CHAPTER 1 - NATURE OF SALE
If
DEFINITION OF SALE
Article 1458 of the Civil Code defi nes “sale” as a contract
whereby one of the contracting parties (Seller) obligates himself
to transfer the ownership, and to deliver the possession, of a
determinate thing; and the other party (Buyer) obligates himself
to pay therefor a price certain in money or its equivalent.1
The Roman Law concept embodied in the old Civil Code2
that treated delivery of tangible property as the sole purpose of
sale has been modifi ed under the present Article 1458, which
applies the common law concept of requiring the obligation to
transfer the ownership of the subject matter of the sale as a
principal obligation of the seller.
1. Nature of Obligations Created in a Sale
The defi nition of the contract of sale under Article 1458
provides that its perfection brings about the creation of two sets
of obligations:
(a) Two OBLIGATIONS of the SELLER to:
(i) Transfer the Ownership,3 and
1Alfredo v. Borras, 404 SCRA 145 (2003); Cruz v. Fernando,
477 SCRA 173 (2005);
Roberts v. Papio, 515 SCRA 346 (2007).
2Art. 1445 of the old Civil Code.
3Flancia v. Court of Appeals, 457 SCRA 224, 231 (2005), defi
nes “ownership” as
“the independent and general power of a person over a thing for
purposes recognized
by law and within the limits established thereby — aside form
the jus utendi and the
jus abutendi inherent in the right to enjoy the thing, the right to
dispose, or the jus
disponendi, is the power of the owner to alienate, encumber,
transform and even destroy
the thing owned.”
2 LAW ON SALES
(ii) Deliver the Possession, of the SUBJECT
MATTER;
(b) An OBLIGATION for the BUYER to:
(i) Pay the PRICE.4
Both sets of obligations, are real obligations or obligations
“to give,” as contrasted from personal obligations “to do” and
“not to do,” and can be the proper subject of actions for specifi c
performance.5 In contrast, obligations to do or not to do, cannot
be enforced through actions for specifi c performance because
of the public policy against involuntary servitude;6 although the
creditor can have the same executed by another at the cost of
the obligor,7 and the obligor’s refusal to comply can be the basis
for claims for damages.8
To illustrate, Article 1480 of the Civil Code, which crossrefers
to Article 1165 thereof, provides that when what is to be
delivered is a determinate thing, the buyer, in addition to the
right to recover damages, may compel the seller to make the
delivery. In other words, a defaulting party in a sale cannot insist
on just paying damages when the non-defaulting party demands
performance.
2. Subject Matter of Sale
Although Article 1458, in defi ning sale, uses the word
“determinate” to describe the subject matter of the sale, the
present Law on Sales has expanded the coverage to include
generic objects which are at least “determinable.” Article 1460
states that the “requisite that the thing be determinate is satisfi
ed
if at the time the contract is entered into, the thing is capable of
4Acap v. Court of Appeals, 251 SCRA 30 (1995); Velarde v.
Court of Appeals, 361
SCRA 56 (2001).
5Art. 1165 of the Civil Code: “When what is to be delivered is a
determinate thing,
the creditor . . . may compel the debtor to make the delivery.
the thing is indeterminate
or generic, he may ask that the obligation be complied with at
the expense of the
debtor.”
6Sec. 18(2), Art. III, 1987 Constitution.
7Art. 1167, Civil Code.
8Art. 1170, Civil Code.
3
being made determinate without the necessity of a new or
further
agreement between the parties,” which includes “determinable”
albeit generic objects as valid subject matters of sale.
Nonetheless, the use of the word “determinate” in the
defi nition of sale under Article 1458 seems accurate since it
pertains to the performance of the obligations of the seller
to transfer ownership and to deliver possession. This would
require that even if the subject matter of the sale was generic
(determinable), the performance of the seller’s obligation
would require necessarily its physical segregation or particular
designation, making the subject matter determinate at the point
of performance.
The use of the word “determinate” to describe the subject
matter emphasizes more specifi cally the fact that the obligation
to deliver and transfer ownership can be performed only with
the subject matter becoming specifi c or determinate, and is not
meant to exclude certain generic things from validly becoming
the proper subject matter of sale, at the point of perfection.
3. Elements of Contract of Sale
Coronel v. Court of Appeals,9 enumerates the essential
elements of a valid contract of sale to consist of the following:
(a) CONSENT, or meeting of the minds to transfer
ownership in exchange for the price;
(b) SUBJECT MATTER; and
(c) PRICE, certain in money or its equivalent.10
9263 SCRA 15 (1996).
10See also Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160
(1997); Quijada
v. Court of Appeals, 299 SCRA 695 (1998); Co v. Court of
Appeals, 312 SCRA 528
(1999); Heirs of San Andres v. Rodriguez, 332 SCRA 769
(2000); Roble v. Arbasa, 362
SCRA 69 (2001); Peñalosa v. Santos, 363 SCRA 545 (2001);
Polytechnic University of
the Philippines v. Court of Appeals, 368 SCRA 691 (2001);
Katipunan v. Katipunan, 375
SCRA 199 (2002); Londres v. Court of Appeals, 394 SCRA 133
(2002); Manongsong
v. Estimo, 404 SCRA 683 (2003); Jimenez, Jr. v. Jordana, 444
SCRA 250 (2004); San
Lorenzo Dev. Corp. v. Court of Appeals, 449 SCRA 99 (2005);
Yason v. Arciaga, 449
SCRA 458 (2005); Roberts v. Papio, 515 SCRA 346 (2007);
Navarra v. Planters Dev.
Bank, 527 SCRA 562 (2007); Republic v. Florendo, 549 SCRA
527 (2008).
NATURE OF SALE
4 LAW ON SALES
When all three elements are present, there being a meeting
of the minds, then a perfected contract of sale arises, and its
validity is not affected by the fact that previously a fi ctitious deed
of sale was executed by the parties,11 or by the fact of
nonperformance
of the obligations thereafter.
Unfortunately, the Supreme Court has considered in a
number of decisions that the resulting sale is “void” when some
of
the essential requisites are not present.12 To the author, the
more
appropriate term to use when an essential element is not
present
at meeting of the mind is to declare a “no contract” situation.
To illustrate, Dizon v. Court of Appeals,13 holds that all three
elements of consent, subject matter and consideration must be
present for a valid sale to exist; and that in a situation where
any of the elements is not present, “[t]there was no perfected
contract of sale,”14 and that “the absence of any of these
essential
elements negates the existence of a perfected contract of
sale,”15
rather than using the technical term “void.” In Manila Container
Corp. v. PNB,16 the Court held that absence of the concurrence
of all the essential elements, the giving of earnest money cannot
establish the existence of a perfected contract of sale.
