CHAPTER 2 - PARTIES OF SALE
“integrity” or “quality” of the consent of the parties to a sale,
GENERAL RULE ON CAPACITY OF PARTIES
Q: Who can be the proper parties to a sale?
GR: any person who has “capacity to act,” or “the power to do acts
with legal effects,” or more specifically with the power to obligate
himself, may enter into a contract of sale, whether as seller or as
buyer.
natural persons or juridical persons, such as
individuals corporations, partnerships,
associations and cooperatives
age of majority (capacity juridical personality separate and
to act) begins at 18 years distinct from that of the
shareholders, partners or
members, is expressly recognized
by law, with full “juridical capacity”
to obligate themselves and enter
into valid contracts.
MINORS, INSANE OR DEMENTED PERSONS, AND DEAF-
MUTES
GR: minors, insane and demented persons, and deaf-mutes who
do not know how to write, have no legal capacity to contract,
and therefore are disqualified from being parties to a sale.
Contracts entered into by such legally incapacitated persons are
not void, but merely voidable, subject to annulment or ratification.
The action for annulment cannot be instituted by the person
who is capacitated since he is disqualified from alleging the
incapacity of the person with whom he contracts.
Contracts entered into during lucid intervals by insane or
demented persons are generally valid;
Those entered into in a state of drunkenness, or during a hypnotic
spell, are merely voidable.
When the defect of the contract consists in the incapacity of one
of the parties, the incapacitated person is not obliged to make
any restitution, except insofar as he has been benefited by the
thing or price received by him
1. Necessaries
(Art 194 Family Code)
“everything indispensable for sustenance, dwelling, clothing,
medical attendance, education and transportation.
GENERAL minor is without legal capacity to give consent to
RULE a sale
consent is an essential requisite of every
contract
absence thereof cannot give rise to a valid sale
defective consent gives rise to a voidable sale,
meaning “valid until annulled.”
XPN [w]here necessaries are sold and delivered to a
minor or other person without capacity to act:
 he must pay a reasonable price
therefore
 resulting sale is valid, and not merely
voidable.
ELEMENTS FOR A SALE OF NECESSARIES TO MINORS BE
VALID:
 perfection of the sale
 delivery of the subject necessaries.
If there is only perfection at the time the case reaches litigation,
SALE = voidable for vice in consent and the rules on voidable
contracts apply.
2. Senility and Serious Illness: On effects of senility and
serious illness of the seller on the validity of a sale
Domingo v. CA
Issue: WON the proponents were able to establish the existence
and due execution of a deed of sale (only evidence adduced being
a carbon copy of the alleged original deed where the signature of
the alleged seller was a thumb mark made while sick on the
hospital bed.)
SALE WAS NULL AND VOID AB INITIO.
 consideration for the nine (9) parcels of land including
the house and bodega is grossly and shockingly
inadequate,”
 property owner Paulina Rigonan was already of
advanced age and senile.
GR: person is not incompetent to contract merely because of
advanced years or by reason of physical infirmities
XPN: when such age or infirmities have impaired the mental
faculties so as to prevent the person from properly, intelligently,
and firmly protecting her property rights then she is undeniably
incapacitated.
Case: There is sufficient reason to seriously doubt that she
consented to the sale of and the price for the parcels of land.
There is no receipt to show that said price was paid to and
received by her.
“never any meeting of the minds”
Paragas v. Heirs of Dominador Balacano
 invoked Domingo
 declared a sale executed by one who is already of
advanced age and senile to be “null and void,”
the alleged seller, shown to have signed the Deed of Sale on his
death bed in the hospital, “was an octogenarian at the time of
the alleged execution of the contract and suffering from liver
cirrhosis at that — circumstances which raise grave doubts
on his physical and mental capacity to freely consent to the
contract.”
Court used Article 24 of the Civil Code:
“[i]n all contractual, property or other relations, when one of the
parties is at a disadvantage on account of his moral
dependence, ignorance, mental weakness, tender age or
other handicap, the courts must be vigilant for his protection.”
SALES BY AND BETWEEN SPOUSES
1. Sales With Third Parties
Before the Civil Code provided limitations on when
enactment of the the husband or the wife may deal with
Family Code conjugal partnership property.
CASE: Heirs of Ignacia Aguilar-Reyes v. Mijares
 the alienation or encumbrance of a conjugal real property
requires the consent of the wife
 absence of such consent rendered the transaction
merely voidable and not void;
 wife may, during the marriage and within ten years
from the questioned transaction, bring an action for
the annulment of the contract on the entire property, and
not just the one-half portion that pertains to her share.
Under the common provisions apply equally to both
present spouses
Family Code
not only because the default rule is the
“absolute community of property regime,” but
more so even when the spouses chose under
their marriage settlements to be governed by
the conjugal partnership of gains, the spouses
would still have joint administration of the
conjugal properties.
Article 73 FC: either spouse may exercise
any legitimate profession, occupation,
business or activity without the consent of the
other
the latter may object only on valid, serious and
moral grounds
Re: disagreements - courts shall decide
WON the objection is proper, and make
rulings on the benefits, depending on whether
the benefits had accrued to the family prior to
the objection or thereafter
 benefits resulting obligation shall be enforced against
accrued the separate property of the spouse who has
prior to the not obtained consent;
objection
otherwise, the same shall be chargeable
against the community property, without
prejudice to the creditors who acted in good
faith.
