of unregistered land.
The author posits that the better way to construe the
principle without prejudice to a third party with a better right
under Act No. 3344, and now Section. 113 of Pres. Decree No.
1459, is to say that it implements the primary doctrine of Prius
tempore, potior jure, and thereby always favors the first buyer.
Firstly, if we accept that the two other rules found in Article
1544, namely, first to possess in good faith and the person
with the oldest title in good faith, are consistent with the
principle under Act No. 3344 of protecting the third party with a
better right, then such rules on double sales as found in Article
1544 would be applicable to unregistered land. Secondly, how
would you consider the other line of decisions of the Supreme

1 Dagupan Trading Co. v. Macam, 14 SCRA 179 (1965); Carumba v. Court of

Appeals, 31 SCRA 558 (1970); Radiowealth Finance Co. v. Palileo, 197 SCRA 245
(1991); Naawan Community Rural Bank, Inc. v. Court of Appeals, 395 SCRA 43 (2003);
Abrigo v. De Vera, 432 SCRA 544 (2004); Naval v. Court of Appeals, 483 SCRA 102
(2006).
Court which have applied Article 1544 in situations where there
has been double sales of unregistered land? 2
A reading (and re-reading) of the leading and relevant
decisions of the Supreme Court covering double sales
situations over unregistered land would lead to one clear
conclusion: That the rules on double sales for immovables
under Article 1544 are applicable to unregistered land, but only
insofar as they do not undermine specific rules and legislations
that have a higher hierarchical enforcement value, such as the
without prejudice to a better right provision under Act No.
3344, now Section 113 of the Property Registration Decree.
Who therefore is the third party with a better right for
unregistered land? Is it always the first buyer under the concept
of oldest title in good faith under Article 1544?
In both Lichauco v. Berenguer,140 and Hanopol v. Pilapil,141
the Court defined the buyer with a better right as more than
just having in his favor an earlier deed of sale, but rather a
mode by which ownership is directly affected, like acquisitive
prescription or when one who has taken possession of the
property bought either by actual or constructive delivery (i.e.,
first to take possession in good faith). The Court thus held in
Hanopol

It thus appears that the better right referred to in

Act No. 3344 is much more than the mere prior deed
of sale in favor of the first vendee. In the Lichauco
case just mentioned, it was the prescriptive right that
had supervened. Or, as also suggested in that case,
other facts and circumstances exist which, in addition
to his deed of sale, the first vendee can be said to
have better right than the second purchaser.
In the case at bar, there appears to be no clear
evidence of Hanopols possession of the land in
controversy. In fact, in his complaint against the
vendors, Hanopol alleged that the Siapos took
possession of the same land under claim of ownership
in 1945 and continued and were in such possession at
the time of the filing of the complaint against them in
1948. Consequently, since the Siapos were in actual
occupancy of the property under claim of ownership,
when they sold the said land to ... appellee Pilapil ...,
2 Lichauco v. Berenguer, 39 Phil. 643 (1919); Hanopol v. Pilapil, 7 SCRA 452
(1963); Dischoso v. Roxas, 5 SCRA 781 (1962); Espiritu v. Valerio, 9 SCRA 761 (1963).
 such possession was transmitted to the latter, at least
constructively, with the execution of the notarial deed
of sale, if not actually and physically. ... Thus, even on
this score, Hanopol cannot have a better right than
appellee Pilapil who, according to the trial court, was
not shown to be a purchaser in bad faith.142

The consistent ruling of the Court that although registration

under Act No. 3344 of his sale by the second buyer cannot of
itself overcome the sale to the first buyer, and yet registration by
the first buyer under Act No. 3344 can have the effect of
constructive notice to the second buyer that can defeat his right
as a buyer in good faith. 3 In other words, registration under Act
No. 3344, now under Section 113 of Pres. Decree No. 1459,
would have legal effect only when it is consistent with the
principle of protecting a third party with a better right, which
essentially refers to the first buyer in a double sales situation
involving unregistered land.
Another situation covers the sale of unregistered land
under a public auction sale, where rules under Article 1544
cannot overcome the particular provisions of the Rules of Court.
For example, Carumba v. Court of Appeals,144 had distinguished
the applicability of Article 1544 depending on whether the land
is registered under the Torrens system or is unregistered land.
In Carumba, the first buyer had a private deed of sale which
was never registered, but he took possession of the land;
whereas, the second buyer was the highest bidder in the public
auction of the same land, and the sale to him was registered
under Act No. 3344.
Carumba ruled that the provisions of Article 1544 granting
priority to the buyer who registers in good faith over the other
buyer who takes possession in good faith are inapplicable to
unregistered land because the purchaser of unregistered land
at a sheriffs execution sale only steps into the shoes of the
judgment debtor, and merely acquires the latters interest in the
property sold as of the time the property was levied upon, as
expressly provided for in then Section 35, Rule 39 of the
Revised Rules of Court on execution sale (now Section 33, Rule
39, 1997 Rules of Civil Procedure). In other words, the essence

3 Bautista v. Fule, 85 Phil. 391 (1950); Bayoca v. Nogales, 340 SCRA 154
(2000); Naval v. Court of Appeals, 483 SCRA 102 (2006). 14431 SCRA 558 (1970).
of the Carumba ruling is not that Article 1544 is wholly
inapplicable to unregistered land, but that the specific provision
of now Section 33, Rule 39 of the 1997 Rules of Civil Procedure
providing that the purchaser at public auction shall be
substituted to and acquire all the rights, title, interest and claim
of the judgment obligor to the property as of the time of the
levy, overrides the provision of Article 1544 when it involves
unregistered land since under Act No. 3344 registration of
instruments affecting unregistered lands is without prejudice to
a third party with a better right.
In contrast, in Radiowealth Finance Co. v. Palileo,145 citing
Carumba, the Court noted that under the Torrens system, it is
the act of registration that operates to convey and affect
registered land, and that therefore a bona fide purchaser of a
registered land at an execution sale (in spite of the merely
stepping into the shoes of the judgment debtor rule for public
auctions done pursuant to the Rules of Court) acquires a good
title as against a prior transferee, if such transfer was
unrecorded, thus:

... There is no ambiguity regarding the application

of the law with respect to lands registered under the
Torrens System. Section 51 of Presidential Decree
No. 1529 (amending Section 50 of Act No. 496) clearly
provides that the act of registration is the operative act
to convey or affect registered lands insofar as third
person are concerned. Thus, a person dealing with
registered land is not required to go behind the
register to determine the condition of the property. He
is only charged with notice of the burdens on the
property which are noted on the face of the register or
certificate of title. Following this principle, this Court
has time and again held that a purchaser in good faith
of registered land (covered by a Torrens Title)
acquires a good title as against all the transferees
thereof whose right is not recorded in the registry of
deed at the time of sale.146

Radiowealth Finance confirms the proposition that even in

the purchase of registered land under levy on execution, the
provisions of Section 33, Rule 39 of the 1997 Rules of Civil
Procedure cannot overturn the specific provisions of Pres.
Decree No. 1529, which provide that it is registration that is the
operative act to convey or affect registered lands; and therefore,
the earlier unregistered sale, although coupled with possession,
cannot overturn the effect of the registration in good faith of the
second judicial sale.
But since Radiowealth Finance involved the issue of
whether the rules in Article 1544 are applicable to an
unregistered land purchased at a judicial sale recorded under
Act No. 3344, which was earlier sold by the judgment debtor in
a conventional sale, but unrecorded, the Court again upheld the
principle in Carumba. Although Radiowealth Finance declared
that Article 1544 of the Civil Code has no application to land
not registered under Act No. 496, nevertheless the subsequent
discussions in the decision meant to cover only the situation
where the subject unregistered land was first sold by
conventional sale, and subsequently sold by public auction, in
which case again the provision of now Section 33, Rule 39 of
the 1997 Rules of Civil Procedure would be made to apply,
since the purchaser of unregistered land at a sheriffs execution
sale only steps into the shoes of the judgment debtor, and
merely acquires the latters interest in the property sold as of
the time the property was levied upon.
Although an obiter, Espiritu v. Valerio,147 held that where
the owner sold his a parcel of unregistered land to two different
parties assuming that both sales are valid the buyer
whose deed of sale was first registered under the provisions of
Act No. 3344 would have a better right. Thus

... If both are valid, appellants contention that they

have a better right than that claimed by appellee
would seem to be meritorious in the light of the facts
of the case and the provisions of Article 1544 of the
New Civil Code, it not being disputed that the Deed of
Sale in favor of the appellee was registered under the
provisions of Act 3344 on June 16, 1955, while
Exhibits 1 and 2 were similarly registered eleven days
before.148

In Dischoso v. Roxas,149 the substantive discussions in the

decision presumed that Article 1544 would have been
applicable to the double sales of an unregistered coconut land,
except for the fact that the first sale involved the land itself,
while the second sale involved the right to repurchase the said
land.
 4. Global Rules on Double Sales
In a global set of rules on double sales, where Article 1544
is only a component, registration in good faith under the Torrens
system (i.e., Pres. Decree No. 1529), is considered to be of the
highest order, providing for absolute first priority to the buyer
who has it in his favor. This particular rule, for obvious reasons,
cannot apply to unregistered land.
Under that same global set of rules on double sales, the
principle embodied in the Rules of Court as to the risk being
taken by the highest bidder, occupy the second highest priority
rule, which would overcome the rules provided for in Article
1544. But because registration for registered land has the
highest priority, this second rule can pertain only to cases
involving unregistered land.
Oddly enough, this rule was demonstrated in Dagupan
Trading Co. v. Macam,150 which held that where one of the two
conflicting sales of a piece of land was executed before the land
was registered, while the other was an execution sale in favor of
the judgment creditor of the owner made after the same
property had been registered and issued a title free from all
liens and encumbrances, Article 1544 should not apply, and
what should determine the rights of the second buyer would be
the then Section 35, Rule 39 of the Revised Rules of Court on
execution sale. Such a position of the Court meant that since
the land was previously sold to the first buyer, the second buyer
at the execution sale actually bought nothing since the judgment
debtor no longer had rights to the property previously sold.
Dagupan Trading admitted that [i]f the property covered by
the conflicting sales were unregistered land [then the first buyer]
would undoubtedly have the better right in view of the fact that
his claim is based on a prior sale; whereas, were the land
involved in the conflicting transaction was a duly registered
land, the second buyer at public auction would prevail since the
registration of the deed of sale is the operative act that gives
validity to the transfer. Nevertheless, the Court held that the
case did not fall in either cases, and therefore the provisions of
then Section 35, Rule 39 of the Rules of Court were applied in
direct conflict with the provisions of the Torrens system that
guaranteed the title to the land. The Court considered the
subsequent registration of the land as a technicality that could
not cancel and render ineffective the previous unregistered sale
and conveyance of title and ownership in favor of the first buyer,
especially when the first buyer took possession of the land
conveyed as owner thereof, and introduced considerable
improvements thereon.
The Dagupan Trading ruling found application in Naval v.
Court of Appeals,151 where both buyers bought the same parcel
of land from the same seller when it was still unregistered land,
with the first buyer having registered his purchase under Act No.
3344, and the second buyer subsequently being able to obtain
a title by having the land registered under the Torrens system.
The Court held in Naval, that Article 1544 had no application to
double sales which both covered the same unregistered land at
the time of both sales, and held that the registration
contemplated under this provision has been held to refer to
registration under the Torrens system, which considers the act
of registration as the operative act that binds the land. What the
Court held applicable was the rules on double sales of
unregistered land under Act No. 3344, which provides for the
registration of all instruments on land neither covered by the
Spanish Mortgage Law or the Torrens system. Under that law,
registration by the first buyer is constructive notice to the
second buyer that can defeat his right as such buyer in good
faith, and that the registration of an instrument involving
unregistered land in the Registry of Deeds creates constructive
notice and binds third person who may subsequently deal with
the same property.4
In Naval, although the second buyer was able to register
the land under the Torrens system, the Court held that it cannot
detract from the fact that she acquired the land as unregistered
land, and her act of registration under the Torrens system
cannot cleanse her title of defect that it carried under the
provisions of Act No. 3344. The Court clarified that the issue of
good faith or bad faith of the buyer under Article 1544 or that
under the Property Registration Decree is relevant only where
the subject of the sale is registered land and the purchaser is
buying the same from the registered owner of whose title to the
land is clean. In Naval, the second buyer did not buy the land
from a registered owner thereof, but in fact she was the one
who had the land subsequently registered, with constructive

4 See also Bautista v. Fule, 85 Phil. 391 (1950), cited in Naawayan Community
Rural Bank, Inc. v. Court of Appeals, 395 SCRA 43 (2003).
knowledge of the previous sale which was deemed to have
placed her in bad faith.
The rulings in Dagupan Trading and Naval cover unusual
cases, constituting equitable exception to the basic tenets laid
down in Carumba and Radiowealth Finance. More importantly,
the rulings in Dagupan Trading and Naval are diametrically
opposed to the rulings in Naawan Community Rural Bank and
Abrigo discussed above.
Under a global set of rules pertaining to double sales, the
particular rules provided under Article 1544 take only third rung,
with registration under the Torrens system and the rule on public
auction sales under the Rules of Court, coming in first and
second, respectively. If this were the case, what does the first
rule under Article 1544 on first to register in good faith still
cover? This is where things become truly confusing based on
the conflicting decisions of the Court.
There is a line of decisions that says that the first to
register in good faith rule in Article 1544 covers precisely the
absolutely first rule of registration being the operative fact
under the Torrens system, and has no application to
unregistered land; and yet the Court has applied the first to
register in good faith rule for double sales involving
unregistered land,5 albeit in favor of first buyer. The other
position holds that the rules embodied in Article 1544 of the Civil
Code presume that the issues to be resolved do not fall within
the priority rules of the Torrens system under Pres. Decree No.
1546, nor of the specific rules on auction sale under the Rules
of Court.
The author offers no clear solution to these issues. For
whatever it is worth, it must be observed that the principle of
registration in good faith as the operative act, under Pres.
Decree No. 1459, although of utmost priority application, goes
beyond contracts of sale, but includes priority rules covering
other forms of transactions, like liens, encumbrances,
involuntary dealings with registered land, like attachment and
executions. In addition, the priority rule under Pres. Decree No.
1459 covers even contracts to sell and other processes within
the policitacion stage and will even protect the title of a
purchaser in good faith and for value who derives his title from
5 Bautista v. Fule, 85 Phil. 391 (1950); Bayoca v. Nogales, 340 SCRA 154
(2000); Naval v. Court of Appeals, 483 SCRA 102 (2006). 15469 SCRA 99 (1976).
one who had void title (i.e., chain of title theory). Whereas, the
rules on double sales under Article 1544 of the Civil Code are
strictly applicable to double sales only when they are valid and
demandable and the issues arise only at the consummation
stage.
In his concurring opinion in Carbonell v. Court of Appeals,154
then Justice Teehankee had explained that Article 1544 is not
the only rule pertaining to double sales, as in fact the main rule
is essentially a principle not embodied directly in a statutory
provision, which is First in time, priority in right. The peculiarity
of it all, however, is that the main rule is not the primary rule,
since the provisions of Article 1544, although not the main rule,
constitute nevertheless the primary rule, i.e., one has to go
through the tests provided in Article 1544 before one may apply
the main rule of prius tempore, potior jure. As pointed out
earlier, the first in time, priority in right, is embodied within the
oldest title in good faith provided in Article 1544, which is a
concept developed hereunder. Nonetheless, in a global rule of
double sales, the rule first in time, priority in right, would
occupy the bottom rung.

5. Essential Elements for Applicability of Article 1544

Whether the subject matter of double sales be movable or
immovable, jurisprudence has confirmed that for the provisions
of Article 1544 to apply, the following requisites must concur:
(a) The two (or more) sales transactions must
constitute valid sales;
(b) The two (or more) sales transactions must
pertain to exactly the same subject matter;
(c) The two (or more) buyers at odds over the
rightful ownership of the subject matter
must each represent conflicting interests;
and
(d) The two (or more) buyers at odds over the
rightful ownership of the subject matter
must each have bought from the very
same seller.
 The foregoing requisites of double sales were quoted
directly by the Court in Cheng v. Genato,155 without giving due
acknowledgment to the author.

a. Nature of Two Sales Involved

For Article 1544 test to even apply, both sales involved in
the dispute must be valid, or at least be voidable, sales. This is
a critical requirement because the rules under Article 1544
being applications of rules of delivery at consummation stage,
can operate only from the premise that tradition was effected
as a consequence of a valid sale. Thus, in a case where one
of the sales was void for having forged the signature of the
seller, the provisions of Article 1544 were held to be
inapplicable.67
We therefore look with rabid curiosity at the
pronouncement in Caram, Jr. v. Laureta,157 where in a double
sales situation it held that that the second contract of sale,
having been registered in bad faith, is null and void. Article 1410
of the Civil Code of the Philippines provides that any action or
defense for the declaration of the inexistence of a contract does
not prescribe. In effect, Caram, Jr. considered the failure of the
second buyer to comply with the registration requirement under
Article 1544 in good faith to make his sale void, thus

The fact that the second contract is not considered

void under Article 1409 and that Article 1544 does not
declare void a deed of sale registered in bad faith
does not mean that said contract is not void. Article
1544 specifically provides who shall be the owner in
case of a double sale (sic) of an immovable property.
To give full effect to this provision, the status of the
two contracts must be declared valid so that one
vendee may contract must be declared void to cut off
all rights which may arise from said contract.
Otherwise, Article
1544 will be meaningless.8

Since Article 1544 provides for rules on tradition, it must

operate under the premise that the contracts upon which the

6 Espiritu v. Valerio, 9 SCRA 761 (1963). Also San Lorenzo Dev. Corp. v. Court
of Appeals, 449 SCRA 99 (2005); Fudot v. Cattleya Land, Inc., 533 SCRA 350 (2007).
7 SCRA 7 (1981).
8 Ibid, at p. 19.
rules are to operate would have to be valid contracts; otherwise,
tradition pursuant to a void contract would not create any legal
effect. Registration, much less delivery of the subject matter, are
matters that go into consummation and cannot legally affect the
status of a sale valid at perfection.
The proper doctrine in Caram, Jr. is that the attempt to
deliver the subject matter pursuant to a second valid sale would
not produce the legal effects of delivery (i.e., the attempt to
transfer ownership in the person of the second buyer would
produce no legal consequences); but the second contract itself
would remain a valid contract, and can be rescinded for breach
of the obligation to deliver. The lack of ownership on the part of
the seller does not affect the validity of an otherwise valid sale;
and the failure of the seller to effect proper delivery does not
render the contract void, but merely constitutes a breach as the
basis for rescission.

b. Applicability of Rules on Double Sales to

Contracts to Sell and Adverse Claims
Since the rules on double sales are rules pertaining to
tradition at consummation stage, they have no application when
the covered valid contracts are not yet demandable sales, such
as when one or both the contracts in dispute are contracts to
sell.159

In the early case of Mendoza v. Kalaw,160 what were

involved were the sales by the owner of the same parcel of land
to two buyers: the first buyer under a conditional sale, and the
second buyer, under a deed of absolute sale. The second buyer
paid the purchase price and obtained possession of the
property. In any event, the first buyer obtained an anotacion
preventiva (now equivalent to an adverse claim).
Mendoza held that the rules on double sales under the
then Article 1473 of the old Civil Code were not applicable on
the ground that there was no double sales situation since the
first sale was a conditional sale: [A] conditional sale, before the
performance of the condition, can hardly be said to be a sale of
property, especially where the condition has not been performed
or complied with.161 The Court also held that the registration of
the adverse claim, which was good only for 30-days, did not
grant to the first buyer any advantage because [a] preventive
precautionary notice only protects the interests and rights of the
person who secures it against those who acquire an interest in
the property subsequent thereto, and then, only for a period of
thirty days. It cannot affect the rights or interest of persons who
acquired an interest in property theretofore.162
The pronouncements in Mendoza on the non-effect of an
adverse claim have of course been clarified by the ruling in
Carbonell v. Court of Appeals,163 where the annotation of the
adverse claim by the first buyer was deemed to be equivalent to
the registration required under Article 1544. Likewise, the ruling
that a conditional sale does not constitute a sale for the
application of the rules on double sales under Article 1544 has
likewise been abrogated in Andalin v. Court of Appeals,164 where
the first sale was under a Deed of Conditional Sale, while the
second sale was under Deeds of Sale of Registered Land.
In Adalin, the Court had to resolve the issue of whether the
first unconsummated conditional sale, which required the seller
to eject the existing lessees on the property sold, could prevail
over the subsequent consummated absolute contracts of sale
effected in favor of the lessees who have refused to vacate the
premises. The Court held that the non-compliance by the seller
of the undertaking to eject the lessees cannot be considered a
legal justification for him to renege on the first sale, otherwise it
would be equivalent to sanctioning the performance by the
seller of his obligations under the deed subject to his own will
and caprices; and that seller cannot employ his own failure to
comply with his undertaking to justify his obligation under the
conditional sale. More importantly, the Court applied the
provisions of Article 1544 on double sales and held that the
subsequent buyers were already aware of the first conditional
sale and therefore they were in bad faith, and their knowledge
of the first sale gave preference to the first sale.
In contrast, Coronel v. Court of Appeals,165 earlier held that
Article 1544 on double sales does not apply where the earlier
sale is a contract to sell. The Court ruled that it is essential to
distinguish a contract to sell and a conditional contract of sale,
the subject property is sold by the owner not to the party the
seller contracted with, but to a third person, thus:
In a contract to sell, there being no previous sale of
the property, a third person buying such property
despite the fulfillment of the suspensive condition such
as the full payment of the purchase price, for instance,
 cannot be deemed a buyer in bad faith and the
prospective [first] buyer cannot seek the relief of
reconveyance of the property. There is no double sale
in such case. Title to the property will transfer to the
buyer after registration because there is no defect in
the owner-sellers title per se, but the latter, of course,
may be sued for damages by the intending [first]
buyer.9

It seems therefore, that when one of the sales is a contract

to sell, as distinguished from a conditional contract of sale, the
rules of Article 1544 on double sales do not apply, and the buyer
under the contract of sale albeit conditional is always
preferred,10 as being effectively the first in time.
It is interesting to note, however, that the distinction has
further been blurred by the Court in Cheng v. Genato.168 In that
case, the Court held that the rules on double sales under Article
1544 are not applicable to a contract to sell because of the
circumstances that must concur in order for the provisions to
Article 1544 on double sales to apply, namely that there must be
valid sales transactions, and buyers must be at odds over the
rightful ownership of the subject matter who must have bought
from the very same seller, are lacking in a contract to sell

... for neither a transfer of ownership nor a sales

transaction has been consummated. The contract to
be binding upon the obligee or the vendor depends
upon the fulfillment or non-fulfillment of an event.

Notwithstanding this contrary finding [that it is a

contract to sell] we are of the view that the governing
principle of Article 1544, Civil Code, should apply in
this situation. Jurisprudence teaches us that the
governing principle of PRIMUS TEMPORE, PORTIOR
JURE (first in time, stronger in right). For not only was
the contract between herein respondents first in time;
it was also registered long before petitioners intrusion
as second buyer. This principle only applies when the
special rules provided in the aforecited article of the
Civil Code do not apply or fit the specific

9 Ibid, at p. 28.
10 San Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005).
168
300 SCRA 722 (1998).
 circumstances mandated under said law or by
jurisprudence interpreting the article.11

The Cheng ruling can only be interpreted to mean that the

contract to sell whereby the suspensive conditions are first
fulfilled, would be considered as first in time.

c. There Must Be Sameness of Subject Matter

In a case where one buyer bought the parcel of land, and
the other buyer bought the right to redeem the same parcel of
land, Article 1544 was deemed to be inapplicable, because the
subject of the second sale is not the land itself, but the right to
redeem.12

d. There Must Involve the Same Seller

In a case where Buyer 1 bought the thing from Mr. X, who
in turn bought it from Mr. Seller, and the contending Buyer 2
bought the same subject matter from Mr. Seller, the issue
between Buyer 1 and Buyer 2 cannot be resolved by using the
provisions of Article 1544 since they do not have the same
immediate seller.13 As will be noted, successors and
predecessors-in-interest theories are not applicable to be able
to obtain application of the provisions of Article 1544.
Although a number of decisions have been rendered by the
Court applying Article 1544 principles even in case of
successive sales from the same original seller, this requisite has
been reiterated lately in Consolidated Rural Bank (Cagayan
Valley), Inc. v. Court of Appeals,172 where the Court held

[The provisions of Article 1544 of the Civil Code]

contemplate a case of double or multiple sales by a
single vendor. More specifically, it covers a situation
where a single vendor sold one and the same
immovable property to two or more buyers. ... it is
necessary that the conveyance must have been made
by a party who has an existing right in the thing and
the power to dispose of it. It cannot be invoked where
the two different contracts of sale are made by two
different persons, one of them not being the owner of
11 Ibid, at p. 740.
12 Dischoso v. Roxas, 5 SCRA 781, 789-790 (1962).
13 Cruzado v. Bustos, 34 Phil. 17 (1916). Reiterated in Ong v. Olasiman, 485
SCRA 464 (2006); Solera v. Rodaje, 530 SCRA 432 (2007).
 the property sold. And even if the sale was made by
the same person, if the second sale was made when
such person was no longer the owner of the property,
because it had been acquired by the first purchaser in
full dominion, the second purchaser cannot acquire
any right.173

e. Article 1544 Is Not a Contest Between Two

Protagonists Running the Same Race
When one reads the language of Article 1544 one may be
led to believe that the rules govern, in a manner of speaking, a
contest between two buyers, who race against each other to
comply with the hierarchical modes provided for in said article to
have preferential right over the subject matter. This is not so, as
explained in Carbonell v. Court of Appeals.174
In Carbonell, the Seller sold under a private instrument a
registered parcel of land to Buyer 1, who in addition to paying
cash to the Seller also updated the mortgage lien on said land
with the mortgagee bank. A week later, the Seller sold the same
parcel of land to Buyer 2, who took possession thereof. When
the Buyer 1 learned of the sale to Buyer 2, he registered an
adverse claim on the title of the land with the Registry of Deeds.
Subsequently, Buyer 2 registered his sale.
In ruling for Buyer 1, the Court in the main decision held
that when Buyer 1 bought the lot from the Seller, she was the
only buyer thereof and the title of Seller was still in his name
solely encumbered by a bank mortgage duly annotated thereon.
Buyer 1 was not aware and she could not have been aware
of any sale to Buyer 2 as there was no such sale to Buyer 2
then. Hence, Buyer 1s prior purchase of the land was made in
good faith. Buyer 1s good faith subsisted and continued to exist
when she recorded her adverse claim prior to the registration of
Buyer 2s deed of sale. Nor did Buyer 1s good faith cease
when she found out earlier of the subsequent sale to Buyer 2.
Buyer 1s recording of the adverse claim should be deemed to
have been done in good faith and should emphasize Buyer 2s
bad faith when she registered her deed of sale thereafter.
As culled from the reasoning in the main decision of
Carbonell, the Buyer 1 under Article 1544 does not start from
the same level as the subsequent buyers of the same subject
matter. Being the first buyer, Buyer 1 necessarily is in good faith
compared to the second or subsequent buyer. But the good
faith of Buyer 1 remains and subsists throughout, despite his
subsequent acquisition of knowledge of the second or
subsequent sale. Whereas, Buyer 2 who may have entered into
the sale in good faith, would become a buyer in bad faith by his
subsequent acquisition of knowledge of the first sale. In other
words, Buyer 1 always has priority rights over subsequent
buyers of the same property.
Such a state of affairs does not clearly come across from a
reading of the Carbonell main decision, especially when the
main decision imputed bad faith on the part of Buyer 2 even at
the time she entered into the second sale over the property. The
principle comes out more clearly by reading the separate
opinion of then Justice Teehankee, who starts his reasoning
from the premise that both Buyer 1 and Buyer 2 were
purchasers in good faith at the respective dates of their
purchases, but posits the main rule prius tempore, potior jure,
thus:

The governing principle here is prius tempore,

potior jure (first in time, stronger in right). Knowledge
gained by the first buyer of the second sale cannot
defeat the first buyers rights except only as provided
by the Civil Code and that is where the second buyer
first registers in good faith the second sale ahead of
the first. Such knowledge of the first buyer does not
bar her from availing of her rights under the law,
among them, to register first her purchase as against
the second buyer. But in converso knowledge gained
by the second buyer of the first sale defeats his rights
even if he is first to register the second sale, since
such knowledge taints his prior registration with bad
faith.
This is the price exacted by Article 1544 of the Civil
Code for the second buyer being able to displace the
first buyer: that before the second buyer can obtain
priority over the first, he must show that he acted in
good faith throughout (i.e., in ignorance of the first
sale and of the first buyers rights) from the time of
acquisition until the title is transferred to him by
registration or failing registration, by delivery of
possession. The second buyer must show continuing
good faith and innocence or lack of knowledge of the
 first sale until his contract ripens into full ownership
through prior registration as provided by law. 14

In essence, then Justice Teehankee indicated that the

positive steps provided under Article 1544 are directed to Buyer
2, if he wishes to obtain preference of title to the subject matter,
but not to Buyer 1 because he is already by the rule of first in
time priority in rights the preferred buyer.
The Carbonell principle in applying Article 1544 can be
likened to a race where it is only Buyer 2 who must run the track
and achieve certain goals in order to dislodge Buyer 1 who
already stands at the winners box. Somehow, Buyer 2, without
knowing that there is already a winner, Buyer 1, must run the
race in a prescribed manner to win, i.e., he must register his
sale without knowing of the first sale and before the first sale is
registered; or take possession of the property without knowing
of the first sale and before Buyer 1 takes possession thereof.
And yet, even as Buyer 2 runs the race (without actually
knowing that he is in a race with the first buyer), Buyer 1 can
knowingly or unknowingly finish the race in his favor by simply
registering his sale. That is why the specification of good faith
in Article 1544 is addressed only to the second or subsequent
buyer.
If Buyer 1 registers his sale now aware of Buyer 2, that
practically ends the race, for there is no way that legally Buyer 2
can topple Buyer 1 from the winners box. On the other hand,
even if Buyer 1 learns of the second buyer, so long as Buyer 2
has not registered his sale, Buyer 1 can end the race by
registering his sale, because his good faith remains throughout.
Buyer 1 is basically the winner of the race without doing
anything, by the fact that he is the first buyer. The only manner
by which Buyer 1 by doing nothing could possibly lose is for
Buyer 2 to register his sale before the second buyer learns of
the first buyer. Practically, the only way by which Buyer 2 can
win the race at the prescribed manner under Article 1544 is not
to know during the race that he is in a race against Buyer 1 who
merely sits or stands on the winners box without registering his
own sale.