On the other hand, when all three elements are present, but
there is defect or illegality constituting any of such elements, the
resulting contract is either voidable when the defect constitutes
a vitiation of consent, or void as mandated under Article 1409 of
the Civil Code.
11Peñalosa v. Santos, 363 SCRA 545 (2001).
12Mapalo v. Mapalo, 17 SCRA 114 (1966) and Rongavilla v.
Court of Appeals, 294
SCRA 289 (1998), both consider the contract “void” even when
they agreed that there
was no meeting of the minds on the price stated in the underlying
instrument of sale.
Bagnas v. Court of Appeals, 176 SCRA 159 (1989), considers a
simulated price or a
nominal price to give rise to a “void” contract of sale. Cabotaje
v. Pudunan, 436 SCRA 423
(2004), considers the lack of consent by the owner of the
property to bring about a “void”
sale.
13302 SCRA 288 (1999).
14Ibid, at p. 301.
15Ibid, at p. 302. Reiterated in Firme v. Bukal Enterprises and
Dev. Corp., 414
SCRA 190 (2003).
16511 SCRA 444 (2006).
5 “by their conduct, words, actions and deeds prior to, during and
4. Stages in the Life of Sale
Strictly speaking, there are only two stages in the “life” of a
contract of sale, i.e., perfection and consummation, since it is
only
at perfection that sale as a contract begins to exist in the legal
world. Until sale is perfected, it cannot serve as an independent
source of obligation, nor as a binding juridical relation between
the parties.17 Nevertheless, the Supreme Court18 has
considered
the following to be the stages in the life of a sale:
(a) POLICITACION, negotiation, or preparation
stage;
(b) PERFECTION, conception or “birth”; and
(c) CONSUMMATION or “death.”
Policitacion or negotiation covers the period from the time
the prospective contracting parties indicate their interests in the
contract to the time the contract is perfected; perfection takes
place upon the concurrence of the essential elements of the
sale which are the meeting of the minds of the parties as to the
object of the contract and upon the price; and consummation
begins when the parties perform their respective undertaking
under the contract of sale, culminating in the extinguishment
thereof.19
ESSENTIAL CHARACTERISTICS OF SALE
Before dissecting sale as a contract, it would be useful to
look at sale from a general point of view, by analyzing its
essential
characteristics.
17Jovan Land, Inc. v. Court of Appeals, 268 SCRA 160, 164
(1997); Dizon v. Court
of Appeals, 302 SCRA 288 (1999); Platinum Plans Phil., Inc. v.
Cucueco, 488 SCRA 156
(2006); Manila Metal Container Corp. v. PNB, 511 SCRA 444
(2006); Roberts v. Papio,
515 SCRA 346 (2007).
18Ang 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);
Province of Cebu v. Heirs of Rufi na Morales, 546 SCRA 315
(2008).
19San Miguel Properties Philippines v. Huang, 336 SCRA 737,
743 (2000).
NATURE OF SALE
6 LAW ON SALES
1. Nominate and Principal
Sale is a nominate contract since it has been given a
particular name by law;20 more importantly, its nature and
consequences are governed by a set of rules in the Civil Code,
which euphemistically we refer to as the “Law on Sales.”
Sale is a principal contract, as contrasted from accessory
or preparatory contracts, because it can stand on its own, and
does not depend on another contract for its validity or existence;
more importantly, that parties enter into sale to achieve within
its essence the objectives of the transaction, and simply not in
preparation for another contract.
The “nominate and principal” characteristics of sale leads to
the doctrine held by the Supreme Court that in determining the
real character of the contract, the title given to it by the parties is
not as signifi cant as its substance.21
In one case,22 the Court held that in determining the nature
of a contract, the courts look at the intent of the parties and not
at
the nomenclature used to describe it, and that pivotal to deciding
such issue is the true aim and purpose of the contracting parties
as shown by the terminology used in the covenant, as well as
immediately after executing the agreement.”
In another case,23 the Court held that contracts are not
defi ned by the parties thereto but by the principles of law; and
that in determining the nature of a contract, the courts are not
bound by the name or title given to it by the contracting parties.
The other doctrinal signifi cance of the “nominate and
principal” characteristics of sale is that all other contracts which
have for their objective the transfer of ownership and delivery
of possession of a determinate subject matter for a valuable
consideration, are governed necessarily by the Law on Sales.24
20Art. 1458, Civil Code.
21Bowe v. Court of Appeals, 220 SCRA 158 (1993); Romero v.
Court of Appeals,
250 SCRA 223 (1995); Santos v. Court of Appeals, 337 SCRA
67 (2000).
22Lao v. Court of Appeals, 275 SCRA 237, 250 (1997).
23Cavite Dev. Bank v. Lim, 324 SCRA 346 (2000).
24In-depth discussions of this doctrinal signifi cance are found
in Chapter 3.
7
2. Consensual
Sale is consensual contract (as contrasted from solemn
and real contracts), since it is perfected by mere consent, at the
moment there is a meeting of the minds upon the thing which is
the object of the contract and upon the price.25
Buenaventura v. Court of Appeals,26 held that a sale over a
subject matter is not a real contract, but a consensual contract,
which becomes a valid and binding contract upon the meeting
of
the minds as to the price. Once there is a meeting of the minds
as to the price, the sale is valid, despite the manner of its actual
payment, or even when there has been breach thereof. If the
real price is not stated in the contract, then the sale is valid but
subject to reformation; if there is no meeting of the minds as to
the price, because the price stipulated is simulated, then the
contract is void.27
Under Article 1475 of the Civil Code, from the moment of
perfection of the sale, the parties may reciprocally demand
performance, even when the parties have not affi xed their
signatures to the written form of such sale,28 but subject to
the provisions of the law governing the form of contracts.29
Consequently, the actual delivery of the subject matter or
payment of the price agreed upon are not necessary
components
to establish the existence of a valid sale;30 and their non-
25Art. 1475, Civil Code. Balatbat v. Court of Appeals, 261 SCRA
128 (1996); Coronel
v. Court of Appeals, 263 SCRA 15 (1996); Xentrex Automotive,
Inc. v. Court of Appeals,
291 SCRA 66 (1998); Laforteza v. Machuca, 333 SCRA 643
(2000); Londres v. Court of
Appeals, 394 SCRA 133 (2002); San Lorenzo Dev. Corp. v.
Court of Appeals, 449 SCRA
99 (2005); Yason v. Arciaga, 449 SCRA 458 (2005); Ainza v.
Padua, 462 SCRA 614
(2005); Cruz v. Fernando, 477 SCRA 173 (2005); Marnelgo v.
