Chapter 4: Law on Sales PDF
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This document provides a detailed overview of the law of sales. It covers topics such as contracts of sale, different rights and obligations of the parties, and the consequences of breaching these obligations.
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CHAPTER IV LAW ON SALES Another subject in Civil Law is the Law on Sales. In hospitality and tourism industry, entering into a contract of sale is one of the many activities the management does. Sale is a contract; hence, as a general rule it is per...
CHAPTER IV LAW ON SALES Another subject in Civil Law is the Law on Sales. In hospitality and tourism industry, entering into a contract of sale is one of the many activities the management does. Sale is a contract; hence, as a general rule it is perfected from by mere consent. The parties in this kind of contract are called the Vendor (seller) and the Vendee (buyer). Both have obligation to each other, the vendor is obliged to deliver and transfer ownership, while the vendee pays the price thereof. There shall be legal consequences when this obligation is breached. This chapter aims to discuss the different rights, obligations, and the consequences in entering into a contract of sale. Contract of Sale Art. 1458. By the contract of sale, one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefore a price certain in money or its equivalent. A contract of sale may be absolute or conditional. Essential Elements of a Contract of Sale Sale, by its very nature, is a consensual contract because it is perfected by mere consent. The essential elements of a contract of sale are the following: a) Consent or meeting of the minds, that is, consent to transfer ownership in exchange for the price; b) Determinate subject matter (Object); and c) Price certain in money or its equivalent (Consideration). The term equivalent may refer to check or other negotiable instruments. Forms of Contract of Sale The Contract of Sale is perfected at the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the forms of contract. Thus, Contract of Sale may be made in writing or by word of mouth (orally). In the following transactions, however, the contract must be in WRITING otherwise the contract is unenforceable, unless when there is already partial or complete execution: 1. The sale of real property (land, building etc.), 2. Sale of movable property or personal property if the price thereof is 500 pesos or more; 3. Sale which must be performed or executed only after more than a year from the time of the agreement. Sale of Immovable Property through an Agent, Special Power of Attorney is Needed When the sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing; otherwise the sale shall be void. Example: Mr. X is a Filipino citizen and is working in a big company in the United States of America. He owns a 300 square-meter parcel of land located in Quezon City, Philippines. Considering that he has already decided to stay in America for good, he now intends to sell that parcel of land. Through his cellular phone, he called up his cousin Isabelo to look for a buyer. Isabelo was able to look for one and that is Mr. Mat, a professor Tourism Management and an owner of various restaurants in Manila. Isabelo then called up Mr. X informing him that he has already a buyer. Mr. X simply replied "all right, execute all necessary documents on my behalf." Mr. Mat and Isebelo entered into a contract of sale. Is the contract of sale valid? No, because the authority of Mr. Isabelo who is the agent of Mr. X to sell the property, was not in writing. In order for the agent to validly sell the immovable property of the principal or the owner, the agent must be authorized to do so in writing, otherwise the sale is void. A Contract of Sale of a Parcel of Land must be in Writing but not Necessarily Notarized Though a conveyance of land is not made in a public document (meaning not notarized), it does not affect the validity of such conveyance. Two Kinds of Sale 1. Absolute Sale. A contract of sale is absolute when title to the property passes to the vendee upon delivery of the thing sold. A deed of sale is absolute when there is no stipulation in the contract that title to the property remains with the seller until full payment of the purchase price. The sale is also absolute if there is no stipulation giving the vendor the right to cancel unilaterally the contract the moment the vendee fails to pay within a fixed period. Example: Justine Corporation through its President entered into a contract with Joey, the registered owner of a 500-square-meter lot located in Baguio city. In the said contract, Joey conveys, transfers and sells his said land to Justine Corporation for the amount of 5 million pesos. Justine Corporation shall pay the contract price into two instalments. 2.5 million pesos upon signing of the contract and the other on December 15, 2016. The above example is an absolute sale because the contract expressly transferred ownership to Justine Corporation despite the fact that the latter pay the contract price into two equal instalments. In absolute sale the transfer of ownership is not subject to any condition. 