14 Ibid, at pp. 122-123. Reiterated in Ulep v. Court of Appeals, 472 SCRA 241
(2005); Tanglao v. Parungao, 535 SCRA 123 (2007).
 In further refinement of the Carbonell doctrine on the main
rule of priority in time, the decision in Caram, Jr. v. Laureta,176
and subsequent rulings,177 seem to point out that Buyer 1 never
even has to leave the winners box in order to end the race by
having to register his sale; Buyer 1 just need to draw the
attention of the second buyer as to his (Buyer 1s) existence. In
those cases it was ruled that the knowledge of the first
unregistered sale by Buyer 2 ends the race altogether either
because (a) the knowledge by Buyer 2 of the first sale is
equivalent to registration in favor of Buyer 1; or (b) knowledge of
the first sale makes Buyer 2 one in bad faith, and only a good
faith second buyer is qualified to run the race.
On the other hand, knowledge of the second unregistered
sale by Buyer 1 is not equivalent to registration in favor of Buyer
2 because the act required of the second buyer under Article
1544 seems to be a positive act of registration or taking of
possession, as the case may be, before he learns of the first
sale.1516 As summarized by Justice Melo in Coronel v. Court of
Appeals:179

The ... provision on double sale (sic) presumes title

or ownership to pass to the first buyer, the exception
being: (a) when the second buyer, in good faith,
registers the sale ahead of the first buyer, and (b)
should there be no inscription by either of the two
buyers, when the second buyer, in good faith,
acquires possession of the property ahead of the first
buyer. Unless, the second buyer satisfies these
requirements, title or ownership will not transfer to him
to the prejudice of the first buyer. 1718

Uraca v. Court of Appeals,181 summarized it succinctly,

when it held that before the second buyer can obtain priority
over the first, he must show that he acted in good faith
throughout (i.e., ignorance of the first sale and of the first
buyers rights) from the time of acquisition until the title is

15 Carbonell v. Court of Appeals, 69 SCRA 99 (1976); but see dissenting opinion

of Justice Muoz-Palma.
16 SCRA 15 (1996).
17 Ibid, at p. 37.
18 SCRA 702 (1997). See also Martinez v. Court of Appeals, 358 SCRA 38
(2001); Gabriel v. Spouses Mabanta, 399 SCRA 573 (2003).
transferred to him by registration or failing registration, by
delivery of possession.19
Bayoca v. Nogales,183 held that to merit protection under
Article 1544 ... the second buyer must act in good faith in
registering the deed. Thus, it has been held that in cases of
double sale[s] of immovables, what finds relevance and
materiality is not whether or not the second buyer was a buyer
in good faith but whether or not said second buyer registers
such second sale in good faith, that is, without knowledge of
any defect, in the title of the property sold.184
In Escueta v. Lim,185 it was held that by applying Article
1544, a second buyer of the property who may have had actual
or constructive knowledge of such defect in the sellers title
cannot be a registrant in good faith; such second buyer cannot
defeat the first buyers title, and if title has been issued to the
second buyer, the first buyer may seek reconveyance of the
property subject of the sale.

f. Peculiar Developments
The rather well-established Carbonell doctrine seems to be
undergoing indirect erosions by the obiter ruling in San Lorenzo
Dev. Corp. v. Court of Appeals,186 where the Court held that the
provisions of Article 1544 presented an actual race between the
two buyers in equal level, thus: When the thing sold twice is an
immovable, the one who acquires it and first records it in the
Registry of Property, both made in good faith, shall be deemed
the owner. Verily, the act of registration must be coupled with
good faith that is, the registrant must have no knowledge of
the defect or lack of title of his vendor or must not have been
aware of facts which should have put him upon such inquiry and
investigation as might be necessary to acquaint him with the
defects in the title of his vendor. 187 The Court thereby decreed
the annotation of lis pendens by the first buyer as ineffective to
overcome the previous possession acquired in good faith by the
second buyer, because the annotation was done at the time
when first buyer already knew of the second sale. Impliedly
included in the ruling is that the annotation of lis pendens by the
first buyer cannot qualify to be equivalent to the requisite of
registration under Article 1544.

19 Ibid, at p. 712, quoting from Cruz v. Caban, 129 SCRA 656, 663 (1984).
183
340 SCRA 154 (2000).
 This particular obiter ruling in San Lorenzo Dev. Corp. is
contrary to the established principle that by the annotation of the
lis pendens the second buyer is deemed to have learned of the
first sale, which is equivalent to registration in favor of the first
buyer.

g. Who Is Purchaser in Good Faith?

Since the tests provided for in Article 1544 are really
addressed to the second or subsequent buyers, it would be
important to note that each of the tests that have to be hurdled
by the second or subsequent buyer must be done in good
faith.2021 As the Court said in Occea v. Esponilla,189 [i]n all
cases [of double sales], good faith is essential. It is the basic
premise of the preferential rights granted to the one claiming
ownership over an immovable. What is material is whether the
second buyer first registers the second sale in good faith, i.e.,
without knowledge of any defect in the title of the property sold.
The defense of indefeasibility of a Torrens title does not extend
to a transferee who takes the certificate of title in bad faith, with
notice of a flaw.22

This seems to be in conformity with the principle in the Law

on Property that the law will protect an innocent purchaser, i.e.,
a buyer in good faith and for value, often even against the
owner of the property who had acted with negligence.

(1) Burden of Proof

Mathay v. Court of Appeals,191 held that as a rule, he who
asserts the status of a purchaser in good faith and for value,
has the burden of proving such assertion. This onus probandi
cannot be discharged by mere invocation of the legal
presumption of good faith, i.e., that everyone is presumed to act
in good faith.232425
20 Gabriel v. Mabanta, 399 SCRA 573 (2003); Alfredo v. Borras, 404 SCRA 145
(2003).
21 SCRA 116 (2004).
22 Ibid, at pp. 123-124. Reiterated in Consolidated Rural Bank (Cagayan Valley),
Inc. v. Court of Appeals, 448 SCRA 347 (2005); San Lorenzo Dev. Corp. v. Court of
Appeals, 449 SCRA 99 (2005); Portic v. Cristobal, 546 SCRA 577 (2005). 191295 SCRA
556 (1998).
23 Reiterated in Tsai v. Court Appeals, 366 SCRA 324 (2001); Aguirre v. Court of
Appeals, 421 SCRA 310 (2004); Raymundo v. Bondong, 526 SCRA 514 (2007);
Tanglao v. Parungao, 535 SCRA 123 (2007). 193247 SCRA 336 (1995).
24 SCRA 484 (2003).
25 SCRA 563 (1992).
 Reference must be made however to the isolated rulings in
Santiago v. Court of Appeals,193 and Ten Forty Realty and Dev.
Corp. v. Cruz,194 where the Court held that it is anxiomatic that
good faith is always presumed in the absence of any direct
evidence of bad faith.

(2) Requisite of Full Payment

Agricultural and Home Extension Dev. Group v. Court of
Appeals,195 defines a purchaser in good faith as one who buys
the property of another without notice that some other person
has a right to or interest in such property and pays a full and fair
price for the same at the time of such purchase or before he
has notice of the claim or interest of some other person in the
property.26 If we take a close look at the definition given, it
actually includes as an element of good faith that there must be
full payment on the part of the buyer.
The element of having paid in full as part of good faith
determination has since been consistently reiterated in
subsequent
Supreme Court rulings.27
This concept of good faith including the requisite of the
buyer having paid in full the purchase price may seem contrary
to wellestablished principle that the effects of tradition over the
subject matter are unhindered by the fact that the buyer has not
paid the purchase price. Nevertheless, since the operative
doctrine under Article 1544 is that the second or subsequent
buyer is being granted an opportunity to take the subject matter
from the clutches of the first buyer by positive act, he may do so
only when he acts with equity, which is that he is an innocent
purchaser for value and in good faith.
The doctrine is also consistent with the bilateral-reciprocal
nature of contracts of sale: that a party to a sale cannot demand

26 Ibid, at pp. 565-565, quoting from Co v. Court of Appeals, 196 SCRA 705
(1996). Reiterated in Diaz-Duarte v. Ong, 298 SCRA 388 (1998); Millena v. Court of
Appeals, 324 SCRA 126 (2000); Tanongon v. Samson, 382 SCRA 130 (2002);
Universal Robina Sugar Milling Corp. v. Heirs of Angel Teves, 389 SCRA 316 (2002);
Heirs of Aguilar-Reyes v. Spouses Mijares, 410 SCRA 97 (2003); San Roque Realty
and Dev. Corp. v. Republic, 532 SCRA 493 (2007).
27 Veloso v. Court of Appeals, 260 SCRA 593 (1996); Balatbat v. Court of
Appeals, 261 SCRA 128 (1996); Mathay v. Court of Appeals, 295 SCRA 556 (1998);
Diaz-Duarte v. Ong, 298 SCRA 388 (1998); Tanongon v. Samson, 382 SCRA 130
(2002); Heirs of Aguilar-Reyes v. Spouses Mijares, 410 SCRA 97 (2003); Portic v.
Cristobal, 546 SCRA 577 (2005); Galvez v. Court of Appeals, 485 SCRA 346 (2006).
fulfillment from the other when he himself is in default or not
ready to comply with his own obligation.

(3) Obligation to Investigate Known Facts

Mathay v. Court of Appeals,198 also discussed the principle
that actual lack of knowledge of the flaw in title by ones
transferor is not enough to constitute a buyer to be in good faith,
thus:

... Although it is a recognized principle that a person

dealing on a registered land need not go beyond its
certificate of title, it is also a firmly settled rule that
where there are circumstances which would put a
party on guard and prompt him to investigate or
inspect the property being sold to him, such as the
presence of occupants/tenants thereon, it is, of
course, expected from the purchaser of a valued piece
of land to inquire first into the status or nature of
possession of the occupants, i.e., whether or not the
occupants possess the land en concepto dueo, in the
concept of owner. As is the common practice in the
real estate industry, an ocular inspection of the
premises involved is a safeguard a cautious and
prudent purchaser usually takes. Should he find out
that the land he intends to buy is occupied by anybody
else other than the seller who, as in this case, is not in
actual possession, it would then be incumbent upon
the purchaser to verify the extent of the occupants
possessory rights. The failure of a prospective buyer
to take such precautionary steps would mean
negligence on his part and would thereby preclude
him from claiming or invoking the rights of a
purchaser in good faith.2829

As held in Aguirre v. Court of Appeals,200 a purchaser

cannot close his eyes to facts which should put a reasonable
man upon his guard, and then claim that he acted in good faith
under the belief that there was no defect in the title of the
vendor.30

28 Ibid, at pp. 575-576. Reiterated in Tanglao v. Parungao, 535 SCRA 123

(2007); Bermudez v. Court of Appeals, 533 SCRA 451 (2007).
29 SCRA 310 (2004).
30 Reiterated in Tanongon v. Samson, 382 SCRA 130 (2002); Heirs of
AguilarReyes v. Spouses Mijares, 410 SCRA 97 (2003); Escueta v. Lim, 512 SCRA 411
(2007). 202473 SCRA 570 (2005).
 (4) Special Rule on Real Estate Market Players
Expresscredit Financing Corp. v. Velasco,202 expressed the
special rule that applies to persons or entities who regularly
engage in dealing with real estate. They cannot simply rely
upon the title, but are obliged to enter upon an investigation of
the actual condition and occupants of the subject property.
In Expresscredit Financing a mortgage was constituted on
a parcel of land which had previously been sold to the first
buyer who took possession and enjoyment thereof without
having registered his purchase. The mortgagee who eventually
ended buying the property at the public auction held for the
foreclosure of the mortgage, was deemed not eligible to claim to
be a buyer in good faith when his business was in the
constructing and selling townhouses and extending credit to the
public, including real estate loans. The Court held that in such
an instance, the mortgagee is charged with greater diligence
that ordinary buyers or encumbrances for value, because it
would be standard in his business, as a matter of due diligence
required of banks and financing companies, to ascertain
whether the property being offered as security for the debt has
already been sold to another to prevent injury to prior innocent
buyers.
(5)31 Land in Adverse Possession
In Martinez v. Court of Appeals,203 it was held that a
purchaser who is aware of facts which should put a reasonable
man upon his guard cannot turn a blind eye and later claim that
he acted in good faith; and the fact that there were already
occupants on the property should put a buyer on inquiry as to
the nature of the occupants right over the property.3233
Heirs of Trinidad de Leon Vda. De Roxas v. Court of
Appeals,205 held that where the land sold is in the possession of
a person other than the vendor, the purchaser must go beyond

31 SCRA 38 (2001).
32 Reiterated in Heirs of Severa P. Gregorio v. Court of Appeals, 30 SCRA 565
(1998); Heirs of Celestial v. Heirs of Celestial, 408 SCRA 291 (2003); Consolidated
Rural Bank (Cagayan Valley), Inc. v. Court of Appeals, 448 SCRA 347 (2005);
Raymundo v.
Bondong, 526 SCRA 514 (2007).
33 SCRA 101 (2004).
the certificate of title and make inquiries concerning the rights of
the actual possessor.34
The rule is settled that a buyer of real property which is in
the possession of persons other than the seller must be wary
and should investigate the rights of those in possession,
otherwise without such inquiry, the buyer can hardly be
regarded as a buyer in good faith.35

(6) Existence of Lis Pendens

Agricultural and Home Extension Dev. Group also pointed
out that even the annotation of lis pendens on the title to the
property by third parties does not place the buyer thereof in bad
faith since these did not have the effect of establishing a lien or
encumbrance on the property affected. Their only purpose was
to give notice to third persons and to the whole world that any
interest they might acquire in the property pending litigation
would be subject to the result of the suit.36 The ruling seems
reasonable when it is a third party who annotates a lis pendens;
but would not be good law if it is one of the disputing buyers
who annotates the lien, because such annotation is equivalent
to registration or at least affects the good faith situation of the
second buyer.
A contrary ruling was issued in Limketkai Sons Milling, Inc.
v. Court of Appeals,209 where the Court held that a buyer could
not be considered an innocent purchaser where it ignored the
notice of lis pendens on the title when it bought the lot. The rule
has been reiterated in Po Lam v. Court of Appeals.210
In any event, the ruling in Agricultural and Home Extension
Dev. Group should be considered absurd (see discussions
below) in that in the case of adverse claim (which has a lower
binding category than lis pendens) its annotation is equivalent to
registration and would place a subsequent buyer in bad faith.211

(7) Annotation of Adverse Claim

In Balatbat v. Court of Appeals,212 it was held that in the
realm of double sales, the registration of an adverse claim
34 Reiterated in Occea v. Esponilla, 431 SCRA 116 (2004).
35 Republic v. De Guzman, 326 SCRA 267 (2000); Heirs of Ramos Durano, Sr.
v.
Uy, 344 SCRA 238 (2000); Tanglao v. Parungao, 535 SCRA 123 (2007).
36 Ibid, at p. 566.
places any subsequent buyer of the registered parcel of land in
bad faith, for

[S]he should have known that there was a pending

case and an annotation of adverse claim was made in
the title of the property before the Register of Deeds
and she could have discovered that the subject
property was already sold. ... It is incumbent upon the
vendee of the property to ask for the delivery of the
owners duplicate copy of the title from the vendor. A
purchaser of a value piece of property cannot just
close his eyes to facts which should put a reasonable
man upon his guard and then claim that he acted in
good faith and under the belief that there was no
defect or lack of title of the vendor. One who
purchases real estate with knowledge of a defect or
lack of title in his vendor cannot claim that he has
acquired title thereto in good faith as against the true
owner of the land or of an interest therein; and the
same rule must be applied to one who has knowledge
of facts which should have put him upon such inquiry
and investigation as might be necessary to acquaint
him with the defects in the title of his vendor. Good
faith, or the want of it is not a visible, tangible fact that
can be seen or touched, but rather a state or condition
of mind which can only be judged of by actual or
fancied tokens or signs.213

The principle providing that the prior annotation of adverse

claim places subsequent buyers in bad faith has been reiterated
in Alfredo v. Borras.214
If the annotation of an adverse claim, which was good for
30-days only is sufficient to place a subsequent buyer in bad
faith, then logically, the annotation of a lis pendens should have
the same legal effect, as was the ruling in Limketkai Sons
Milling, Inc. v. Court of Appeals.215
(8) Existence of Relationship
In Pilapil v. Court of Appeals,216 the Court held that the sale
to ones daughter and sons will give rise to the conclusion that
the buyers, not being really third parties, knew of the previous
sales and cannot be considered in good faith, since the buyers
are deemed to have constructive knowledge by virtue of their
relationship to their sellers.
 In Aguirre v. Court of Appeals,217 the Court refused to
recognize good faith in the person of a buyer who lived in the
same area and was familiar to the members of the family of the
seller, since he deliberately chose to close his eyes to said
facts and despite his personal knowledge to the contrary, he
purchased the disputed property from [seller] on the basis of the
misrepresentation of the latter in his Affidavit of Transfer that he
is the sole surviving heir of [the decedent] 373839 who was the
registered owner of the land.
(9) Stipulations in Deed Showing Bad Faith
In Limketkai Sons Milling, Inc. v. Court of Appeals,219 the
Court held that a stipulation in the deed of sale providing that
any losses which the buyer may incur in the event the title turns
out to be vested in another person are to be borne by the buyer
alone, showed that the buyer did not purchase the subject
matter in good faith without notice of any defect in the title of the
seller.

(10) When Dealing With Non-Registered Owner

In R.R. Paredes v. Caliling,220 the Court held that while one
who buys from the registered owner does not need to look
behind the certificate of title, one who buys from one who is not
the registered owner is expected to examine not only the
certificate of title but all factual circumstances necessary for him
to determine if there are any flaws in the title of the transferor, or
in his capacity to transfer the land. 40

h. Requisites of Prior Registration

Registration means any entry made in the books of the
registry, including both registration in its ordinary and strict
sense, and cancellation, annotation, and even marginal
notes. It is the entry made in the registry which records
solemnly and permanently the right of ownership and other real
rights.41

37 Ibid, at p. 321.
38 SCRA 523, 543 (1995).
39 SCRA 369 (2007).
40 Reiterated in Chua v. Soriano, 521 SCRA 68 (2007).
41 Cheng v. Genato, 300 SCRA 722 (1998). Also Ulep v. Court of Appeals, 472
SCRA 241 (2005).
 Annotation of an adverse claim or lis pendens have been
held to produce the same effect as formal registration.42
Curiously though, in 43San Lorenzo Dev. Corp. v. Court of
Appeals,224 the Court did not consider the subsequent
registration of lis pendens to be equivalent to the registration
required under Article 1544 as to have greater effect on the prior
possession in good faith by the second buyer.
In several other cases,44 the Court held that in the case of
unregistered land, not sold under public auction sale,
registration by the first buyer under Act No. 3344 can have the
effect of constructive notice to the second buyer that can defeat
his right as such buyer, but not vice versa.
On the other hand, the Court held that the registration of
the Extrajudicial Partition which merely mentions the sale is not
the registration covered under Article 1544 on double sales and
cannot prevail over the registration of the pacto de retro sale.45
In another case,4647 it was held that the declaration of purchase
for taxation purpose does not comply with the required
registration, and the fact alone does not even itself constitute
evidence of ownership.

(1) Prior Registration By the Second Buyer

Must Always Be in Good Faith
Uraca v. Court of Appeals,228 held that the prior registration
of the disputed property by the second buyer does not by itself
confer ownership or a better right over the property, and that
Article 1544 requires that such registration must be coupled with
good faith, thus

Jurisprudence teaches us that (t)he governing

principle is primus tempore, potior jure (first in time,
stronger in rights). Knowledge gained by the first
buyer of the second sale cannot defeat the first
buyers rights except where the second buyer

42 Carbonell v. Court of Appeals, 69 SCRA 99 (1976); Balatbat v. Court of

Appeals, 261 SCRA 128 (1996).
43 SCRA 99 (2005).
44 Bautista v. Fule, 85 Phil. 391 (1950); Bayoca v. Nogales, 340 SCRA 154
(2000); Naval v. Court of Appeals, 483 SCRA 102 (2006).
45 Vda. de Alcantara v. Court of Appeals, 252 SCRA 457 (1996).
46 Santiago v. Court of Appeals, 247 SCRA 336 (1995); Bayoca v. Nogales, 340
SCRA 154 (2000).
47 SCRA 702 (1997).
 registers in good faith the second sale ahead of the
first, as provided by the Civil Code. Such knowledge
of the first buyer does not bar her from availing of her
rights under the law, among them, to register first her
purchase as against the second buyer. But in
converso, knowledge gained by the second buyer of
the first sale defeats his rights even if he is first to
register the second sale, since such knowledge taints
his prior registration with bad faith. This is the priced
exacted by Article 1544 of the Civil Code for the
second buyer being able to displace the first buyer;
that before the second buyer can obtain priority over
the first, he must show that he acted in good faith
throughout (i.e., in ignorance of the first sale and of
the first buyers right) from the time of acquisition
until the title is transferred to him by registration or
failing registration, by delivery of possession.229

Esquivias v. Court of Appeals,230 held that while the deed of

sale of a second buyer was registered ahead of the deed of sale
of the first buyer, the prior registration cannot prevail over the
deed of sale in favor of the first buyer because the second
buyer at that time already knew of the prior sale to the first
buyer, and such knowledge tainted his registration with bad
faith. To merit protection under Article 1544, the second buyer
must act in good faith in registering his deed.

(2) The Need for Second Buyer to Do Positive Act

under Article 1544
The Carbonell doctrine that Article 1544 is addressed
particularly to the second buyer to do a positive act, was
reiterated in Fudot v. Cattleya Land Inc.,231 where the Court held

Knowledge gained by the first buyer of the second

sale cannot defeat the first buyers rights, except
where the second buyer registers in good faith the
second sale ahead of the first as provided by the
aforequoted provision of the Civil Code. Such
knowledge of the first buyer does not bar him from
availing of his rights under the law, among them to
register first his purchase as against the second
buyer. However, knowledge gained by the second
buyer of the first sake defeats his rights even if he is
first to registered the second sale, since such
 knowledge taints his prior registration with bad faith it
is thus essential, to merit the protection of Art. 1544,
second paragraph, that the second realty buyer must
act in good faith in registering his deed of sale.48

i. First to Possess in Good Faith

Ten Forty Realty and Dev. Corp. v. Cruz,233 held that in the
absence of inscription in double sales, the law gives preferential
right to the buyer who in good faith is first in possession, under
the following jurisprudential parameters:
(a) Possession mentioned in Article 1544
includes not only material but also
symbolic possession;
(b) Possessors in good faith are those who
are not aware of any flaw in their title or
mode of acquisition;
(c) Buyers of real property that is in the
possession of persons other than the seller
must be wary they must investigate the
rights of the possessors; and
(d) Good faith is always presumed, upon
those who allege bad faith on the part of
the possessors rests the burden of proof.
The juridical parameters summarized by Ten Forty
Realty, do not all conform to the previous rulings rendered by
the Court under Article 1544. In particular, the Court had ruled
consistently in the past, that under double sales, presumption of
good faith cannot apply, and the buyer has the burden of
showing that he was the first to register or possess in good
faith.234
The rule of first to possess in good faith, is consistent with
the provision under then Act No. 3344, now Sec. 113 of Pres.
Decree No. 1459, that registration of a transaction over
unregistered land shall be without prejudice to a third party with
a better right. Hanopol v. Pilapil,235 held that the better right
that cannot be prejudiced by the registration of a second sale of
a parcel of unregistered land, referred to in Act No. 3344, was
considered to mean more than a mere prior deed of sale in
48 Ibid, at p. 362. Also Tanglao v. Parungao, 535 SCRA 123, 131-132 (2007).
233
410 SCRA 484 (2003).
favor of the first buyer. It involves facts and circumstances in
addition to a deed of sale which, combined, would make it
clear that the first buyer has a better right than the second
purchaser, such as acquisition of possession by the second
buyer either by actual delivery or through the execution of a
public instrument.236

(1) Registration in Good Faith Always Pre-empts

Possession in Good Faith
Santiago v. Court of Appeals,237 held that in double sales of
real property, the buyer who has in possession the Torrens title
and had the deed of sale registered must prevail.
Taedo v. Court of Appeals,238 emphasized the rule that
buyer-registrant in good faith always has preference to the
buyer-possessor in good faith, even when in point in time, the
possession in good faith happened ahead of the registration in
good faith. In that case the Court held that under Article 1544, in
case of double sales of an immovable

... Ownership shall belong to the buyer who in good

faith registers it first in the registry of property.
Although the deed of sale in favor of private
respondents was later than the one in favor of
petitioner, ownership would vest in the former because
of the undisputed fact of registration. On the other
hand, petitioners have not registered the sale to them
at all. Petitioners contend that they were in possession
of the property and that private respondents never
took possession thereof. As between two purchasers,
the one who registered the sale in his favor has a
preferred right over the other who has not registered
his title, even if the latter is in actual possession of the
immovable property.4950

In Balatbat v. Court of Appeals,240 the seller sold his

proindiviso share in a registered land co-owned with his
children. Subsequently, the same entire lot was sold again by
the same seller and his children, represented by the Clerk of
Court under the Rules of Court, pursuant to a final judgment.
The Court held that undoubtedly this was a case of double sales
of immovable property covered by Article 1544, and hence

49 Ibid, at p. 88.
50 SCRA 128 (1996).
ownership shall vests in the person acquiring it who in good
faith first recorded it in the Registry of Property. The first buyer
had caused the annotation of an adverse claim on the title of the
subject property, which is deemed sufficient compliance as
mandated by law and serves notice to the whole world, and is
preferred to the notice of lis pendens annotated by the second
buyer subsequently.
In addition, Balatbat held that although the second buyer
was in possession of the subject property by virtue of the writ of
possession issued by the court, the writ was conditioned as
follows subject to the valid rights and interest of third persons
over the same portion thereof, other than vendor or any other
person or persons privy to or claiming any right to interest under
it.51 The Court held that [a]s between two purchasers, the one
who has registered the sale in his favor, has a preferred right
over the other who has not registered his title even if the latter is
in actual possession of the immovable property.52
And yet, in its obiter ruling on the particular issue raised in
San Lorenzo Dev. Corp., to wit, Did the registration of the sale
after the annotation of the notice of lis pendens obliterate the
effects of delivery and possession in good faith which
admittedly had occurred prior to [Second Buyer] SLDCs
knowledge of the transaction in favor of [First Buyer]
Babasanta? the Court ruled

We do not hold so.243

x x x.
A purchaser in good faith is one who buys property
of another without notice that some other person has
a right to, or interest in, such property and pays a full
and fair price for the same at the time of such
purchase, or before he has notice of the claim or
interest of some other person in the property.
Following the foregoing definition, we rule that SLDC
qualifies as a buyer in good faith ... At the time of the
sale of the property to SLDC, the vendors were still
the registered owners of the property and were in fact
in possession of the lands. Time and again, this Court
has ruled that a person dealing with the owner of

51 Ibid, at p. 134.
52 Ibid, at p. 142.
 registered land is not bound to go beyond the
certificate of title as he is charged with notice of
burdens on the property which are noted on the face
of the register or on the certificate of title. ...
Babasanta apparently relies on the principle of
constructive notice incorporated in Section 52 of the
Property Registration Decree (P.D. No. 1529) 244 ...
However, the constructive notice operates as such by
the express wording of Section 52 from the time of the
registration of the notice of lis pendens which in this
case was effected only on 2 June 1989, at which time
the sale in favor of SLDC had long been
consummated [with the] . ... transfer ownership over
the property to SLDC is concerned.
More fundamentally, given the superiority of the
right of SLDC to the claim of Babasanta the
annotation of the notice of lis pendens cannot help
Babasantas position a bit and it is irrelevant to the
good or bad faith characterization of SLDC as a
purchaser. 245

The San Lorenzo obiter ruling above-quoted is disturbing

on two points: (a) it equates the annotation of a lis pendens only
to qualifying the state of minds of the buyers (whether they be in
good faith or bad faith) and does not equate it to be a species of
registration under the Torrens system; and (b) it holds that prior
possession by the second buyer in good faith has superiority
to a subsequent registration by the first buyer who has
knowledge of the second sale.
San Lorenzo cites Abarquez v. Court of Appeals,246 to say
that this Court had the occasion to rule that if a vendee in a
double sale registers the sale after he has acquired knowledge
of a previous sale, the registration constitutes a registration in
bad faith and does not confer upon him any right. If the
registration is done in bad faith, it is as if there is no registration
at all, and the buyer who has taken possession first of the
property in good faith shall be preferred.247 Yet a reading of
Abarquez would show that the ruling was addressed to the
second buyer, that his prior registration cannot overcome the
earlier possession by the first buyer, which was registered in
bad faith.
 (2) Possession Under Article 1544 Refers to
Material and Symbolic Possession
In Navera v. Court of Appeals,248 where both deeds of sale
over the same registered parcel of land were not registered with
the Registry of Deeds, the buyer of the first deed of sale
executed in a public instrument had a better right, although the
subsequent buyer took material possession thereof. It was ruled
that since the sale to the first buyer was in a public instrument it
was clearly tantamount to a delivery of the land, resulting in the
material and symbolic possession thereof being transferred to
the latter. So that when subsequently the second buyer took
material possession of the same land, he did so merely as a
detainer. Navera held that the possession mentioned in Article
1544 for determining who has better right when the same piece
of land has been sold several times by the same seller includes
not only the material but also the symbolic possession thereof.
Navera reiterated the doctrine laid down earlier under the
old Civil Code provision on double sales (then Article 1473) in
the cases of Quimson v. Rosete,249 and Sanchez v. Ramos.250
(3) Possession Acquired in Good Faith Is Stable Status
When the second buyer who takes possession of the
subject matter in good faith, must he remain in good faith
subsequently thereafter in order to claim priority based on
possession under Article 1544 of the Civil Code? San Lorenzo
Dev. Corp. v. Court of Appeals,251 answered this particular issue
in favor of the second buyer when it held:

Did the registration of the sale after the annotation

of the notice of lis pendens obliterate the effects of
delivery and possession in good faith which admittedly
had occurred prior to SLDCs knowledge of the
transaction in favor of Babasanta?
We do not hold so.252
... At the time both deeds were executed, SLDC
had no knowledge of the prior transaction of the
Spouses Lu with Babasanta. Simply stated, from the
time of execution of the first deed up to the moment of
transfer and delivery of possession of the lands to
SLDC, it had acted in good faith and the subsequent
annotation of lis pendens has no effect at all on the
consummated sale between SLDC and the Spouses
 Lu.253

j. When Article 1544 Does Not Apply, Priority

in Time Rule Applies
In either of the following situations, thus:
(a) Where not all the requisites necessary to
make Article 1544 applicable are present;
or
(b) Where the requisites to make Article 1544
applicable were present, but that either the
first to register or first to possess rules
were not complied with;
which legal rule should apply to the case? In the first situation, it
would be the general rule of Prius tempore, potior jure, which is
actually the main rule in double sales.5354 Article 1544 rules on
double sales provide for special rules and when the transactions
do not fit the specific circumstances mandated under the article
or by jurisprudence interpreting the article, then there is no
basis to apply such rules, and the proper doctrine applicable
should be the main rule of Priority in time, priority in right.
In the second situation, Article 1544 provides that
ownership should go to the person who presents the oldest
title, provided there is good faith. Is the buyer who has the
oldest title in good faith not necessarily the chronological first
buyer under a valid and demandable sale? If the answer is in
the affirmative, then the oldest title rule merely reflects the
general rule of First in time, priority in right. That means there
is no race to run at all because the first buyer should always win
over subsequent buyers. This observation is consistent then
with the statement in Cheng v. Genato,255 that the governing
principle under Article 1544 is first in time, priority in rights.55
Notice that the rule of first in time, priority in right, is a rule
that falls back to perfection stage: Who between contending
buyers is first in time would be that buyer who chronologically
had the first perfected and valid sale over the same subject
matter with the same seller. The rationale of the rule is that if
none of the contending buyers have validly effected a transfer of
53 Essentially lifted by Consolidated Rural Bank (Cagayan Valley), Inc. v. Court
of Appeals, 448 SCRA 347 (2005).
54 SCRA 722 (1998).
55 Ibid, at p. 740.
ownership in his favor through any of the modes of tradition,
then the first buyer in point of time should be preferred because
his title (i.e., the legal basis upon which he can claim ownership
over the subject matter), was first in time.
Under a global set of rules pertaining to double sales, the
principle of First in time, priority in right, occupies the cellar
position only when special rules do not apply, perhaps because
it is the least representative of the mode of tradition.