Banco Filipino Savings and
Mortgage Bank, 480 SCRA 399 (2006); MCC Industries Sales
Corp. v. Ssanyong Corp.,
536 SCRA 408 (2007); Castillo v. Reyes, 539 SCRA 193 (2007);
Roberts v. Papio, 515
SCRA 346 (2007).
26416 SCRA 263 (2003).
27Ibid, at p. 271, citing VILLANUEVA, PHILIPPINE LAW ON
SALES, p. 54 (1998).
28Gabelo v. Court of Appeals, 316 SCRA 386 (1999); Province
of Cebu v. Heirs of
Rufi na Morales, 546 SCRA 315 (2008).
29Co v. Court of Appeals, 312 SCRA 528 (1999). Also City of
Cebu v. Heirs of
Candido Rubi, 306 SCRA 408 (1999); San Lorenzo Dev. Corp.
v. Court of Appeals, 449
SCRA 99 (2005).
30Alcantara-Daus v. de Leon, 404 SCRA 74 (2003);
Buenaventura v. Court of
Appeals, 416 SCRA 263 (2003).
NATURE OF SALE
8 LAW ON SALES
performance do not also invalidate or render “void” a sale that
has
began to exist as a valid contract at perfection; non-
performance,
merely becomes the legal basis for the remedies of either specifi
c perfected.”
performance or rescission, with damages in either case.31
The binding effect of a deed of sale on the parties is based
on the principle that the obligations arising therefrom have the
force of law between them.32
In Fule v. Court of Appeals,33 the Court summarized the
doctrines pertaining to sale being a consensual contract, thus:
A contract of sale is perfected at the moment there
is a meeting of the minds upon the thing which is the
object of the contract and upon the price.34 Being
consensual, a contract of sale has the force of law
between the contracting parties and they are expected
to abide in good faith by their respective contractual
commitments. Article 1358 of the Civil Code which
requires the embodiment of certain contracts in a
public instrument, is only for convenience,35 and
registration of the instrument only adversely affects
third parties.36 Formal requirements are, therefore, for
the benefi t of third parties. Non-compliance therewith
does not adversely affect the validity of the contract
nor the contractual rights and obligations of the parties
thereunder.37
Since sale is a consensual contract, the party who alleges
it must show its existence by competent proof, as well as of the
31Gabelo v. Court of Appeals, 316 SCRA 386 (1999); Alcantara-
Daus v. de Leon,
404 SCRA 74 (2003); Buenaventura v. Court of Appeals, 416
SCRA 263 (2003), citing this
particular passage in VILLANUEVA, PHILIPPINE LAW ON
SALES, p. 54 (1998).
32Veterans Federation of the Philippines v. Court of Appeals,
345 SCRA 348
(2000).
33286 SCRA 698 (1998).
34Citing Art. 1475, Civil Code; Romero v. Court of Appeals, 250
SCRA 223
(1995).
35Citing Aspi v. Court of Appeals, 236 SCRA 94 (1994).
36Citing Olegario v. Court of Appeals, 238 SCRA 96 (1994).
37286 SCRA 698, 712-713 (1998). Reiterated in Quijada v.
Court of Appeals, 299
SCRA 695 (1998); Agasen v. Court of Appeals, 325 SCRA 504
(2000).
9
essential elements thereof.38 However, when all three elements
of a sale are present, there being a meeting of the minds, then
a perfected contract of sale arises, and its validity is not affected
by the fact that previously a fi ctitious deed of sale was executed
by the parties;39 and at that point the burden is on the other
party
to prove the contrary.40
Despite the consensual character of a sale, under Article
1332 of the Civil Code, when one of the parties is unable to read,
or if the contract is in a language not understood by him, and
mistake or fraud is alleged, the person enforcing the contract
must show that the terms thereof have been fully explained to
the former.41
a. Modalities That Affect the
Characteristic of Consensuality
The consensual characteristic of sale can be affected by
modalities that by stipulation may be added into the contractual
relationship, such as a suspensive term or condition. Biñan Steel
Corp. v. Court of Appeals,42 reminds us that “even if
consensual,
not all contracts of sale become automatically and immediately
effective. . . In sales with assumption of mortgage, the
assumption
of mortgage is a condition precedent to the seller’s consent and
therefore, without approval of the mortgagee, the sale is not
On the other hand, National Housing Authority v. Grace
Baptist Church,43 demonstrates clearly that even the delivery
and
taking possession of the subject matter by the buyer with the
knowledge or consent of the seller, would not bring about the
perfection and binding effect of the sale, when the meeting of
the
minds is incomplete, there being no agreement yet on the fi nal
price.
38Villanueva v. Court of Appeals, 267 SCRA 89 (1997); Roberts
v. Papio, 515
SCRA 346 (2007).
39Peñalosa v. Santos, 363 SCRA 545 (2001).
40Heirs of Ernesto Biona v. Court of Appeals, 362 SCRA 29
(2001).
41Vda. de Ape v. Court of Appeals, 456 SCRA 193 (2005).
42391 SCRA 90 (2002).
43424 SCRA 147 (2004).
NATURE OF SALE
10 LAW ON SALES
3. Bilateral and Reciprocal
Sale is a bilateral contract embodying reciprocal obligations,
as distinguished from a unilateral contract, because it imposes
obligations on both parties to the relationship,44 and whereby
the
obligation or promise of each party is the cause or consideration
for the obligation or promise of the other.45
Reciprocal obligations are “those which arise from the same
cause, and in which each party is a debtor and a creditor of the
other, such that the obligation of one is dependent upon the
obligation of the other. They are to be performed simultaneously
such that the performance of one is conditioned upon the
simultaneous fulfi llment of the other.”46
The legal effects and consequences of sale being a bilateral
contract composed of reciprocal obligations are as follows:
(a) The power to rescind is implied, and such
power need not be stipulated in the contract
in order for the innocent party to invoke the
remedy;47
(b) Neither party incurs delay if the other party
does not comply, or is not ready to comply
in a proper manner, with what is incumbent
upon him;48 and
(c) From the moment one of the parties fulfi lls his
obligation, the default by the other begins,49
without the need of prior demand.50
Since both parties in a sale are bound by their respective
obligations which are reciprocal in nature, then a party cannot
44Art. 1458, Civil Code; People v. Tan, 338 SCRA 330 (2000).
45Art. 1191, Civil Code; see also Vda. De Quirino v. Palarca, 29
SCRA 1 (1969).
46Agro Conglomerates, Inc. v. Court of Appeals, 348 SCRA 450
(2000). See also
Ong v. Court of Appeals, 310 SCRA 1 (1999); Mortel v.