2. Conditional Sale. Ownership remains with the vendor and does not pass to the vendee until full payment of the purchase price The full payment of the purchase price partakes of a suspensive condition, and non-fulfillment of the condition prevents the obligation to sell from arising. An example is contract to sell. Example: Justine Corporation through its President entered into contract with Joey, the registered owner of a 500-square-meter lot located in Baguio City. In the said contract it was stipulated that Joey shall convey, transfer and sell said land to Justine Corporation upon payment of the full contract price amounting to five (5) million pesos which shall be payable in in two monthly instalments: 2.5 million pesos upon signing of the contract, and the other 2.5 million shall be paid on December 15, 2016. Further, upon payment of the said price, Justine Corporation and Joey shall execute another contract that finally transfers ownership.. The above example is a conditional sale because the transfer of the ownership is dependent upon the happening of the condition that is the full payment of the contract price and upon execution of another contract that finally transfers ownership. If these two conditions are not met, there will be no transfer of ownership. Transfer of Ownership Article 1477. The ownership of the thing sold shall be transferred to the vendee upon the actual or constructive delivery thereof. Perfection of Contract of Sale does not in itself transfer ownership. The ownership of the object of the contract is transferred by delivery, which may be actual or constructive. The law imposes upon the vendor the obligation to deliver the thing sold. The thing is considered to be delivered when it is placed in the hands and possession of the vendee. Example: Mr. X is the owner of a restaurant. He entered into an agreement with his supplier Mr. Y to deliver 5 sacks of rice amounting to 12,000.00 pesos on December 14, 2015. Mr. X immediately paid the price. Is Mr. X already the absolute owner of the rice even without delivery of the rice? No. In order for Mr. X to be the absolute owner of the 5 sacks of rice, the same must be delivered to him because delivery transfers ownership. What is the effect if the thing subject of the contract of sale was lost, deteriorated or damaged before or after delivery? 1. If the object has been lost before perfection of the contract, the seller bears the loss. This is because there is no contract. The seller remains to be the owner. 2. If the object is lost after the same has been delivered to the buyer, then the buyer bears the loss. This is the doctrine of Resperit Domino (He, who is the owner of the thing shall bear the risk of loss). Effect of the sale by a person who is not the owner of the thing sold Where the goods are sold by a person who is not the owner thereof, the buyer acquires no better title than the seller had. Example: Paolo is a housekeeping staff of Mabuhay Hotel. One day, while cleaning room 65, he stole the gold ring left by Kristine, the guest of the said hotel. Paolo sells the same to his co-employee Turibio for P3,000.00. Did Turibio acquire title to the ring? Turibio never acquired better title to the ring. This is because he bought the ring from Paolo who is not the owner of the same. As a consequence, Kristine may recover the ring from Turibio without any obligation on her part to reimburse Turibio. While Turibio has no right to be reimbursed, he may, however, demand from Paolo the amount of P3,000.00 that he paid. Situations where the buyer acquires better title even if the seller is not the owner of the thing Even if the person is not the owner of thing sold the same is valid and the buyer acquires better title as in the following cases: 1. When the sale is made under the authority or with the consent of the owner. Example: The sale of goods by the agent of the owner of the goods 2. When the owner is precluded by his conduct from denying the seller's authority to sell. Example: Lenin is an employee of Mabuhay hotel. He gave his ring to Morris for of safekeeping because he was scheduled purposes to clean room 65 of the hotel. After cleaning, Lenin immediately went to Morris to get his ring. However, when he was about to reach the station of Morris, he saw Morris selling the ring but Lenin did not object nor react. Morris successfully sold the ring to Ponpon) In this case Ponpon acquires better title and right over the ring because by Lenin's failure to object to the sale, he can no longer deny the authority of Morris to sell his ring. It is as if he allows Morris to sell it. 3. When the sale is made under the provision of any factor acts, recording laws or any provisions of law enabling the apparent owner to dispose of the goods as if he were the true owner thereof. Example: Dianna is the registered owner of a parcel of land. She sold the same to Ponponan hotelier. Dianna and Ponpon executed a deed of absolute sale. The problem is that after the execution of the absolute sale, Dianna remains in possession of the Transfer Certificate of Title (land title) and that Ponpon did not register the deed of absolute sale to the register of deeds. Dianna then sold the same property to Lizel who is not aware of the previous sale. Lizel and Dianna executed a deed of absolute sale and registered the same in her name to the register of deeds. In this case, Lizel has the better title over Ponpon because the name of Dianna is still the one appearing in the Transfer Certificate of Title (land title); hence, Dianna is still the apparent owner of the land as per the register of deeds. It must be noted that Dianna is no longer the owner when she sold the same property to Lizel; considering that she had previously sold the property to Ponpon by virtue of the deed absolute sale they executed. However, because Ponpon failed to register it to the register of deeds, Dianna is presumed to be the owner the land that enables her to sell to Lizel. 4. When the sale is made under statutory power of sale or under the order of the court. Example: Turibio is indebted to Morris for the amount of 1 million pesos. Since Turibio failed to pay, Morris filed a case for collection of sum of money against Turibio. The court found that Turibio is indeed liable. Considering that Turibio has no cash, the court ordered the Sheriff to sell the car and other properties of Turibio in the public auction. In this case, the Sheriff is not the owner of the thing sold but because this was an order of the court the sale made by the Sheriff is valid. 