OBLIGATIONS OF BUYER
1. Pay the Price
Buyer is obliged to pay for the price at the time and place
stipulated in the contract.56 Mere sending of a letter by the buyer
expressing his intention to pay without the accompanying
payment is not considered a valid tender of payment.57 Unless
the parties have agreed to the payment of the price to any other
party, then its payment to be effective must be made to the
seller in accordance with Art. 1240 of the Civil Code which
provides that [P]ayment shall be made to the person in whose
favor the obligation has been constituted or his successor in
interest, or any person authorized to receive.58

Buyer is also obliged to pay interest for the

period between delivery of the subject matter and the
payment of the price when: (a) the same has been
stipulated; (b) should object delivered produce fruits or
income; or (c) in case the buyer is in default, from the
time of judicial or extrajudicial demand.260

Non-payment of the consideration in the sale does not

prove simulation; at most, it gives the seller the right to sue for
collection. Generally in a sale, payment of the price is a
resolutory condition and the remedy of the seller is to exact
fulfillment or, in case of a substantial breach, to rescind the
contract under Article 1191 of the Civil Code.59

56 Art. 1582, Civil Code.

57 Torcuator v. Bernabe, 459 SCRA 439 (2005).
58 Montecillo v. Reynes, 385 SCRA 244 (2002).
260
Art. 1589, Civil Code.
59 Villaflor v. Court of Appeals, 280 SCRA 297 (1997).
 2. Accept Delivery of Thing Bought
The buyer is bound to accept delivery of the thing bought
at the time and place stipulated in the contract. If the time and
place should not have been stipulated, the payment must be
made at the time and place of the delivery of the thing sold.60
In case of goods, the buyer is deemed to have accepted
the goods when he intimates to the seller that he has accepted
them, or when the goods have been delivered to him, and he
does any act in relation to them which is inconsistent with the
ownership of the seller, or when, after the lapse of a reasonable
time, he retains the goods without intimating to the seller that he
has rejected them.61

a. Opportunity to Inspect Goods

Where goods are delivered to the buyer, which he has not
previously examined, he is not deemed to have accepted them
unless and until he has had a reasonable opportunity of
examining them for the purpose of ascertaining whether they
are in conformity with the contract, if there is no stipulation to
the contrary.62

(1) Exception: C.O.D. Sales

Where goods are delivered to a carrier in accordance with
an order from or agreement with the buyer, upon the terms that
the goods shall not be delivered by the carrier to the buyer until
he has paid the price, whether such terms are indicated by
marking the goods with words collect on delivery, or otherwise,
the buyer is not entitled to examine the goods before the
payment of the price, in the absence of agreement or usage of
trade permitting such examination.63

b. Goods Sold Deliverable by Installments

Unless otherwise agreed, the buyer of goods is not bound
to accept delivery thereof by installments.64

60 Art. 1582, Civil Code.

61 Art. 1585, Civil Code.
62 Art. 1584, Civil Code.
63 Art. 1584, Civil Code.
64 Art. 1583, Civil Code.
 Where the sale covers goods to be delivered by stated
installments, which are to be separately paid for, and the seller
makes defective deliveries in respect of one or more
installments, or the buyer neglects or refuses without just cause
to take delivery of or pay for one or more installments, it
depends in each case on the terms of the contract and the
circumstances of the case, whether the breach of contract is so
material as to justify the injured party in refusing to proceed
further and suing for damages for breach of the entire contract,
or whether the breach is severable, giving rise to a claim for
compensation but not to a right to treat the whole contract as
broken.65

c. Effect of Acceptance of Goods on Sellers Warranty

In the absence of an agreement to the contrary,
acceptance of the goods by the buyer shall not discharge the
seller from liability in damages or other legal remedy for breach
of promise or warranty in the sale.66
However, if after acceptance of the goods, the buyer fails
to give notice to the seller of breach in any promise or warranty
within a reasonable time after the buyer knows, or ought to
know, of such breach, the seller is excused.67

d. Refusal to Accept Goods

Unless otherwise agreed, where goods are delivered to the
buyer, and he refuses to accept them, having the right to do so,
he is not bound to return them to the seller, and it is sufficient
that he notifies the seller of his refusal. 68 If he voluntarily
constitutes himself as a depository, he shall be liable as such.69
On the other hand, in the absence of stipulation, when the
buyers refusal to accept the goods is without just cause, the
title thereto passes to him from the moment they are placed at
his disposal.70

oOo

65 Art. 1583, Civil Code.

66 Art. 1586, Civil Code.
67 Art. 1586, Civil Code.
68 Art. 1587, Civil Code.
69 Art. 1587, Civil Code.
70 Art. 1588, Civil Code.
 CHAPTER 7

DOCUMENTS OF TITLE
DEFINITION AND FUNCTION
A document of title of goods includes any bill of lading, dock warrant, quedan, or
warehouse receipt or order for the delivery of goods, or any other document used in the ordinary
course of business in the sale or transfer of goods, as proof of the possession or control of the
goods, or authorizing or purporting to authorize the possessor of the document to transfer or
receive, either by endorsement or by delivery, goods represented by such document.71
Documents of title therefore serve two (2) functions:
(a) As evidence of the possession or control of the goods described therein; and
(b) As the medium of transferring title and possession over the goods described
therein, without having to effect actual delivery thereof.
In an early case,72 the Supreme Court held that a warehouse receipt represents the goods,
but the entrusting of the receipt is more than the mere delivery of the goods; it is a
representation that the one to whom the possession of the receipt has been so entrusted has
the title to the goods.
In another case,73 the Court held that the endorsement and delivery of a negotiable quedan
prior to the filing of the petition for insolvency, operates as the transfer of possession and
ownership of the goods referred to therein, and had the effect of divorcing the property covered
from the estate of the insolvent.

Through the document of title, the seller is allowed, by fiction of law, to deal with the goods
described therein as though he had physically delivered them to the buyer; and the buyer may
take the document of title as though he had actually taken possession and control over the
goods described therein.
Dealings through documents of title represent a species of constructive delivery, and
therefore operate under the same premise as other forms of delivery, namely, that the delivery is
pursuant to a valid underlying sale, and that the seller had ownership of the goods described
therein to effect proper delivery. However, when the document of title is negotiable in character,
the public policy behind the States protective mantle on the effects of negotiation, the invalidity
of the underlying sale or the actual lack of ownership of the seller of the goods described
therein, would still effectively transfer ownership to the buyer who takes the document of title in
due course.

71 Art. 1636, Civil Code.

72 Siy Cong Bieng v. Hongkong & Shanghai Bank, 56 Phil. 598 (1932).
73 Philippine Trust Co. v. National Bank, 42 Phil. 413 (1921).
 a. Warehouse Receipts and Bonded Warehouse Acts
The provisions of the Civil Code on documents of title, i.e., Articles 1507 to 1520, appear as
original provisions (n), and have neither been derived nor taken from the old Civil Code. In
addition, they were promulgated part of the the New Civil Code as of a later date than the
provisions of the Warehouse Receipts Act74 and the Bonded Warehouse Act;75 yet the New Civil
Code includes within the enumerations of what constitute documents of title under Article
1636, quedans and warehouse receipts. When Articles 1507 to 1520 were being considered as
integral part on the Title on Sales, Legislature was fully aware of the existing provisions of the
Warehouse Receipts Act and the Bonded Warehouse Act, as in fact many of the key principles
were copied from said statutes.
Consequently, the provisions of the Warehouse Receipts Act and the Bonded Warehouse
Act constitute the primary sets of rules governing warehouse receipts, and the provisions of
Articles 1507 to 1520 of the Civil Code should be treated as having suppletory effect.

b. Rationale for Documents of Title

Documents of title are not innovations or inventions of law, but evolved from the
commercial practices of merchants and gained much acceptance under clearly defined
commercial customs.
The developmental imperatives of commercial transactions required that merchants should
be allowed to transact with goods and merchandise without having to physically carry them
around, and that buyers should be assured that they may deal with the evidence thereof with
the same effect as though they could feel the merchandise themselves. Documents of title
have been recognized by the State as the medium by which such transactions be promoted by
the instruments which evidence the merchandise covered.
Through the incorporation into our statutes of the commercial system of documents of title,
and expressing in statutory language the customs and usages which the tests of time have
proven to be efficient and effective in the commercial world, the State has therefore placed its
seal of approval and legal guarantee upon the institution of documents of title, especially those
which are negotiable in character, for their common acceptance by persons engaged in
commerce. Therefore, the provisions on documents of title are geared towards assuring the
public to take, accept, and deal with transactions over goods and merchandise by means of the
documents of title issued in representation thereof.

TYPES OF DOCUMENTS OF TITLE

1. Negotiable Document of Title
A document of title in which it is stated that the goods referred to therein are deliverable to
bearer, or to order of any person named in such document, is a negotiable document of title.76
2. Non-Negotiable Document of Title
Consequently, a document of title which does not state that the goods referred to therein
are deliverable either to bearer or to the order of any person named therein, is a non-negotiable
document of title.

74 Act No. 2137, as amended.

75 Act No. 3893, as amended.
76 Art. 1507, Civil Code.
 3. Effects of Errors on Documents of Title
Clerical errors in the words of negotiability, such as the use of the term by the order
instead of to the order does not destroy the negotiability of a warehouse receipt.77
The wrongful designation of the subject of the warehouse receipt indicating the tobacco as
Cagayan tobacco, when the evidence clearly showed that it was intended to cover tobacco
coming from Isabela, did not destroy the validity nor the negotiability of the document of title, nor
the effects of the negotiation thereof.78

4. Effects of Use of Non-Negotiable Terms on Negotiable Documents of

Title
If a document of title which contains an undertaking by a carrier, warehouseman or other
bailee to deliver the goods to bearer, to a specified person or order, to the order of a specified
person, or which contains words of like import, has placed upon it the words non negotiable,
not-negotiable or the like, such document may nevertheless be negotiated by the holder and is
a negotiable document of title.9

NEGOTIATION OF NEGOTIABLE DOCUMENTS OF TITLE

1. Who Can Negotiate
A negotiable document of title may be negotiated by:
(a) The owner thereof (i.e., the person to whom it was originally issued); or
(b) Any person to whom the possession or custody of the document has been
entrusted by the owner, if, by the terms thereof the bailee undertakes to
deliver the goods to the order of the person to whom the possession or
custody of the document has been entrusted, or if at the time of such
entrusting the document is in such form that it may be negotiated by
delivery.79

2. How Negotiation Properly Effected

a. By Delivery Alone
A negotiable document of title may be negotiated by delivery alone (without need of
endorsement) in the following cases:
(a) Where by the terms of the document the carrier, warehouseman or other
bailee issuing the same undertakes to deliver the goods to bearer; and
(b) Even when originally the document of title was issued to the order of a
specified person, where such person or a subsequent endorsee of the
document has endorsed it in blank or to the bearer.11
In either of the above-enumerated cases, any holder may endorse the same to himself or
to any specified person, and in such case the document shall thereafter be negotiated only by
the endorsement of such endorsee.80
77 Roman v. Asia Banking Corporation, 46 Phil. 705 (1922).
78 American Foreign Banking Corp. v. Herridge, 49 Phil. 975 (1924). 9Art. 1510, Civil Code.
79 Art. 1512, Civil Code. 11Art. 1508, Civil Code.
80 Art. 1508, Civil Code.
 b. By Endorsement and Delivery
A negotiable document of title may be negotiated only by the endorsement of the person to
whose order the goods are by the terms of the document deliverable, coupled with a delivery
thereof.81
Such endorsement may be in blank, to bearer or to a specified person. If endorsed to a
specified person, it may again be negotiated by the endorsement of such person in blank, to
bearer or to another specified person. Subsequent negotiations may be made in like manner.82

3. Effects of Proper Negotiation

A person to whom a negotiable document of title has been duly negotiated acquires
thereby:
(a) Such title to the goods as the person negotiating the document to him had
or had ability to convey to a purchaser in good faith and for value;
(b) Such title to the goods as the person to whose order the goods were to be
delivered by the terms of the document had or had ability to convey to a
purchaser in good faith and for value; and
(c) The direct obligation of the bailee issuing the document to hold possession
of the goods for him according to the terms of the document as fully as if
such bailee had contracted directly with him.83
The legal effects of proper negotiation is the assurance to the buying or negotiating public
of the protective mantle that the law places upon their faith in accepting a negotiable document
of title as a medium to transact on the goods covered thereby. The result is that by dealing with
the negotiable document of title it is as though the parties to the sale were dealing directly with
the goods covered thereby.
Although the law does not include one who takes by trespass or a finder within the
description of those who may negotiate, the clear import of these provisions is that if the owner
of the goods permits another to have the possession or custody of negotiable warehouse
receipts running to the order of the latter, or to bearer, it is a representation of title upon which
bona fide purchasers for value are entitled to rely, despite breaches of trust or violations of
agreement on the part of the apparent owner.84

4. Effects of Merely Transfering/Delivering of Order Negotiable Documents of

Title
The following are the legal effects when a negotiable document of title deliverable to order
is not properly negotiated, thus:
(a) Under Article 1511 of the Civil Code, a negotiable document of title which is
not in such form that it can be negotiated by delivery (i.e., not a bearer
document), may be transferred by the holder by delivery to a purchaser or
donee, meaning that the transferee would thereby own the document of
title;

81 Art. 1509, Civil Code.

82 Art. 1509, Civil Code.
83 Art. 1513, Civil Code.
84 Siy Cong Bieng v. Hongkong & Shanghai Bank, 56 Phil. 598 (1932).
 (b) The legal consequence of such transfer under Article 1514 is that the
person to whom a document has been transferred, but not negotiated,
acquires thereby as against the transferor, the title to the goods, subject to
the terms of any agreement with the transferor, meaning as between the
transferor and the transferee, the goods are owned by the transferee, but
not as to the rest of the world, including the bailee;
(c) Under Article 1515, where a negotiable document of title is transferred for
value by delivery, and the endorsement of the transferor is essential for
negotiation, the transferee acquires a right against the transferor to compel
him to endorse
the document unless a contrary intention appears, meaning that the
negotiation shall take effect as of the time when the endorsement is
actually made.

5. Effects and Consequences of Unauthorized Negotiation

In spite of the provision in Article 1512 of the Civil Code that only the owner of the
document of title or his assignee can negotiate the same, nevertheless, under Article 1518, the
validity of the negotiation of a negotiable document of title is not impaired by the following facts:
(a) That the negotiation was a breach of duty on the part of the person making the
negotiation;
(b) That the owner of the document was deprived of the possession of the same
by:
loss fraud theft conversion
accident mistake duress
if the person to whom the document was negotiated paid value therefor in good faith without
notice of the breach of duty, loss, theft, fraud, accident, mistake, duress or conversion (referred
to hereinafter as holder in due course). Since a negotiable document of title cannot be dealt
with apart from the goods that it covers, necessarily the legal consequences as to the effects of
unauthorized negotiation thereof would also pertain to the goods that it describes.
Even when the owner loses the negotiable document of title to a thief, and it is deliverable
to bearer, the latter may validly impart title thereto to a holder in due course, who is essentially a
buyer in good faith and for value.
It is important to note also that although Article 559 of the Civil Code provides that an
owner who has lost any movable or has been unlawfully deprived thereof, may recover it from
the person in possession of the same, the same cannot apply to a holder in due course of a
negotiable document of title because the enumerated instances in Article 1518 includes
specifically loss, theft, fraud, accident [and] conversion.
The effects of unauthorized negotiation of a negotiable document of title are much more
liberal and protective of the holder (i.e., buyer) who takes it in good faith and for value, than in
the case of a holder in due course for negotitable instruments under the Negotiable Instruments
Law. There is practically no real defense against an assignee or holder of the negotiable
document of title in good faith and for value. The only real defense that can validly be raised
against the holder in due course of a negotiable document of title (and therefore as to his title to
the goods covered thereby) would be forgery of the endorsement of the owner when such
endorsement is necessary to effect proper negotiation.
It is in protecting the rights and contractual expectations of a buyer in good faith that the
law encourages the public to accept by way of negotiations and at face value negotiable
documents of title. The protection to a buyer in good faith and for value also encourages velocity
in commerce as the prospective buyer does not have to waste time and effort having to assure
himself of the authority of the person so negotiating and the validity of his title and possession
over the goods covered by the document of title.
In Siy Long Bieng v. Hongkong and Shanghai Banking Corp.,17 it was held that as between
the owner of a negotiable document of title who endorsed it in blank and entrusted it to a friend,
and the holder of such negotiable document of title to whom it was negotiated and who received
it in good faith and for value, the latter is preferred, under the principle that as between two
innocent persons, he who made the loss possible should bear the loss.
The immediately foregoing comments refer to problems relating to the custody and
negotiation of a negotiable document of title, which rules are different to those applied when the
problem relates to the goods covered by the negotiable document of title. Such separate rules
are discussed below, on the topic Effects When Owner of the Document of Title Has No Title to
the Goods.
ASSIGNMENT OF NON-NEGOTIABLE DOCUMENTS OF TITLE
1. How Assignment Made
A non-negotiable document cannot be negotiated and the endorsement of such a
document gives the transferee no additional right.85
A document of title which is not in such form that it can be negotiated by delivery may be
transferred by the holder by delivery to a purchaser or donee.86
Since a non-negotiable document of title constitutes an incorporeal right, its sale
constitutes actually an assignment which under Article 1624 is perfected by mere consent, but
which under Article 1625 would require its appearance in a public instrument, otherwise it shall
produce no effect as against third persons.

2. Effects of Transfer by Assignment

A person to whom a non-negotiable document of title has been duly assigned acquires
thereby, as against the transferor:
(a) The title to the goods, subject to the terms of any agreement with the
transferor; and
(b) The right to notify the bailee who issued the document of the transfer
thereof, and thereby to acquire the direct obligation of such bailee to hold
possession of the goods for him according to the terms of the document.87
Unlike in the negotiation of a negotiable document of title which ipso jure makes the bailee
liable to the holder thereof, in the assignment of a non-negotiable document of title, there is no
legal relationship between the assignee and the bailee until the latter is informed by the former

85 Art. 1511, Civil Code.

86 Art. 1511, Civil Code.
87 Art. 1514, Civil Code.
of the assignment of the covering document of title. Likewise, the assignee merely steps into the
shoes of his immediate assignor.

WARRANTIES ON NEGOTIATION AND ASSIGNMENT

OF DOCUMENTS OF TITLE

A person who for value negotiates or transfers a document of title by endorsement or

delivery, including one who assigns for value a claim secured by a document of title, unless a
contrary intention appears, warrants that:
(a) The document is genuine;
(b) He has a legal right to negotiate or transfer
it;
(c) He has no knowledge of any fact which would impair the validity or worth of the
document;
(d) He has a right to transfer the title to the goods; and
(e) The goods are merchantable or fit for a particular purpose, whenever such
warranties would have been implied if the contract of the parties had been to
transfer without a document of title the goods represented thereby.88
The warranties of one who negotiates a negotiable document of title, and one who assigns
a non-negotiable document of title are the same.
Unlike under the Negotiable Instruments Law which imposes warranties on the endorser,
Article 1517 of the Civil Code expressly states that [t]he indorsement of a document of title shall
not make the indorser liable for any failure on the part of the bailee who issued the document or
previous indorsers thereof to fulfill their respective obligations.
Since the assignment of a document of title is covered by the species assignment under
Chapter 8 of the Title on Sales of the Civil Code, under Article 1628 thereof, the seller/assignor
of the document of title also warrants the existence and legality of the documents of title at the
time of sale, unless it has been sold as doubtful; but that he does not warrant the solvency of
the debtor (i.e., the bailee), unless it has been so expressly stipulated or unless the insolvency
was prior to the sale and of common knowledge.

EFFECTS WHEN OWNER OF THE DOCUMENT OF TITLE HAS

NO LEGAL TITLE TO THE GOODS
The foregoing discussions on the effects of negotiations and assignment are premised on
the fact that the owner of the document of title, or the transferor thereof, had valid title to the
goods described therein and deposited with the bailee, and the defect or illegality pertained only
to the custody and negotiation of the document of title.
What happens in a situation where the legal owner of the document of title (i.e., the person
who deposited the goods with the bailee), had in fact no valid title to the goods deposited, for
which the document of title has been issued by the bailee, and the document of title is properly
assigned or negotiated to a buyer in good faith and for value? As between the real owner of the
goods and the buyer in good faith and for value, who is rightfully entitled to the goods?

88 Art. 1516, Civil Code.

 1. When Goods Covered by Non-Negotiable Document
Where the goods are covered by a non-negotiable document of title, and under the
premise that the assignee-buyer had obtained possession of the goods by the proper
notification to the baillee of such purchase, the situation would have to be governed by the
formula provided under Article 559 of the Civil Code.
In all situations where the owner had neither lost nor been unlawfully deprived of the
goods, the assignee-buyers title to the goods is preferred even against the owner who can no
longer recover the goods. In such cases, the assignee-buyers ownership to the goods is not
derived from the assignor-seller, but is granted directly under the aegis of Article 559 which
states that [t]he possession of the movable property acquired in good faith is equivalent to title.
In such situations, it does not even matter if the assignor-seller had no ownership at all to the
goods he sold to the assignee-buyer since the latters title is not dependent on the assignor-
sellers title.
On the other hand, if the owner had lost the goods or been unlawfully deprived thereof, the
owner may recover against the assignee-buyer, even when the latter is in good faith and bought
for value, because Article 559 expressly does not give to the assignee-buyer any original title;
and in such case the assigneebuyers title to the goods must be derived from that of the
assignorsellers. If the assignor-seller had no title to the goods sold, the assignee-buyer
receives no title even if the goods are delivered to him under the principle Nemo dat quod non
habet.

2. When Goods Covered by Negotiable Document

In a situation where the goods are covered by a negotiable document of title properly
negotiated to the holder-buyer, the premise would have to be that by issuing such negotiable
document the bailee has constituted himself as an agent to possess the goods for the benefit of
the holder of the document as his principal, then it becomes apparent that the same principles
under Article 559 of the Civil Code would have to apply.
If the owner had neither lost nor been unlawfully deprived of the goods, then the holder-
buyer acquires valid ownership of such goods because his possession in good faith and for
value, which by itself would constitute as an original source of ownership under Article 559, is
clearly evidenced by his being a holder in due course of the negotiable document of title.
On the other hand, if the owner had lost or been unlawfully deprived of the goods, the
owner may recover against the bailee, and therefore against the holder-buyer, even when the
latter is a holder in due course with respect to the negotiable document of title, and a possessor
in good faith and for value with respect to the goods, based on the following reasons:

(a) As a holder in due course, under Article 1513 of the Civil Code, the buyer
takes only such title to the goods as the person negotiating the document
to him had or had ability to convey, as well as such title to the goods as
the person to whose order the goods were to be delivered by the terms of
the document, and since both those predecessors-in-interest had no title,
or had void titles, to the goods, the holder-buyer also has no title thereto;
(b) As a buyer in good faith and for value, Article 559 does not give him a
basis for original title to the goods (because the owner had lost or been
unlawfully deprived of the goods), and therefore such buyer derives his
source of ownership from that of his sellers; but since the seller had no
 title to the goods, the buyer takes none also, under the principle Nemo dat
quod non habet.

The foregoing conclusions are supported by the language of Article 1519 of the Civil Code,
which protects a holder in due course of a negotiable documents of title against attachments,
garnishments and levies by the creditors of the transferor of the negotiable document of title,
only under the indispensable premise the goods are delivered to a bailee by the owner or by a
person whose act in conveying the title to [the goods] to a purchaser in good faith for value
would bind the owner of such goods.
In addition, Article 1505 of the Civil Code provides that where goods are sold by a person
who is not the owner thereof, and who does not sell them under authority or with the consent of
the owner, the buyer requires no better title to the goods than the seller had. Article 1505
provides for exception to the principle of Nemo dat quod non habet that it provides, and the
case of goods covered by a negotiable instrument is not within any of the exceptions.
Furthermore, Article 1506 provides that [w]here the seller of goods has a voidable title
thereto, but his title has not been avoided, at the time of sale, the buyer acquires good title to
the goods, provided he buys them in good faith, for value, and without notice of the sellers
defect. The article does require that the minimum requirements for the buyer to obtain valid title
to goods by reason of delivery is that at least the seller had voidable title thereto, and the
principle under said article cannot extend to benefit a buyer in good faith and for value who
takes delivery of the goods from a seller who had void title thereto.
Finally, the rules of warranties clearly provide that owner has title to the goods as one of
his warranties, and consequently if it turns out that owner does not have title to the goods, then
it would constitute an actionable breach of warranties, and the remedy of the buyer-holder is to
run after the transferor of the negotiable document of title.

RULES ON LEVY/GARNISHMENT OF GOODS COVERED

BY DOCUMENTS OF TITLE

1. When Non-Negotiable Document of Title

Under Article 1625 of the Civil Code, when an assignment of credit or other incorporeal
right is made through a public instrument, it would also bind third persons. Although the
assignment of a non-negotiable document of title would involve the assignment of incorporeal
right, nevertheless the binding effect of the assignment on the bailee and third persons would
have to follow specific provisions governing documents of title.
Under Article 1514, a person to whom a non-negotiable document of title has been
transferred, must notify the bailee who issued the document of the transfer thereof, and only
then does the transferee acquire the direct obligation of such bailee to hold possession of the
goods for him according to the terms of the document. Prior to the notification to such bailee by
the transferor or transferee of a non-negotiable document of title, the title of the transferee to the
goods and the right to acquire the obligation of such bailee may be defeated by the levy of an
attachment of execution upon the goods by a creditor of the transferor, or by a notification to
such bailee by the transferor or a subsequent purchaser from the transferor of a subsequent
sale of the goods by the transferor.89

89 Art. 1514, Civil Code.

 In effect, the assignment or sale by the original owner of the non-negotiable document of
title, even when executed in a public instrument, does not transfer possession or title over the
goods covered by the document of title, until actual notification is made to the bailee of the
transfer or assignment of the goods, actions can be taken by the original owner to defeat the
transfer of the title and/or possession of the goods.
Even when by the execution of a public instrument to assign the non-negotiable document
of title, ownership over the document of title is transferred to the assignee, nevertheless, the
transferor can still exercise possessory lien over the goods covered by notification thereof to the
bailee prior to the time that the transferee-assignee shall have notified the bailee of the
assignment to him of the document of title.90
In the case of a non-negotiable document of title, possession and ownership of the
document of title (by assignment) does not necessarily bring with it possession or title over the
goods covered thereby; it is the notification of the bailee of the assignment that is the operative
act that will transfer title and/or possession of the goods in favor of the transferee-assignee.

2. When Negotiable Document of Title

If goods are delivered to a bailee by the owner or by a person whose act in conveying the
title to them to a purchaser in good faith for value would bind the owner and a negotiable
document of title is issued for them, such goods cannot thereafter, while in possession of such
bailee, be attached by garnishment or otherwise or be levied under an execution unless the
document be first surrendered to the bailee or its negotiation enjoined. 91 The bailee shall in no
case be compelled to deliver up the actual possession of the goods until the document is
surrendered to him or impounded by the court.92
The special rules on goods covered by a negotiable document of title show that in such
case ownership and possession of the document itself is equivalent to the holder having actual
ownership and possession of the goods covered thereby. The goods are treated to be
inseparable from the negotiable document of title covering them, and vice-versa.
In such case, a creditor whose debtor is the owner of a negotiable document of title shall
be entitled to such aid from courts of appropriate jurisdiction by injunction and otherwise in
attaching such document or in satisfying the claim by means thereof as is allowed at law or in
equity in regard to property which cannot readily be attached or levied upon by ordinary legal
process.93

oOo
CHAPTER 8

SALE BY A NON-OWNER OR BY ONE HAVING

VOIDABLE TITLE:
90 Art. 1532, Civil Code.
91 Art. 1519, Civil Code.
92 Art. 1519, Civil Code.
93 Art. 1520, Civil Code.
 THE LIFE OF CONTRACT OF SALE
Discussions on the legal effects of the sale by a seller who (a) is not the owner of the
subject matter sold, or (b) only has a voidable title thereto, provide revealing angles in the way
one looks into the nature of the contract of sale, and the stages, as it were, of its life. The
discussions hereunder would also demonstrate the rather loose manner by which the Supreme
Court uses the terms sale, sell, and sold in evolving doctrinal pronouncements on the
nature of sale itself, considering that sale is a progressive contract, and like the metamorphosis
that a larva undergoes, sale has variant stages as it goes through its legal existence.
The author begs indulgence with the reference to sale as though it were a person or a
being. This is resorted to only for the purpose of demonstrating more clearly the essence of its
life.

PHILOSOPHICAL DISCUSSIONS ON STAGES IN THE LIFE OF SALE

Sale has two stages in its life, the perfection stage and the performance or consummation
stage. The perfection stage, although it may involve a period of time, is best conceptualized as
that point in time when the sale, as a contractual reality, begins to exist: upon a meeting of
minds as to the subject matter to be delivered and the price to be paid. 94 On the other hand, the
consummation stage covers the period when the obligations that arise from the legal existence
of the sale are to be performed: delivery of possession and transfer of ownership of the subject
matter by the seller; and the payment of the price by the buyer.95

The consummation stage presupposes that the perfection stage has happened; but the
perfection stage does not necessarily, or rather does not inexorably, result into every aspect of
the consummation stage. Perfection goes into the very essence or birth of the sale; whereas,
consummation goes into the performance, or the manner by which the sale as a contract, leads
out its life.
The point that is being made is this: Perfection is the only stage in the life of a sale that
determines whether the contract exists at all and the nature of its existence, whether it is a valid,
voidable, unenforceable, rescissible, or void contract; consummation stage merely is the living-
out of that kind of life that has been set by the perfection stage. If the sale is valid at perfection,
it remains valid throughout its life and consummation has no choice but to lead the life of a valid
contract and the consequences thereof; consummation cannot change the nature of such
contract. If the contract is voidable it is valid until annulled or it can be ratified; if it is rescissible,
it is subject to rescission within the period provided for by law; if it is unenforceable, although it
is valid, it cannot be enforced in court, unless it falls within the exceptions provided for by law;
and if it is void, no attempt at performance can change its inexistence.
We next tackle the concepts of breach and rescission in relation to sale. In a sale, there
is breach when any party does not comply with what is incumbent upon him under the contract:
94 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. v. Court of Appeals, 250 SCRA 523 (1995); Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160
(1997).
95 Ibid.
delivery of possession and transfer of ownership on the part of the seller; and payment of the
price on the part of the buyer; and no prior demand is required to establish breach because of
the reciprocal nature of the obligations. 96 When there is breach, the other party not at fault may
then rescind or resolve the sale. The concepts of breach and rescission therefore presuppose
the existence of a valid sale; when a sale is void, it gives rise to no obligations that can be
breached, neither does it allow a rescission of a contract that in the first place has no legal
existence.
The point being made is this: Both breach and rescission are legal concepts that
necessarily pertain to the consummation or performance stage, and they do not attack the very
essence of perfection, as in fact they are premised upon a previous perfection having taken
place.

WHEN SELLER IS NOT OWNER OF THE SUBJECT MATTER

1. At Perfection
Sale is consensual in nature since it is perfected or comes into legal being by mere
consent,97 and not by performance of an act, such as delivery in real contracts; nor does it
require the payment of price for its validity. 98 Consent or perfection of the sale is manifested by
the meeting of the offer and the acceptance on three items: (a) subject matter; (b) price; and (c)
terms of payment of the price.99
Although a sale ordinarily covers existing things, a valid sale can cover a subject matter
that is not existing or having only a potential existence at the time of perfection; 100 or even a
thing subject to a resolutory condition;101 and ownership of the subject matter by the seller at the
time of perfection is not an essential requirement for the validity of the sale. 102 In other words, a
valid sale exists to bind both seller and buyer even if at the time of perfection the seller was not
the owner thereof since it does not even exist yet; or even if it existed then but did not belong in
ownership to the seller at that time of perfection.
Perfection of a sale merely creates the obligation on the part of the seller to transfer
ownership, but by itself perfection does not transfer ownership. The law states that the vendor
must have a right to transfer the ownership thereof at the time it is delivered,103 and that
ownership of the thing sold is not transferred by perfection but shall be transferred to the
vendee upon the actual or constructive delivery thereof.11
Consummation stage concerns itself with the actual transfer of ownership of the subject
matter and the payment of the price; perfection stage merely concerns itself with the creation of
the obligations to transfer and to pay. Therefore, it is not critical for valid perfection of a sale to
come about, that the seller at that time is the owner of the subject matter of the sale, or even
that the subject matter should exist at the time of perfection.