Under the Law on Sales, therefore, it would seem that a spouse
may, without the consent of the other spouse, enter into sale
transactions in the regular or normal pursuit of his or her
profession, vocation or trade.
Articles 96 and 124 of the Family Code - the administration and
enjoyment of the community property or the conjugal property
shall belong to both spouses jointly
In case of disagreement, the husband’s decision shall prevail,
subject to the wife seeking remedy from the courts, which must be
availed of within five (5) years from the date of the contract.
the disposition or encumbrance of community property or
conjugal property shall be void without:
1. authority of the court or
2. written consent of the other spouse.
In such case, the transaction shall be construed as a
continuing offer on the part of the consenting spouse and the
third person, and may be perfected as a binding contract upon the
acceptance by the other spouse or authorization by the court
before the offer is withdrawn by either or both offerors.
Even when the property regime prevailing was the conjugal
partnership of gains, the Court held that the sale by the husband
of a conjugal property without the consent of the wife to be
not merely voidable but void, under Article 124 of the Family
Code, since the resulting contract lacked one of the essential
elements of “full consent.”
Sales Between Spouses
Article 1490 - Civil Code:
GR spouses cannot sell property to each other
XPN: when a separation of property was agreed upon in the
marriage settlements
when there has been a judicial decree for the
separation of property
Article 1492
prohibition relating to spouses selling to one another is applicable
even to sales in legal redemption, compromises and
renunciations.
a. Status of Prohibited Sales Between Spouses, generally
null and void
only persons who can question the sale:
 the heirs of either of the spouses who have been
prejudiced;
 prior creditors; and
 the State when it comes to the payment of the proper
taxes due on the transactions.
CASE: Medina v. Collector of Internal Revenue,
Deficiency sales tax were sought to be collected against the sales
of lumber products by the wife to the public, although when the
husband previously sold the lumber products to the wife (of course
at a lower price) he had already paid the sales tax thereon.
Considering that only the first and original sales were taxable
under the then Tax Code, the spouses held that the second and
subsequent sales by the wife to the public could not be subjected
to further sales tax.
In addition, the spouses alleged that the sales between them were
valid since they were governed by the complete separation of
property regime pursuant to a pre-nuptial agreement executed
between them.
RULING: Sales between the spouses as void and non-
existent in violation of Art 1490; sales by the wife to the public
as the first and original sales – subject to sales tax.
 records of the alleged pre-nuptial agreement were non-
existent
 at the time of their marriage, the spouses had no
properties to have warranted them to execute a pre-
nuptial agreement for complete separation of property
b. Rationale for Prohibition
Medina v CIR: relative incapacity of spouses to sell properties to
one another to be as follows:
(a) To prevent a spouse defrauding his creditors by transferring
his properties to the other spouse;
(b) To avoid a situation where the dominant spouse would unduly
take advantage of the weaker spouse, thereby effectively
defrauding the latter; and
(c) To avoid an indirect violation of the prohibition against
donations between spouses under Article 133 of the Civil Code.
Donation between spouses governed by the complete separation
of property regime, being a gratuitous contract, would necessarily
reduce the estate of the donor and increase the estate of the
donee.
Sale between spouses: results in same value
There simply cannot be a purchase of what a party-buyer already
owns.
c. Rationale for Exceptions to Prohibition under Article 1490
There is greater danger of undue influence or fraud in situations
where the spouses are governed by the complete separation of
property regime.
Two legal ways by which a complete separation of property
regime could exist between married spouses:
1. execution of a prenuptial agreement stipulating such
property regime to apply
2. by the spouses going to court to ask for the dissolution
of the prevailing conjugal partnership of gains or
absolute community of property regimes.
In either case, the situation bespeaks clearly of hardness of heart
on the part of the spouses, showing a business-like approach to
the relationship, rather than of two lovers falling head-over-heels
for one another.
Whereas, the conjugal partnership of
gains or the absolute community of property regime exemplifi es
spouses wishing to share most if not all with one another
confi rming their romantic fervor. On the other hand, in a situation
where spouses who before or at the time they say their “I do’s”
would be so cold-hearted and unromantic to pause and stipulate
complete separation of property, or who during marriage would
be cold-blooded as to agree and seek court separation of their
properties, clearly indicates that it would be unlikely that one
spouse would allow the other spouse to infl uence him or her; or
would allow his or her properties to be involved in a suit covering
the creditors of the other spouse. After all, if a spouse takes time
and effort to insulate his or her properties from the other spouse,
why would he or she later on involve himself or herself in the
fraudulent manipulations of the other spouse, and consequently
open himself or herself (as well as his or her separate properties)
to suits by creditors for fraud and recovery of damages?
But even the foregoing explanation does not adequately
cover a situation where a dominant spouse would insist upon
the complete separation of property regime, either at the time of
the execution of the marriage settlements, or by judicial action
during marriage, precisely to venture upon a future course of
defraudation or being in a position to defraud either his weaker
spouse or his separate creditors. In the end, the absolute
prohibition under Article 133, now Article 87 of the Family Code,
on donations between spouses, should also be made to apply to
sales between spouses, irrespective of their property regime.