KASSCO, 348 SCRA 391 (2000);
Carrascoso, Jr. v. Court of Appeals, 477 SCRA 666 (2005). See
also Vda. De Quirino v.
Palarca, 29 SCRA 1 (1969) as it pertains to an option contract.
47Art. 1191, Civil Code.
48Art. 1168, last paragraph, Civil Code; Almocera v. Ong, 546
SCRA 164 (2008).
49Ibid.
50Art. 1191, Civil Code.
11
simply choose not to proceed with the sale by offering also the
other party not to be bound by his own obligation; that each party
has the remedy of specifi c performance; and that rescission or
resolution cannot be enforced by defaulting party upon the other
party who is ready and willing to proceed with the fulfi llment of
his obligation.51
Polytechnic University of the Philippines v. Court of Appeals,52
summed up the reciprocal and nominate nature of sale, thus:
“It is therefore a general requisite for the existence of a valid
and enforceable contract of sale that it be mutually obligatory,
i.e., there should be a concurrence of the promise of the vendor
to sell a determinate thing and the promise of the vendee to
receive and pay for the property so delivered and transferred.”53
Consequently, Carrascoso, Jr. v. Court of Appeals,54 held that
since a sale is constituted of reciprocal obligations, then “[t]he
right of rescission of a party to an obligation under Article 1191
is
predicated on a breach of faith by the other party who violates
the
reciprocity between them.”
4. Onerous
Sale is an onerous contract, as distinguished from a
gratuitous contract, because it imposes a valuable consideration
as a prestation, which ideally is a price certain in money or its
equivalent.55
In Gaite v. Fonacier,56 the Court ruled that the stipulation in
a contract of sale on the payment of the balance of the purchase
price must be deemed to cover a suspensive period rather than
a
condition since “there can be no question that greater reciprocity
obtains if the buyer’s obligation is deemed to be actually
existing,
with only its maturity (due date) postponed or deferred, than if
such obligation were viewed as non-existing or not binding until
51Almira v. Court of Appeals, 399 SCRA 351 (2003).
52368 SCRA 691 (2001).
53Ibid, at p. 705.
54477 SCRA 666, 686 (2005).
55Art. 1458, Civil Code.
562 SCRA 831 (1961).
NATURE OF SALE
12 LAW ON SALES
the ore was sold.”57 The Court held that the rules of
interpretation
would incline the scales in favor of “the greater reciprocity of
interests,” since sale is essentially an onerous contract.
5. Commutative
Sale is a commutative contract, as distinguished from an
aleatory contract, because a thing of value is exchanged for
equal
value, i.e., ideally the value of the subject matter is equivalent
to the price paid. Nevertheless, there is no requirement that the
price be equal to the exact value of the subject matter; all that is
required is for the seller to believe that what was received was
of
the commutative value of what he gave.58
Again Gaite held that a sale is “normally commutative
and onerous: not only does each one of the parties assume a
correlative obligation (the seller to deliver and transfer
ownership
of the thing sold, and the buyer to pay the price), but each party
anticipates performance by the other from the very start.”59
Gaite
recognized that although in a sale “the obligation of one party
can be lawfully subordinated to an uncertain event, so that the
other understands that he assumes the risk of receiving nothing
for what he gives (as in the case of a sale of hope or expectancy,
emptio spei), it is not in the usual course of business to do so;
hence, the contingent character of the obligation must clearly
appear.”60
Gaite therefore acknowledged that obligations in a sale can
be subordinated to a suspensive condition with the party fully
aware that “he assumes the risk of receiving nothing for what
he gives,” although such stipulation may seem to be contrary
to the commutative nature of a sale. This confi rms the view that
although “commutativeness” is an essential characteristic of a
sale, the test for compliance therewith is not objective but rather
subjective; i.e., so long as the party believes in all honesty that
he
is receiving good value for what he transferred, then it complies
57Ibid, at p. 838.
58Buenaventura v. Court of Appeals, 416 SCRA 263 (2003).
592 SCRA 831, 837 (1961).
60Ibid.
13
with the commutative character of a sale, and would not be
deemed a donation nor an aleatory contract.
Take the example of a seller, selling his old car for only
5200,000.00, when a more objective review of the prevailing
market price for the particular model shows that its correct
selling
value would be 5500,000.00. Under those circumstances, the
contract perfected with the buyer would still be a sale, because
by agreeing to receive a price of only 5200,000.00, the seller
believes honestly that he is receiving appropriate value for the
car he is selling. Likewise, the consequences of negotiations
and
bargaining, such as being able to obtain a large discount, do not
destroy the commutative nature of the sale, since in the end the
test would be that the parties to the sale believe that they have
each received the proper and appropriate value for what they
each in turn gave up.
However, the point of discussion pertaining to the subjective
test of the commutative nature of sale cannot, and should not,
be pushed to absurdity. Take a situation, where the same seller,
knowing fully well that the going price for his car is 5200,000.00,
sells it for only 5100.00 to the buyer. Even if the seller, is satisfi
ed
in receiving only 5100.00 for the car, the resulting contract, from
a strictly legal standpoint, is not a sale, but more of a donation,
and the law will presume that the underlying consideration must
have been liberality. Therefore, the tax authorities may insist
that the gift tax be paid on the transaction. This is all academic
discussions, of course, since if no third party complains,
the nature of the contract would never be at issue, and in all
probability the contracting parties themselves would be bound
by their characterization of the contract under the principle of
estoppel.
The subjective test of the commutative nature of sale is
further bolstered by the principle that inadequacy of price does
not affect ordinary sale.61 Inadequacy of price may be a ground
for setting aside an execution sale but is not a suffi cient ground
for the cancellation of a voluntary contract of sale otherwise free
61Arts. 1355 and 1470, Civil Code; Ereñeta v. Bezore, 54 SCRA
13 (1973).
NATURE OF SALE
14 LAW ON SALES
from invalidating effects.62 Inadequacy of price may show vice
in consent, in which case the sale may be annulled, but such
annulment is not for inadequacy of price, but rather for vitiation
in consent.63
Only recently Buenaventura v. Court of Appeals,64 held that:
“Indeed, there is no requirement that the price be equal to the
exact value of the subject matter of sale; all that sellers believed
was that they received the commutative value of what they gave.