96 Art. 1191, Civil Code.

97 Art. 1475 Civil Code. Also, Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160, 163-164 (1997); Quijada v. Court of
Appeals, 299 SCRA 695 (1998); Co v. Court of Appeals, 312 SCRA 528 (1999).
98 Balatbat v. Court of Appeals, 261 SCRA 128 (1996); Pealosa v. Santos, 363 SCRA 545 (2001); Soliva v. The Intestate
Estate of Marcelo M. Villalba, 417 SCRA 277 (2003).
99 Navarro v. Sugar Producers Corp., 1 SCRA 12180 (1961); Leabres v. Court of Appeals, 146 SCRA 158 (1986); Coronel v.
Court of Appeals, 263 SCRA 15 (1996).
100 Art. 1461, Civil Code.
101 Art. 1465, Civil Code.
102 Arts. 1459 and 1475, Civil Code.
103 Art. 1459, Civil Code. 11Art. 1477, Civil Code.
 This truism is bolstered by the fact that the law on estoppel provides that [w]hen the
person who is not the owner of a thing sells or alienates and delivers it, and later the seller or
grantor acquires title thereto, such title passes by operation of law to the buyer or grantee. 104 It
is obvious that Article 1434 uses the word sells to refer to the perfection stage of a sale since it
includes and delivers it as an additional part of its qualification.

2. At Consummation
Article 1505 of the Civil Code provides that where goods are sold by a person who is not
the owner thereof, and who does not sell them under authority or with the consent of the owner,
the buyer acquires no better title to the goods than the seller had. The article does not say that
the sale of goods by a non-owner renders the contract void; it describes the consequences
when delivery under a sale is effected when the seller is not the owner of the thing delivered. As
the Supreme Court aptly held: It is a well-settled principle in law that no one can give what one
does not have nemo dat quod non habet. Accordingly, one can sell only what one owns or is
authorized to sell, and the buyer can acquire no more than what the seller can transfer
legally.105106

In Mindanao Academy, Inc. v. Yap,14 a widow, without the consent or authority of her co-
owners-children, sold school properties to buyer Yap, who obtained possession of the properties
by virtue of the sale, and took over the operations of the school. Consequently, the other co-
owners brought two actions against buyer Yap: one for annulment of sale, and the other for
rescission. The two cases having been tried together, the trial court ruled that the sale was null
and void. On appeal, the Court upheld the decision of the trial court, as follows:

The lower court did not rule categorically on the question of rescission considering it
unnecessary to do so in view of its conclusion that the contract of sale is null and void.
This conclusion is premised on two grounds: (a) the contract purported to sell properties
of which the sellers were not the only owners ...; and (b) the prestation involved in the
sale was indivisible, and therefore incapable of partial annulment, inasmuch as the buyer
Yap, by his own admission, would not have entered into the transaction except to acquire
all of the properties purchased by him. 107

In affirming the nullity of the sale, by the fact that the seller sold under the sale
properties that she did not own solely, the Court seemed to have reasoned improperly.
Certainly, a seller may validly sell (enter into a valid and binding sale) properties which he
entirely does not own at the time of perfection. Such contract is valid, and an action to annul
such contract is improper; and it is his failure to comply with his obligation to transfer ownership
over the subject matter that would give rise to an action for rescission with damages. But really
much depends on what the Court meant to cover by the term contract of sale as being null
and void.
If the sale referred to in Mindanao Academy was considered as a contract defined by law
as a meeting of minds between two persons whereby one binds himself, with respect to the
other, to give something, such sale was certainly not null and void even though the seller was
108

not the owner of the thing sold at the time of perfection. On the other hand, if the sale was being

104 Art. 1434, Civil Code.

105 Gonzales v. Heirs of Thomas and Paula Cruz, 314 SCRA 585, 597 (1999). Also Segura v. Segura, 165 SCRA 368
(1988).
106 SCRA 190 (1965).
107 Ibid, at p. 194; emphasis supplied.
108 Art. 1305, Civil Code. 1724 SCRA 59 (1968).
considered at its consummation stage, that by tradition it has transferred ownership to the
buyer, then indeed such transfer of ownership was null and void for a seller cannot transfer
ownership by delivery of a thing which he does not own, even as a consequence of a valid sale.
Mindanao Academy therefore indicates to us the difficulties of not distinguishing which stage in
the life of the sale is being referred to: is it the contract as an agreement that gives rise to
obligations (perfected contract), or is it the living contract as a manner of performance
(consummated contract).
In Estoque v. Pajimula,17 Buyer 1 bought a designated 1/3 southeastern portion of a large
tract of land (lot 802) from the seller who was then a pro-indiviso one-third co-owner thereof.
Subsequently, the seller, having obtained the ownership of the entire property from his co-
owners, sold the remaining 2/3 portion thereof to Buyer 2. Buyer 1 thereupon sought to exercise
the statutory right of redemption, 109 as a co-owner of the property as against Buyer 2 on the
basis that since the seller was merely a co-owner at the time of the sale to her, Buyer 1 merely
acquired one-third pro-indiviso title to the property, making her a co-owner thereof. In ruling
against Buyer 1, the Court held:

... While on the date of the sale to [Buyer 1] said contract may have been ineffective,
for lack of power in the vendor to sell the specific portion described in the deed , the
transaction was validated and became fully effective when the next day ... the vendor ...
acquired the entire interest of her remaining co-owners ... and thereby became the sole
owner. ... Article 1434 of the Civil Code of the Philippines clearly prescribes that When
a person who is not the owner of a thing sells or alienates and delivers it, and later the
seller or grantor acquires title thereto, such title passes by operation of law to the buyer or
grantee.
Pursuant to this rule, [Buyer 1] became the actual owner of the southeastern third of lot
802 ... Wherefore, she never acquired an undivided interest
in lot 802 ...110

Again in Estoque we encounter difficulties with the structure of the ruling which held as
ineffective a sale upon its execution (on the date of the sale) just because seller lacked the
power to sell the specific portion described in the deed. Such lack of power to transfer
ownership does not affect the validity of a sale, since the subject matter at perfection had all the
statutory requisites to make the sale valid: it was existing, licit and determinate. On the other
hand, the reasoning in Estoque is not bad when taken in the sense that if we focus on the
execution of the deed of sale, as a public document, equivalent to constructive delivery to
transfer ownership of the subject matter to Buyer 1, then the Court was correct in saying that
such sale (i.e., the transfer of ownership by constructive delivery) was indeed ineffective as of
the date of the execution of the deed, since the seller could not validly transfer a specific one-
third portion which he did not own. But again, we have to cut and dice in order to get the Courts
conclusion right, when it would all be so easy to state clear doctrinal pronouncements by
specifying what particular stage is being referred to.
In Almendra v. Intermediate Appellate Court,20 the Court, in holding void the sale of a
particular one-half portion of a conjugal property by the surviving spouse held

The unquestionability of the due execution of the deeds of sale notwithstanding, the
Court may not put an imprimatur on the intrinsic validity of all the sales. The ... sale ... of
one-half portion of the conjugal property ... may only be considered valid as a sale of
Alejas one-half interest therein. Aleja could not have sold the particular hilly portion
109 Art. 1620, Civil Code.
110 Ibid, at p. 63; emphasis supplied. 20204 SCRA 142 (1991).
 specified in the deed of sale in the absence of proof that the conjugal partnership property
had been partitioned after the death of Santiago. Before such partition, Aleja could not
claim title to any definite portion of the property for all she had was an ideal or abstract
quota or proportionate share in the entire property. 21

The Court in Almendra obviously used the words sale and sold to cover the
consummated stage of the sale referred to. It reiterated the principle on the issue of ownership
at the time of consummation in Noel v. Court of Appeals,22 thus

In a contract of sale, it is essential that the seller is the owner of the property he is
selling. The principal obligation of a seller is to transfer the ownership of the property
sold (Civil Code of the Philippines, Art. 1458). This law stems from the principle that
nobody can dispose of that which does not belong to him (Azcona v. Reyes, 59 Phil. 446
[1934]; Coronel v. Ona, 33 Phil.
456 [1916]). NEMO DAT QUOD NON HABET.23

In Development Bank of the Philippines v. Court of Appeals,24 the Court continued to view
the sale by a non-owner of the subject property to be void instead of treating the tradition aspect
as having no effect on transferring ownership to the buyer, thus

As a general rule, if one buys the land of another, to which the seller is supposed to
have a good title, and in consequence of facts unknown alike to both parties, the seller
has in fact no title at all, equity will cancel the sale and cause the purchase money to be
restored to the buyer, putting both parties in status quo. This is because the declaration
of nullity of a contract which is void ab initio operates to restore things to the state and
condition in which they were found before the execution thereof.
Therefore, the purchaser is entitled to recover the money paid by him where the contract is
set aside by reason of the mutual material mistake of the parties as to the identity or quantity of
the land sold. And where a purchaser recovers the purchase money from a vendor who fails or
refuses to deliver the title, he is entitled as a general rule to interest on the money paid from the
time of payment.25
Although the Court talks about the effect of declaration of nullity of a sale, the proper
remedy was actually rescission and the same ends sought to be achieved would have
happened, which was restitution.
In Nool v. Court of Appeals,26 the Court recognized the principle that the absence of
ownership by the seller at the time of perfection does not render the sale void. Nevertheless, the
Court relied on the concept of impossible service as the basis to hold the sale void, thus:

In the present case, it is clear that the sellers no longer had any title to the parcels of
land at the time of sale. Since ... the alleged contract of repurchase, was dependent on
the validity of the [main contract of sale], it is itself void. A void contract cannot give rise to
a valid one. Verily, Article 1422 of the Civil Code provides that (a) contract which is the
direct result of a previous illegal contract, is also void and inexistent.
We should however add that Dignos did not cite its basis for ruling that a sale is null
and void where the sellers were no longer the owners of the property. Such a situation
(where the sellers were no longer owners) does not appear to be one of the void
contracts enumerated in Art. 1409 of the Civil Code. Moreover, [Article 1462 of] the Civil
Code itself recognizes a sale where the goods are to be acquired x x x by the seller after
the perfection of the contract of sale clearly implying that a sale is possible even if the
 seller was not the owner at the time of sale, provided he acquires title to the property later
on.
In the present case however, it is likewise clear that the sellers can no longer deliver
the object of the sale to the buyers, as the buyers themselves have already acquired title
and delivery thereof from the rightful owner, the DBP. Thus, such contract may be
deemed to be inoperative and may thus fall, by analogy, under item No. 5 of Article 1409
of the Civil Code: Those which contemplate an impossible service. Article 1459 of the
Civil Code provides that the vendor must have a right to transfer the ownership thereof
[object of the sale] at the time it is delivered. Here, delivery of ownership is no longer
possible. It has become impossible.27

The problem with the foregoing reasoning is that it treats sellers obligations as personal
obligations to do which would then be covered by paragraph 5 of Article 1409. Fact is that
sellers obligations are real obligations to give and therefore do not fall within the category of
impossible service; and if indeed the obligation to delivery ownership can no longer be
complied with, the remedy is not to declare the sale void, but actually to rescind the sale for
breach of contract.
Recently though, in Cavite Development Bank v. Spouses Syrus Lim,28 the Court explained
the proper application of the Latin maxim Nemo dat quod non habet, as properly applicable to
the consummation of a sale thus:

Nemo dat quod non habet as an ancient Latin maxim says, One cannot give what one
does not have. In applying this precept to a contract of sale, a distinction must be kept in
mind between the perfection and the consummation stages of the contract.
A contract of sale is perfected at the moment there is a meeting of minds upon the
thing which is the object of the contract and upon the price. It is, therefore, not required
that, at the perfection stage, the seller be the owner of the thing sold or even that such
subject matter of the sale exists at that point in time. Thus, under Article 1434 of the Civil
Code, when a person sells or alienates a thing which, at that time, was not his, but later
acquires title thereto, such title passes by operation of law to the buyer or grantee. This is
the same principle behind the sale of future goods under Art. 1462 of the Civil Code.
However, under Art. 1459, at the time of delivery or consummation stage of the sale, it is
required that the seller be the owner of the thing sold. Otherwise, he will not be able to
comply with his obligation to transfer ownership to thebuyer. It is at the consummation
stage where the principle of nemo dat quod non habet applies.111
3. Sale by Co-Owner of the Whole Property or Definite Portion Thereof
The rule in co-ownership is that none of the co-owners may claim any right, title or interest
to a particular portion of the thing owned in common. A co-owner has no right to sell a divided
part of the real estate;112 although he is the owner of an undivided half of a tract of land, he has a
right to sell and convey an undivided half, but he has no right to divide the lot into two parts, and
convey the whole of one part by metes and bounds.113
When a co-owner sells a particular portion of the property owned in common, the early rule
was that the sale is void as it attempts to sell a particular portion of the property, but is valid as
to the spiritual share of the co-owner-seller. In Lopez v. Cuaycong,32 where a co-owner sold the
particular portion of the property owned in common when there has been no partition yet, the
Court held: The fact that the contract of sale made by a coowner purports to sell a concrete

111 Ibid, at pp. 355-356.

112 Acabal v. Acabal, 454 SCRA 555 (2005); Barcenas v. Tomas, 454 SCRA 593 (2005).
113 Lopez v. Ilustre, 5 Phil. 567 (1906). 3274 Phil. 601 (1944).
portion of the property held in common, does not render the sale void, for it is a well-established
principle that the binding force of a contract must be recognized as far as it is legally possible to
do so.114
The rule therefore is when prior to partition a co-owner sells the entire property owned in
common, the sale of the property itself is void (i.e., the attempt to transfer ownership of the
entire property by virtue of the sale), but valid as to his spiritual share. 115116 On the other hand,
when a co-owner prior to partition sells a definite portion of the property owned in common, the
sale as to that portion is not valid as to the other co-owners, but valid as to his spiritual share, if
indeed the buyer would have still bought such spiritual share had he known that the definite
portion sold would not be acquired by him.
Bailon-Casilao v. Court of Appeals,35 outlined the effects of sale by one co-owner without
the consent of all the co-owners, thus:

The rights of a co-owner of a certain property are clearly specified in Article 493 of the
Civil Code. ... As early as 1923, this Court has ruled that even if a co-owner sells the
whole property as his, the sale will affect only his own share but not those of the other co-
owners who did not consent to the sale (Punsalan v. Boon Liat, 44 Phil. 320 [1923]). This
is because under the aforementioned codal provision, the sale or other disposition affects
only his undivided share and the transferee gets only what would correspond to his
grantor in the partition of the thing owned in common. [Ramirez v. Bautista, 14 Phil. 528
[1909])...
From the foregoing, it may be deduced that since a co-owner is entitled to sell his
undivided share, a sale of the entire property by one co-owner without the consent of the
other co-owners is not null and void. However, only the rights of the co-owner-seller are
transferred, thereby making the buyer a co-owner of the property. 117118

The effects of the sale of the entire property by one of the coowners, without the consent of
the other co-owners, as affecting only the sellers pro-indiviso share, has been revisited lately in
Paulmitan v. Court of Appeals,37 which rightly found that the sale by a co-owner of the entire
property without the consent of the other co-owners cannot be considered as null and void.119120
Tomas Claudio Memorial College, Inc. v. Court of Appeals,39 held that when a co-owner
sells the entire property, the sale is valid as to his spiritual share since a co-owner is entitled to
sell his individual share and the proper action to take is not the nullification of the sale, or for
recovery of possession of the property owned in common from the other co-owners, but for
division or partition of the entire property.121
The foregoing rulings seem to gloss over the commercial fact that often the meeting of
minds between the seller and the buyer comes about by the commutative nature of the
transaction, i.e., that the buyer was willing to pay a higher price, if he thought the seller was
114 Ibid, at p. 602.
115 Lopez v. Cuaycong, 74 Phil. 601 (1944). Reiterated in Fernandez v. Fernandez, 363 SCRA 811 (2001); Acabal v. Acabal,
454 SCRA 555 (2005); Panganiban v. Oamil, 542 SCRA 166 (2008).
116 SCRA 738 (1988).
117 Ibid, at pp. 744-745.
118 SCRA 866 (1992).
119 Reiterated in Aguirre v. Court of Appeals, 421 SCRA 310 (2004); Heirs of the Late Spouses Aurelio and Esperanza Balite
v. Lim, 446 SCRA 54 (2004).
120 SCRA 502 (1999). Reiterated in Santos v. Lumbao, 519 SCRA 408 (2007); Republic v. Heirs of Francisca Dignos-
Sorono, 549 SCRA 58 (2008).
121 Reiterated in Heirs of Romana Ingjug-Tiro v. Casals, 363 SCRA 435 (2001), Fernandez v. Fernandez, 363 SCRA 811
(2001); and Aguirre v. Court of Appeals, 421 SCRA 310 (2004).
obliging himself to sell the entire property or a definite portion thereof. If it turns out that the
seller had no capacity to do so, because he is in fact merely a co-owner, then it may happen
more often than not that the sale is void under the provisions of Article 1409(6) where the
intention of the parties relative to the principal object of the contract cannot be ascertained.
Otherwise, to compel the buyer to stick by the terms of the contract, would lead to either or both
of two things: (a) you compel the buyer to accept a subject matter (i.e., spiritual share) to which
he never agreed to buy; and (b) to pay the agreed price for a subject matter (spiritual share)
which commands a smaller value in the market. The solutions given by the Court would often
lead to unjustment enrichment on the part of the seller. On the other hand, if the proferred
solution is that the buyer shall be compelled to accept delivery of the spiritual share in the
property intended to be bought, and mandate that he will be paying a smaller amount as the
price for the spiritual portion, then it really amounts to making a new contract between them,
where the subject matter has drastically changed, as well as the price.
The proper solution it seems to the author is that, the original contract terms be upheld as
valid (which is so, as discussed above), but the option is granted to the buyer to either seek for
rescission for breach of sellers obligation to deliver the object agreed upon, or to accept partial
delivery, i.e., only the spiritual portion, which appropriate reduction of price, similar to the rules in
sale of real property per unit of measure or number.

4. Exceptions to Rule on Effect of Sale of Definite Portion by Co-

owner
The general rule on the effect of the sale of the entire property owned in common by one of
the co-owners, to be void as a sale of the whole property or any definite portion thereof (i.e., to
validly effect transfer of ownership), but valid as to the co-owner-sellers spiritual share, is
subject to a number of exceptions:
Firstly, it does not apply to a situation where the subject matter is indivisible in nature or by
intent. In Mindanao Academy, Inc. v. Yap,41 where one of the co-owners sold the school and its
properties owned in common with other co-owners, the Court held that the sale of the entire
property owned in common by one of the co-owners was void, and could not even be binding
as to the spiritual share of the seller since the prestation involved in the sale was indivisible, and
therefore incapable of partial annulment, inasmuch as the buyer would not have entered into the
transaction except to acquire all of the properties purchased by him.42
Secondly, when a sale of a particular portion of the thing owned in common is with the
consent of the other co-owners, the legal effect is different. In Pamplona v. Moreto,43 the Court
held that when there has been no express partition of the subject matter owned in common, but
the co-owners who sells points out to his buyers the boundaries of the part he was selling, and
the other co-owners make no objection, there is in effect already a partial partition, and the sale
of the definite portion can no longer be assailed by the other co-owners.
Thirdly, in Imperial v. Court of Appeals,44 it was held that a co-owner who sells one of the
two lands owned in common with another co-owner, and does not turn-over one-half of the
proceeds of the sale to the other co-owner, the latter by law and equity may lay exclusive claim
to the remaining parcel of land.
Fourthly, would be the effect of the ipso jure transfer of ownership under Article 1434 of the
Civil Code. In Pisuea v. Heirs of Petra Unating,45 the Court held that when co-heirs sell and
deliver the entire lot owned in common with their father who was still alive at that time, and
subsequently the father dies, then the buyer becomes the owner of the entire property bought
pursuant to the provisons of Article 1434 of the Civil Code which upholds the validity of a sale by
one who previously did not have, but who subsequently acquired, title to the property sold.
Finally, would be the binding effect of registration under the Torrens System. Cruz v. Leis,46
held that although a co-owner may validly sell only her co-ownership interests, and that the sale
of the entire property or of a particular portion thereof is void, nevertheless, when Torrens title to
the conjugal property indicates that the wife is the only owner thereof being described as a
widow, then one who buys such property from the wife in good faith and for value, will acquire
valid title thereto against the heirs of the deceased spouse: The rationale for this rule that a
person dealing with registered land is not required to go behind the register to determine the
condition of the property. He is only charged with notice of the burdens on the property which
are noted on the face of the register or the certificate of title. To require him to do more is to
defeat one of the primary objects of the Torrens system.122
EXCEPTIONS TO RULES ON LEGAL EFFECTS
OF SALE BY A NON-OWNER

The discussions that follow immediately hereunder pertain to applicable rules in

consummation stage that pertain to issues as to preference of ownership between the original
owner of the property who is a third party to a sale between a seller and a buyer over the same
property; essentially, there is only one sale involved, with the original owner being a stranger to
said contract. The rules should therefore not be confused with the set of rules governing double
sales.
Although Article 1505 provides that where goods are sold by a person who is not the owner
thereof, and who does not sell them under authority or with the consent of the owner, the buyer
acquires no better title to the goods than the seller had, it also provides for the following
exceptions:
(a) When the owner is, by his conduct, precluded from denying the sellers
authority to sell;
(b) When the contrary is provided for in recording laws;
(c) When the sale is made under statutory power of sale or under the order of
a court of competent jurisdiction; and
(d) When the sale is made in a merchants store in accordance with the Code
of Commerce and special laws.
Other exceptions to the main principle enunciated under Article 1505 would be the
following:
(e) Under Article 1506, the sale by a seller who at the time of delivery had
voidable title to the thing delivered;
(f) In case of movables, under Article 559, acquisition of possession in good
faith under a claim of ownership, where the real owner has not lost or been
unlawfully deprived of the movable, makes the possessor the rightful
owner of the movable; and
(g) Special rights of an unpaid seller of goods to resell under Articles 1526 and
1533 of the Civil Code.

122 Ibid, at p. 578.

 The first two additional exceptions will be discussed in their proper sections below, while
the third item is discussed in Chapter 10.

1. When Real Owner Estopped

An example when the owner is estopped is Article 1434 of the Civil Code that provides that
when a person who is not the owner of a thing sells or alienates title thereto, such title passes
by operation of law to the buyer or grantee. In Bucton v. Gabar,48 where the seller sold a parcel
of land to the buyer at the time the seller was not yet the owner of the land sold, the acquisition
after one year by the seller of the ownership of said land was automatically transferred to the
buyer, and the seller was estopped from questioning the title of his buyer.

2. Recording Laws
Except on the effect of registration of chattel mortgage and its subsequent foreclosure and
sale at public auction, and the jurisprudential rules that have come to govern the hierarchy of
claims on shares of stock of a corporation, there are at present no other recording laws
pertaining to movables that provide the same principle as registration as the operative act
principle applicable to registered land under The Property Registration Decree.
3. Statutory Power; Judicial Sale
Judgments of courts divesting the registered owner of title and vesting them in the other
party are valid although the courts may not be the owner of the land. Also, the sale by a sheriff
of land levied upon at public auction would validly transfer ownership to the highest bidder,
although the sheriff in executing the certificate of sale has no ownership over said property.

4. Sale at Merchant Store

The reason for validating the sale and transfer of ownership to buyers who bought from
merchant stores is well summarized in the syllabus in Sun Brothers & Co. v. Velasco:49

Under paragraph (3) of Article 1505 of the Civil Code, a person who buys a thing at a
merchants store after the same has been put on display thereat, acquires a valid title to
the thing although his predecessors in interest did not have any right of ownership over it.
This is a case of an imperfect or void title ripening into a valid one, as a result of some
intervening causes. The policy of the law has always been that where the rights and
interests of a vendor come into clash with that of an innocent buyer for value, the latter
must be protected. ... protecting innocent third parties who have made purchases at
merchants stores in good faith and for value appears to be a wise and necessary rule not
only to facilitate commercial sales on movables but to give stability to business
transactions. This rule is necessary in a country such as ours where free enterprise
prevails, for a buyer cannot be reasonably expected to look behind the title of every
article when he buys at a store. The doctrine of caveat emptor is now rarely applied, and
if it is ever mentioned it is more of an exception rather than the general rule.

What constitutes merchant store can be culled from City of Manila v. Bugsuk Lumber
Co., when it held that a store is any place where goods are kept for sale; or where goods are
50

deposited and sold by one engaged in buying and selling them. It held that placing of an order
for goods and the making of payment thereto at a principal office does not transform said office
into a store, for it is a necessary element that there must also be goods or wares stored therein
or on display, and provided also that the firm or person maintaining that office is actually
engaged in the business of buying and selling.51
 5. Sale by a Seller Who Has Voidable Title on the Subject Matter Sold
Under Article 1506, Where the seller of goods has a voidable title thereto, but his title has
not been avoided at the time of sale, the buyer acquires a good title to the goods, provided he
buys them in good faith, for value, and without notice of the sellers defect of title.
When the article states that title has not been avoided at the time of sale, what stage of
the sale is referred to as the cut-off point? It would seem that if the rest of the provisions of
Article 1506 would require that the buyer should have paid value therefor, it must cover the
consummation stage. Article 1506 talks of title or ownership to the property which covers the
consummation stage; perfection stage of sale involves the obligation to transfer ownership, but
does not cover nor convey ownership itself.
It would logically follow then that if the cut-off point under Article 1506 is the delivery of the
subject matter to the buyer by the seller, if the sellers voidable title thereto is avoided after the
perfection of the sale but before delivery, the buyer does not obtain good title to the property.
The buyer is not in good faith may be determined from the language of the deed of sale, as
held by the Court in one case: 123 The language of the deed of sale may show bad faith on the
part of the buyer. In the deed, instead of the buyer insisting that the seller guarantee its title to
the land and recognize the right of the buyer to proceed against the seller if the title to the land
turns out to be defective as when the land belongs to another person, and instead the reverse is
found in the deed of sale providing that any losses which the buyer may incur in the event the
title turns out to be vested in another person are to be borne by the buyer alone, show that the
buyer did not purchase the subject matter in good faith without notice of any defect in the title of
the seller.124

6. Applicable Rules to Immovables

Do the rules provided for under Articles 1505 and 1506, except for the application of the
Torrens system, apply to immovables? For example, if a seller at the time of sale and delivery,
has only voidable title to the subject parcel of land, would the buyer in good faith and for value
take a better title to the land (i.e., valid title) than that of his seller, following the principle under
Article 1506?
The answer seems to be in the negative, since the essence of the coverage of Articles
1505 and 1506 would be goods, which require not only a valid underlying sale, but necessarily
the element of transfer of possession embodied as the primary test of ownership for movables
under Article 559 of the Civil Code. Consequently, when the seller of a parcel of land has only
voidable or void title to the property, then the buyer, even though in good faith and for value, and
in spite of actual or constructive delivery, takes only the same title to the land which his seller
had. The only exception to this principle of Nemo dat quod non habet is the registration in good
faith as the operative act doctrine embodied in Sec. 113 of the Property Registration Degree. 125
By way of illustration, we can rely upon the ruling in Heirs of Spouses Benito Gavino v. Court of
Appeals.55
In that decision, the Court held that even when the sale is void for being based on a
fictitious transfer from a previous seller to the current seller (as the former did not own the
property in its entirety when sold), the general rule that the direct result of a previous void

123 Limketkai Sons Milling, Inc. v. Court of Appeals, 250 SCRA 523 (1995).
124 Ibid, at p. 543.
125 Pres. Decree No. 1529.
contract cannot be valid, is inappicable when it will directly contravene the Torrens system of
registration, thus

... Where innocent third persons, relying on the correctness of the certificate of title
thus issued, acquire rights over the property, the court cannot disregard such rights and
order the cancellation of the certificate, since the effect of such outright cancellation will
be to impair public confidence in the certificate of title. The sanctity of the Torrens system
must be preserved; otherwise, everyone dealing with the property registered under the
system will have to inquire in every instance as to whether the title had been regularly or
irregularly issued, contrary to the evident purpose of the law. Every person dealing with
the registered land may safely rely on the correctness of the certificate of title issued
therefor and the law will in no way oblige him to go behind the certificate to determine the
condition of the property.56

In Cavite Development Bank v. Spouses Cyrus Lim,57 the Court applied the same principle
to a foreclosure sale, though essentially a forced sale, on the ground that it is still a sale in
accordance with Article 1458 of the Civil Code, under which the mortgagor in default, the forced
seller, becomes obliged to transfer the ownership of the thing sold to the highest bidder who, in
turn, is obliged to pay the bid price in money or its equivalent, thus

... Being a sale, the rule that the seller must be the owner of the thing sold also applies
in a foreclosure sale. This is the reason why Article 2085 of the Civil Code, in providing for
the essential requisites of the contract of mortgage, requires among other things, that the
mortgagor or pledgor be the absolute owner of the thing mortgaged, in anticipation of a
possible foreclosure sale should the mortgagor default in the payment of the loan.
There is however, a situation where, despite the fact that the mortgagor is not the
owner of the mortgaged property, his title being fraudulent, the mortgage contract and any
foreclosure sale arising therefrom are given effect by reason of public policy. This is the
doctrine of the mortgagee in good faith based on the rule that all persons dealing with
property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not
required to go beyond what appears on the face of the title. The public interest in
upholding the indefeasibility of a certificate of title, as evidence of the lawful ownership of
the land or of any encumbrance thereof, protects a buyer or mortgagee who, in good
faith, relied upon what appears on the face of the
certificate of title.58

It should be noted that in Tsai v. Court Appeals,59 the Court held that the defense of
indefeasibility of Torrens title is unavailing to properties and other improvements situated or built
therein, such that the mere fact that the lot where the factory and disputed properties stand was
in the name of the bank did not automatically mean that everything found on the lot also
belonged to the bank, especially when there was a letter received by the buyer revealing such
fact.
Likewise, the principle is premised on the existence of a valid sale. Insurance Services and
Commercial Traders, Inc.
v. Court of Appeals,60 reiterated that an innocent purchaser for value is one who purchases a
titled land by virtue of a deed executed by the registered owner himself, and not under a forged
deed.
7. Title as to Movable Properties
Article 559 of the Civil Code provides that possession of movable property acquired in good
faith is equivalent to title. In addition, the article provides that one who has lost any movable or
has been unlawfully deprived thereof, may recover it from the person in possession of the same.
If the possessor of a movable lost or of which the owner has been unlawfully deprived, has
acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing
the price paid therefor.
Although it may be settled jurisprudence that the term unlawfully deprived, would cover
situations when the original owner has been dispossessed without his consent, 126 which
includes not only cases of theft and robbery, but including one occasioned by swindling or
estafa,127 nonetheless the rule under Article 559 is subject to the following exceptions:

(a) By cross-reference to Article 1505, even if the owner of a movable has lost
it or has been unlawfully deprived thereof, and even if he offers to
reimburse the buyer, he cannot recover the movable from the buyer who
bought it at a merchant store; and
(b) By cross-reference to Article 1506, even if the owner of a movable has lost
it or has been unlawfully deprived thereof, if the possessor in good faith
acquired title from a seller who at the time of delivery had a voidable title
thereto, then the original owner cannot recover the movable.
In Tagatac v. Jimenez,63 Tagatac was the owner of a vehicle she sold to Feist who issued a
check to cover the purchase price, which check bounced. In the meantime, buyer sold the
vehicle to another person, and eventually the vehicle was sold to Jimenez, who bought it in
good faith and for value. Subsequently, Feist was convicted for estafa. On the issue as to who
was the rightful owner of the vehicle, the Court held that Tagatac cannot be deemed to have
been unlawfully deprived of the vehicle as the term is used in Article 559 since the failure of
Feist to pay the purchase price of the vehicle or the issuance of a check for its price without
funds to answer therefor did not or could not affect the validity of the transfer of title of the
subsequent buyer who acquired the car in good faith; at the most it would give Tagatac a right to
rescind the contract, but the title to the thing sold would not revert to the seller until the sale has
been set aside by a competent court. Until that is done, the rights of stranger in good faith,
acquired before resolution of the contract are entitled to protection.
In the case of Aznar v. Yapdiangco,64 where the owner had not yet consented to the sale of
the vehicle when it was taken and driven away by the would-be buyer, the acquisition
subsequently of another person who took it in good faith, would still entitle the original owner to
recover the same since it constituted unlawful deprivation under Article 559 entitling the owner
to recover it from any possessor thereof. Aznar also held that the provisions of Article 1506
would not apply to the present possessor since it was essential that his seller should have a
voidable title at least. In the case of the present possessor his seller did not even have any title
to the property since it was never sold to him nor delivered to him pursuant to a valid or at least
voidable sale.
In EDCA Publishing & Distributing Corp. v. Santos,65 an impostor identifying himself as a
professor obtained delivery of books from EDCA and for which he issued a check that
subsequently bounced. The impostor sold the books to Santos, who bought them in good faith
and for value. In the resulting suit over the books between EDCA and Santos, the Court held
that Santos did not have to establish his ownership over the books since under Article 559 his

126 Dizon v. Suntay, 47 SCRA 160, 165 (1972).

127 Del Rosario v. Lucena, 8 Phil. 535 (1907); Valera v. Finick, 9 Phil. 479 (1908); Arenas v. Raymundo, 19 Phil. 47 (1911);
U.S. v. Sotelo, 28 Phil. 147 (1914); Dizon v. Suntay, 47 SCRA 160 (1972); Cruz v. Pahati, 98 Phil. 788 (1956).
All the foregoing cases have one factor in common: Persons not duly authorized to do so pawned or pledged jewelry in favor
of innocent third persons. Tagatac v. Jimenez, 53 O.G. No. 12 3792, 3796 (30 June 1957).
possession of books acquired in good faith is equivalent to title. In denying the contention of
EDCA that it had been unlawfully deprived of the books, the Court held non-payment of the
purchase price by the impostor, although amounting to fraud, did not amount to unlawful
deprivation under Article 559, but merely may be considered vitiation of consent as to make the
contract voidable; but that so long as the contract has not been annulled, it remained valid, and
the subsequent sale and delivery by the impostor of the books to Santos effectively transferred
ownership to Santos.
The implication of the Tagatac and EDCA Publishing rulings is that Article 1506 represents
an operative act which would constitute a further exception to the provisions of Article 559,
which means that if the owner has been unlawfully deprived by means of deceit pertaining to the
non-payment of the purchase price, but the one who takes the movable is able to sell and
deliver the movable to another person who takes it in good faith and for value before the owner
is able to rescind the earlier sale, the buyer obtains good title and the original owner has no
cause of action to recover; and
What is gratifying from a reading of the foregoing three cases is that the Court incisively
distinguished between the perfection stage and the consummation stage of the sale to arrive at
a proper resolution of the issues.
In Tagatac, the Court ruled that deceit or fraud, which do not render the contract void but
merely voidable (valid until annulled) resulted into the existence of a sale, so that when delivery
was effected pursuant to such voidable contract, tradition effectively and legally transferred
ownership to the buyer, even though he was a deceitful person. It also correctly ruled that the
nonpayment of the price by the bouncing of the check went into the performance of the contract
and not to its perfection and therefore non-payment could not reverse the coming into existence
of the sale by the meeting of minds of the parties.
In Aznar, the Court held the line that non-delivery of the vehicle by the seller could not have
possibly given any sort of title to the would-be buyer, and the latter could not in turn convey any
title, valid or voidable, to his own buyer to bring the case under Article 1506. The Court pointed
out that perfection of the contract does not transfer ownership; and that ownership is not
transferred by contract merely (i.e., perfection of the contract) but by tradition or delivery.
Finally, in EDCA, the Court with much lucidity said, and by the succeeding quoted
passages, end this chapter, thus:

The contract of sale is consensual and is perfected once agreement is reached

between the parties on the subject matter and the consideration. According to the Civil
Code:
... ART. 1478. The parties may stipulate that ownership in the thing shall not pass to the
purchaser until he has fully paid the price.
It is clear from the above provisions, particularly the last one quoted, that ownership
in the thing sold shall not pass to the buyer until full payment of the purchase price only if
there is stipulation to that effect. Otherwise, the rule is that such ownership shall pass
from the vendor to the vendee upon the actual or constructive delivery of the thing sold
even if the purchase price has not yet been paid.
Non-payment only creates a right to demand payment or to rescind the contract, or
to criminal prosecution in the case of bouncing checks. But absent the stipulation noted,
delivery of the thing sold will effectively transfer ownership to the buyer who can in turn
transfer it to another.128

128 Ibid, at p. 618.

 oOo
CHAPTER 9

LOSS AND DETERIORATION, FRUITS AND

OTHER BENEFITS
Analysis of the prevailing doctrines in Philippine jurisdiction on the risk of loss and
deterioration, and the benefits flowing from the fruits and improvements, of the object of sale,
offer interesting study on the convergence of disparate principles in civil law and common law.
The discussions hereunder cover only contracts of sale where the subject matter is determinate
or specific, since a determinable generic subject matter does not deteriorate nor is it subject to
loss.129
In drafting the Title on Sales of the New Civil Code, the Code Commission engrafted many
provisions of the Uniform Sales Law of the United States to achieve a common set of rules on
sales on both sides of the Pacific, since the United States was then our biggest and most
important trading partner. Unfortunately, the grafting together of civil and common law principles
in our Law on Sales has yielded confusing and varying interpretations.
The Roman law principle embodied in the Spanish Civil Code previously applicable to the
Philippines, mandated that from the moment of perfection of sale, the risk of loss on a
determinate subject matter passes to the buyer without need of delivery, provided that the sale
is unconditional. Although the principles provided that ownership of the subject matter is
transferred to the buyer only upon delivery thereof by the seller, nonetheless, after perfection of
the sale but before delivery, the consequences of deterioration of the subject matter without the
fault of the seller shall likewise be borne by the buyer, and he must still pay the price agreed
upon even when eventually the subject matter delivered is no longer in the same condition.
Under the same principle, any improvement or fruits of the subject matter after perfection are for
the benefit of the buyer.

On the other hand, under common law principles, it is the owner who bears the risk of loss
(res perit domino), in the absence of any stipulation to the contrary. However, in a sale,
ownership of the subject matter is transferred to the buyer from the moment the contract is
entered into and the goods are available to be delivered to the buyer. When it comes to goods,
it is not delivery under common law that transfers ownership to the buyer, but the perfection of
an unconditional sale with availability of the subject matter for delivery.
Therefore, even when the legal principles were different, the legal consequences from the
point of perfection were the same in both legal systems: upon perfection of an unconditional
sale involving specific or determinate subject matter, the risk of loss, deterioration and the
benefits of fruits and improvements, were for the account of the buyer.
In amending the provisions relating to the risk of loss, the Code Commission decided to
adopt the common law principle that it should be the owner of the subject matter of the sale that
should bear the risk of loss (res perit domino); but they maintained the civil law principle that
ownership can only be transferred by delivery. This legal fusion on principles have caused the
current confusion that prevails on the issue of risk of loss.
129 Art. 1263 of the New Civil Code provides that: In an obligation to deliver a generic thing, the loss or destruction of
anything of the same kind does not extinguish the obligation.
BEFORE PERFECTION
Before the perfection of a sale, the rules on loss, deterioration, fruits and improvement of
the purported subject matter are the same: such loss, deterioration, fruits and improvements
shall pertain to the purported seller, since he owns the thing. Notwithstanding the extent of the
negotiations that have taken place, prior to perfection, the purported subject matter bears no
legal or even equitable relationship to the purported buyer, and therefore no assumption of risk
of loss or deterioration can be 130ascribed to the latter.
The civil law concept of risk of loss was exemplified by the early case of Roman v. Grimalt,2
which was decided under the Spanish Civil Code then in force in the Philippines. The case
involved the negotiations for the sale of a schooner for a total sum of 51,500.00 payable in three
installments, but subject to the condition that the seller must clear his title to the vessel, before
the buyer would commit to buy at the agreed price. The seller then went about clearing his title
to the schooner and prepared it for delivery to the buyer. But before delivery to the buyer could
be done, the schooner sunk during a severe storm. The seller demanded for the payment of the
purchase price as agreed upon.
Roman upheld the principle that [a] sale shall be considered perfected and binding as
between vendor and vendee when they have agreed as to the thing which is the object of the
contract and as to the price, even though neither has been actually delivered.131 The Court held
that the facts clearly show that no sale had been perfected, and therefore the loss of the vessel
must be borne by its owner and not by a party who only intended to purchase it. 132
Unfortunately, the Court held that [o]wnership is not considered transmitted until the property is
actually delivered and the purchaser has taken possession of the same and paid the price
agreed upon, in which case the sale is considered perfected.5 Although the Court used the
word perfected, such a statement of course belied the consensual nature of the contract of
sale, perfected by mere consent without need of delivery.
In any event, finding that no sale had been perfected between the parties, Grimalt held that
the articles of the old Civil Code relative to the injury or benefit of the thing sold after the
contract has been perfected and those relative to the obligations to deliver a specified thing and
the extinction of such obligation when the thing is either lost or destroyed, were not applicable to
the case.
From the language of the decision of Grimalt the implication was clear under the old Civil
Code: that had the contract been perfected, even without the schooner being delivered to the
buyer to transfer ownership, the buyer would have borne the risk of loss. This was supported by
then Article 1452 of the old Civil Code (now Article 1480 of the New Civil Code) that any injury to
or benefit from the thing sold, after the contract has been perfected, from the moment of
perfection to the time of delivery, shall be to the account of the buyer.

AT THE TIME OF PERFECTION

Under Article 1493 of the New Civil Code, if at the time the sale is perfected, the subject
matter has been entirely lost, the contract shall be without any effect. But if the thing should
have been lost in part only, the buyer may choose between withdrawing from the contract and
demanding the remaining part, paying its price in proportion to the total sum agreed upon.

130 Phil. 96 (1906).

131 Ibid, at p. 98, citing Art. 1450 of the old Civil Code, now Art. 1475 of the New Civil Code.
132 Ibid, at p. 99. 5Ibid.
 In sale of specific goods, and without the knowledge of the seller, the goods have perished
in part or have wholly or materially deteriorated in quality as to be substantially changed in
character, the buyer may treat the sale as either avoided, or as valid in all of the existing goods
or in so much thereof as have not deteriorated, and as binding the buyer to pay the agreed price
for the goods in which the ownership will pass, if the sale was divisible.133
Article 1493 does not hold a sale at perfection to be void when the object thereof is lost; it
uses the phrase without any effect. Strictly speaking, the physical existence or non-existence
of the subject matter is not important for perfection of the sale. However, if the subject matter is
lost, there is really no point is pursuing the contract since the seller is not in a position to comply
with his obligation to deliver the subject matter. Therefore, the law decrees the same effect as if
the sale is void. Tolentino holds that the contract never comes into existence. There can be no
sale without a thing to be sold. In such case, there is no need of an action to annul the contract,
because there can be no annulment of something that does not exist. 134 Paras also refers to
such a contract as being void when at the time of perfection, the subject matter thereof is lost.8
Nevertheless, the provisions of Articles 1493 and 1494 of the New Civil Code should be
instructive of how to treat loss, deterioration and benefits after perfection: If the subject matter is
lost at the point of perfection, and the seller bears the loss and the buyer is relieved of his
obligations under the contract, then the implication is that after perfection the buyer then bears
the risk of loss and deterioration even without prior delivery to him.

AFTER PERFECTION BUT BEFORE DELIVERY

After perfection of the sale, ideally the rules on loss, deterioration, fruits and improvements
should be governed by the same set of principles. Unfortunately, with the adoption of the
common law rule on the risk of loss in the period from perfection and before delivery, the rule on
loss differ from the rules on deterioration, fruits and improvements, with respect to the same
object sold.

1. Loss of Subject Matter

The Title on Sales of the New Civil Code has retained the Roman law rule that ownership is
transferred only by delivery, whether actual or constructive; but has adopted the common law
principle of res perit domino, i.e., it is the owner of the thing (the seller before delivery) who
bears the consequences of its loss.
On one hand, the civil law principle that ownership of the thing sold shall be transferred to
the buyer only upon actual or constructive delivery thereof is now clearly expressed in Article
1477 of the New Civil Code. On the other hand, although the Supreme Court has held that the
general rule under Philippine jurisdiction is that after perfection but before delivery, the risk of
loss is borne by the seller under the rule of res perit domino,135 the statutory bases for such
doctrine are not clear-cut and sometimes conflicting.
Firstly, the general principle of res perit domino is now covered by Article 1504 of the New
Civil Code, which provides that [u]nless otherwise agreed, the goods remain at the sellers risk
until the ownership therein is transferred to the buyer, but when the ownership therein is

133 Art. 1494, New Civil Code.

134 TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. V (1959 ed.), p. 37, citing 10 MANRESA 119. 8PARAS, CIVIL CODE OF THE
PHILIPPINES, Vol. V (1990 ed.), p. 89.
135 Union Motor Corp v. Court of Appeals, 361 SCRA 506 (2001); Chrysler Philippines
v. Court of Appeals, 133 SCRA 567 (1984).
transferred to the buyer the goods are at the buyers risk whether actual delivery of the goods
has been made or not. Unfortunately, Article 1504 is worded to cover only goods.136
Secondly, Article 1480 of the New Civil Code (based on Article 1452 of the old Civil Code),
provides that [a]ny injury to or benefit from the thing sold, after the contract has been perfected,
from the moment of the perfection of the contract to the time of delivery, shall be governed by
Articles 1163 to 1165, and 1262. As applied to the sale, under cross-referred Article 1165, it is
provided 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. This shows that the
underlying obligation in a sale is a real obligation and therefore may be subject to the remedy of
specific performance. Under cross-referred Article 1262, as applied to a sale, the obligation to
deliver a determinate thing shall be extinguished if it should be lost or destroyed without the fault
of the seller, and before he has incurred in delay.
Thirdly, Article 1538 of the New Civil Code provides that [i]n case of loss, deterioration or
improvement of the thing before its delivery, the rules in Article 1189 shall be observed, the
vendor being considered the debtor. Article 1538 is a new article not based on any provision of
the old Civil Code. But like Article 1480, Article 1538 is a specific provision in the Title on Sales
invoking provisions of loss applicable to contracts in general in Article 1189, which embodies
civil law principles,
Article 1189, which essentially embodies civil law principles, and which applies to contracts
in general, provides that the following rules shall be observed in case of the improvement, loss
or deterioration of the thing:

(a) If the thing is lost through the fault of the seller, the seller shall be obliged
to pay damages; and
(b) If the thing is lost without the fault of the debtor [seller], the obligation shall
be extinguished;

which is consistent with Article 1262 which provides that in [a]n obligation which consists in the
delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the
fault of the debtor, and before he has incurred in delay.
Whether it is the seller or the buyer who bears the risk of loss of the subject matter from
perfection but before delivery, depends on the proper interpretation of the extinguishment of
obligation clauses under Articles 1189 and 1262, which is not well-settled in our jurisdiction.
Paras interprets Articles 1189 and 1262 to mean that the obligation of the seller to deliver
is extinguished, but the obligation [of the buyer] to pay is not extinguished 137 as the necessary
consequence even when the underlying contract is reciprocal because this happens only when
the seller is able to deliver but does not. In such a case, the buyer is not required to pay, for lack
of reciprocity. It is different if the law excuses the seller, but not the buyer. 12 Buyer should pay
even if he does not receive the object lost through a fortuitous event, since there was a cause
or consideration, at the time the contract was perfected, the thing purchased still existed.138
Paras cites no authority for his position on this matter.
Padilla takes the same position as Paras, and states that when the subject matter of the
sale is lost without the fault of the seller, he is released from his obligation to deliver the thing,
136 Under Article 1636(1) of the New Civil Code, goods include all chattels personal but not things in action or money of
legal tender in the Philippines, and includes growing fruits or crops.
137 PARAS, CIVIL CODE OF THE PHILIPPINES, Vol. V (1990 ed.), p. 58. 12Ibid.
138 Ibid, at p. 58.
while the buyers obligation to pay the price subsists. The legal effect being that the buyer
assumes the risk of loss of the object of the sale from the time of perfection up to the time of
delivery.139
Tolentino, on the other hand, believes that in reciprocal obligations, the extinguishment of
the obligation due to loss of the thing affects both debtor and creditor; the entire juridical
relation is extinguished, so that if the creditor has himself an obligation, this is likewise
extinguished. The debtor must return to the creditor whatever the latter may have already
delivered by reason of the obligation. This is a logical consequence of the principle of res perit
domino recognized in the code.140 He further writes:

The rule is that the risk pertains to the debtor, which means that if an obligation is
extinguished by the loss of the thing or impossibility of performance through fortuitous
events, the counter-prestation is also extinguished. The debtor is released from liability;
but he cannot demand the prestation which has been stipulated for his benefit. Thus, if
the thing leased is destroyed by fortuitous event, the lessee is not obliged to pay the
stipulated rental. Or, in a contract of a piece of work where the contractor furnished both
labor and material, if the thing is lost before delivery, the contractor cannot recover the
agreed compensation. This is the result of the reciprocal character of the obligations; he
who gives nothing has no reason to demand anything. 141
Under Tolentinos interpretation, the rule on loss under Article 1189, would be different from
the rule on deterioration and improvement: the loss of the thing would be for the account of the
seller, while the deterioration and improvement, would be for the account of the buyer.
Baviera also affirms such varying rules and says that Article 1189 embodied the rule in
Roman Law regarding sales subject to a condition precedent, where loss is borne by the
vendor, but deterioration or improvement of the thing is for the account of the buyer.142
Jurado, although recognizing and discussing the other views on the matter, affirmed the
view of Tolentino, as being more just and equitable and being more in conformity with the
principle of res perit domino.143
If we were therefore to take Parass stand, the legal effect of the application of either Article
1480 or Article 1538 is that after perfection of the sale but before delivery, the risk of loss is to
be borne by the buyer, even when he is not yet the owner of the subject property. If the thing is
lost through a fortuitous event, the seller is excused from complying with his obligation, but the
buyer is still obliged to pay for the purchase price. As a result, it is the buyer who bears the risk
of loss even if he never became the owner of the subject matter.
If we were to take Tolentinos position, the effect of both Articles 1480 and 1538 would be
that the risk of loss is still to be borne by the seller from the time of perfection up to before
delivery of thing, but he would no longer be liable for damages if the thing is lost through
fortuitous event. Before delivery, if the determinate subject of the sale is lost through the fault of
the seller, the buyer need not pay the price, but can recover damages for breach of contract.
However, should the determinate subject matter be lost through fortuitous event, the seller is
excused from his obligation to deliver the thing, and not being in breach of his obligation, he
cannot be held liable for damages by the buyer. The buyer is then not obliged to pay the price
because of the inability of the seller to comply with his obligation. The net effect of course is that

139 PADILLA, CIVIL CODE, pp. 840-841.

140 TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. IV (1991 ed.), p. 337.
141 Ibid, citing 3 COLLIN & CAPITANT 734, DE BUEN, 2 VON TUHR, OBLIGACIONES 110.
142 BAVIERA, SALES (1981 ed.), pp. 82-82.
143 JURADO, CIVIL LAW REVIEWER (1980 ed.), pp. 658-659.
the buyer ends up not the poorer, whereas, the sellers estate has diminished by the value of the
thing lost. Consequently, the risk of loss would have been borne by the seller, and the
provisions of Articles 1480 and 1538 do not contradict the adopted principle under the new Civil
Code of res perit domino.
The position would then make Articles 1480 and 1538 consistent with the provisions of
Articles 1504. Under Article 1504, unless otherwise agreed, the goods remain at the sellers risk
until the ownership therein is transferred to the buyer; but when the ownership is transferred to
the buyer the goods are at the buyers risk whether actual delivery of the goods has been made
or not, except that:

(a) Where delivery of the goods has been made to the buyer or to a bailee for
the buyer, in pursuance of the contract and the ownership in the goods has
been retained by the seller merely to secure performance by the buyer of
his obligations under the contract, the goods are at the buyers risk from
the time of such delivery;
(b) Where actual delivery has been delayed through the fault of either the
buyer or seller the goods are at the risk of the party in fault.

Article 1504 is a new provision in the present Civil Code, without a counter-part in the old
Civil Code. Also, by its language, the rules it establishes on the risk of loss pertain specifically to
goods, and it applies the common law principle of res perit domino. The term goods includes
all chattels personal and growing fruits or crops, but not things in action or money of legal
tender.144
Under the Paras position, Article 1504 contradicts the rule in Articles 1480 and 1538 where
the risk of loss is to be borne by the buyer from perfection of the sale but before delivery.
Therefore, authors like Jurado, have opined that the general rule on the Law on Sales is that
from perfection but before delivery, the risk of loss of the subject matter is borne by the buyer,
except when the subject matter is goods in which case the risk of loss is borne by the seller,
from perfection up to before delivery of the subject matter of the sale.
Article 1504 therefore is the clearest evidence that the Civil Code has adopted the principle
of res perit domino in the Law on Sales. What dilutes full reliance on Article 1504 is that as
worded, it clearly contradicts the rules of deterioration, fruits and improvements, to which rules
all authors are in accord.

2. Deterioration, Fruits and Improvements

Under Article 1504, the goods remain at the sellers risk until the ownership therein is
transferred to the buyer; but when the ownership is transferred to the buyer, the goods are at
the buyers risk whether actual delivery of the goods has been made or not. This embodies the
common law principle of res perit domino, but unlike the American principle that ownership of
the goods is transferred by the perfection of an unconditional sale, the New Civil Code has
retained the principle of delivery as the mode by which ownership is transferred. Thus, Paras
states that Article 1504 contradicts directly Article 1480, and holds that under American law, the
mere perfection of the contract of sale, as distinguished from a contract to sell, transfers
ownership, delivery not being essential for such transfer of ownership.145

144 Art. 1636, New Civil Code.

145 PARAS, supra, at pp. 111-112.
 If we were to apply the language of Article 1504 therefore, from the moment of perfection of
the sale, the effects of deterioration of the subject matter should be borne by the seller, who
remains the owner thereof, and strictly speaking the buyer is not bound to pay the same amount
if he receives a subject matter that is much more inferior than to what it was at the time of
perfection. To the same extent, since any fruit or improvement of the subject matter after
perfection, but before delivery, should also pertain to the seller as the owner thereof, then the
buyer is obliged to pay more than the agreed price if the subject matter is more than what it was
at the time of the perfection of the contract. If such be the construction of Article 1504, not only
does it yield absurd results, but it would grant either party a legal excuse not to proceed with the
contract because of developments that ensued since perfection not through the fault of the other
party.
Under Article 1538 of the New Civil Code, in case of deterioration or improvement of the
thing before its delivery, the rules in Article 1189 shall be observed, the seller being considered
the debtor. Under Article 1189 of the Civil Code, as it is applicable to a sale, the following rules
shall govern the deterioration of the thing during the pendency of a condition suspending the
efficacy of the sellers obligation to deliver the subject matter:

(a) When the thing deteriorates without the fault of the seller, the impairment is
to be borne by the buyer;
(b) If the thing deteriorates through the fault of the seller, the buyer may
choose between the rescission of the obligation and its fulfillment, with
indemnity for damages in either case;
(c) If the thing is improved by its nature, or by time, the improvements shall
inure to the benefit of the buyer;
(d) If the thing is improved at the expense of the seller, he shall have no other
right than that granted to the usufructuary.

Under Articles 1480 any injury to or benefit from the thing sold, after the contract has been
perfected, from the moment of the perfection of the contract to the time of delivery, shall be
governed by Articles 1163 to 1165, and 1262. It further provides that this rule shall apply to sale
of fungible things, made independently and for a single price, or without consideration of their
weight, number, or measure. Should fungible things be sold for a price fixed according to
weight, number, or measure, the risk shall not be imputed to the buyer until they have been
weighed, counted, or measured and delivered, unless the latter has incurred in delay.
Under Article 1537, the seller is bound to deliver the thing sold and its accessions and
accessories in the condition in which they were upon the perfection of the contract; all the fruits
shall pertain to the buyer from the day on which the contract is perfected.
The only logical and reasonable conclusion one can derive from the foregoing discussions
is that the rule of res perit domino provided in Article 1504 on goods, applies only to loss and
has no application to issues pertaining to deterioration or fruits and improvements over the
subject matter of the sale. This also shows that because of the faulty grafting into the Philippine
Law of Sales of common law principle, the rules of risk of loss based on res perit domino
determined by delivery, are different from the rules pertaining to deterioration, fruits and
improvement based on res perit domino under the common law rule determined by the
perfection of the contract, or the civil law rule based on the perfection of contract. Again, note
that both the common law rule and the civil law rule had a common point of transfer of the risk of
loss and deterioration and the benefits of fruits and improvement: perfection of the sale;
whereas, the hybrid rule on the risk of loss under the present Civil Code happens not at the
point of perfection, but at the point of delivery.

AFTER DELIVERY
Under Article 1504, when ownership of the goods has been transferred to the buyer, the
goods shall be at the buyers risk. One of the exceptions provided by the article is when the
delivery of the goods has been made to the buyer and the ownership in the goods has been
retained by the seller merely to secure performance by the buyer of his obligations under the
contract, although ownership is not yet with the buyer, the goods are still at the buyers risk. The
other exception provided is that if actual delivery had been delayed through the fault of either
the buyer or seller, the goods are at the risk of the party at fault.
In Song Fo & Co. v. Oria,21 the Court held that after the delivery of the vessel by the seller
to the buyer, and it was lost, the buyer was still obliged to pay the balance of the purchase price.
In Lawyers Cooperative v. Tabora,22 the ownership of the books purchased on installment
were retained by the seller, although they have already been delivered to the buyer, under the
condition that ownership thereof will be transferred to the buyer upon his full payment of the
purchase price, it was held that despite the loss of the books in a fire, the risk of loss would be
borne by the buyer although he was not the owner yet, not only because such was agreed
merely to secure the performance by the buyer of his obligation, but also because in the very
contract itself, it was agreed that loss or damage to the books after delivery to the buyer shall be
borne by the buyer.23
Lawyers Cooperative also disposed of the defense of the buyer of pleading force majeure
in exempting himself from paying for the books which were lost to fire. The Court held that
although an obligor is relieved from his obligation under the rule that an obligor should be held
exempt from liability when the loss occurs through a fortuitous event, nevertheless, as applied to
the buyer in a sale, his obligation does not pertain to the delivery of the subject matter, but to the
payment of the purchase price, and the ability to pay in money or legal tender is never lost
through fortuitous event.

STRUCTURING PROPER DOCTRINE ON LOSS, DETERIORATION, FRUITS AND IMPROVEMENTS

From all the foregoing, it would seem that the prevailing doctrine under our jurisdiction on
the subject matter of a sale generally depends on the issue of title pursuant to the principle of
res perit domino or beneficial interest to the subject property.
Prior to perfection, both title and beneficial interests pertain to the seller and therefore he
must bear the risk of loss, deterioration, and benefits from the fruits and improvements. The
buyer has no risk nor participation in any of those aspects since neither title nor beneficial
interest over the subject matter pertains to him, as in fact there is no legal relationship that
exists at that point between him and the seller on the subject matter of the would-be sale, even
assuming negotiation was in the process.
After delivery which effectively transfers title and beneficial interest to the buyer, buyer
bears both the risk of loss and deterioration, as well as benefits from the fruits and
improvements of the subject matter of sale. At that point, neither title nor beneficial interests
pertain to the seller and therefore he ceases to have any legal relation to the subject matter and
should not be affected by anything that may happen to the subject matter without his fault.
 It is only after perfection and before delivery that title and beneficial interests actually do not
pertain to the same person since title remains with the seller, but beneficial interest actually
pertains to the buyer. This is clear from the provisions of the New Civil Code which govern the
responsibilities of the obligor in an obligation to deliver a determinate thing, all for the benefit of
the obligee:

(a) Every person obliged to give something is also obliged to take care of it
with the proper diligence of a good father of a family;146
(b) The obligee has a right to the fruits of the thing from the time the obligation
to deliver it arises;147
(c) When what is to be delivered is a determinate thing, the obligor who incurs
fraud, negligence, or delay, or contravene the tenor of their agreement, are
liable for damages;148

(d) The obligation to give a determinate thing includes that of delivering all its
accessions and accessories, even though they may not have been
mentioned.27
When title and beneficial interest over the subject matter of the sale do not pertain to the
same person, who should suffer the loss and deterioration thereof, and benefit from the fruits
and improvements? In American jurisprudence such issue does not arise during such period
because there is a confluence between perfection and transfer of ownership at perfection when
the sale is unconditional; consequently, from perfection up to delivery, both title and beneficial
interest would be in the same person, the buyer. However, since under our jurisdiction
perfection by itself does not transfer ownership, during said period, title remains with the seller
and beneficial interest would be with the buyer. Therefore, the ordinary enforcement of the
principle of res perit domino would not apply since although the seller is the formal owner, the
buyer during that period is actually the beneficial owner.
The proper resolution therefore should be obtained from the same legal authorities from
whence the Code Commission copied the res perit domino doctrine, the common law system.
Under common law, when the sale is conditional, the perfection thereof does not serve to
transfer title to the buyer. We would then have the same situation where title has remained with
the seller, but beneficial interest is with the buyer. The resolution to this issue would be and
should be that the person who should bear the risk of loss should be the party who had greater
stake on the subject matter at the point of loss, deterioration or improvement. There is enough
authority in our laws to support such a conclusion.
Under Article 1189, even prior to delivery to transfer ownership, but where there is an
existing obligation to deliver a determinate thing, since the accompanying obligations of the
obligor shows that he possesses the goods for the benefit of the buyer, although the seller has
ownership still over the subject matter, the benefits and improvements over the subject matter
are for the account of the obligee-buyer, and in turn he must bear the risk of deterioration.
Under Article 1504, although the goods remain at the risk of the owner thereof, where
delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of
the contract and the ownership in the goods has been retained by the seller merely to secure
performance by the buyer of his obligations under the contract, the goods are at the buyers risk
146 Art. 1163, New Civil Code.
147 Art. 1164, New Civil Code.
148 Arts. 1165 and 1170, New Civil Code. 27Art. 1166, New Civil Code.
from the time of such delivery. In such case, title did not determine who bears the risk, because
such title was merely nominal, and the beneficial interest is with the buyer, and therefore he
must bear the risk of loss.
When the seller intends to have control over the goods until the buyer has complied with
certain obligations, such as C.O.D. sale,149 or where the buyer does not intend to have
dominion, use or control over the goods until certain conditions are met, such as sale on
approval or trial,29 the general rule is that the owner must bear the risk of loss, which in this case
would be the seller. In such instances, the title that has remained with the seller is dominical, not
merely nominal.
To perhaps oversimplify the unifying doctrine on the risk of loss, deterioration and
improvement, the same shall always be for the account of the person or party who has both title
and beneficial interest over the property or subject matter of the sale. When title and beneficial
interest do not merge in the same party, then he who bears the risk of loss or deterioration, and
who benefits from the improvement of the thing, should be the party who at that point in time is
understood to have the beneficial interest over the subject matter.

oOo

CHAPTER 10

REMEDIES OF PARTIES
INTRODUCTION
In the realm of performance, the main rule in Sales was that of caveat emptor (Let the
buyer beware), which required the buyer to be aware of the supposed title of the seller to the
subject matter; and that a buyer who buys without checking the sellers title takes all the risks
and losses consequent to such failure.150 Today, the doctrine is not meant to excuse the seller
from his warranties, but is essentially used to determine whether the buyer, in taking delivery of
the subject matter of sale, can be considered a buyer in good faith; 151 or to determine whether
the buyer assumed the risks and contingencies attached to the subject matter of sale.152
In one case,153 the Supreme Court held that while the buyer purchases vessels at its own
risk, such assumed risk pertained only to the possibility of the sale being rescinded. Therefore,
in the absence of a formal rescission of the sale, it would be erroneous to make such buyer
liable for the value of the vessels lost, or to order the return of the vessels without the sale first
being rescinded.
In another case,154 the Court held that the rule of caveat emptor also applies to execution
sales, and consequently, the sheriff does not warrant the title to the property sold by him and it
is not incumbent on him to place the purchaser in possession of the property.
The principles embodied in our Torrens system present an exception to the caveat emptor
rule, since under such system a buyer need only rely upon the title of a registered land and has
149 Arts. 1524 and 1584, New Civil Code. 29Art. 1502, New Civil Code.
150 Salvoro v. Taega, 87 SCRA 349 (1978); Oro Land Realty Dev. Corp. v. Claunan, 516 SCRA 681 (2007).
151 Caram, Jr. v. Laureta, 103 SCRA 7 (1981).
152 Samson v. Court of Appeals, 238 SCRA 397 (1994).
153 Union Insurance Society of Canton v. Court of Appeals, 260 SCRA 431 (1996).
154 Allure Manufacturing, Inc. v. Court of Appeals, 199 SCRA 285 (1991).
no obligation to look beyond such title.155 Although, jurisprudence still supports the rules that one
who deals with registered land must still ensure that he is dealing with the actual registered
owner;156 and that one must conduct in ocular examination of the land or real estate he is
purchasing and cannot just realy upon the description in the title. 157158 In addition, the Law on
Sales provides for certain remedies available to the seller and the buyer in case of breach of
contract on the part of the other party.