3. Applicability of Incapacity to Common Law Spouses
In Matabuena v. Cervantes,38 the Court was asked to decide
the issue of whether the ban in Article 133 of the Civil Code on
a donation between the spouses during a marriage applies to a
common-law relationship. In that case, the sister of the deceased
common-law husband, sought to annul the previous donation by
the deceased during his lifetime to his then common law spouse,
3838 SCRA 284 (1971).
53
although the two subsequently married thereafter. Today, that
would no longer be an issue because of the all-inclusive coverage
under Article 87 of the Family Code to those living as husband
and wife without the benefi t of a valid marriage.
The Court held the donation to be void, although Article
133 of the Civil Code considers as void a “donation between the
spouses during the marriage.” It held that “[i]f the policy of the law
. . . is to ‘prohibit donations in favor of the other consort and his
descendant because of fear of undue and improper pressure and
infl uence upon the donor, a prejudice deeply rooted in our ancient
law . . . then there is every reason to apply the same prohibitive
policy to persons living together as husband and wife without the
benefi t of nuptials. For it is not to be doubted that assent to such
irregular connection . . . bespeaks greater infl uence of one party
over the other, so that the danger that the law seeks to avoid
is correspondingly increased.”39 In addition, the Court held that
“[s]o long as marriage remains the cornerstone of our family law,
reason and morality alike demand that the disabilities attached to
marriage should likewise attach to [common-law relationship].”40
In 1984, in Calimlim-Canullas v. Fortun,41 the Court gave
formal imprimatur to the rationale of Matabuena being applied
to sales by ruling that sales between common-law spouses are
void; that Article 1409 of the Civil Code declares such contracts
void as being contrary to morals and public policy, and not only
because Article 1352 declares them void for having an unlawful
cause, but specifi cally because Article 1490 prohibits sales
between spouses. The Court gave the following reasoning for its
ruling:
And this is so because if transfers or conveyances
between spouses were allowed during marriage, that
would destroy the system of conjugal partnership,
a basic policy in civil law. It was also designed to
prevent the exercise of undue infl uence by one spouse
over the other, as well as to protect the institution of
marriage, which is the cornerstone of family law. The
39Ibid, at pp. 287-288.
40Ibid, at p. 288.
41129 SCRA 675 (1984).
PARTIES OF A SALE
54 LAW ON SALES
prohibition apply (sic) to a couple living as husband
and wife without the benefi t of marriage, otherwise, “the
condition of those who incurred guilt would turn out to
be better that those in legal union.” Those provisions
are dictated by public interest and their criterion must
be imposed upon the will of the parties.42
Calimlim-Canullas ruling was reiterated in Cruz v. Court of
Appeals,43 but which held that “[a]lthough under Art. 1490 the
husband and wife cannot sell property to one another as a rule
which, for policy consideration and the dictates of morality require
that the prohibition apply to common-law relationship,”44 but that
when registered property has been conveyed subsequently to a
third-party-buyer in good faith and for value, then reconveyance
is no longer available to common-law spouse, since under the
Torrens system every buyer has a right to rely upon the title of his
immediate seller.
SPECIFIC INCAPACITY MANDATED BY LAW
Article 1491 of the Civil Code prohibits the following persons
from entering into contracts of sale under the circumstances
covered therein:
(a) Agent, with respect to the property whose
administration or sale may have been
entrusted to him, unless the consent of the
principal has been given;
(b) Guardian, with respect to the property of
the person who is under his guardianship;
(c) Executor or administrator, with respect to
the property of the estate under his administrations;
(d) Public offi cers and employees, with respect
to property of the State or any subdivision
thereof, or of any government-owned or
42Ibid, at p. 680.
43281 SCRA 491 (1997).
44Ibid, at p. 495.
55
controlled corporation, or institution, the
administration of which has been entrusted
to them; it includes judges and government
experts who, in any manner whatsoever,
take part in the sale;
(e) Justices, judges, prosecuting attorneys,
clerks of courts, and other offi cers and
employees connected with the administration
of justice, with respect to the
property and rights in litigation or levied
upon an execution before the court within
whose jurisdiction or territory they exercise
their respective functions; and
(f) Lawyers, with respect to the property and
rights which may be the object of any
litigation in which they may take part by
virtue of their profession.
The above-enumerated relative incapacities are, under
Article 1492, made to apply to sales in legal redemption,
compromises and renunciations, confi rming the policy that what
cannot be done directly, cannot be done by indirection.
1. Legal Status of Contracts Entered Into In
Violation of Articles 1491 and 1942
Based on the wordings of Article 1491, only purchases made
by agents of the property covered by the agency are valid and
binding when made with the express consent of their principals;45
and no such exception is granted in all the other instances
covered
by said article.46 That would also mean that, apart from the case
of the agents, in all cases covered under Article 1491, consent or
knowledge by the persons who is sought to be protected by the
law, cannot validate any of the transactions covered.
45The prohibition against an agent purchasing property in his
hands for sale or
management is however, clearly not absolute. When so
authorized by the principal, the
agent is not disqualifi ed from purchasing the property he holds
under a contract of agency
to sell. Olaguer v. Purungganan Jr., 515 SCRA 460 (2007).