All the respondents believed that they received the commutative
value of what they gave.”65
6. Sale Is Title and Not Mode
The perfection of a sale gives rise to the obligation on the
part of the seller to transfer ownership and deliver possession of
the subject matter; nevertheless, it would be delivery or tradition
that is the mode to transfer ownership and possession to the
buyer. Although in one case the Court defi ned a “sale” as a
“contract transferring dominion and other real rights in the thing
sold,”66 sale is merely title that creates the obligation on the part
of the seller to transfer ownership and deliver possession, but
on its own sale is not a mode that transfers ownership.67 Thus,
Alcantara-Daus v. de Leon,68 held that while a sale is perfected
by mere consent, ownership of the thing sold is acquired only
upon its delivery to the buyer. Upon the perfection of the sale,
the
seller assumes the obligation to transfer ownership and to
deliver
the thing sold, but the real right of ownership is transferred only
“by tradition” or delivery thereof to the buyer.
In Acap v. Court of Appeals,69 the Court held that an asserted
right or claim to ownership, or a real right over a thing arising
from
62Alarcon v. Kasilag, 40 O.G. Supp. 15, p. 203 (1940).
63Art. 1470, Civil Code.
64416 SCRA 263 (2003).
65Ibid, at p. 272.
66Titong v. Court of Appeals, 287 SCRA 102 (1998).
67Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 370
SCRA 56 (2001);
Alcantara-Daus v. de Leon, 404 SCRA 74 (2003).
68404 SCRA 74 (2003).
69251 SCRA 30, 38 (1995).
15
a juridical act, is not per se suffi cient to give rise to ownership
over
the thing; that right or title must be completed by fulfi lling certain
conditions imposed by law: “Hence, ownership and real rights
are acquired only pursuant to a legal mode or process. While
title
(such as sale) is the juridical justifi cation, mode (like delivery) is
the actual process of acquisition or transfer of ownership over a
thing.”
Acap held that the “Declaration of Heirship and Waiver of
Rights” executed by the heirs waiving their inheritance rights in
favor of a non-heir cannot be deemed a proper mode to affect
title to the land involved because waiver of inheritance right can
only be done in favor of another heir; whereas, it could not also
be considered a sale contract because the document did not
provide for the element of price, which is required for a valid sale
under Article 1458 of the Civil Code.
Manongsong v. Estimo,70 emphasized that once a sale has
been duly perfected, its validity “cannot be challenged on the
ground of the non-transfer of ownership of the property sold at
that time of the perfection of the contract, since it is
consummated
upon delivery of the property to the vendee. It is through tradition
or delivery that the buyer acquires ownership of the property
sold.” Consequently, the proper remedy was not annulment, but
rescission.
Mode is the legal means by which dominion or ownership
is created, transferred or destroyed (e.g., succession, donation,
discovery, intellectual creation, etc.);71 title only constitutes the
legal basis by which to affect dominion or ownership. Therefore,
sale by itself does not transfer or affect ownership;72 the most
that sale does is to create the obligation to transfer ownership;
it is tradition or delivery, as a consequence of sale, that actually
transfers ownership.73
70404 SCRA 683 (2003).
71Cited in San Lorenzo Dev. Corp. v. Court of Appeals, 449
SCRA 99, 113 (2005).
72Quoted or used verbatim in San Lorenzo Dev. Corp. v. Court
of Appeals, 449
SCRA 99, 113 (2005) without acknowledgment given to the
author.
73Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 370
SCRA 56 (2001). The
passage was quoted or used verbatim in San Lorenzo Dev.
Corp. v. Court of Appeals, 449
SCRA 99, 114 (2005) without acknowledgment given to the
author.
NATURE OF SALE
16 LAW ON SALES
The Roman Law concept of sale encompassing only the
obligation of the seller to deliver the property is actually
consistent
with the treatment of sale as merely a title, and by its perfection
does not affect the ownership nor effect the transfer thereof to
the buyer. Since it is tradition or delivery as the mode by which
ownership over the subject matter is transferred to the buyer,
the Roman Law concept of mandating delivery of possession
of the subject matter as the essence of the sale contract would
be logical. This is in stark contrast to the common law concept
that the perfection of a sale over a determinate subject matter
which is ready for delivery would legally transfer ownership to
the buyer, even when there has been no actual or constructive
delivery thereof by the seller.
SALE DISTINGUISHED FROM OTHER SIMILAR
CONTRACTS
The other manner by which to “recognize” a sale is to know
how to differentiate it from other contracts which may happen to
have some characteristics similar to sale. The other contracts by
which clear distinctions had to be made by the Supreme Court
involved basically obligations to transfer ownership and deliver
possession of a subject matter.
In determining the nature or essential characteristic of a
contract purported to be a sale, the Court has held that the
title given to it by the parties is not as much signifi cant as its
substance;74 that courts look at the intent of the parties and
the elements of the contractual relationship and not at the
nomenclature used to describe it.75 Pivotal to deciding this
issue is the true aim and purpose of the contracting parties as
shown by the terminology used in the covenant, as well as “by
their conduct, words, actions and deeds prior to, during and
immediately after executing the agreement.”76
74Romero v. Court of Appeals, 250 SCRA 223 (1995); Lao v.
Court of Appeals,
275 SCRA 237 (1997); Cavite Dev. Bank v. Spouses Cyrus Lim,
324 SCRA 346 (2000);
Santos v. Court of Appeals, 337 SCRA 67 (2000).
75Santos v. Court of Appeals, 337 SCRA 67 (2000).
76Lao v. Court of Appeals, 275 SCRA 237 (1997).
17
In one case,77 the Court held that “[A] contract is what
the law defi nes it to be, taking into consideration its essential
elements, and not what the contracting parties call it. The
transfer
of ownership in exchange for a price paid or promised is the very
essence of a contract of sale.”
1. From Donation
Donation is an act of liberality whereby a person disposes
gratuitously of a thing or right in favor of another person, who
accepts it.78 Sale is essentially an onerous contract, whereas
donation is a gratuitous contract.79 A sale is perfected by mere
consent,80 whereas donation, being a solemn contract,
although
consent is also required, must comply with the formalities
mandated by law for its validity.81
Knowing the distinctions between sale and donation is
important in situations where the consideration for the transfer
or
alienation of a subject matter is not certain as to ensure that it is
valuable consideration to constitute a valid sale. As observed in
Manongsong v. Estimo,82 unlike in a donation by the decedent,
a 84Art. 1641, Civil Code.
valid sale cannot have the legal effect of depriving the
compulsory
heirs of their legitimes: “As opposed to a disposition inter vivos
by
lucrative or gratuitous title, a valid sale for valuable consideration
does not diminish the estate of the seller. When the disposition
is
for valuable consideration, there is no diminution of the estate
but
merely substitution of values, that is, the property sold is
replaced
by the equivalent monetary consideration.”83
77Santos v. Court of Appeals, 337 SCRA 67 (2000).