Finally, note must be taken of what the Court held in Erquiaga v. Court of Appeals,9 that A
basic premise of the doctrine of Let the buyer beware is that there be no false representation
by the seller. The ancient defense of caveat emptor belongs to a bygone age, and has no place
in contemporary business ethics.

REMEDIES IN CASES OF MOVABLES

A. ORDINARY REMEDIES OF SELLER

1. Movables in General
In the sale of movables, in case the buyer, upon the expiration of the period fixed for the
delivery of the thing, should not have appeared to receive it, or, having appeared, he should not
have tendered the price at the same time, unless a longer period has been stipulated for its
payment, the seller may maintain an action to rescind the sale.10
2. Sale of Goods
a. Non-Payment of Price by Buyer
Ownership Transferred to Buyer Where the ownership of the goods has passed to the
buyer who wrongfully neglects or refuses to pay for them according to the terms of the contract,
the seller may maintain an action against him for the price of the goods, 159 i.e., an action for
specific performance.
No Transfer of Ownership to Buyer When the ownership in the goods has not passed, if
they cannot readily be resold for a reasonable price, the seller may offer to deliver the goods to
the buyer, and, if the buyer refuses to receive them, may notify the buyer that the goods are
thereafter held by the seller as bailee for the buyer; thereafter, the seller may treat the goods as
the buyers and may maintain an action for the price.160
When Price Payable on Certain Day Where the price is payable on a certain day,
irrespective of delivery or of transfer of title, and the buyer wrongfully neglects or refuses to pay

155 Heirs of Spouses Gavino v. Court of Appeals, 291 SCRA 495 (1998).
156 Insurance Services and Commercial Traders, Inc. v. Court of Appeals, 341 SCRA 572 (2000).
157 Heirs fo Ramon Durano, Sr. v. Uy, 344 SCRA 238 (2000); Heirs of Celestial v. Heirs of Celestial, 408 SCRA 291 (2003);
Erasusta, Jr. v. Court of Appeals, 495 SCRA 319 (2006); Dela Cea v. Briones, 508 SCRA 62 (2006); Oro Land Realty Dev. Corp. v.
Claunan, 516 SCRA 681 (2007).
158 SCRA 357 (2001). 10Art. 1593, Civil Code.
159 Art. 1595, Civil Code.
160 Art. 1595, Civil Code.
such price, the seller may maintain an action for the price although the ownership in the goods
has not passed.161
However, it shall be a defense to such an action that the seller at any time before the
judgment in such action has manifested an inability to perform the sale on his part or an
intention not to perform it.162

b. When Buyer Wrongfully Neglects/Refuses to Accept Goods

Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller
may maintain an action against him for damages for non-acceptance, 163 in accordance with the
following rules:
(a) Damages shall cover the estimated loss directly and naturally resulting in
the ordinary course of events from the buyers breach of contract;
(b) Where there is an available market for the goods in question, in the
absence of special circumstances showing proximate damage of a
different amount, the measure of damages is the difference between the
contract price and market or current price at the time or times when the
goods ought to have been accepted, or, if no time was fixed for
acceptance, then at the time of the refusal to accept;
(c) If the buyer repudiates the contract or notifies the seller to proceed no
further, buyer shall be liable for labor performed or expenses of material
amount is necessary on the part of the seller to enable him to fulfill his
obligations under the sale made before receiving notice of the buyers
repudiation or countermand; and
(d) The profits the seller would have made if the contract or the sale had been
fully performed shall be considered in awarding damages.164

B. SPECIAL REMEDIES OF UNPAID SELLER OF GOODS

The provisions of the Civil Code on the remedies of an unpaid seller demonstrate the
intention of the Code Commission to empower individuals with remedies to take matters into
their own hands when the circumstances warrant the same, provided it does not involve
physical intrusion into the person or privacy of the buyer in default, by being able to achieve
legal effects without need of seeking the intervention of the courts.
The remedies of an unpaid seller are similar to the doctrine of self-help embodied in
Article 429 of the Civil Code, which authorizes the owner or lawful possessor of a thing to use
force as may be reasonably necessary to repel or prevent an actual or threatened unlawful
physical invasion or usurpation of his property. In the case of the remedies of the unpaid seller,
the minimum requirement is that the goods are in the possession of the seller so as to prevent
an actual physical tussle with the buyer in the exercise of such remedies.

1. Definition of Unpaid Seller

161 Art. 1595, Civil Code.

162 Art. 1595, Civil Code.
163 Art. 1596, Civil Code.
164 Art. 1596, Civil Code.
 Under Article 1525 of the Civil Code, the seller of goods is deemed to be an unpaid seller
either:
(a) When the whole of the price has not been paid or tendered; or
(b) When a bill of exchange or other negotiable instrument has been received as
conditional payment, and the condition on which it was received has been
broken by reason of the dishonor of the instrument, the insolvency of the
buyer, or otherwise.
The term unpaid seller includes an agent of the seller to whom the bill of lading has been
indorsed, or consignor or agent who has himself paid, or is directly responsible for the price, or
any other person who is in the position of a seller.165

2. Rights of Unpaid Seller

When a seller is an unpaid seller as defined by law, whether or not ownership over the
goods has been transferred to the buyer, the unpaid seller is entitled to the following rights or
remedies:
(a) Possessory lien;(b) Stoppage in transitu; (c) Special right of resale; and (d)
Special right to rescind.
The four (4) remedies of an unpaid seller have a hierarchical application, as in fact, the
special rights to resell and to rescind can be availed of by the unpaid seller only when either of
the two prior rights of possessory lien or stoppage in transitu have been exercised by the unpaid
seller. The designation special is attached to the rights to resell and to rescind, because they
are rights accorded only to the unpaid seller as technically defined by law, and are not of the
same nature as the right to rescind accorded under Article 1191 of the Civil Code to reciprocal
contracts.

3. Possessory Lien
The general rule is that when it comes to movables, the seller is not bound to deliver the
thing sold, if the buyer has not paid him the price, or if no period for the payment has been fixed
in the contract.166 However, in the absence of stipulation to the contrary, delivery of the goods to
the buyer transfers ownership to the latter, and the non-payment of the price does not prevent
such transfer of ownership as a result of tradition to take effect.
If the seller is an unpaid seller as defined by law, notwithstanding that the ownership in the
goods may have passed to the buyer, the unpaid seller still has a lien on the goods or right to
retain them for the price while he is in possession of them. 167 Where the ownership in the goods
has not passed to the buyer, the unpaid seller has, in addition to his other remedies, a right of
withholding delivery similar to and co-extensive with his right of lien.168
The possessory lien of the unpaid seller is exerciseable only in the following instances:
(a) Where the goods have been sold without any stipulation as to credit;
(b) Where the goods have been sold on credit, but the term of credit has expired;
(c) Where the buyer becomes insolvent.
165 Art. 1525, Civil Code.
166 Art. 1524, Civil Code.
167 Art. 1526, Civil Code.
168 Art. 1526, Civil Code.
 The seller may exercise his right of lien notwithstanding that he is in possession of the
goods as agent or bailee for the buyer.169
The unpaid sellers right of lien is not affected by any sale, or other disposition of the goods
which the buyer may have made, unless the seller assented thereto.170

a. When Negotiable Document of Title Issued

If a negotiable document of title has been issued for goods, no sellers lien shall defeat the
right of any purchaser for value and in good faith to whom such document has been negotiated,
whether such negotiation be prior or subsequent to the notification to the carrier, or other bailee
who issued such document, of the sellers claim to a lien.171

b. When Part Delivery Effected

Where an unpaid seller has made part delivery of the goods, he may exercise his right of
lien on the remainder, unless such part delivery has been made under such circumstances as to
show an intent to waive the lien or right of retention.172

c. Instances When Possessory Lien Lost

The unpaid seller of goods loses his lien on the goods whenever:
(a) Seller delivers the goods to a carrier or other bailee for the purpose of
transmission to buyer without reserving the ownership in the goods or the
right to the possession thereof;
(b) The buyer or his agent lawfully obtains possession of the goods; (c) By
waiver thereof.
However, the unpaid seller of goods, having a lien thereon, does not lose his lien by reason
only that he has obtained judgment or decree for the price of the goods.173
As will be noted, the unpaid seller losses his possessory lien, when he parts with physical
possession of the goods, as when he delivers the goods to the carrier. In that case, he still has
the remedy of stoppage in transitu, but only if the buyer has in the meantime become insolvent.

4. Stoppage in Transitu
Notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid
seller of goods has, in case of the insolvency of the buyer, a right of stopping the goods in
transitu after he has parted with the possession of them.174
Under Article 1530 of the Civil Code, when the buyer of goods is or becomes insolvent, the
unpaid seller who has parted with the possession of the goods has the right of stopping them in
transitu, that is to say, he may resume possession of the goods at any time while they are in
transit, and he will then become entitled to the same rights in regard to the goods as he would
have had if he had never parted with the possession.

169 Art. 1527, Civil Code.

170 Art. 1535, Civil Code.
171 Art. 1535, Civil Code.
172 Art. 1528, Civil Code.
173 Art. 1529, Civil Code.
174 Art. 1526, Civil Code.
 The unpaid sellers right of stoppage in transitu is not affected by any sale or other
disposition of the goods which the buyer may have made, unless the seller assented thereto.175

a. When Negotiable Document of Title Issued

If a negotiable document of title has been issued for goods, no sellers right to stoppage in
transitu shall defeat the right of any purchaser for value and in good faith to whom such
document has been negotiated, whether such negotiation be prior or subsequent to the
notification to the carrier, or other bailee who issued such document, of the sellers claim to right
of stoppage in transitu.176
b. When Buyer Is Deemed Insolvent
Under the Law on Sales, a buyer is deemed insolvent who either has ceased to pay his
debts in the ordinary course of business or cannot pay his debts as they become due, whether
insolvency proceedings have been commenced or not.177

c. When Goods Are Deemed In Transit

Goods are in transit to authorize the unpaid seller to exercise his right of stoppage in
transitu:
(a) From the time they are delivered to a carrier by land, water, or air, or other
bailee for the purpose of transmission to the buyer, until the buyer, or his
agent in that behalf, takes delivery of them from such carrier or other
bailee; or
(b) If the goods are rejected by the buyer, and the carrier or other bailee
continues in possession of them, even if the seller has refused to receive
them back.30

d. When Goods Are Deemed No Longer In Transit Goods are no longer in transit when:
(a) The buyer or his agent obtains delivery of the goods before their arrival at
the appointed destination;
(b) After the arrival of the goods at the appointed destination, the carrier or
other bailee acknowledges to the buyer or his agent that
he holds the goods on his behalf and continues in possession of them as
bailee for the buyer or his agent (and it is immaterial that further
destination for the goods may have been indicated by the buyer);
(c) The carrier or other bailee wrongfully refuses to deliver the goods to the
buyer or his agent.178
If the goods are delivered to a ship, freight train, truck, or airplane chartered by the buyer, it
is a question depending on the circumstances of the particular case, whether they are in the
possession of the carrier as such or as agent of the buyer.179

175 Art. 1535, Civil Code.

176 Art. 1535, Civil Code.
177 Art. 1636(2), Civil Code. 30Art. 1531, Civil Code.
178 Art. 1531, Civil Code.
179 Art. 1531, Civil Code.
 e. When Part Delivery Already Made
If part delivery of the goods has been made to the buyer, or his agent in that behalf, the
remainder of the goods may be stopped in transitu, unless such part delivery has been under
such circumstances as to show an agreement with the buyer to give up possession of the whole
of the goods.180

f. How Right Is Exercised

The unpaid seller may exercise his right of stoppage in transitu either by:
(a) Obtaining actual possession of the goods; or
(b) Giving notice of his claim to the carrier or other bailee in whose possession
the goods are.
When notice is given, such notice may be given either to the person in actual possession of
the goods or to his principal. In the latter case the notice, to be effectual, must be given at such
time and under such circumstances that the principal, by the exercise of reasonable diligence,
may prevent a delivery to the buyer.181

When notice of stoppage in transitu is given by the seller to the carrier, or other bailee in
possession of the goods, he must redeliver the goods to, or according to the directions of, the
seller.
The expenses of such delivery must be borne by the seller.182
g. When Goods Covered by Negotiable Document of Title
When a negotiable document of title representing goods has been issued by the carrier or
other bailee, he shall not be obliged to deliver or justified in delivering the goods to the unpaid
seller unless such document is first surrendered for cancellation.183
It is only when the unpaid seller has exercised either his right of possessory lien or his right
of stoppage in transitu, that he can then proceed with his other special rights of resale or to
rescind.

5. Special Right to Resell Goods

Notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid
seller has a special right of resale, but only under the conditions provided by law.184

a. When Right Exercisable

The special right of resale can be made only when the unpaid seller has previously
exercised either his right of possessory lien or stoppage in transitu, and under any of the
following conditions:
(a) The goods are of perishable nature;
(b) Where the seller has been expressly reserved in case the buyer should
make default; or

180 Art. 1531, Civil Code.

181 Art. 1532, Civil Code.
182 Art. 1532, Civil Code.
183 Art. 1532, Civil Code.
184 Art. 1526, Civil Code.
 (c) Where the buyer has been in default in the payment of the price for an
unreasonable time.38
In Hanlon v. Hausserman,39 even before the formal statutory adoption of the remedies of an
unpaid seller, the Court had already recognized the right of a seller, when the sale is still
executory in stage, to resell the movables subject matter of the sale, when the buyer fails to pay
the purchase price:

... In the present case the contract between Hanlon and the mining company was
executory as to both parties, and the obligation of the company to deliver the shares
could not arise until Hanlon should pay or tender payment of the money. The situation is
similar to that which arises every day in business transactions in which the purchaser of
goods upon an executory contract fails to take delivery and pay the purchase price. The
vendor in such case is entitled to resell the goods. If he is obliged to sell for less than the
contract price, he holds the buyer for the difference; if he sells for as much as or more
than the contract price, the breach of contract by the original buyer is damnum absque
injuria. But it has never been held that there is any need of an action of rescission to
authorize the vendor, who is still in possession, to dispose of the property, where the
buyer fails to pay the price and take delivery ...40

Katigbak v. Court of Appeals,41 held that if the buyer fails to take delivery and pay the
purchase price of the subject matter of the contract, the seller, without need of first rescinding
the contract judicially, is entitled to resell the same, and if he is obliged to sell it for less than the
contract price, the buyer is liable for the difference.42

b. Effect of Having Exercised Right of Resale

When the unpaid seller has exercised his right of resale, he shall not thereafter be liable to
the original buyer upon the sale or for any profit made by such resale, but may recover from the
buyer damages for any loss occasioned by the breach of the sale.185

c. Transfer of Ownership
Where a resale is made by the unpaid seller, the buyer acquires a good title as against the
original buyer.186 This is the special feature of the right of the unpaid seller to resell: not only is
he able to destroy or obliterate the ownership over the goods in the original buyer, he is also
able to transfer ownership to the subsequent buyer, even if at the time of tradition, he no longer
had ownership over the goods. Ordinarily, the destruction or taking away of ownership in one
person and placing it in another person in such manner can only be done through court action.
But in the case of an unpaid seller, he can effect these, even without judicial action.

d. Notice to Defaulting Buyer

It is not essential to the validity of a resale that notice of an intention to resell the goods be
given by the seller to the original buyer. But where the right to resell is not based on the
perishable nature of the goods or upon an express provision of the sale, the giving or failure to
give such notice shall be relevant in any issue involving the question whether the buyer had
been in default for an unreasonable time before the resale was made. It is not essential to the
validity of a resale that notice of the time and place of such resale should be given by the seller
to the original buyer.187

185 Art. 1533, Civil Code.

186 Art. 1533, Civil Code.
187 Art. 1533, Civil Code.
 e. Standard of Care and Disqualification in Resale
The seller is bound to exercise reasonable care and judgment in making a resale, and
subject to this requirement may make a resale either by public or private sale. He cannot,
however, directly or indirectly buy the goods.188

6. Special Right to Rescind

Notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid
seller has a special right to extrajudicially rescind the sale.189

a. When Right May Be Exercised

An unpaid seller having the right of lien or having stopped the goods in transitu, may
rescind the transfer of title and resume the ownership in the goods, where:
(a) The seller has expressly reserved the right to do so in case the buyer should
make default; or
(b) The buyer has been in default in the payment of the price for an
unreasonable time.190

b. Effect of Exercise of Such Right

The seller shall not thereafter be liable to the buyer upon the sale, but may recover from
the buyer damages for any loss occasioned by the breach of the contract.191

c. Transfer of Title
The transfer of title shall not be held to have been rescinded by an unpaid seller until he
has manifested by notice to the buyer or by some other overt act an intention to rescind. It is not
necessary that such overt act should be communicated to the buyer, but the giving or failure to
give notice to the buyer of the intention to rescind shall be relevant in any issue involving the
question whether the buyer had been in default for an unreasonable time before the right of
rescission was asserted.192

C. REMEDIES OF BUYER
1. Failure of Seller to Deliver
Where the seller has broken a contract to deliver specific or ascertained goods, the buyer
may seek action for specific performance to direct that the contract shall be performed
specifically, without giving the seller the option of retaining the goods on payment of damages.193
The judgment or decree may be unconditional, or upon such terms and conditions as to
damages, payment of the price and otherwise, as the court may deem just.194

188 Art. 1533, Civil Code.

189 Art. 1526, Civil Code.
190 Art. 1534, Civil Code.
191 Art. 1534, Civil Code.
192 Art. 1534, Civil Code.
193 Art. 1598, Civil Code.
194 Art. 1598, Civil Code.
 2. Breach of Sellers Warranty
Under Article 1599 of the Civil Code, where there is a breach of warranty by the seller in
the sale of goods, the buyer may, at his election, avail of the following remedies:
(a) Accept or keep the goods and set up against the seller, the breach of
warranty by way of recoupment in diminution or extinction of the price;
(b) Accept or keep the goods and maintain an action against the seller for
damages for the breach of warranty;
(c) Refuse to accept the goods, and maintain an action against the seller for
damages for breach of warranty;
(d) Rescind the sale and refuse to receive the goods or if the goods have
already been received, return them or offer to return them
to the seller and recover the price or any part thereof which has been paid.
When the buyer has claimed and been granted a remedy in any of these ways, no other
remedy can thereafter be granted, without prejudice to the buyers right to rescind, even if
previously he has chosen specific performance when fulfillment has become impossible.195

3. Suspension of Payments in Anticipation of Breach

Under Article 1590 of the Civil Code, should the buyer be disturbed in the possession or
ownership of the thing acquired, or should he have reasonable grounds to fear such
disturbance, by a vindicatory action or a foreclosure of mortgage, he may suspend the payment
of the price until the seller has caused the disturbance or danger to cease, unless the latter
gives security for the return of the price in a proper case, or it has been stipulated that,
notwithstanding any such contingency, the buyer shall be bound to make the payment. A mere
trespass shall not authorize the suspension of the payment of the price.

a. Remedy of Buyer for Pending Suit

The pendency of suit over the subject matter of the sale justifies the buyer in suspending
payment of the balance of the purchase price by reason of aforesaid vindicatory action filed
against it. The assurance made by the seller that the buyer did not have to worry about the case
because it was pure and simple harassment is not the kind of guaranty contemplated under the
exceptive clause in Article 1590 wherein the buyer is bound to make payment even with the
existence of a vindicatory action if the seller should give a security for the return of the price.196
D. RECTO LAW: SALES OF MOVABLES ON INSTALLMENTS
1. Coverage of Law
Article 1484 of the Civil Code provides for the remedies of a seller in contracts of sale of
personal property by installments, and incorporates the provisions of Act No. 4122 passed by
the Philippine Legislature on 9 December 1939, known as the Installment Sales Law, but more
popularly referred to as the Recto Law, which then amended Article 1454 of the Civil Code of
1889.197

195 Art. 1191, second paragraph, Civil Code.

196 Adelfa Properties, Inc. v. Court of Appeals, 240 SCRA 565, 586 (1995).
197 Macondray & Co., Inc. v. Ablaza, 71 Phil. 297 (1941).
 Under Article 1484 of the New Civil Code, in a sale of personal property the price of which
is payable in installments, the seller may exercise any of the following remedies:
(a) Exact fulfillment of the obligation, should the buyer fail to pay any installment;
(b) Rescind the sale, should the buyers failure to pay cover two or more
installments;
(c) Foreclose the chattel mortgage on the thing sold, if one has been constituted,
should the buyers failure to pay cover two or more installments.
The article specifically provides that if the seller should foreclose on the mortgage
constituted on the thing sold, he shall have no further action against the purchaser to recover
any unpaid balance of the price and any agreement to the contrary shall be void.
The original wordings of the Recto Law which introduced Article 1454-A in the old Civil
Code had used the term unpaid balance owing instead of the present wording limiting it to the
unpaid balance of the price, thus

ART. 1454-A. In a contract for the sale of personal property payable in installments,
failure to pay two or more installments shall confer upon the vendor the right to cancel the
sale or foreclose the mortgage if one has been given on the property, without
reimbursement to the purchaser of the installments already paid, if there be an agreement
to this effect.
However, if the vendor has chosen to foreclose the mortgage he shall have no further
action against the purchaser for the recovery of any unpaid balance owing by the same,
any agreement to the contrary shall be null and void.

a. Rationale of Recto Law

The passage of the Recto Law was meant to remedy the abuses committed in connection
with the foreclosure of chattel mortgages and to prevent mortgagees from seizing the
mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against
the mortgagor for a deficiency judgment. The invariable result of such a procedure was that the
mortgagor found himself minus the property and still owing practically the full amount of his
original indebtedness.198
The Recto Law aims to correct a social and economic evil, the inordinate love for luxury of
those who, without sufficient means, purchase personal effects, and the ruinous practice of
some commercial houses of purchasing back the goods sold for a nominal price besides
keeping a part of the price already paid and collecting the balance, with stipulated interest, cost
and attorneys fees. ... And although, of course, the purchaser must suffer the consequences of
his imprudence and lack of foresight, the chastisement must not be to the extent of ruining him
completely and, on the other hand, enriching the vendor in a manner which shocks the
conscience. The object of the law is highly commendable.199

b. When Is Sale on Installments?

In Levy Hermanos, Inc. v. Gervacio,58 the seller sold a car whereby the buyer paid an initial
payment, and issued a promissory note for the balance payable on or before a specified date,
with stipulated interest. When the buyer failed to pay the note at its maturity, the seller

198 Bachrach Motor Co. v. Millan, 61 Phil. 409 (1935); Cruz v. Filipinas Investment & Finance Corp., 23 SCRA 791 (1968);
PCI Leasing and Finance, Inc. v. Giraffe-X Creative Imaging, Inc., 527 SCRA 405 (2007).
199 Manila Trading and Supply Co. v. Reyes, 62 Phil. 461, 463-464, 467 (1935). 5869 Phil. 52 (1939).
foreclosed the mortgage constituted on the car and sold the same at public auction, which
resulted into a deficiency judgment. When the action was brought to collect on the deficiency,
the buyer sought the application of the provisions of the then Article 1454-A of the old Civil
Code, and held that the seller could no longer collect on the balance unpaid.
The Court held that the provisions of the Recto Law cannot apply to a sale where there is
an initial payment, and the balance payable in the future, because the same is not a sale on
installment but actually a straight sale. Since such a sale is not covered by the Recto Law, the
barring effects of the law cannot be made to apply, and the seller may recover the unpaid
balance of the purchase price against the buyer even when the latter shall have lost by
foreclosure the subject matter of the sale.
The Court held that when there is only one payment to be paid in the future, there is no
basis to apply the Recto Law, since under the language of then Article 1454-A, the buyer needs
to have defaulted in the payment of two or more installments to allow the seller to rescind or
foreclose on the chattel mortgage.
In addition, the Court held that the Recto Law is aimed at those sales where the price is
payable in several installments, for, generally, it is in these cases that partial payments consists
in relatively small amounts, constituting thus a great temptation for improvident purchasers to
buy beyond their means. There is no such temptation where the price is to be paid in cash, or,
as in the instant case, partly in cash and partly in one term, for, in the latter case, the partial
payments are not so small as to place purchasers off their guard and delude them to a
miscalculation of their ability to pay.200

c. Loans and Financing Transactions

The provisions of the Recto Law are applicable to financing transactions derived or arising
from sales of movables on installments, even if the underlying contract at issue is a loan
because the promissory note had been assigned or negotiated by the original seller.
In Industrial Finance Corp. v. Ramirez,60 the seller who sold his car to the buyer payable in
eighteen monthly installments, secured by a chattel mortgage on the car, which mortgaged was
assigned by the seller to a finance company, which brought an action for specific performance
coupled with a prayer for a writ of replevin to recover the possession of the car and if effected
would proceed with the extrajudicial foreclosure thereof. In discussing whether the action taken
by the finance company amounted to virtual foreclosure of the chattel mortgage, the Court
applied the provisions of Article 1484 of the Civil Code, even when clearly, as to the finance
company, its involvement in the affair was as assignee of the mortgage contract.
Zayas, Jr. v. Luneta Motor Company,61 affirmed that Article 1484 would apply to a person or
entity which has financed the purchase on installments of a motor vehicle, where the seller
subsequently assigns the loan documents to the financing person or entity. In that case, the
Court held that the nature of the transaction as a sale of personal property on installment basis
remains. When, therefore, Escao Enterprises, assigned its rights vis--vis the sale to
respondent Luneta Motor Company, the nature of the transaction ... did not change at all. As
assignee, respondent Luneta Motor Company had no better rights than assignor Escao
Enterprises under the same transaction. The transaction would still be a sale of personal
property in installments covered by Article 1484 of the New Civil Code. To rule otherwise would
pave the way for subverting the policy underlying Article 1484 of the New Civil Code, on the
foreclosure of chattel mortgages over personal property sold on installment basis.62

200 Ibid, at p. 54.

 In all other cases, where the financing transaction is not derived from a sale, the provisions
of the Recto Law do not apply. Thus, in 201PAMECA Wood Treatment Plant, Inc. v. Court of
Appeals,63 the Court held that a mortgagee-bank is not prevented from recovering on a
deficiency caused by the foreclosure and sale at public auction of the mortgage movable which
security arose from a loan given to the mortgagor. The provisions of Article 1484 cannot be
applied by analogy or by equity since the provisions apply to a sale on installments.
d. Contracts to Sell Movables Not Covered
When the contract governing the sale of movables is a contract to sell, then the rules on
rescission and substantial breach are not applicable, since when the suspensive condition upon
which the contract is based fails to materialize, it would extinguish the contract, and
consequently there is no contract to rescind.202 Nevertheless, the provisions of Article 1597
would apply which would grant the seller the right to rescind the contract by giving notice of
his election so to do to the buyer.203

2. Remedies Provided Under Article 1484

a. Nature of Remedies under Article 1484

Should the buyer of a personal property default in the payment of two or more of the
agreed installments, the vendor or seller has the option to avail of any of these three remedies:
(a) Exact fulfillment by the purchaser of the obligation;
(b) Rescind or cancel the sale; or
(c) Foreclose the mortgage on the purchased personal property, if one was
constituted.
The remedies under Article 1484 have been recognized as alternative, not cumulative, in
that the exercise of one would bar the exercise of the others.204
The remedies cannot also be pursued simultaneously, as when a complaint is filed to exact
fulfillment of the obligation, to seize the property purchased and to foreclose the mortgage
executed thereof.67
In Borbon II v. Servicewide Specialists, Inc.,68 the Court discussed the alternative nature of
the remedies provided under Article. 1484, thus:

The remedies under Article 1484 of the Civil Code are not cumulative but alternative
and exclusive x x x.69 In an ordinary alternative obligation, a mere choice categorically
and unequivocally made and then communicated by the person entitled to exercise the
option concludes the parties. The creditor may not thereafter exercise any other option,
unless the chosen alternative proves to be ineffectual or unavailing due to no fault on his
part. This rule, in essence, is the difference between alternative obligations, on the one
hand, and the alternative remedies, upon the other hand, where in the latter case, the
choice generally becomes conclusive upon the exercise of the remedy. For instance, in
one of the remedies expressed in Article 1484 of the Civil Code, it is only when there has
been a foreclosure of the chattel mortgage that the vendee-mortgagor would be permitted
to escape from a deficiency liability. Thus, if the case is one for specific performance,
even when this action is selected after the vendee has refused to surrender the
201 SCRA 281, 289 (1999).
202 Visayan Sawmill Company, Inc. v. Court of Appeals, 219 SCRA 378 (1993).
203 Ibid.
204 Bachrach Motor Co. v. Millan, 61 Phil. 409 (1935); Manila Trading and Supply
 mortgaged property to permit an extrajudicial foreclosure, the property may still be levied
on execution and an alias writ may be issued if the proceeds thereof are insufficient to
satisfy the judgment credit. So, also, a mere demand to surrender the object which is not
heeded by the mortgagor will not amount to a foreclosure, but the repossession thereof
by the vendor-mortgagee would have the effect of foreclosure. 70

b. Two Groups of Barring Effects of Remedies

Article 1484 of the Civil Code actually has two (2) levels of barring effects: the first level on
the choice of remedies (vertical); and the second level, on the non-recovery of any unpaid
balance when it comes to the remedies of rescission and foreclosure (horizontal). There can be
no mixing of the effects of the remedies provided in Article 1484.
In Tajanlangit v. Southern Motors, Inc.,71 the Court held that although the subject matter of
the sale on installment was mortgaged to secure the note issued to the seller for the balance of
the purchase price, where the seller actually chose to collect on the note and did not seek
foreclosure of the mortgage, and although the execution of the judgment resulted in the levy on
execution and eventual sale at public auction of the very subject matter of the sale,
nevertheless, the barring effect of foreclosure cannot be applied, and the seller had every right
to recover on the unpaid balance of the purchase price from the buyer. The Court held: [The
seller] had a right to select among the three remedies established in Article 1484. In choosing to
sue on the note, it was not thereby limited to the proceeds of the sale, on execution, of the
mortgaged good.72
In Southern Motors, Inc. v. Moscoso,73 a direct plea was made to the Court insisting that
considering [the] history of the [Recto] law, the circumstances leading to its enactment, the evil
that the law was intended to correct and the remedy afforded, then when the seller who had in
fact obtained a preliminary attachment of the subject property and sold it at public auction where
he became the only bidder, should not be allowed to recover the balance although his complaint
may assert that the remedy of specific performance was being sought. It was proposed to the
Court that the matter should be looked at, not by the allegations in the complaint, but by the
very effect and result of the procedural steps taken and that [seller] tried to camouflage its acts
by filing a complaint purportedly to exact the fulfillment of an obligation, in an attempt to
circumvent the provisions of Article 1484 of the new Civil Code.205
The Court refused the view that the substance of the proceedings should be looked into
and that the barring effects of foreclosure should also be applied to specific performance when
the effect was the same as foreclosure. The Court held: The complaint is an ordinary civil
action for recovery of the remaining unpaid balance due on the promissory note. The [seller]
had not adopted the procedure or methods outlined by Sec. 14 of the Chattel Mortgage Law but
those prescribed for ordinary civil actions, under the Rules of Court.206 The Court found nothing
unlawful or irregular in sellers act of attaching the mortgaged subject matter of the sale itself,
since a mortgage creditor may recover judgment on the mortgage debt and cause an execution
on the mortgaged property and may cause an attachment to be issued and levied on such
property, upon beginning his civil action.
In his concurring opinion, Justice J.B.L. Reyes wrote that the argument of the buyer
ignores a substantial difference between the effect of foregoing the chattel mortgage and
attaching the mortgaged chattel. The variance lies in the ability of the debtor to retain