46See Distajo v. Court of Appeals, 339 SCRA 52 (2000).
PARTIES OF A SALE
56 LAW ON SALES
Article 1491 does not also state the legal consequences
of having entered into contracts in violation of said article,
i.e., it does not state expressly that the resulting contracts are
“void.” In the 1911 case of Wolfson v. Estate of Martinez,47
the Court held that the sale’s “voidability can not be asserted
by one not a party to the transaction or his representative,”48
that “considering the question from the point of view of the
civil law, the view taken by the code, we must limit ourselves
to classifying as void all acts done contrary to the express
prohibition of the statute. Now then as the code does not
recognize such nullity by the mere operation of law, the
nullity of the acts hereinbefore referred to must be asserted
by the person having the necessary legal capacity to do so
and decreed by a competent court.”49 In other words, Wolfson
had classifi ed such contracts as being merely voidable or
annullable, and not void. Later, in Director of Lands v. Abagat,50
covering the purchase by a lawyer of the property of his client
under litigation, the Court cited two precedent cases decided
in Spain holding such a contract as merely “invalid.”
In Rubias v. Batiller,51 the Court discussed why it became
necessary in Philippine jurisdiction to abandon Manresa’s position
and consider such contracts as void, and not merely voidable,
thus:
The reason thus given by Manresa in considering
such prohibited acquisitions under Article 1459 of the
Spanish Civil Code as merely voidable at the instance
and option of the vendor and not void — “that the Code
does not recognize such nullity de pleno derecho” — is
no longer true and applicable to our own Philippine
Civil Code which does recognize the absolute nullity of
contracts “whose cause, object, or purpose is contrary
to laws, morals, good customs, public order or public
policy” or which are “expressly prohibited or declared
4720 Phil. 340 (1911).
48Citing Manresa Vol. 10, p. 108.
49Ibid, at p. 343.
5053 Phil. 147 (1929).
5151 SCRA 120 (1973).
57
void by law” and declares such contracts “inexistent
and void from the beginning.”52
In addition, Rubias held that even the Supreme Court of
Spain and modern authors have likewise veered away from
Manresa’s view of the Spanish codal provision itself, holding that
since the provision is based on public policy, that violation of the
prohibition cannot be validated by confi rmation or ratifi cation.53
It
adopted Castan’s rationale for his conclusion “that fundamental
considerations of public policy render void and inexistent such
expressly prohibited purchase (e.g., by public offi cers and
employees of government property intrusted [sic] to them and
by justices, judges, fi scals and lawyers of property and rights
in litigation submitted to or handled by them, under Art. 1492,
paragraphs [4] and [5] of our Civil Code) has been adopted in
a new article of our Civil Code, viz., Art. 1409 declaring such
prohibited contracts as ‘inexistent and void from the beginning.”54
Rubias therefore holds that a purchase by a lawyer of
property of a client in litigation, in which the purchasing lawyer
appeared as counsel of record, “was void and could produce no
legal effect, by virtue of Article 1409(7) of our Civil Code which
provides that contracts ‘expressly prohibited or declared void by
law’ are ‘inexistent and void from the beginning’ and that ‘(t)hese
contracts cannot be ratifi ed. Neither can the right to set up the
defense of illegality be waived.’”55
a. A Different Form of “Ratifi cation”
Rubias, however, sought to declare a difference in the state of
“nullity” between prohibited contracts entered into by guardians,
agents, administrators and executors, from those entered into by
judges, judicial offi cers, fi scals and lawyers, thus —
In this aspect, the permanent disqualifi cation
of public and judicial offi cers and lawyers grounded
on public policy differs from the fi rst three cases of
52Supra, at p. 133.
53Supra, at pp. 133-134.
54Supra, at p. 135.
55Supra, at pp. 130-131.
PARTIES OF A SALE
58 LAW ON SALES
guardians, agents and administrators (Art. 1491, Civil
Code), as to whose transactions, it has been opined
that they may be “ratifi ed” by means of and in “the form
of a new contract, in which case its validity shall be
determined only by the circumstances at the time of
execution of such new contract. The causes of nullity
which have ceased to exist cannot impair the validity
of the new contract. Thus, the object which was illegal
at the time of the fi rst contract, may have already
become lawful at the time of the ratifi cation or second
contract; or the service which was impossible may
have become possible; or the intention which could not
be ascertained may have been clarifi ed by the parties.
The ratifi cation or second contract would then be valid
from its execution; however, it does not retroact to the
date of the fi rst contract.”56
The functional difference between the two groups of
contracts declared void under Article 1491, is that in the fi rst
group after the inhibition has ceased, the only real wrong that
subsists is the private wrong to the ward, principal or estate; and
therefore, if private parties wish to condone the private wrongs
among themselves, the State would not stand in the way. When
it comes to the second group, however, even when the inhibition
has ceased, there exists not only the private wrong, but in fact
a public wrong, which is damage to public service or to the high
esteem that should be accorded to the administration of justice
in our society. Therefore, in the second group, even when the
private parties seek to “ratify” the private wrong by executing a
new contract between themselves when the inhibition no longer
exists, such cannot resurrect and validate a relationship, which
continues to be tainted with a public wrong. As the policy goes,
private parties cannot ratify or compromise among themselves
matters contrary to public interests.