78Art. 725, Civil Code.
79Art. 725, Civil Code.
80Art. 1457, Civil Code.
81Arts. 745 to 749, Civil Code. For example, in the donation of
movable, Article 748
allows an oral donation provided that there is a simultaneous
delivery of the thing or of
the document representing the right donated; and if the value of
the movable exceeds
55,000.00, then the acceptance must be in writing, otherwise the
donation is void.
Under Article 749, the donation of an immovable must be in a
public document, and the
acceptance may be in the same instrument or a separate public
document, otherwise the
donation is void.
82404 SCRA 683 (2003).
83Ibid, at p. 695.
NATURE OF SALE
18 LAW ON SALES
Under Article 1471 of the Civil Code, when the price of a
sale is simulated, the sale itself may be void, “but the act may
be shown to have been in reality a donation or some other act
or
contract.” In other words, a contract may be entered into in the
form of a “sale” and may end up being governed by the Law on
Donations, even when there may be a formal price agreed upon,
if it is simulated, and the real intention is that the subject matter
is being donated to the supposed “buyer.” In such a case, the
governing rule on perfection of sale by mere consent does not
resolve whether the real contract is valid, since being a donation,
the formality for donation should also have been complied with
for the transaction to be considered valid.
On the other hand, a purported donation may have
been executed by the parties, but it is not mere liberality that
permeates the contract as the only consideration, because other
consideration or burdens are placed upon the donee. In such a
case, the issue of what is the applicable rule (i.e., Law or Sales
or Law on Donation) becomes critical in determining the validity
and enforceability of the contract.
Under Article 726 of the Civil Code, even when the donor
imposes upon the donee a burden, but which is less than the
value
of the thing given, there is still a donation. The legal implication
under said article is clear: when the value of the burden placed
upon the donee is more than the value of the thing given, it
becomes an “onerous” donation, as either a barter or sale, which
are both governed by the Law on Sales.84 In such cases, the
solemnities provided for by the Law on Donations are wholly
irrelevant, even if the contract is called a “donation”; and since
the relationship is governed by the Law on Sales, the perfection
and enforceability of the contract happen upon consent.85
2. From Barter
By barter or exchange, one of the parties binds himself to
give one thing in consideration of the other’s promise to give
85Application of these principles may be seen in Carloz v.
Romil, 20 Phil. 183
(1911), and Manalo v. De Mesa, 20 Phil. 496 (1911).
19
another thing;86 whereas, by sale, one of the parties binds
himself
to deliver a thing in consideration of the other’s undertaking to
pay the price in money or its equivalent.87
It is interesting to note that in Delpher Trades Corp. v. IAC,88
in somewhat a complete defi ance of the doctrine of separate
juridical personality of a corporation from its stockholders, the
Court held that an assignment of property to the corporation by
controlling shareholders in exchange for shares is not a sale
nor barter because the corporation cannot be considered a third
party when it would be controlled by the transferor as part of
estate planning.
a. Rules to Determine Whether Contract
Is Sale or Barter
Article 1468 of the Civil Code provides for the following rules
in cases of dispute whether the contract is a sale or a barter,
especially when the consideration agreed upon is partly in
money
and partly in another thing:
(a) Manifest Intention of the Parties – Even if the
acquisition of a thing is paid for by another
object of greater value than the money component,
it may still be a sale and not a barter,
when such was the intention of the parties;
(b) When Intention Does Not Appear and
Consideration Consists Partly in Money and
Partly in Another Thing:
(i) It is a barter, where the value of the
thing given as part of the consideration
exceeds the amount of money given or
its equivalent;
(ii) It is a sale, where the value of the thing
given as part of the consideration equals
or is less than the amount of money
given.
86Art. 1638, Civil Code.
87Art. 1458, Civil Code.
88157 SCRA 349 (1988).
NATURE OF SALE
20 LAW ON SALES
The distinctions between sale and barter are merely
academic, since aside from two separate rules applicable to
barter, as to all matters not specifi cally provided for, Article 1641
provides that barter shall be governed by the Law on Sales. The
two rules specifi cally provided for barter contracts, but which
are
similar anyway to the rules on warranty against eviction
applicable
to sale, are as follows:
(a) If one of the contracting parties, having
received the thing promised in barter, should
prove that it did not belong to the person
who gave it, he cannot be compelled to
deliver that which he offered in exchange,
but he shall be entitled to damages;89 and
(b) One who loses by eviction the thing received
in barter may recover that which he gave
in exchange with a right to damages, or he
can only make use of the right to recover
the thing which he has delivered while the
same remains in the possession of the other
party, but without prejudice to the rights
acquired in good faith by a third person.90
Nonetheless, there are a few instances when the difference
between the two types of contracts is critical. Firstly, the rules on
the Statute of Frauds,91 which apply to the sale of real property,
and personal property bought at 5500.00 or more, do not apply
to barter. Secondly, the right of legal redemption granted by law
to an adjoining owner of an urban land,92 covers only “resale”
and
does not cover exchanges of properties.93
3. From Contract for a Piece-of-Work
By the contract for a piece-of-work, the contractor binds
himself to execute a piece of work for the employer, in consi-
89Art. 1639, Civil Code.
90Art. 1640, Civil Code.
91Art. 1403, Civil Code.
92Art. 1622, Civil Code.
93De Santos v. City of Manila, 45 SCRA 409 (1972).
21
deration of a certain price or compensation; the contractor may
either employ only his labor or skill, or also furnish the
material.94
The similarity between a sale and a contract for a piece of
work has been recognized in Commissioner of Internal Revenue
v. Court of Appeals and Ateneo de Manila University.95 The
Court held that the research output delivered by the Institute of
Philippine Culture of the Ateneo de Manila University pursuant
to
an endowment or grant given by sponsors cannot be considered
a sale nor a contract for a piece-of-work, since: “Transfer of title
or an agreement to transfer it for a price paid or promised to be
paid is the essence of sale.96 Ineluctably, whether the contract
be
one of sale or one for a piece of work, a transfer of ownership is
involved and a party necessarily walks away with an object.”97
There may be situations where it is diffi cult to determine
whether the contract in dispute is a sale or a contract for a
pieceof-
work, because essentially, in both instances, the client or
customer walks away from the transaction bringing with him an
object.98
For example, one may buy a painting from an art gallery,
under a sale, or he may request the artist himself to execute the
painting for a price certain, which is a contract for a piece-of-
work.