205 Ibid, at pp. 170-171.

206 Ibid, at p. 171.
possession of the property attached by giving a counterbond and thereby discharging the
attachment. This remedy the debtor does not have in the event of foreclosure.207
The rule that in installment sales, if the action instituted is for specific performance and the
mortgaged property is subsequently attached and sold, the sale does not amount to a
foreclosure of the mortgage, has been upheld in subsequent decisions and seems now well-
established.208

3. Remedy of Specific Performance

The general rule is that when the seller has chosen specific performance, he can no longer
seek for rescission nor foreclosure of the chattel mortgage constituted on the thing sold.
Although it can be reasoned that even if the seller had chosen specific performance, but the
same has become impossible, he may still choose rescission pursuant to the provisions of
Article 1191 of the Civil Code, which provides that the non-defaulting party to a reciprocal
obligation may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible; nonetheless, it is difficult to see how the generic obligation of the buyer to
pay can become impossible.
The seller is deemed to have chosen specific performance to foreclose the resort to the
other two remedies under Article 1484, when he files an action in court for recovery. Generally,
the mere sending of demand letters to the buyer to pay the balance of the purchase price
should not be considered as having barred the resort to either the remedies of rescission or
foreclosure.
A judgment in an action for specific performance may be executed on all personal and real
properties of the buyer which are not exempt from execution and which are sufficient to satisfy
such judgment, which would include the subject matter of the sale upon which payment is being
sought. It has been held therefore that the mere fact that the seller secured possession of the
property subject of the sale by installments did not necessarily mean that the seller would resort
to a foreclosure of the mortgage constituted thereon.78

4. Remedy of Rescission
When a seller chooses the remedy of rescission, then generally he is under obligation to
make restitution, which would include the return of any amount of the purchase price that the
buyer may have paid. However, under the terms of Article 1486 of the Civil Code which provides
that a stipulation that the installments or rents paid shall not be returned to the vendee or
lessee shall be valid insofar as the same may not be unconscionable under the circumstances.
A stipulation for the forfeiture of the amounts paid by the buyer even when the contract is
rescinded is not really contrary to the mutual restitution characteristic of the remedy of
rescission, since to a great extent it offers a means of restitution to the obligee for the loss in
value or deterioration of the thing subject of the sale, or recompense for the lost opportunity
suffered by the seller due to the default of the buyer. In fact, when the remedy of rescission is
chosen, the rescinding party may recover damages against the party in default, since the
recovery of damages is supposed to make the rescinding party whole again to bring him back
to the position he was prior to the entering into the contract. In the same manner, the stipulation
of the forfeiture of the amounts paid by the buyer in case of rescission can also be considered a
207 Ibid, at p. 172.
208 Industrial Finance Corp. v. Ramirez, 77 SCRA 152 (1977). 78Palma v. Court of Appeals, 232 SCRA 714
(1994).
measure of recompense for damages suffered by the seller, and this is more the rationale since
when the forfeiture becomes unconscionable the courts may reduce the effect of such
stipulation pursuant to the provision of Article 1486 which provides that such stipulation is valid
only insofar as the same may not be unconscionable under the circumstances.
In Delta Motor Sales Corp. v. Niu Kim Duan,79 the Court recognized that [a] stipulation in a
contract that the installments paid shall not be returned to the vendee is valid insofar as the
same may not be unconscionable under the circumstances,80 The Court took pains to show that
the treatment of the forfeited installments as rental is more than justified by the retention and
use of the air-conditioning units by the buyer for 22 months.
However, even if the contract stipulates a forfeiture of the amounts paid in the event of
rescission, the Court in Bricktown Development Corp. v. Amor Tierra Dev. Corp.,81 held that we
have intimated that the relationship between parties in any contract must always be
characterized and punctuated by good faith and fair dealing.82 The Court denied forfeiture of the
amounts paid by taking into consideration that prior to rescission, several negotiations were held
between the parties to try to amend the relationship.
a. When Rescission Deemed Chosen
The general rule is that the seller is deemed to have chosen the remedy of rescission, and
can no longer avail of the other two (2) remedies under Article 1484, when he has clearly
indicated to end the contract, such as when he sends a notice of rescission, or takes
possession of the subject matter of the sale, or when he files an action for rescission.
Nonato v. Intermediate Appellate Court,83 held that when the sellers assignee, a financing
company, is able to take back possession of the motor vehicle with a condition that the vehicle
could be redeemed by the buyers within fifteen (15) days, then such taking of possession is
clearly with the intent to cancel the contract.
Earlier in Vda. de Quiambao v. Manila Motor Co., Inc.,84 the Court held that only the taking
back of the property coupled with an unequivocal desire on its part to rescind its contract or
for the purpose of appropriating the same, would suffice to bar the seller from proceeding with
specific performance. In that case, it was not the seller who demanded a return of the subject
motor vehicle, but rather it was the buyer who voluntarily returned the same to postpone the
satisfaction of the enforcement of the judgment debt obtained by the seller on the unpaid
balance of the purchase price.

b. Barring Effect of Rescission

The present version of the Recto Law under Article 1484 only provides for a barring on
recovery of balance only when it comes to the remedy of foreclosure. Delta Motor Sales Corp. v.
Niu Kim Duan,85 would assert that [t]he third option or remedy, however, is subject to the
limitation that the vendor cannot recover any unpaid balance of the price and any agreement to
the contrary is void,86 implying no such barring effect to the remedy of rescission. Nevertheless,
it recognized that when the seller takes possession of the subject property in rescission of the
sale, the seller is barred from recovering the balance of the price.
Although no barring effect is expressly provided for the remedy of rescission under the
present language of Article 1484 of the Civil Code, the same is implicit from the nature of the
remedy of rescission, which requires mutual restitution. Under Article 1385 of the Civil Code,
even a non-defaulting party cannot seek rescission unless he is in a position to return what he
has received under the contract. In other words, when the unpaid seller shall have chosen the
remedy of rescission, then generally he cannot seek further action on the purchase price
against the buyer, and in fact, where there is no stipulation to the contrary, the seller is even
obliged to return any portion of the purchase price he received from the buyer, although he can
recover damages.
In Nonato v. Intermediate Appellate Court,87 Justice Escolin, in concluding that the sellers
assignee had chosen to rescind the sale by having taken possession of the subject motor
vehicle, held that since it has opted to cancel the sale of the vehicle, it is thus barred from
exacting payment from the [buyers] of the balance of the price of the vehicle which it had
already repossessed. It cannot have its cake and eat it too.88
Perhaps it was a good judgment to limit the statutory barring effect of Article 1484 to the
remedy of foreclosure and allowed the barring effect of rescission to continue to be governed by
the very nature of the remedy itself. Otherwise, a lumping together of the remedies of rescission
and foreclosure into the same barring effect clause, would have the unintended consequence
that any and all interpretations and constructions of the Court having to do with the barring
effect of foreclosure would be tied to the barring effect on the remedy of rescission when it
comes to sale of movables on installments. The two remedies are not the same, and in fact
seek to achieve opposite results: rescission seeks to cancel the contract and to waive further
claim on the purchase price; whereas, foreclosure seeks to pursue and realize on the purchase
price of the sale.
The complete barring effect on the remedy of foreclosure under the Recto Law which
covers any and all further claims against the buyer, even for attorneys fees and stipulated
damages and interests,209 is contrary to the nature of the remedy of rescission that allows the
non-defaulting party in a reciprocal obligation to recover damages, precisely to make him again
whole resulting from the breach of the defaulting party.

5. Foreclosure of Chattel Mortgage Constituted on

Subject Property
a. When Remedy of Foreclosure Deemed Chosen
When the seller shall have chosen to foreclose on the mortgage constituted on the subject
matter of the sale, he can seek neither the remedies of specific performance nor rescission.
Note however, that an action for foreclosure seeks the same objective as an action for specific
performance: to recover from the buyer the price agreed upon in the sale.
Although generally, the filing of an action for foreclosure should be the point in which the
seller is deemed to have chosen such remedy, and at which time he can no longer resort to
either the remedies of specific performance or rescission, yet the Court held that the point by
which the seller is deemed to have chosen the remedy of foreclosure is only at the time of
actual sale of the subject property at public auction pursuant to the foreclosure proceedings
commenced.210
Universal Motors Corp. v. Sy Hian Tat,91 held that the filing by the seller of an action for the
issuance of a writ of replevin, and the actual recovery of possession of the subject property,
would not amount to a foreclosure, even with the attachment of the mortgage contract on the
complaint itself, since no actual foreclosure pursuant to the relevant provisions of the Rules of

209 Macondray & Co. v. Eustaquio, 64 Phil. 446 (1937).

210 Manila Trading & Supply Co. v. Reyes, 62 Phil. 461 (1935); Manila Motor Co., Inc.
v. Fernandez, 99 Phil. 782 (1956). 9128 SCRA 161 (1969).
Court have been pursued. The Court held that the mere fact that [the seller] has secured
possession of the truck in question does not necessarily mean that it will foreclose its mortgage.
Indeed, there is no showing at all that [the seller] is causing the sale thereof at public auction or
is even preparing to do so. It is quite possible that [the seller] wanted merely to be sure that the
truck is not lost or rendered valueless, preparatory to having it levied upon under a writ of
attachment.211212
Industrial Finance Corp. v. Ramirez,93 held that even with the filing of an action
denominated as replevin with damages where the allegations of the complaint sought the
repossession of the movable to allow extrajudicial foreclosure and sale of the same, and in the
alternative should the movable not be recovered sought for the recovery of the unpaid balance
of the price, the filing of such complaint does not amount to having chosen the remedy of
foreclosure.

b. Barring Effect of Foreclosure

It is the foreclosure and actual sale at public action of the mortgaged chattel that shall bar
further recovery by the seller of any balance on the purchasers outstanding obligation not
satisfied by the sale; prior to that point in time, the seller has every right to receive payments on
the unpaid balance of the price from the buyer.94

In Northern Motors, Inc. v. Sapinoso,95 although the seller had already filed an action for
foreclosure, if prior to the actual sale of the subject property at public auction, the seller had
received further payments from the buyer, the seller was not obliged to refund said payments
after foreclosure to the buyer. The Court held that If the mortgage creditor, before the actual
foreclosure sale, is not precluded from recovering the unpaid balance of the price although he
has filed an action of replevin for the purpose of extrajudicial foreclosure, or if a mortgage
creditor who has elected to foreclose but who subsequently desist from proceeding with the
auction sale, without gaining any advantage or benefit, and without causing any disadvantage or
harm to the vendee-mortgagor, is not barred from suing on the unpaid account ... there is no
reason why a mortgage creditor should be barred from accepting, before a foreclosure sale,
payments made by the buyer.96

c. Barring Effect on Other Securities Given for Payment of Price

In Cruz v. Filipinas Investment & Finance Corp., where the seller had already foreclosed
97

on the chattel mortgage constituted on the subject property of the sale, it sought to recover the
deficiency judgment by foreclosing on the real estate mortgage constituted by third-party
mortgagors, on the ground that Article 1484 prohibited further action against the purchaser
only.
In holding that the seller could no longer proceed to foreclose on the real estate mortgage
pursuant to the barring effect provided under Article 1484 of the Civil Code, the Court held that
[T]o sustain [sellers] argument is to overlook the fact that if the guarantor should be compelled
to pay the balance of the purchase price, the guarantor will in turn be entitled to recover what
she has paid from the debtor vendee (Art. 2066, Civil Code); so that ultimately, it will be the
buyer who will be made to bear the payment of the balance of the price, despite the earlier
foreclosure of the chattel mortgage given by him. Thus, the protection given by Article 1484
would be indirectly subverted, and public policy overturned.98

211 Ibid, at p. 166.

212 SCRA 152 (1977).
 Cruz also held that the further action being barred under Article 1484 is not limited to
judicial proceedings, but should include extrajudicial proceedings by virtue of which the seller
may be enabled to exact recovery of the supposed unsatisfied balance of the purchase price
from the purchaser or his privy.
Pascual v. Universal Motors Corp.,99 reiterated the Cruz doctrine as it denied the position
taken by the seller that Article 1484 withholds from the seller the right to recover any deficiency
from the purchaser after the foreclosure of the chattel mortgage and not a recourse to the
additional security put up by a third party to guarantee the purchasers performance of his
obligation.
Ridad v. Filipinas Investment and Finance Corp.,100 held that if under the Cruz doctrine a
seller is prohibited from having a recourse against the additional security put up by a third party
insofar as how the burden would ultimately fall on the buyer himself is concerned, there is no
ground why such seller should not likewise be precluded from further extrajudicially foreclosing
the additional security put up by the buyer himself.
Previous classroom discussions of Cruz have always lead to the issue of what would be
the effect if instead of proceeding first on the foreclosure of the chattel mortgage constituted on
the subject matter of the sale, the seller should first proceed to foreclose on the real estate
mortgage constituted by a third-party mortgagor, and should there be deficiency judgment, only
then should the seller proceed to foreclose on the chattel mortgage.

One school of thought held that since it is the actual foreclosure and sale at public auction
of the subject matter of the sale that creates the barring effect, then by simply reversing the
process followed in Cruz, the seller would be able to effect the same result sought to be avoided
in Cruz. The other school of thought posited that if we were to take the rationale given in Cruz,
then it would be easy to say that one cannot escape by indirection the matter prohibited by law.
Nevertheless, if indeed the reverse process is pursued, where the seller first forecloses on the
third-party real estate mortgage, when does the barring effect actually come in?
If the barring effect comes in after foreclosure on the real estate mortgage, that would not
be in accordance with the language of Article 1484 and the jurisprudential pronouncements of
the Court itself which held that it is the actual sale at public action when the barring effect
becomes effective.
On the other hand, the barring effect comes by the fact that the seller seeks to foreclose
the real estate mortgage, then it would be certainly unfair to the seller who at that point has not
even taken any action to recover any amount of the purchase price. In addition, such a position
would render void and ineffective any real estate mortgage constituted to secure the payment of
the purchase price, in addition to the chattel mortgage constituted thereon, since by barring the
initial foreclosure thereof, it would be like saying only the foreclosure of the chattel mortgage
can be availed of by the seller.
The issue was finally addressed, albeit by obiter, in Borbon II v. Servicewide Specialists,
Inc.,101 where it held that when the assignee forecloses on the chattel mortgage, there can be no
further recovery of the deficiency, and the seller-mortgagee is deemed to have renounced any
right thereto. A contrario, the Court held that in the event the seller-mortgagee first seeks the
enforcement of the additional mortgages, guarantees or other security arrangement, he must
then be held to have lost by waiver or non-choice his lien on the chattel mortgage of the
personal property sold by and mortgaged back to him, although, similar to an action for specific
performance, he may still levy on it. The implication is that the remedy of foreclosing the chattel
mortgage is no longer available, but the barring effect as to prevent recovery of deficiency
judgment does not come into play since the Court confirmed that the seller may still levy on
it.102
d. Extent of Barring Effect
Under the original version of the Recto Law, it explicitly stated that if the vendor has
chosen to foreclose the mortgage he shall have no further action against the purchaser for the
recovery of any unpaid balance owing by the same, any agreement to the contrary shall be null
and void. The extent of the barring effect of foreclosure was then all-encompassing and did not
limit itself to the balance of the purchase price.
Therefore, in Macondray & Co., Inc. v. Eustaquio,103 the Court held that the words any
unpaid balance should be interpreted as having reference to the deficiency judgment to which
the mortgagee may be entitled where, after the mortgaged chattel is sold at public auction, the
proceeds obtained therefrom are insufficient to cover the full amount of the secured obligation
which in the case at bar as shown by the note and by the mortgage deed, include interest on the
principal, attorneys fees, expenses of collection, and the costs. Were it the intention of the
Legislature to limit its meaning to the unpaid balance of the principal, it would have so stated.104
If we were to follow the line in Eustaquio that if it were the intention of Legislature to limit
the barring effect to the unpaid balance of the price it would have so stated, then it follows that
in enacting the present Civil Code, and adopting the present version of Article 1484 which limits
the right of recovery to any unpaid balance of the price, then clearly the Legislature has so
stated and therefore the barring effect of the present version of the Recto Law is only on the
purchase price, and cannot cover stipulations in the contract for damages, interests and
attorneys fees. Nevertheless, current jurisprudence upholds the full barring effect on recovery
even of the present language of Article 1484.
e. Perverse Buyer-Mortgagor
By way of exception to the complete barring effect on the remedy of foreclosure, Filipinas
Investment & Finance Corp. v. Ridad,105 held that when a defaulting buyer-mortgagor refuses to
surrender the chattel to the seller to allow the latter to be able to proceed with foreclosure, then
the seller, even after actual foreclosure, should be allowed to recover expenses and attorneys
fees incurred in trying to obtain possession of the chattel. The
Court held
Where the mortgagor plainly refuses to deliver the chattel subject of the mortgage
upon his failure to pay two or more installments, or if he conceals the chattel to place it
beyond the reach of the mortgagee, what then is the mortgagee expected to do? It is part
of conventional wisdom and the rule of law that no man can take the law into his own
hands; so it is not to be supposed that the Legislature intended that the mortgagee should
wrest or seize the chattel forcibly from the control and possession of the mortgagor, even
to the extent of using violence which is unwarranted in law. Since the mortgagee would
enforce his rights through the means and within the limits delineated by law, the next step
in such situations being the filing of an action for replevin to the end that he may recover
immediate possession of the chattel and, thereafter, enforce his rights in accordance with
the contractual relationship between him and the mortgagor as embodied in their
agreement, then it logically follows as a matter of common sense, that the necessary
expenses incurred in the prosecution by the mortgagee of the action for replevin so that
he can regain possession of the chattel, should be borne by the mortgagor. Recoverable
expenses would, in our view, include expenses properly incurred in effecting seizure of
the chattel and reasonable attorneys fees in prosecuting the action for replevin.213

213 Ibid, at pp. 572-573; emphasis supplied. 107271 SCRA 457 (1997).
 The transaction in Ridad was entered into in 1964, and the decision itself promulgated in
1969, when the current version of Article 1484 was effective and which limited the barring effect
only to any unpaid balance of the price. And yet the Court in Ridad applied without reservation
the 1937 Eustaquio doctrine completely barring any recovery by the seller against the buyer
after the former has foreclosed on the chattel subject of the sale. We may safely presume
therefore, that in spite of the limiting language of the present Article 1484, the Eustaquio
doctrine still applies.
Agustin v. Court of Appeals,107 held that where the mortgagor plainly refuses to deliver the
chattel subject of the mortgage upon his failure to pay two or more installments, or if he
conceals the chattel to place it beyond the reach of the mortgagee, the necessary expenses
incurred in the prosecution by the mortgagee of the action for replevin so that he can regain
possession of the chattel should be borned by the mortgagor.
In Borbon II v. Servicewide Specialist, Inc., the Court held:

A mere demand to surrender the object which is not heeded by the mortgagor will not
amount to a foreclosure, but the repossession thereof by the vendor-mortgagee would
have the effect of foreclosure. Hence, where the mortgagor unjustifiably refused to
surrender the chattel subject of the mortgage upon failure of two or more installments, or
if he concealed the chattel to place it beyond the reach of the mortgagee, that thereby
constrained the latter to seek court relief, the expenses incurred for the prosecution of the
case, such as attorneys fees, could rightly be awarded. Furthermore, the interests of
justice dictate that the issue on liquidated damages and attorneys fees must be
considered and resolved, as long as they bear relevance and close relation to those
specifically raised, notwithstanding failure to specifically raise them. 108

E. LEASE WITH OPTION TO PURCHASE

Under Article 1485 Civil Code, the provisions of Article 1484 are expressly made applicable
to contracts purporting to be leases of personal property with option to buy, when the lessor
has deprived the lessee of the possession or enjoyment of the thing. Article 1486 provides that
a stipulation that the rents paid shall not be returned to the lessee shall be valid insofar as the
same may not be unconscionable under the circumstances.
The Court has recognized that sellers who do not wish to enter into conditional contracts of
sale have often resorted to lease with options to purchase, but that nevertheless the underlying
contract would not prevent the transfer of ownership of the subject matter to the buyer-lessee
upon fulfillment of the condition of the full payment of the rents,109 thus:

Sellers desirous of making conditional sales of their goods, but who do not wish openly
to make a bargain in that form, for one reason or another, have frequently resorted to the
device of making contracts in the form of leases either with options to the buyer to
purchase for a small consideration at the end of term, provided the so-called rent has
been duly paid, or with stipulations that if the rent throughout the term is paid, title shall
thereupon vest in the lessee. The so-called rent must necessarily be regarded as
payment of the price in installments since the due payment of the agreed amount results,
by the terms of the bargain, in the transfer of title to the lessee. 110

Elisco Tool Manufacturing Corp. v. Court of Appeals,111 recognized that [t]his Court has
long been aware of the practice of vendors of personal property of denominating a sale on
installment as one of lease to prevent the ownership of the object of the sale from passing to the
vendee until and unless the price is fully paid.214215
The provision of the Recto Law may be to apply to lease arrangements over moveables
which do not expressly provide for an option on the part of the lessee to purchase. In PCI
Leasing and Finance, Inc. v. Giraffe-X Creative Imaging, Inc., 113 although the Financing Lease
Agreement entered into did not provide an option to purchase in favor of the lessee,
nonetheless, the demand made by the lessor which fashioned its claim in the alternative:
payment of the full amount of the 58,248,657.47, representing the unpaid balance, for the entire
36-month lease period or the surrender of the financed asset and pain of legal action, 216 was
interpreted to reveal the real agreement that the lessee had the option to purchase the property
leased, thus

The demand could only be that the [lessee] need not return the equipment if it paid the
58,248,657.47 outstanding balance, ineluctably suggest that the [lessee] can keep
possession of the equipment if it exercise its option to acquire the same by paying the
unpaid balance of the purchase price. Stated otherwise, if the [lessee] was not minded to
exercise its option of acquiring the equipment by returning them, then it need not pay the
outstanding balance. This is the logical import of the letter: that the transaction in this
case is a lease only. The so-called monthly rentals are in truth monthly amortization of the
price of the leased office equipment.217

a. What Is the Barring Effect on Such Contracts?

The issue that arises when it comes to purported contracts of lease with option to purchase
is whether the taking back of possession or enjoyment of the property leased as treated by
Article 1485 carries the concept of rescission or foreclosure. The distinction is critical, because if
the taking back of possession or enjoyment of the leased movable is treated as a rescission,
then the barring effect of rescission is applicable, which means that even after taking back
possession or enjoyment, and forfeiting all rentals previously paid, the lessor-seller will be able
to collect damages as may be warranted by the circumstances. On the other hand, if the taking
back of possession or enjoyment of the leased movable is equivalent to foreclosure, then
although the seller-lessor may forfeit in his favor all rentals previously paid, if such has been
stipulated, he can no longer collect any further amounts against the buyer-lessee, whether in
the form of damages, attorneys fees, or even unpaid but accrued rentals, and not even the
expenses incurred in repairing the movable.
In the early case of Manila Gas Corp. v. Calupita,116 the Court considered that the only
remedies of the seller-lessor would be specific performance and rescission. In that case, it was
held that when a purported lease contract of personal property is determined to be a conditional
sale, and it has been shown that the buyer-lessee has not complied with his obligation to pay
the rentals due under the contract, the seller-lessor may elect between compliance with or
rescission of the obligation, with indemnity for damages and interest in either case. Thus, the
barring effect would be equivalent to that of rescission.
In the 1938 case of H.E. Heacock Company v. Buntal Manufacturing Co.,117 the Court
treated the return of the sewing machine subject of the contract of lease with option to
purchase, as an act of rescission, and for which the seller-lessor could no longer obtain from the
buyer-lessee a reimbursement of the unpaid rentals. In that case, the fixing of the price of the

214 Ibid, at p. 741. Also, PCI Leasing and Finance, Inc. v. Giraffe-X Creative Imaging, Inc., 527 SCRA 405 (2007).
215 SCRA 405 (2007).
216 Ibid, at p. 421.
217 Ibid, at pp. 422-423.
machine in the contract of lease was considered as a factor in considering the contract as of
sale payable on installments because the fixing of a fixed purchase price is not the usual feature
of a lease.

The rulings in both Manila Gas Corporation and H.E. Heacock Company do not provide us
with any useful guide in resolving the issue posed because they were both decided when the
Recto Law was not yet a feature included in the pertinent Civil Code provision, and indeed the
only remedy available to the seller-lessor was either specific performance or rescission.
Consequently, the barring effect of foreclosure was not a matter that the Court had to face
when the decisions were rendered.
U.S. Commercial Co. v. Halili,118 decided on the proper coverage of then Article 1454-A
(now Article 1484) of the Civil Code when it came to purported lease contracts of personal
property with option to purchase. In that case, the seller-lessor had leased eight army vehicles
under the stipulation that the value of the vehicles was divided into twelve equal parts to be
made as monthly and by the end of the period, the vehicles would be owned by the buyer-
lessee. The contract also provided waiver of the benefits of Article 1454-A of the Civil Code.
When the lessee defaulted in the payment of the rentals, upon demand of the seller-lessor, the
buyer-lessee voluntarily returned the vehicles, but refused to pay the rentals in arrears. When
the action was brought by the seller-lessor to recover on the rentals, the Court held that the
waiver of the provisions of Art. 1454-A was void because said article expressly provided that any
waiver of its benefit would be void. The Court also ruled that with the recovery of the possession
of all the vehicles, the seller-lessor was without further remedy to recover the accrued rentals
thereon, thus:

Being leases of personal property with option to purchase as contemplated in the

above-article, the contracts in question are subject to the provision that when the lessor in
such case has chosen to deprive the lessee of the enjoyment of such personal property,
he shall have no further action against the lessee for the recovery of any unpaid
balance owing by the latter, any agreement to the contrary being null and void. 119

Note that in its ruling in Halili, the Court uses the language of then Article 1454-A which
refers to the effects of foreclosure.
The case of Filinvest Credit Corp. v. Court of Appeals,120 provides us with a more
auspicious setting to resolve the issue because it was decided based on the current versions of
Articles 1484 and 1485, and there was even an underlying real estate mortgage constituted on
the real property of the buyerlessee. In that case the buyers had inspected and tested a rock
crusher and thereafter sought to have the purchase financed by Filipinas Credit Corporation,
which agreed to finance the purchase only if the machinery be purchased in the name of the
finance company, but to be leased back with option to purchase to the buyers; and that the
buyers would execute a real estate mortgage in favor of the finance company to secure the
financed amount.
When the buyers had received delivery of the machinery, and they found that it did not
have the features they desired, they stopped paying the installment obligations. The finance
company began the process of extra-judicially foreclosing on the real estate mortgage. The
buyers then commenced an action to enjoin the foreclosure, to rescind the contract of lease with
option to purchase, and to annul the real estate mortgage. The finance company interposed that
it merely financed the purchase and therefore any defect on the machinery should be addressed
to the real and original seller.
 The Court held that in any event, the finance company obtained ownership of the rock
crusher, that is why it was able to enter into a contract of lease with option to purchase with the
buyer. The nomenclature of the agreement cannot change its true essence, i.e., a sale on
installments. It is basic that a contract is what the law defines it and what the parties intend it to
be, not what it is called by the parties. It is apparent here that the intent of the parties to the
subject contract is for the so-called rentals to be the installment payments. Upon completion of
the payments, then the rock crusher, subject matter of the contract, would become the property
of the [buyers-lessees]. This form of agreement has been criticized as a lease only in name.218
The Court explained the rationale of Article 1485 of the Civil Code:

Indubitably, the device contract of lease with option to buy is at times resorted to
as a means to circumvent Article 1484, particularly paragraph (3) thereof. Through the
set-up, the vendor, by retaining ownership over the property in the guise of being the
lessor, retains, likewise, the right to repossess the same, without going through the
process of foreclosure, in the event the vendee-lessee defaults in the payment of the
installments. There arises therefore no need to constitute a chattel mortgage over the
movable sold. More importantly, the vendor, after repossessing the property and, in
effect, cancelling the contract of sale, gets to keep all the installments-cum-rentals
already paid.122

The reasoning of the Court as afore-quoted would clearly imply that the rationale behind
the Recto Law found in Article 1484 is meant to cover purported lease of personal property with
option to purchase and are considered a circumvention of the prohibition under Article 1484 in
order to obviate the need to constitute a chattel mortgage over the movable sold.
However, no definite ruling on the nature barring effect under Article 1485 was issued, the
Court holding therein that the buyers-lessees have defaulted on their contract with the finance
company, and therefore dismissed the complaint of the buyerslessees.
A reading of the ratiocination in both Halili and Filinvest Credit Corp. would give the
impression that in the case of purported contracts of lease with option to buy, the taking back of
possession or enjoyment of the leased movable by the sellerlessor would amount to both a
foreclosure that bars all other actions of whatever nature, and not rescission that would still
authorize the seller the right to recover damages to make him whole.
In Elisco Tool Manufacturing Corp. v. Court of Appeals,123 the Court held that under a
purported contract of lease with option to purchase which is covered under Articles 1484 and
1485, the condition that the lessor has deprived the lessee of possession or enjoyment of the
thing for the purpose of applying Article 1485 which would be fulfilled by the filing by the lessor
of a complaint for replevin to recover possession of movable property and its enforcement by
the sheriff, and barred all action to recover any amount from the lessee. However, the Court
also held that if the main purpose for seeking recovery of the personal property under a writ of
replevin was merely to ensure enforcement of the remedy of specific performance under Article
1484(1), there would be no barring effect by reason of the enforcement of the writ. Therefore,
not every deprivation of possession would result in producing the barring effect under Article
1485 of the Civil Code.
Lately, in PCI Leasing and Finance, Inc. v. Giraffe-X Creative Imaging, Inc., 124 the Court
held that when the lessor in a lease with option to purchase, in choosing, through replevin, to
deprive the lessee of possession of the leased equipment, waived its right to bring an action to

218 Ibid, at pp. 193-194. 122Ibid, at p. 195.

recover unpaid rentals, since the remedies provided for in Article 1484 are alternative, not
cumulative the exercise of one bar the exercise of the others.
By and large, it seems to be the thinking of the Court that a sale of movables on
installment, when structured as a lease with option to purchase is equivalent to a security
arrangement whereby the subject movables are mortgaged by the buyer to the seller.
Consequently, when the purported lessor takes possession of the subject movable, the same is
treated legally as a foreclosure and the barring effect applicable to foreclosure remedy, not
rescission, is given application.