What remains at issue with respect to the “ratifi cation” by
the execution of a “new contract” in the cases of purchases by
the guardian, agent, administrator or executor, is whether such
ratifi cation involves only a new meeting of the minds with respect
56Ibid., at pp. 135-136.
59
to the same subject matter and the same price, or it would require
in addition the payment of a new price or consideration as part
of the new meeting of the minds when the inhibition no longer
prevails. These are issues yet to be addressed by the Court.
b. Proper Party to Raise Issue of Nullity
Rubias quoted Tolentino in discussing who would be the
proper parties who could raise the nullity of contracts entered into
in violation of Article 1491, stating that “[A]ny person may invoke
the inexistence of the contract whenever juridical effects found
thereon are asserted against him,”57 and that “If the contract
has already been fulfi lled, an action is necessary to declare its
inexistence since nobody can take the law into his own hands
and thus the intervention of the competent court is necessary
to declare the absolute nullity of the contract and to decree the
restitution of what has been given under it. If the contract is still
fully executory, no party need bring an action to declare its nullity;
but if any party should bring an action to enforce it, the other
party can simply set up the nullity as defense.”58
c. Fraud or Lesion Not Relevant for Nullity
The existence of fraud or lesion is not a factor at all in the
application of the prohibitions covered by Article 1491, and the
proof that the person disqualifi ed has paid more than an adequate
consideration for the property he purchased is no defense in an
action to declare the sale void.
The rationale for the absolute disqualifi cations set by
Article 1491, is in line with “the general doctrine that each
of [such relationships] is a trust of the highest order, and the
trustee cannot be allowed to have any inducement to neglect
his ward’s interest;” and therefore to avoid “[t]he temptation
which naturally besets a [person holding such a fi duciary
position] so circumstanced, necessitates the annulment of the
transaction.”59
57Supra, at p. 136 quoting from TOLENTINO, Vol. IV, pp. 578-
579.
58Idem.
59Philippine Trust Co. v. Roldan, 99 Phil. 392 (1956).
PARTIES OF A SALE
60 LAW ON SALES
Even in situations where the purchase by a disqualifi ed
person under Article 1491 had received approval by the court
as in the case of probate court approving the purchase by the
administrator or executor, the sale would still be void.60
2. Agents
“Brokers” do not come within the coverage of the prohibition
as their authority consist merely in looking for a buyer or a seller,
and to bring the former and the latter together to consummate the
transaction; therefore, they are not prohibited to buy for
themselves.
As held in Schmid & Oberly v. RJL Martinez Fishing Corp.,61 “[a]
broker is generally defi ned as one who is engaged, for others, on
a commission, negotiating contracts relative to property with the
custody of which he has no concern; the negotiation between
other
parties, never acting in his own name but in the name of those
who
employed him; he is strictly a middleman and for some purpose
the agent of both parties. ... A broker is one whose occupation it
is to bring parties together to bargain, or to bargain for them, in
matters of trade, commerce or navigation.”62
3. Guardians, Administrators and Executors
Guardians, administrators and executors are necessarily
offi cers of the courts since they are appointed or confi rmed to
such position pursuant to judicial proceedings.
In Philippine Trust Co. v. Roldan,63 the court-appointed
guardian had fi led a motion with the trial court for authority to
sell as guardian the parcels of land of the ward for the purpose
of being able to invest the proceeds for a residential house for
the ward. When the court authority was granted, the guardian
60Modina v. Court of Appeals, 317 SCRA 696, 707 (1999): “This
does not constitute
an interference or review of the order of a co-equal court since the
probate court has
no jurisdiction over the question of title to subject properties.
Consequently, a separate
action may be brought to determine the question of ownership.”
61166 SCRA 493 (1988).
62Ibid, at p. 501, quoting from Behn, Meyer and Co., Ltd. v.
Nolting and Garcia, 35
Phil. 274, 279-80 (1916).
6399 Phil. 392 (1956).
61
sold the parcels of land in favor of her brother-in-law in the sum
approved by the court. The guardian subsequently asked for
and was granted judicial confi rmation of the sale. Immediately
thereafter, the brother-in-law sold the same parcels of land to the
guardian. The Philippine Trust Co., which became the substitute
guardian, brought an action to annul the contract, on the ground
that the prohibition under the Civil Code prevented the guardian
from purchasing “either in person or through the mediation of
another.”
In the earlier case of Rodriquez v. Mactal,64 the Court held that
the prohibition under the Civil Code cannot be made to apply
unless
there was proof that a third-party buyer was a mere intermediary
of the guardian, or that the latter had previously agreed with the
third-party buyer to buy the property for the disqualifi ed guardian.
In Philippine Trust Co., the Court abandoned such doctrine and
held that even without such proof, the sale can be rescinded:
“Remembering the general doctrine that guardianship is a trust
of the highest order, and the trustee cannot be allowed to have
any inducement to neglect his ward’s interest and in line with
the court’s suspicion whenever the guardian acquires the ward’s
property,” the Court held that the re-sale of the parcels of land to
the guardian herself, should be declared void.