In both cases, the resulting object and the price or consideration
paid may be the same. The foregoing illustrations are rather
easy,
and by their simple facts, one can determine the nature of the
contract involved. More complicated situations have, however,
arisen, and covered by rulings of the Supreme Court.
a. Statutory Rule on Distinguishing Sale
from Contract for a Piece-of-Work
In the early case of Inchausti & Co. v. Cromwell,99 the issue
was whether the seller could be made liable for sales tax on the
94Art. 1713, Civil Code.
95271 SCRA 605 (1997).
96Quoting from TOLENTINO, COMMENTARIES AND
JURISPRUDENCE ON THE CIVIL CODE OF THE
PHILIPPINES, Vol. V, pp. 1-2 (1992).
97271 SCRA 605, 618, citing VILLANUEVA, PHILIPPINE LAW
ON SALES, pp. 7-9 (1995).
98Cited in Commissioner of Internal Revenue v. Court of
Appeals and Ateneo de
Manila University, 271 SCRA 605, 618.
9920 Phil. 345 (1911).
NATURE OF SALE
22 LAW ON SALES
price it received from bailing the hemp that it sold to its
customers.
The seller contended that the charge for bailing is to be treated
not as part of the sale but as a charge for the service of bailing
the hemp.
Inchausti & Co. held that the distinction between a sale and
a contract for work, labor, and materials is tested by the inquiry
of
whether the thing transferred is one not in existence and which
never would have existed but for the order of the party desiring
to acquire it, or a thing which would have existed and been the
subject of sale to some other person, even if the order had not
been given. In that case, the Court held that the hemp was in
existence in baled form before the agreements of sale were
made, or, at least, would have been in existence even if none
of the individual sales in question had been consummated; and
that it would have been baled, nevertheless, for sale to someone
else, since it was proven customary to sell hemp in bales.
Subsequently, Article 1467 of the Civil Code gave the
statutory rules in distinguishing a sale from a contract for a
pieceof-
work, employing language similar to the Inchausti & Co. ruling,
thus:
ART. 1467. A contract for the delivery at a certain
price of an article which the vendor in the ordinary
course of his business manufactures or procures for
the general market whether the same is on hand at the
time or not, is a contract of sale, but if the goods are to
be manufactured specially for the customer and upon
his special order, and not for the general market, it is a
contract for a piece of work. (n)
which gives two tests for distinction:
(a) Manufacturing in the ordinary course of
business to cover sales contracts; and
(b) Manufacturing upon special order of customers,
to cover contracts for piece-of-work.
The jurisprudential doctrine that became the basis of Article
1467 therefore indicated that the term “upon special order” is
23
really based on the ability of the producer to manufacture the
goods in the condition that they customarily are without having
to
wait for specifi c orders from customers.
In Celestino Co v. Collector of Internal Revenue,100 a duly
registered co-partnership did business under the trade name
“Oriental Sash Factory.” Although in previous years it paid the
higher sales taxes on the gross receipts of its sash, door and
window factory as a manufacturer-seller (i.e., sales tax), in 1952
it began to claim tax liability only to the lower contractor’s tax
(i.e., for a piece-of-work). The company averred and adduced
evidence to show that since it manufactured sash, windows and
doors only for special customers and upon their special orders
and in accordance with the desired specifi cations and not for
the
general public, its contractual relations with its customers was
that
of a contract for a piece-of-work. Notice that in Celestino Co the
thrust of the taxpayer position in the implementation of the “upon
special order” test was more of timing, rather than by necessity:
that if the manufacture of goods is made always upon or after
the
orders of customers and on the basis of their specifi cations, the
underlying relationship would be that of a contract for a piece-
ofwork.
The Court held that the company could not claim the lower
contractor’s tax, and that it was actually a manufacturer, with its
sales subject to the higher sales tax, taking into consideration
the
following:
(a) The Company habitually made sash, windows
and doors, as it had represented itself
as manufacturer (factory) in its stationery
and in advertisements to the public;
(b) That the products were made only when
customers placed their orders, did not
alter the nature of the establishment, for
it was obvious that fulfi lling the order, only
required the employment of such materialsmoldings,
frames, panels as it ordinarily
10099 Phil. 841 (1956).
NATURE OF SALE
24 LAW ON SALES
manufactured or was in a position to
habitually manufacture; and
(c) The nature of the products manufactured
was such that “[a]ny builder or homeowner,
with suffi cient money, may order windows or
doors of the kind manufactured,” and it was
not true that it served special customers
only or confi ned its services to them alone,
and that it was possible for the company to
“easily duplicate or even mass-produce the
same doors – it is mechanically equipped to
do so.”
Celestino Co recognized that the essence of a contract for
a piece-of-work is the “sale of service” unlike in a sale where
the essence is the sale of an object. It also conceded that if the
company “accepts a job that requires the use of extraordinary
or additional equipment, or involves services not generally
performed by it — it thereby contracts for a piece of work —
fi lling special orders within the meaning of Article 1467.” In that
case, however the Court found that the orders exhibited were
not shown to be special: “They were merely orders for work —
nothing is shown to call them special requiring extraordinary
service of the factory.”101
Celestino Co implies that the test of “special orders” under
Article 1467 of the Civil Code is not one of timing, or habit, but
actually must be drawn from the nature of the work to be
performed
and the products to be made: it must be of the nature that the
products are not ordinary products of the manufacturer, and they
would require the use of extraordinary skills or equipment, if to
be
performed by a manufacturer.
The principles of Celestino Co were reiterated in the later
decision in Commissioner of Internal Revenue v. Arnoldus
Carpentry Shop, Inc.102
101Ibid, at p. 846.
102159 SCRA 199 (1988).
25
In Commissioner of Internal Revenue v. Engineering
Equipment and Supply Company,103 the Engineering
Equipment
and Supply Company (EEI), which was engaged in the design
and installation of central type air-conditioning system, was
assessed the advance sales tax for its importation of parts
and materials as a manufacturer and seller of the central
airconditioning
system, instead of the compensating tax it paid as
a contractor. In countering the assessment, EEI claimed that
it is not a manufacturer and seller of air-conditioning units and
spare parts or accessories thereof, but a contractor engaged
in the design, supply and installation of the central type of
airconditioning
system, “which is essentially a tax on the sale of
service or labor of a contractor rather than on the sale of articles
subject.”