REMEDIES IN CASES OF IMMOVABLES

A. REMEDIES OF SELLER

1. Anticipatory Breach
Under Article 1591 of the Civil Code, if the seller has reasonable grounds to fear the loss of
the immovable property sold and its price, he may immediately sue for the rescission of the
sale.
Should such ground not exist, the provisions of Article 1191 of the Civil Code on rescission
shall be observed, which means that upon substantial breach by the buyer for failure to comply
with his obligation to pay the price when due, the seller may sue for rescission of the sale.

2. Failure of Buyer to Pay Price

a. Rescission under Article 1592
The failure of the buyer to pay the price in full within a fixed period does not, by itself, bar
the transfer of the ownership or possession, much less dissolve the sale. 219 On failure of the
buyer to pay the price, the seller has the option under Article 1592 of the Civil Code to rescind
the sale upon judicial or notarial demand.220
Under Article 1592 of the Civil Code, in the sale of immovable property, even though it may
have been stipulated that upon failure to pay the price at the time agreed upon the rescission of
the contract shall of right take place, the buyer may pay, even after the expiration of the period,
as long as no demand for rescission of the contract has been made upon him either judicially or
by a notarial act.
Although Article 1592 also provides that [a]fter the demand [of the seller], the court may
not grant [the buyer] a new term, nevertheless in cases of residential immovables, the Court
has tended to interpret Article 1592 liberally in favor of the buyer to give him every opportunity to
comply with his obligation and proceed to take the subject immovable.

b. Contracts to Sell Not Covered by Article 1592

In J.M. Tuason & Co., Inc. v. Javier,127 despite the rescission clause provided for in the
contract to sell a residential lot in a subdivision project, the Court refused to rule on the proper
application of Article 1592 to the case, nor to allow either a rescission or cancellation on the part
of the seller in spite of clear default on the part of the buyer holding:

219 Ocampo v. Court of Appeals, 233 SCRA 551 (1994).

220 Ibid.
 Plaintiff maintains that this provision governs contracts of sale, not contracts to sell,
such as the one entered into by the parties in this case. Regardless, however, of the
propriety of applying said Art. 1592 thereto, We find that plaintiff herein has not been
denied substantial justice, for, according to Art. 1234 of said Code: If the obligation has
been substantially performed in good faith, the obligor may recover as though there has
been a strict and complete fulfillment, less damages suffered by the obligee. ...
accordingly, the trial court sentenced the defendant to pay all such installments, interests,
fees and costs. Thus, plaintiff will thereby recover everything due thereto, pursuant to its
contract with the defendant, including such damages as the former may have suffered in
consequence of the latters default. Under these circumstances, We feel that, in the
interest of justice and equity, the decision appeal from may be upheld upon the authority
of Art.
1234 of the Civil Code.128

In Luzon Brokerage v. Maritime Bldg.,129 the Court held that if Article 1592 is applicable to a
sale contract, the filing of a crossclaim in court may be constituted as a judicial demand for
rescission that satisfies the requirement of said article. The Court also held that in any event
Article 1592 of the Civil Code has no application to a contract to sell; the said article applies only
to ordinary sale transferring ownership simultaneously with the delivery of the real property sold,
but not to one in which the seller retained ownership of the immovable object of the sale, merely
undertaking to convey it provided the buyer strictly complied with the terms of the contract.
c. Resort to Equitable Resolutions
In Legarda Hermanos v. Saldana,130 the contract between the parties covering the purchase
of two residential lots clearly provided that in case of default on the part of the buyer, all
amounts paid in accordance with the agreement together with the improvements on the
premises shall be considered as rents and as payment for damages suffered by reason of such
breach. Nevertheless, the Court held that the buyer of the two small residential lots on
installment contracts on a ten-year basis who has faithfully paid for eight continuous years on
the principal alone already more than the value of one lot, besides the larger stipulated interests
on both lots, was entitled to the conveyance of one fully paid lot of his choice. In upholding such
ruling, the Court held that the judgment is fair and just and in accordance with law and
equity.131

B. REMEDIES OF BUYER
1. Suspension of Payment
Under Article 1590 of the Civil Code, should the buyer be disturbed in the possession or
ownership of the thing acquired, or should he have reasonable grounds to fear such
disturbance, by a vindicatory action or a foreclosure of mortgage, the buyer may suspend the
payment of the price until the seller has caused the disturbance or danger to cease, unless the
seller gives a security for the return of the price in a proper case, or it has been stipulated that,
notwithstanding any such contingency, the buyer shall be bound to make the payment. Again, a
mere act of trespass shall not authorize the suspension of the payment of the price.
2. In Case of Subdivision or Condominium Projects
Sections 23 and 24 of Pres. Decree 957, provide that no installment payments made by the
buyer in a subdivision or condominium project for the lot or unit he contracts to buy shall be
forfeited in favor of the owner or developer when the buyer, after due notice to the owner or
developer desists from further payment due to the failure of the owner or developer to develop
the subdivision or condominium project according to the approved plans and within the time limit
for complying with the same. The sections also grant to the buyer the option to be reimbursed
the total amount paid.
In Casa Filipinas Realty Corp. v. Office of the President,132 the Court held that Pres. Decree
957 was issued in the wake of numerous reports that many real estate subdivision owners,
developers, operators and/or sellers have reneged on their representations and obligations to
provide and maintain properly subdivision roads, drainage, sewerage, water systems, lighting
systems and other basic requirements for the health and safety of home and lot buyers. It was
designed to stem the tide of fraudulent manipulations perpetrated by unscrupulous subdivision
and condominium sellers free from liens and encumbrances.133
Relucio v. Brillante-Garfin,134 held that the decree vests upon the buyer the option to
demand reimbursement of the total amount paid, or to wait for further development of the
subdivision or condominium project; and when the latter opts for the latter alternative by waiting
for the proper development of the site, he may not be ousted from the subdivision.135
Lim v. De los Santos,136 and Consing v. Court of Appeals,137 recognized the right of a buyer
in a subdivision land to compel the seller to complete the roads and other facilities of the
subdivision, even when nothing to that effect is stipulated in the sale: A sellers duty is to deliver
the thing sold in a condition suitable for its enjoyment by the buyer for the purposes
contemplated ... and a proper access to a residence is essential to its enjoyment.221 The seller
cannot shift to the buyer the burden of providing for an access to and from the subdivision, and
when the seller has so defaulted in such obligation, the buyer should be entitled to a
proportionate reduction in her purchase price of the two lots.222223224
In Gold Loop Properties, Inc. v. Court of Appeals, 140 it was held that a buyer of a
condominium unit is justified in suspending payment of his monthly amortization where the
seller fails to give a copy of the Contract to Sell despite repeated demands therefore. The buyer
is entitled to a copy of the deed, otherwise, he would not be informed of the rights and
obligations under the contract.
Yet, in Cho Chien v. Sta Lucia Realty & Dev., Inc.,141 it was held that nothing in P.D. 957
provides for the nullification of a contract to sell in the event that the seller, at the time the
contract was entered into did not posses a certificate of registration and a license to sell.

a. Notice Required under Section 23 of P.D. 957

Section 23 of Pres. Decree 957 does not require that a notice be given first by the buyer to
the seller before a demand for refund can be made as the notice and demand can be made in
the same letter or communication.225

b. Retroactive Application of P.D. 957

In Eugenio v. Drilon,143 the Court held that the failure to develop a subdivision constitute
legal justification for the nonpayment of amortization by the buyer on installment under the land
purchase agreements entered into prior to the enactment of Pres. Decree 957: P.D. 957 did not
expressly provide for retroactivity in its entirety, but such can be plainly inferred from the
unmistakable intent of the law. The intent of the law, as culled from its preamble and from the

221 Lim v. Delos Santos, supra, at p. 802.

222 Consing v. Court of Appeals, supra, at p. 24.
223 SCRA 371 (2001).
224 SCRA 570 (2007).
225 Casa Filipinas Realty Corp. v. Office of the President, 241 SCRA 165 (1995). 143252 SCRA 106 (1996).
situation, circumstances and conditions it sought to remedy, must be enforced. 226 x x x It goes
without saying that, as an instrument of social justice, the law must favor the weak and the
disadvantaged, including, in this instance, small lot buyers and aspiring homeowners. P.D. 957
was enacted with no other end in view than to provide a protective mantle over helpless citizens
who may fall prey to the manipulations and machinations of unscrupulous subdivisions and
condominium sellers.227228

In Philippine National Bank v. Office of the President,146 the Court held that a buyer of a
property at a foreclosure sale may not dispossess prior purchasers on installments of individuals
lots therein, nor compel them to pay again for the lots which they previously brought from the
defaulting mortgagor-subdivision developer, based on the provisions of Pres. Decree 957 which
may even be applied retroactively, thus:

While P.D. 957 did not expressly provide for retroactivity in its entirety, yet the same
can be plainly inferred from the unmistakable intent of the law to protect innocent lot
buyers from scheming subdivision developers. As between small lot buyers and the
gigantic financial institution which the developers deal with, it is obvious that the law as
an instrument of social justice must favor the weak. ... 229
xxx.
We cannot over emphasize the fact that the BANK cannot barefacedly argue that
simply because the title or titles offered as security were clean of any encumbrance or
lien, that it was thereby relieved of taking any other step to verify the over-reaching
implications should the subdivision be auctioned on foreclosure. The BANK could not
have closed it eyes that it was dealing over a subdivision where there were already
houses constructed. Did it not enter the mind of the responsible officers of the BANK that
there may even be subdivision residents who have almost completed their installment
payments?230

3. Right to Grace Period Stipulated

When a grace period is provided for in the contract of sale, it should be construed as a
right, not an obligation of the debtor, and when unconditionally conferred, the grace period is
effective without further need of demand either calling for the payment of the obligation or for
honoring the right.231

C. MACEDA LAW: SALES OF REAL ESTATE ON INSTALLMENTS

Republic Act 6552, entitled the Realty Installment Buyer Protection Act (also the Maceda
Law), provides for certain protection to particular buyers of real estate payable on installments.
The law declares as public policy to protect buyers of real estate on installment payments
against onerous and oppressive conditions.232233

226 Ibid, at p. 110.

227 Ibid, at p. 111.
228 SCRA 5 (1996). See also Union Bank of the Philippines v. Housing and Land Use Regulatory Board, 210 SCRA 558
(1992).
229 Ibid, at p. 10.
230 Ibid, at p.15.
231 Bricktown Dev. Corp. v. Amor Tierra Dev. Corp., 239 SCRA 126 (1995).
232 Sec. 2, Rep. Act No. 6552; OIympia Housing Inc. v. Panasiatic Travel Corp., 395 SCRA 298 (2003).
233 SCRA 305 (1978).
 In Luzon Brokerage v. Maritime Bldg.,151 the Court viewed the enactment of the Maceda
Law as a confirmation of its jurisprudential rulings that recognizes the sellers right of
cancellation of sale on installments of industrial and commercial properties with full retention of
previous payments. The Court held:

... The enactment on September 14, 1972 by Congress of Republic Act No. 6552
entitled An Act to Provide Protection to Buyer of Real Estate on Installment Payments,
which inter alia compels the seller of real estate on installments (but excluding industrial
lots, commercial buildings among others from the Acts coverage) to grant one month
grace period for every one year of installments made before the contract to sell may be
cancelled for non-payment of the installments due forecloses any overturning of this
Courts long-established jurisprudence. Republic Act 6552 recognizes in conditional sales
of all kinds of real estate (industrial and commercial as well as residential) the non-
applicability of Article 1592 (1504) Civil Code to such contracts to sell on installments and
the right of the seller to cancel the contract (in accordance with the established doctrine of
this Court) upon non-payment which is simply an event that prevents the obligation of
the vendor to convey title from acquiring binding force. (Manuel vs. Rodriguez, 109 Phil.
1, 10, per Reyes, J.B.L.). The Act in modifying the terms of the application of Art. 1592
Civil Code reaffirms the vendors right to cancel unqualifiedly in the case of industrial lots
and commercial buildings (as in the case at bar) and requires a grace period in other
cases, particularly residential lots, with a refund of certain percentages of payments made
on account of the cancelled contract.234235

This view was reiterated by Rillo v. Court of Appeals,153 which held that in the case of a
contract to sell land, the applicable law is the Maceda Law which recognizes in conditional sales
of all kinds of real estate, whether industrial, commercial, or residential, the right of the seller to
cancel the contract upon non-payment of an installment by the buyer, which is simply an event
that prevents the obligation of the seller to convey title from acquiring binding force.236
Active Realty & Dev. Corp. v. Daroya,155 gave an allencompassing diatribe on the purpose
and objectives of the Maceda Law, thus: The Realty Installment Buyer Protection Act, or more
popularly known as the Maceda Law, [its] declared policy is to protect buyers of real estate on
installment basis against onerous and oppressive condition. The law seeks to address the acute
housing shortage problem in our country that has prompted thousands of middle and lower
class buyers of houses, lots and condominium units to enter into all sorts of contracts with
private housing developers involving installment schemes. Lot buyers, mostly low income
earners eager to acquire a lot upon which to build their homes, readily affix their signatures on
these contracts, without an opportunity to question the onerous provisions therein as the
contract is offered to them on a take it or leave it basis. Most of these contracts of adhesion,
drawn exclusively by the developers, entrap innocent buyers by requiring cash deposits for
reservation agreements which often time include, in fine print, onerous default clauses where all
the installment payment made will be forfeited to pay any installment due even if the buyers had
made payments for several years. Real estate developers thus enjoy an unnecessary
advantage over lot buyers who they often exploit with iniquitous results. They get to forfeit all the
installment payments of defaulting buyers and resell the same lot to another buyer with the
same exigent conditions. To help especially the low income lot buyers, the legislature enacted
R.A. 6552 delineating the rights and remedies of lot buyers and protect them from one sided
and pernicious contract stipulations.156
234 Ibid, at pp. 327-328.
235 SCRA 461 (1997).
236 Reiterated in Cordero v. F.S. Management & Dev. Corp., 506 SCRA 451 (2006); Pagtulungan v. Dela Cruz Vda. De
Manzano, 533 SCRA 242 (2008). 155382 SCRA 152 (2002).
 a. Role of Maceda Law
It would seem that more than just providing for a substantial and procedural setting for the
rescission and cancellation of contracts covered therein, the Maceda Law in whole is relied
upon and used by the courts, including the Supreme Court, as a policy statement of the State
in protecting the interests of buyers of residential real estate on installments. Thus, in the
McLaughlin v. Court of Appeals157 the Court took the Law as an expression of public policy to
protect buyers of real estate on installments against onerous and oppressive conditions (Sec. 2
of Republic Act No. 6552).237238 If that be the case, then the value of the Maceda Law goes
beyond its language and can be interpreted to further a policy that may not even be found within
its language.
Take for example the case of Palay, Inc. v. Clave,159 which involved a contract to sell
entered into by the parties in 1965 (the Maceda Law took effect in 1972), which provided for
automatic extrajudicial rescission upon default in payment of any monthly installment after the
lapse of 90 days from the expiration of the grace period of one month, without need of notice
and with forfeiture of all installments paid. Although the Maceda Law was inapplicable, the Court
took into consideration Section 3 of the Law which provided for the indispensability of notice of
cancellation to the buyer and declared it is a matter of public policy to protect buyers of real
estate on installment payments against onerous and oppressive conditions. Waiver of notice is
one such onerous and oppressive condition to buyers of real estate on installment
payments.239240

b. Retroactive Application of Law

In Siska Dev. Corp. v. Office of the President,161 the Court extended the formal
requirements of rescission under the Maceda Law to apply even to contracts entered into prior
to the effectivity of the Maceda Law.
However, in one case, the Court refused to apply retroactively the terms of the Maceda
Law, thus: As with Presidential Decrees Nos. 9576 and 1344, Republic Act No. 6552 does not
expressly provide for its retroactive application and, therefore, it could not have encompass(ed)
the cancellation of the contracts to sell pursuant to an automatic cancellation clause which had
become operational long before the approval of the law.241
1. Transactions Covered
It should be noted that the Maceda Law does not cover all sales of realty on installments,
but primarily residential real estate. But unlike the Recto Law on movables, the Maceda Law
covers not only sales on installments of real estate, but also financing of such acquisitions. It
expressly covers all transactions or contracts involving the sale or financing of real estate on
installment payments, including residential condominium apartments.242
Unlike Article 1592 of the Civil Code, which the Court has interpreted not to be applicable to
contracts to sell, the Maceda Law clearly includes in its provisions both contracts of sale and
contracts to sell. This conclusion is clear from the use by the Law of the twin terms of notice of
cancellation or the demand for rescission of the contract.

237 Ibid, at p. 700.

238 SCRA 639 (1983).
239 Ibid, at pp. 66-67.
240 SCRA 674 (1994).
241 Peoples Industrial and Commercial Corp. v. Court of Appeals, 281 SCRA 206 (1997).
242 Sec. 3, Rep. Act 6552. 164Ibid, at p. 54.
 On the other hand, we would adopt for the Maceda Law the same definition of sale by
installments held by Levy Hermanos, Inc. for sales of movables by installments, which should
involve at least two (2) installments to be paid in the future at the time of the perfection of the
contract. The rationale of Levy Hermanos, Inc. as to sales of movables, equally should apply to
sale of real estate in installments, thus: the law is aimed at those sales where the price is
payable in several installments, for, generally, it is in these cases that partial payments consists
in relatively small amounts, constituting thus a great temptation for improvident purchasers to
buy beyond their means.164
In any event, the public policy behind the Maceda Law is so all-encompassing with respect
to residential real estate and condominium units, that it would cover even sales or financing
transactions which may not fit into the installment concept.

a. Maceda Law Covers Contracts to Sell

The employment of the term cancellation under the Maceda Law clearly indicates that it
covers contracts to sell residential real estate on installments.
For that reason, the author finds quite surprising the ruling in Mortel v. KASSCO, Inc.,165
which held that when a contract to sell is constituted over a condominium unit subject to the
suspensive condition which is the acquisition of individual condominium certificates of title
(CCT) over the building which seller undertook to accomplish within one year from the date of
execution, then the non-fulfillment of the condition extinguished the contract meant that the
contract to sell did not take into effect. Consequently, the [Maceda Law] invoked by [buyer] ...
find no application to the present case because said laws presuppose the existence of a valid
and effective contract to sell a condominium.166
The reasoning in Mortel is defective for the following reasons: First, there is no doubt under
the provisions of the Maceda Law that it covers both contracts of sale and contracts to sell on
installments condominium units, and the coverage is based on the nature of the contract and
subject matter at the time of perfection, and not what happens at consummation. Secondly,
precisely when the conditions attaching to the contract to sell (such as non-payment of the
installments) is not fulfilled which have the effect of extinguishing the contract, the Maceda
Law governs the effective remedies and consequences available to the parties (i.e., notarial
rescission and return of cash surrender value, etc.). Therefore, the non-fulfillment of condition
under a contract to sell does not take it out of the Maceda Law.

2. Transactions Excluded from Coverage

The following transactions, although involving sales on installments, are expressly
excluded from the coverage of the Law, thus:
(a) Sales covering industrial lots;
(b) Sales covering commercial buildings (and commercial lots by implication);
and (c) Sales to tenants under agrarian reform laws.
The enumeration of the transactions not covered by the Maceda Law is not exclusive, since
other transactions over immovables, although not within the enumerated exclusions are to be
considered as excluded because they are not within the clearly expressed coverage. An
example would be the sale on installment of commercial or office condominium units.
 In one case, the Court held that the Maceda Law normally applies to the sale or financing
of real estate on installments payments, and excludes industrial lots, commercial buildings, and
sales to tenants under R.A. No. 3844. It has no application to a sale on installment of a
commercial building.243

a. Maceda Law Cannot Be Invoked by Highest Bidder in Foreclosure Proceedings

The Court has ruled that the terms of the Maceda Law cannot be invoked by a person or
entity who acquired the subdivision lots in a foreclosure sale on the mortgaged constituted
thereon by the developer. Such person or entity, although binding itself to the terms of the
contracts of sale, is not the real party to the original installment sales, and more importantly,
does not have any rights promoted under the Maceda Law which contains provisions for the
benefits of real estate buyers on installments.168

3. Rights Granted
The rights granted to a buyer of real estate in a sale or financing covered by the Maceda
Law, depend on whether or not he has paid less than or more than two (2) years of installments.

a. At Least Two (2) Years Installments Paid

Where the buyer has paid at least two (2) years of installments, he is entitled to the
following rights in case he defaults in the payments of succeeding installments:
(a) To pay, without additional interest, the unpaid installments due within the total
grace period earned by him, which is fixed at the rate of one (1) month grace
period for every one (1) year of installment payments;
(b) If the contract is cancelled, the seller shall refund to the buyer the cash
surrender value of the payments on the property equivalent to 50% of the total
payments made and, after five (5) years of installments, an additional 5%
every year but not to exceed 90% of the total payments made.

(1) Exercise of Grace Period

The right to make use of the grace period can be exercised by the buyer only once in every
five (5) years of the life of the contract and its extensions, if any.
Down payments, deposits or options on the contract shall be included in the computation of
the total number of installments made.

(2) How Cancellation of Contract Can Be Effected

The actual cancellation of the contract shall take place after thirty (30) days from receipt by
the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial
act and upon full payment of the cash surrender value to the buyer.
In one case,244 it was held that a decision rendered is an ejectment case operated as the
required notice of cancellation, pursuant to Section 3(b) of the Maceda Law. In an earlier
case,245 the Court dispensed with the additional formality of a demand on the sellers part for

243 Odyssey Park, Inc. v. Court of Appeals, 280 SCRA 253 (1997). 168Lagandao v. Court of Appeals, 290 SCRA 330
(1998).
244 Layug v. Intermediate Appellate Court, 167 SCRA 627 (1988).
245 Leao v. Court of Appeals, 369 SCRA 36 (2001).
recission superfluous since the action filled was one for annulment of contract, which is kindred
concept of rescission by notarial act.
In another case,246 it was held that the letter notice given by the sellers counsel which
merely made formal demand upon the buyer to vacate the premises in question did not serve
the same requirement as that of notice of cancellation or demand for recission by a notarial act
as required under the Maceda Law. It was also reitereated that a case for unlawful detainer
does not exempt the seller from complying with the notarial act required under the law.

b. Less Than Two (2) Years Installments Paid

In case where less than two (2) years of installments were paid, the buyer shall still be
entitled to a grace period of sixty (60) days from the date the installment became due.
If the buyer fails to pay the installments due at the expiration of the grace period, the seller
may cancel the contract after thirty (30) days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a notarial act.

c. Compensation Rule on Amortization Payments

The Courts ruling in Leao v. Court of Appeals,172 recognizes the principle of compensation
to be applicable to remedies under the Maceda Law.
Leao held that although the contract to sell allows a total of 10 years within which to pay
the purchase price, nevertheless, the buyer cannot ignore the stipulation on the monthly
amortization payments required under the contract by claiming that the ten-year period within
which to pay has not elapsed. When the buyer fails to pay any monthly amortization, he is under
Article 1169 already in default and liable for the damages stipulated in the contract.
Nevertheless, the Court agreed with the trial court that the default committed by the buyer in
respect of the obligation could be compensated by the interest and surcharges imposed upon
the buyer under the contract.

d. Formula to Compute the Installment Mode

In Jestra Dev. and Mgt. Corp. v. Pacifico, 173 the Court clarified that the proper formula to
apply in determining how many installments have been made is to include any payment made
as downpayment or reservation fee as part of the installments made, and then to divide them by
the stipulated mode of payment, i.e., whether it is monthly, quarterly, semi-annual or annual.
Thus, in Jestra, where the Contract to Sell provided for a total Purchase Price of
52,500,000 with 30% thereof or 5750,000 was to a downpayment payable in six montly
installments, and the balance of 51,750,000 was to be paid in 10 years of equal payment of
534,983 the Court used the stipulated divisor of 5121,666.66 for the period covering the
downpayment, and refused to apply the monthly amortization of 534,983 as the divisor to all
payments made by the buyer. The result was quite substantial in that the Court found the buyer
to have paid less than 2 years of installments, and therefore not entitled to receive any cash
surrender value to complete the effect of the notice of cancellation of the Contract to Sell.

4. Interpretation of Grace Period and Mode of Cancellation

246 Pagtulungan v. Dela Cruz Vda. De Manzano, 533 SCRA 242 (2008).
 Although a formal reading of the provisions of the Maceda Law would imply that once a
buyer fails to avail of the grace period granted to him, then either rescission or cancellation of
the contract becomes a matter of right on the part of the seller, provided he complies with the
procedure provided for in the Law, the Court has interpreted it otherwise.
In McLaughlin v. Court of Appeals,174 the parties had entered into a contract of conditional
sale of real property, with the stipulated purchase price payable on installments. When the buyer
defaulted in the payment of the installments, a complaint was filed by the seller in court for the
rescission of the deed of conditional sale, which suit was eventually compromised, with
the buyer agreeing on a scheduled payment of the balance of the purchase price. The
compromise agreement approved by the court also provided that in case of failure of the buyer
to comply with the terms of payment, all payments previously made shall be forfeited in favor of
the seller as liquidated damages.
When the buyer failed to pay on the dates provided for in the compromise agreement, the
seller subsequently refused to accept further payment and eventually filed a motion with the trial
court for the issuance of a writ of execution to declare the rescission of the contract of
conditional sale, and the forfeiture of all payments of the buyer previously made. The buyer filed
a motion for reconsideration on the order granting the writ of execution, and tendered with the
trial court the balance due to the seller on the sale.
On appeal, the Court upheld the right of the buyer to prevent the rescission of the contract
by his tender of the balance of the purchase price, based on the provisions of the Maceda Law.
Although there was no doubt that the buyer was no longer entitled to the benefits of the
grace period under the Maceda Law, the court held that if the motion for the issuance of the writ
of execution is considered as the notice of cancellation under the Law, the seller could cancel
the contract only thirty (30) days after the receipt of such notice, and then concluded that since
the tender of payment of the balance of the purchase price was made within said thirty (30) day
period, this prevented the cancellation of the contract of conditional sale.
McLaughlin ruling therefore clearly provides for two basic doctrines applicable to the
Maceda Law. First, although the Law seem to require rescission and cancellation to be both by
notarial act, McLaughlin would hold notarial act as merely applicable to rescission, whereas
notice of cancellation need not be by notarial act. Second, McLaughlin would hold that even
after the expiration of the grace period provided by the Law, the buyer still can prevent
rescission or cancellation of the contract within the 30-day period when rescission or
cancellation is to take effect.
In other words, McLaughlin would provide for two grace periods: the first grace period is the
one provided for expressly by the Law, which is a minimum of 60 days; and the other would be
the period before rescission or cancellation actually takes effect. Perhaps, the distinction
between the two types of grace period, is that in the statutory grace period, availment of the
right to update the installment payments is without interest and penalties, even when these are
stipulated in the contract; whereas, in the period prior to the effectivity of the rescission or
cancellation of the contract, the buyer would be liable for and would have to include in his
payments the stipulated interests and penalties incurred.
The McLaughlin ruling would therefore encourage buyers of real estate on installments
covered by the Maceda Law not to take advantage of the statutory grace period, because even
with its expiration, they have a jurisprudential grace period which allows them to prevent the
rescission or cancellation of their contracts even after they have received the demand for
rescission or notice of cancellation, by paying-up the unpaid balance prior to the expiration of
the 30-day period provided in the Maceda Law for effectivity of the notice of rescission or
cancellation.
In Leao v. Court of Appeals,175 the Court held that in cases falling under the Maceda Law,
the issues as to rescission or cancellation, breach of contract, tender and consignation must all
give way to the explicit provisions of the Maceda Law that grants to the buyer a minimum 60-
day grace period and the requirement that notarial notice of cancellation or rescission shall be
effective only after 30-days from service thereof.176
Leao affirmed the principle that even when the requisite notice of cancellation is given but
the buyer has not been given the cash surrender value of the payments made, these was still no
actual cancellation of the conditional sale, and the buyer may still reinstate the contract by
updating the account. This is true even when a decision has been rendered in an ejectment
case which would operate as the required notice of cancellation.
The principle was reiterated in Active Realty & Dev. Corp. v. Daroya, 177 which held that the
refund of the cash surrender value is one of the mandatory twin requriements for a valid and
effective cancellation under the Maceda Law, and absence of which would mean that the
contract remains valid and subsisting. However, in that case, since the lot had already been
sold to an innocent second buyer, the seller was ordered to refund to the first buyer the actual
market value of the lot sold with 12% interest per annum or to deliver a substitute lot, at the
option of the first buyer.
Olympia Housing v. Panasiatic Travel Corp.,178 held that the Maceda law recognizes the
right of the seller to cancel the contract but any such cancellation must be done in conformity
with the requirements therein prescribed. The Court held that In addition to the notarial act of
rescission, the seller is required to refund to the buyer the cash surrender value of the payments
on the property; and that the actual cancellation of the contract can only be deemed to take
place upon the expiration of a 30day period following the receipt by the buyer of the notice of
cancellation or demand for rescission by a notarial act and the full payment of the cash
surrender value.

5. Other Rights Granted to Buyer

In addition, the Maceda Law provides for the following rights to the buyer:

(a) To sell his rights or assign the same to another person or to reinstate the
contract by updating the account during the grace period and before actual
cancellation of the contract. The deed of sale assignment shall be done by
notarial act.179
(b) To pay in advance any installment or the full unpaid balance of the purchase
price any time without interest and to have such full payment of the purchase
price annotated in the certificate of title covering the property.247248
Notice that the provisions of Section 6 of the Maceda Law render nugatory all provisions in
loan agreements covering the financing of residential real estate and condominium units
pretermination penalty clauses whereby any payment ahead to the scheduled amortization
was met with a penalty clause to compensate the bank or financial institution for the inability of
such pre-payment to earn interest income on the loan.

247 Sec. 6, Rep. Act 6552.

248 SCRA 330 (1998).
 6. Effect of Contrary Stipulations
Under Section 7 of the Maceda Law, any stipulation in any contract entered into contrary to
the provisions of the Law, shall be null and void.

7. Maceda Law Cannot Be Availed of by Developer

In Lagandaon v. Court of Appeals,181 the Court held that the Maceda Law has no application
to protect the developer or one who succeeds the developer, since the policy of that law, as
embodied in its title, is to provide protection to buyers of real estate on installment payments.
As clearly specified in Section 3, the declared public policy espoused by Republic Act No. 6552
is to protect buyers of real estate on installment payments against onerous and oppressive
conditions.249 Therefore, one who buys the property from the developer and who steps into the
shoes of the seller under the Contract to Sell cannot claim any right or protection under the Law.
If the Maceda Law has any relevance at all, it is to protect the buyer, not the developer-seller or
his successor-in-interest. The Court further held that Section 3(b) of the same law does not
grant petitioner [developer] any legal ground to cancel the contracts to sell; rather, it prescribes
the responsibility of the seller in case the contract[s are] cancelled.250

CANCELLATION OF JUDICIAL SALE

Where a judicial sale is voided without fault of the purchaser, the latter is entitled to
reimbursement of the purchase money paid by him. A judicial sale can only be set aside upon
the return to the buyer of the purchase price with simple interest, together with all sums paid out
by him in improvements introduced on the property, taxes, and other expenses by him.251
oOo

249 Ibid, at p. 345.

250 Ibid.
251 Seven Brothers Shipping Corp. v. Court of Appeals, 246 SCRA 33 (1995).