Philippine Trust Co. shows that even a court-approved sale
would not stand against the inhibition provided by Article 1491.
There were discussions in the decision of the proof sought
to be shown by the guardian that the transaction benefi ted the
ward; however, the Court disproved such benefi t and showed
that the “minor was on the losing end.” It therefore decreed that
“from both the legal and equitable standpoints these three sales
should not be sustained.”65
These statements of the Court in Philippine Trust Co.
bring up the issue of whether proof of advantage or benefi t to
the ward, estate or the principal, would be suffi cient basis to
take the transaction out of the prohibition of Article 1491. The
6460 Phil. 13 (1934).
6560 Phil. 13 (1934).
PARTIES OF A SALE
62 LAW ON SALES
author believes that any matter relating to advantage or benefi t
is wholly irrelevant under Article 1491, which by clear language
imposes an absolute disqualifi cation on the persons stated
therein occupying fi duciary positions. To imply otherwise, would
indeed open the fl oodgates to abuse, as it would be very easy for
such persons to justify gain or advantage on the part of the ward,
estate or principal whom they represent. Precisely to avoid such
temptation and quibbling, Article 1491 has entirely shut the door
to such persons occupying fi duciary positions, to even desire to
acquire, directly or indirectly, properties of their ward, estate or
principal, as the case may be.
a. Hereditary Rights Not Included in Coverage
Prescinding from the doctrine of Philippine Trust Co., it is
hard to accept the earlier ruling in Naval v. Enriquez,66 which held
that hereditary rights are not included in the prohibition insofar
as the administrator or executor of the estate of the deceased.
Although strictly the legal reasoning of Naval is correct in that
hereditary rights pertain immediately to the heirs upon the death
of the decedent and do not form part of the estate under the
administration of the administrator or executor; nevertheless,
from both the practical and equity points of view, such hereditary
rights derive their value only from the assets that constitute the
estate of the decedent, which is clearly within the fi duciary control
of the administrator or executor.
If an administrator or executor were not disqualifi ed from
purchasing or having interests in the hereditary rights, once he
validly acquires any of such hereditary rights from any of the
heirs, such administrator or executor would already be in clear
confl ict-of-interests situation, or that in fact he may even use his
fi duciary position to compel or convince the remaining heirs to
sell or assign their hereditary rights to him.
Besides, the language and spirit of Article 1492 would
embrace within the prohibition under Article 1491 personal
dealings of administrators and executors on the hereditary rights
of the heirs.
663 Phil. 669 (1904).
63
4. Judges, Justices and Those Involved
in Administration of Justice
The early case of Gan Tingco v. Pabinguit,67 clarifi ed that
for the prohibition under Article 1491 to apply to judges, it is not
required that some contest or litigation over the property itself
should have been tried by the said judge; such property is in
litigation from the moment that it became subject to the judicial
action of the judge, such as levy on execution.
Macariola v. Asuncion,68 held that the doctrine that prohibition
under Article 1491 is “applicable only during the period of
litigation,” should cover not only lawyers, but judges as well. In
that case, the presiding judge, through a corporation of which he
was a stockholder, acquired pieces of land, which previously had
been part of a partition case fi nally decided by him. The Court
in exonerating the judge from the provisions of Article 1491 held
that since the particular provision relating to judges covered only
“property and rights in litigation” said that the article applies only
to the sale or assignment of the property under litigation, which
must take place “during the pendency of the litigation involving the
property.”69 Nevertheless, the judge was held liable for violating
the canons of judicial ethics.
5. Attorneys
Valencia v. Cabanting,70 explained the reason for the
disqualifi cation as it applies to lawyers in this wise: “Public
policy prohibits the transactions in view of the fi duciary
relationship involved. It is intended to curtail any undue infl uence
of the lawyer upon his client. Greed may get the better of the
sentiments of loyalty and disinterestedness. Any violation of this
prohibition would constitute malpractice ... and is a ground for
suspension.”71
6735 Phil. 81 (1916).
68114 SCRA 77 (1982).
69Ibid, at p. 92, citing The Director of Lands v. Ababa, 88 SCRA
513, 519 (1979).
See also Rosario Vda. de Laig v. Court of Appeals, 86 SCRA 641,
646 (1978).
70196 SCRA 302 (1991).
71Ibid, at p. 307, citing In re Attorney Melchor Ruste, 40 O.G. p.
78; Beltran v.
Fernandez, 70 Phil. 248 (1940).
PARTIES OF A SALE
64 LAW ON SALES
In Rubias v. Batiller,72 the facts proven showed that the
plaintiff’s claim of ownership over the disputed land was
predicated
on his purchase made in 1956 from his father-in-law at a time
when the latter’s application for registration there had already
been dismissed by the land registration court and was pending
appeal in the Court of Appeals. He was therefore disqualifi ed
under Article 1491 from purchasing such property since he was
the counsel of record of the applicant, even though the case was
pending appeal. The Court declared that “The nullity of such
prohibited contracts is defi nite and permanent and cannot be
cured by ratifi cation. The public interest and public policy remain
paramount and do not permit of compromise or ratifi cation.”73
In Gregorio Araneta, Inc. v. Tuason de Paterno,74 it was held
that the prohibition under Article 1491 applies only to attorneys
when the property they are buying is the subject of litigation, and
does not apply to a sale to attorneys who were not the defendant’s
attorneys in that case. In Del Rosario v. Millado,75 the Court also
held that the prohibition does not apply to a lawyer who acquired
the property prior to the time he intervened as counsel in an
ejectment suit involving such property.