5. When the purchase is made in a merchant's store, or in fairs. or markets. Sale of Personal Property on Installment: Article 1484, The Recto Law The Recto Law was passed in order to protect the buyers on installment who, more often than not, have been victimized by sellers who, before the enactment of this law, succeeded in unjustly enriching themselves at the expense of the buyers, because aside from recovering the goods sold, upon default of the buyer in the payment of two installments, still retained for themselves all amounts already paid, and in addition, were adjudged entitled to damages, such as attorney's fees, expenses of litigation and costs. Remedies under the Recto Law This Recto Law states that, "In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies:" (1) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should the vendee's failure to pay cover two or more installments; (3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void Recto Law finds applicable if: 1. There is an absolute sale or contract of sale; 2. The object is personal property and not real property or land; and 3. The transaction is installment. The Remedies in Article 1484 are Alternative The three (3) remedies provided for in the "Recto Law" are alternative and not cumulative. This means that the exercise of one would preclude the other remedies. Consequently, should the vendee-mortgagor default in the payment of two or more of the agreed instalments, the vendor-mortgagee has the option to avail of any of these three (3) remedies: either to exact fulfilment of the obligation, to cancel the sale, or to foreclose the mortgage on the purchased chattel, if one was constituted. Illustration: Kristine, Joanna and Lizel are the partners of XXX restaurant. They bought a car from Mot Motors Corporation for P 750,000.00 payable in 60 equal monthly installments of P12,500 each. As a security, the partners executed a chattel mortgage on the said car. After paying the first 3 installments, the partners defaulted in the payment of the fourth installment. What is the remedy of Mot Motors Corporation? Under the Recto Law, one of the remedies of the seller is to demand from the partners for the exact fulfilment of the obligation is to demand payment of the installment defaulted only. May Mot Motors cancel the sale it entered to the partners? No. Under the Recto Law, the remedy of the cancellation of the sale or to foreclose the chattel mortgage constituted on the car is available only when the buyer was in default for two or more instalments. In the given case since the partners failed to pay only one installment Mot Motors cannot cancel or foreclose the sale. Suppose the partners failed to pay 2 or 3 installments, what are the remedies of Mot Motors Corporation? Mot Motors may choose either to cancel the sale or to foreclose the chattel mortgage because the partners had already defaulted in payment for 2 or more installments. Suppose Mot Motors opted to foreclose the chattel mortgage constituted on the car and after the foreclosure sale, the car was sold only for P600,000.00, may Mot Motors Corporation recover the deficiency of P112,500.00 from the partners? No. Since Mot Motors Corporation chose the remedy of foreclosure, it shall have no further remedy or action against the buyer (the partners) for any deficiency. The three remedies provided for in the Recto Law are alternative and not cumulative. Meaning, the exercise of one would preclude the other remedies. Republic Act No. 6552, the Realty Installment Buyer Act or Maceda Law Republic Act No. 6552, the Realty Installment Buyer Act or more popularly referred to as the Maceda Law, named after its author, the late Sen. Ernesto Maceda, was adopted with the purpose of "protecting buyers of real estate on installment payments against onerous and oppressive conditions." It delineates the rights and remedies of buyers and protects them from one-sided and pernicious contract stipulations. Application of RA No. 655 The Maceda Law applies in all transactions or contracts involving the sale or financing of real estate on installment payments, including residential condominium apartments. It does not apply to industrial lots, commercial buildings and sales to tenants under agrarian reform. Rights Granted to the Buyer 1. When the buyer has paid at least two (2) years of installments, the buyer is entitled to the following rights in case he defaults in the payment of succeeding installments: (a) To pay, without additional interest, the unpaid installments due within the total grace period earned by him which is hereby fixed at the rate of one (1) month grace period for every one year of installment payments made: Provided, that this right shall be exercised by the buyer only once in every five years of the life of the contract and its extensions, if any. (b) If the contract is canceled, the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to fifty percent (50%) of the total payments made, and, after five (5) years of installments, an additional five percent (5%) every year but not to exceed ninety percent (90%) of the total payments made: Provided, that 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. Down payments, deposits or options on the contract shall be included in the computation of the total number of installment payments made. 2. In case where less than two years of installments were paid: a. The seller shall give the buyer a grace period of not less than sixty (60) days from the date the installment became due. b. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel 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. Right of the Buyer to Sell or Assign In all cases mentioned above, the buyer shall during the grace period but before the actual cancellation of the contract, shall have the right to sell his rights or assign the same to another person or to reinstate the contract by updating the account. Example: Jose bought from Villar Realty Inc., a condominium unit for one million pesos (P1,000,000.00). The term of the contract are the following: 1. Downpayment of P100,000.00 2. The remaining balance payable in 10 years in installments of P7,500.00 per month Jose paid the downpayment and 36 monthly (3 years) installments, however Jose defaulted payment in the 37th month and succeeding installments. Question: May Villar Realty Inc. cancel the sale? In the affirmative, is Jose entiled to refund of the cash surrender value? How much? Yes, Villar Realty Inc. may cancel the sale for failure of Jose to pay the installments. Since Jose has paid at least two (2) years, he is entitled to the refund of cash surrender value equivalent to 50% of the total payments made. That is P185,000.00. 50% (P100,000.00 downpayment + (P7,500.00 x 36 months) = 185,000.00 Obligations of the Vendor The following are the obligations of the Vendor: 1. To transfer the ownership 2. To deliver the thing 3. To warrant the thing 4. To take care of the thing 5. To pay the expenses for the execution and registration of the sale, unless there is a stipulation to the contrary (Art.1487) Implied Warranties in Contract of Sale Implied warranties are those that are inherent in the contract of sale. This means that even if the parties did not stipulate on the matter, this warranty is always attached in the contract. Note, however, that implied warranties may be waived by agreement of the parties. The following are the implied warranties: 1. Warranty against eviction - The seller warrants that he has the right to sell the thing at the time of the ownership is to pass, and that the buyer shall enjoy the legal and peaceful possession of the thing. If the buyer is evicted, then the seller shall be liable. 2. Warranty against hidden defect - This is warranty that the thing shall be free from any hidden faults or defects, or any charge or encumbrance not declared or known to the buyer. Persons not Liable for Breach of Warranty 1. Sheriff's sale 2. Auctioneer 3. Mortgagee 4. Pledgee 5. Other person professing to sell by virtue of authority in fact or law Double Sale It happens that the same thing which is the object of the contract of sale is sold to different vendees. This is called "Double Sale”. The problem would be as between the two buyers to whom will ownership of the thing be given? Article 1544 of the Civil Code provides: "If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first possession thereof in good faith, if it should be movable property. Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property. Should there be no inscription, the ownership shall pertain to the person who in good faith was first in possession; and, in the absence thereof; to the person who presents the oldest title, provided there is good faith." Rule if the Object is Personal Property If what has been sold to two or more buyers is a personal property, the ownership shall be transferred to the buyer who first possesses the property purchased in good faith. Example: Kelvin sold to John a specific cellphone in January 19, 2020. However, the same cellphone was sold by Kelvin to Morris on January 25, 2020 and Morris took actual possession of the cellphone in good faith, as between John and Morris, who is considered the owner? Morris is the owner because he was the one who took actual possession in good faith. Rule if the Object is Immovable Property If what has been sold to two or more buyers is immovable property, the ownership shall be transferred to: 1. The person acquiring it who in good faith first recorded it in the Registry of Property; 2. In default thereof, to the person who in good faith was first in possession; and 3. In default thereof, to the person who presents the oldest title, provided there is good faith. The requirement of the law then is two-fold: acquisition in good faith and registration in good faith. Good faith must concur with the registration. If it would be shown that a buyer was in bad faith, the alleged registration they have made amounted to no registration at all. Example 1: Grace sold a parcel of land to Danna on February 15, 2020. The same land was sold by Grace to Joanna on March 1, 2020 and registered the sale. As between Danna and Joanna who is considered owner? If Danna and Joanna are both in good faith, Joanna is considered the rightful owner because she was the first to register the sale in good faith. But if Joanna had knowledge of the sale between Grace and Danna, Joanna's right will be defeated because she acted in bad faith. Example 2: Grace sold a parcel of land to Danna on February 15, 2020. The same land was sold by Grace to Joanna on March 1, 2020. However, Joanna and Danna did not register the sale. But on March 10, 2020 Joanna took actual possession of the land in good faith. As between Danna and Joann, who is the owner? Joanna is the owner because she was the one who first took actual possession in good faith. The sale of Grace to Danna although ahead of Joanna does not give her the ownership because there was no registration. Under the law, in the absence of registration, the first who took actual possession in good faith is considered the owner. Example 3: Grace sold a parcel of land to Danna on February 15, 2020. The same land was sold by Grace to Joanna on March 1, 2020. However, no one registered the sale and no one took actual possession of the land Who is the owner? Since no one registered the sale and that no one took actual possession of the land, the owner shall be Danna because she got the oldest title.