In one case,76 the Court held that the prohibition applies
only to sale to a lawyer who in fact represented the client in the
particular suit involving the object of the sale, and cannot cover
the assignment of the property given in judgment made by a
client to an attorney, who has not taken part in the case wherein
said judgment was rendered, made in payment of professional
services in other cases. In another case,77 it was held that the
prohibition does not apply to the sale of a parcel of land, acquired
by a client to satisfy a judgment in his favor, to his attorney as
long as the property was not the subject of the litigation.
Also, the prohibition applies only during the period the
litigation is pending.78 However, when there is a certiorari
7251 SCRA 120 (1973).
73Ibid, at p. 135.
7449 O.G. 45 (1952).
7526 SCRA 700 (1969).
76Municipal Council of Iloilo v. Evangelista, 55 Phil. 290 (1930).
77Daroy v. Abecia, 298 SCRA 172 (1998).
78Director of Lands v. Ababa, 88 SCRA 513 (1979).
65
proceeding still pending, although the subject property is the
subject of a fi nal judgment, the disqualifi cation still applies,
and the purchase by the lawyer during the pendency of the
certiorari proceedings would constitute malpractice in violation
of Article1491 and the canons of professional ethics.79
a. Contingent Fee Arrangements
Recto v. Harden,80 held that the prohibition under Article
1491 does not apply to a contingent fee based on the value of
property involved in litigation and therefore does not prohibit a
lawyer from acquiring a certain percentage of the value of the
properties in litigation that may be awarded to his client.
Vda. de Laig v. Court of Appeals,81 held that the agreement
on contingent fee based on the value of the property involved is
not prohibited since the payment of said fee is not made during
the pendency of the litigation but only after judgment has been
rendered in the case handled by the lawyer.
Director of Lands v. Ababa,82 recognized that contingent fee
arrangement is recognized under Canon 13 of the Canons of
Professional Ethics, as an exception to Canon 10 thereof which
prohibits a lawyer from purchasing any interest in the subject
matter of the litigation which he is conducting. But it recognized
that a contingent fee contract is always subject to the supervision
of the courts with respect to the stipulated amount and may be
reduced or nullifi ed; so that in the event that there is any undue
infl uence or fraud in the execution of the contract or that the fee
is excessive, the client is not without remedy because the court
will amply protect him.
In excluding contingent fee arrangement from the coverage
of Article 1491, even when the very terms of the arrangement
would grant to the lawyer an interest in the property subject of
the litigation, Ababa held: “A contract for a contingent fee is not
covered by Article 1491 because the transfer or assignment of
79Valencia v. Cabanting, 196 SCRA 302 (1991).
80100 Phil. 427 (1956).
8186 SCRA 641 (1978).
8288 SCRA 513 (1979).
PARTIES OF A SALE
66 LAW ON SALES
the property in litigation takes effect only after the fi nality of a
favorable judgment. In the instant case, the attorney’s fees . . .
consisting of one-half (1/2) of whatever [the client] might recover
from his share in the lots in question, is contingent upon the
success of the appeal. Hence, the payment of the attorney’s fees,
that is, the transfer or assignment of one-half (1/2) of the property
in litigation will take place only if the appeal prospers. Therefore,
the transfer actually takes effect after the fi nality of a favorable
judgment rendered on appeal and not during the pendency of
the litigation involving the property in question. Consequently, the
contract for a contingent fee is not covered by Article 1491.”
In Fabillo v. Intermediate Appellate Court,83 the Court justifi ed
excluding contingency fee arrangement from the coverage of
Article 1491 “because the payment of said fee is not made during
the pendency of the litigation but only after judgment has been
rendered in the case handled by the lawyer. In fact, under the
1988 Code of Professional Responsibility, a lawyer may have
a lien over funds and property of his client and may apply so
much thereof as may be necessary to satisfy his lawful fees and
disbursements.”84
However, immediately Fabillo drew the following limitations
on contingency fee arrangements: “As long as the lawyer does
not exert undue infl uence on his client, that no fraud is committed
or imposition applied, or that the compensation is clearly not
excessive as to amount to extortion, a contract for contingent fee
is valid and enforceable.”85 But precisely, these are the burdens
that Article 1491 intends to avoid.
If we pin-down the core of reasoning in Ababa and Fabillo,
it would not justify exclusion contingency fee arrangement from
Article 1491 coverage on the basis of the improbability of the use
of undue infl uence by the lawyer on the judgment of his client, so that his basic ideal becomes one of rendering service and
but rather on the timing of the effectivity of the obligation to pay securing justice, not money-making. For the worst scenario that
attorney’s fees. In fact, Ababa follows to incongruous end the can ever happen to a client is to lose the litigated property to his
“pendency of litigation” doctrine which states that the restriction lawyer in whom all trust and confi dence were bestowed at the
83195 SCRA 28 (1991). very inception of the legal controversy.”87
84Ibid, at p. 35. Perhaps the only true justifi cation is what Ababa held
85Ibid, at pp. 35-36, citing Ulanday v. Manila Railroad Co., 45 Phil. that: “Finally, a contingent fee contract is always subject to the
540. (1923). supervision of the courts with respect to the stipulated amount and
67 may be reduced or nullifi ed. So that in the event that there is any
under Article 1491, as it applies to lawyers cover only the period undue infl uence or fraud in the execution of the contract or that
during which the property is still subject to litigation. Ababa thus the fee is excessive, the client is not without remedy because the
held that since a contingent fee arrangement is demandable court will amply protect him.”88 But even then such a safeguard
only by its nature after the termination of litigation incident on the is
property subject to litigation, then it is not covered “by the during also present with respect to the prohibited contracts entered into
the pendency of litigation” doctrine. by guardians, administrators or executors, who are also court
Precisely, the “pendency of litigation” doctrine is sound mainly offi cers, and yet jurisprudence does not allow exception to their
because when litigation has fi nally been terminated, and the client contracts.
legally and practically is no longer at the mercy of his lawyer, The fi nal issue to tackle is why a contingency fee
negotiation and bargaining between the lawyer and the client on arrangement, which essentially is a contract for service, is to
the property that was the subject of litigation would be on be governed at all by Article 1491 which covers only contracts
armslength of sale? The resolution of this issue rightfully brings into focus
basis, and no undue infl uence can be exercised anymore the ruling of the Supreme Court, discussed in the next chapter,
by the lawyer on the client. A contingency fee arrangement, that the Law on Sales is a “catch-all” provision engulfi ng within
although effective and demandable only after litigation, may in its operations all onerous contracts which have within their
fact be negotiated and bargained for between the lawyer and the coverage the transfer of ownership and delivery of possession
client during the pendency of litigation, a period in which the of a thing. Although a contingency fee arrangement has for its
lawyer main subject matter the service of the lawyer, nevertheless when
would exercise moral and professional infl uence over his client, the consideration for such service allows the lawyer to obtain
and therefore would rightly be covered by Article 1491. ownership and possession of the client’s property in litigation, the
After all, a contingency fee arrangement is simply an Court does not hesitate to apply Article 1491 prohibitions to test
obligation subject to a suspensive condition. If it is void and the validity of such an arrangement.
against public policy for a lawyer to purchase the property —oOo—
of his client under litigation, does the purchase become less
reprehensible, if not void, just because the purchase is made
subject to the suspensive condition that the client should win the
case and effective only after litigation has ended? It would not
seem so with the positive and clear language of Article 1491.
Why then are contingent fee arrangements that directly
grant to the lawyer a proprietary interest in the property of his
client that is the subject of litigation so sacrosanct that the
Supreme Court would exempt them from what seems to be
unyielding provision of Article 1491? Certainly, not because
contingent fee arrangements are recognized in the Canons of
Professional Ethics, since the canons cannot override a direct
statutory provision. Perhaps, aside from the fact that the Court
is composed of members who necessarily are members of the
legal profession and subconsciously have turfs to protect, a
contingency fee arrangement actually puts two negotiators toe-
PARTIES OF A SALE
68 LAW ON SALES
to-toe who are both handicapped, so that one cannot rightly say
that the other occupies a superior or advantageous position as to
the other: the client is disadvantaged by the fact that he must rely
on the lawyer for the legal assessment of the case and the legal
battle that must be fought; and the lawyer, by the fact that he is
actually taking a risk since by the contingent fee arrangement
he really would get nothing for all his efforts and trouble, by the
loss of the case. It may be a case of two handicapped persons
venturing together into the unknown, or at least the uncertain.
Also the Court is faced with a public policy issue of allowing
pauper litigants to be ably represented before the courts for
their just claims. Without a contingency fee arrangement, even
one that grants to the lawyer a proprietary claim on the subject
matter of litigation, many otherwise meritorious causes of action
would never fi nd competent legal representation. As Ababa held:
“Contracts of this nature are permitted because they redound to
the benefi t of the poor client and the lawyer ‘especially in cases
where the client has meritorious cause of action, but no means
with which to pay for legal services unless he can, with the
sanction of law, make a contract for a contingent fee to be paid
out of the proceeds of the litigation.’”86 But even that reasoning
only supports a contingency fee arrangement in general, and
does not justify a particular contingency fee arrangement that
directly grants to the lawyer proprietary interests in the property
subject of litigation. Indeed, the same public policy can still be
achieved by allowing contingency fee arrangement that allows
the lawyer a percentage of the “value” of the property in litigation,
which is essentially still a monetary claim with the property
subject of litigation not being sold or assigned to the lawyer, but
as a measure to determine the value of the attorney’s fee.
In addition, the Court deems itself solicitous when it comes
to contingency fee arrangement, since lawyers are offi cers of the
courts, whose actuations are always subject to court supervision,
and that contingency fee arrangement are not just contracts, and
are always subject to the courts’ discretionary review to ensure
that clients are protected from over-bearing lawyers. As held
86Supra, at p. 525.
69
in Fabillo, “the time-honored legal maxim that a lawyer shall at
all times uphold the integrity and dignity of the legal profession