In resolving that EEI was a contractor and therefore subject
only to the lower compensating tax, the Court held that “[t]he
distinction between a contract of sale and one for work, labor
and
materials is tested by the inquiry whether the thing transferred
is one not in existence and which never would have existed but
for the order of the party desiring to acquire it, or a thing which
would have existed and has been the subject of sale to some
other person even if the order had not been given.”104 It further
explained the test to mean: “If the article ordered by the
purchaser
is exactly such as the plaintiff makes and keeps on hand for
sale to anyone, and no change or modifi cation of it is made at
defendant’s request, it is a contract of sale, even though it may
be entirely made after, and in consequence of, the defendants
order for it.”105
By the foregoing test, Engineering Equipment confi rms the
abandonment of the timing application of the “upon special
order”
test under Article 1467, and that just because the thing came
into
existence after, and was motivated to be produced by reason
of, a specifi c order, does not necessarily qualify the underlying
transaction to be a contract for a piece-of-work.
10364 SCRA 590 (1975).
104Ibid, at p. 597.
105Ibid.
NATURE OF SALE
26 LAW ON SALES
The crucial application of the “upon special order” test under
Article 1467 in Engineering Equipment was the “nature of the
object” or “the test of necessity,” when it took into consideration
the nature of execution of each order.
The Court noted that EEI undertook negotiations and
execution of individual contracts for the design, supply and
installation, “taking into consideration in the process such factors
as the area of the space to be air conditioned; the number of
persons occupying or would be occupying the premises; the
purpose for which the various air conditioning areas are to be
used; and the sources of heat gain or cooling load on the plant
such as sun load, lighting, and other electrical appliances which
are or may be in the plan.”106 The Court determined that EEI
“designed and engineered completely each particular plant and
that no two plants were identical but each had to be engineered
separately.” It also found that even if EEI wanted to mass-
produce
the central air-conditioning system or to produce them ahead of
any order of a client, it could not do so because of the variable
factors that had to be taken into consideration.
Taken together, both Celestino Co and Engineering
Equipment established the proper application of the “upon
special
order” test under Article 1467, as not merely one of timing of the
fl ow of the transactions, but one that goes into the nature of the
product involved when it was possible for the manufacturer or
producer to be able to produce the product ahead of any special
order given by a customer or client.
In addition, by looking at the other facts in Engineering
Equipment, we are also able to deduce that some of the other
tests, including the statutory ones, to determine whether the
contract is a sale or for a piece-of-work, do not prevail.
Take for example, the habituality test enunciated in Celestino
Co. In that case it was held that when the manufacturer engages
in the same activity in the ordinary course of business, and does
not need to employ extraordinary skills and equipment, that
would
classify the underlying transaction as a sale. And yet, if we look
106Ibid, at p. 598.
27
at the activity of EEI in Engineering Equipment, the fabrication
of central air-conditioning system, was as a matter-of-course, a
staple undertaking, one which could be considered ordinary and
usual in its operations; and although each time it serviced an
order it had to take various factors into consideration, EEI really
did not need to employ extraordinary skills or equipment each
time it had to execute an order.
The core test in Engineering Equipment was that each
product or system executed by it had, by its nature, to be unique
and always different from other orders it had to service in the
past, and that even if it wanted to, EEI could not stockpile or
even
mass-produce the products because of their very nature.107
The large quantity of the products to be delivered do not
also indicate that the underlying contract is one of sale. Thus,
in Diño v. Court of Appeals,108 it was held that in a sale for the
manufacture of 20,000 pieces of vinyl frogs and 20,000 copies
of vinyl mooseheads according to the special samples specifi ed
and approved by the “buyer” and which the “seller”
manufactured
not in the ordinary course of its business, the contract executed
was clearly one of piece-of-work.
The consistent theme in the decisions of the Supreme Court
on the matter is that the main distinguishing factor between a
sale and a contract for a piece-of-work is the essence of why the
parties enter into it: if the essence is the object, irrespective of
the party giving or executing it, the contract is sale; if the
essence
is the service, knowledge or even reputation of the person who
executes or manufactures the object, the contract is for piece
of work, which is essentially the sale of service or labor. Thus,
Engineering & Machinery Corp. v. Court of Appeals,109 took
into
account the position of a learned author:
To Tolentino, the distinction between the two contracts
depends on the intention of the parties. Thus, if the
parties intended that at some future date an object has
107Reiterated in Engineering & Machinery Corp. v. Court of
Appeals, 252 SCRA 156
(1996).
108359 SCRA 91 (2001).
109252 SCRA 156 (1996).
NATURE OF SALE
28 LAW ON SALES
to be delivered, without considering the work or labor
of the party bound to deliver, the contract is one of sale.
But if one of the parties accepts the undertaking on the
basis of some plan, taking into account the work he
will employ personally or through another, there is a
contract for a piece of work.110
b. Practical Needs for Being Able to Distinguish
From the point of view of warranty of the contractor on the
product, a contract for a piece-of-work is not much different from
a sale. Pursuant to Article 1714, a contract for a piece-of-work
shall be governed “by pertinent provisions on warranty of title
and
against hidden defects and the payment of price in a contract of
sale.”111
On a more practical basis, however, apart from the issue of
the tax provisions applicable to the transactions, there are still
key areas where it would be important to determine the proper
characterization of a contract, whether it is a sale or one for a
piece-of-work, because of the different sets of laws governing
each type of contract.
Sale is constituted of real obligations and would be the
proper subject of an action for specifi c performance. On the
other hand, a contract for a piece-of-work, where the main
subject matter is the service to be rendered (obligation to do),
would not allow an action for specifi c performance in case the
contractor refuses to comply with his obligation. Instead, Article
1715 provides that “[S]hould the work be not of such quality, the
employer may require that the contractor remove the defect or
execute another work. If the contractor fails or refuses to comply
with this obligation, the employer may have the defect removed
or another work executed at the contractor’s cost.”
In a sale, only when the subject matter is indeterminate
or generic (i.e., determinable) is the buyer granted the remedy
under Article 1165 to have the subject matter done by a third
party with cost chargeable to the seller.
110Ibid, at p. 165.
111Diño v. Court of Appeals, 359 SCRA 91 (2001).
29
Finally a contract for a piece-of-work, unlike a sale, is not
governed by the Statute of Frauds.
4. From Agency to Sell or to Buy
By the contract of agency, a person binds himself to render
some service or to do something in representation or on behalf
of
the principal, with the consent or authority of the latter.112
a. Distinguishing Sale and Agency to Sell/Buy
A contract of agency is one that essentially establishes a
representative capacity in the person of the agent on behalf of
the principal, and one characterized as highly fi duciary.
Involving
obligations to do (i.e., to represent the principal), contracts
In sale, the buyer himself pays for the price of the object,
which constitutes his main obligation; in an agency to sell, the
agent is not obliged to pay the price, and is merely obliged to
deliver the price which he may receive from the buyer.114
In sale, the buyer, after delivery, becomes the owner of the
subject matter; in an agency to buy, the agent does not become
the owner of the thing subject of the agency, even if the object is
delivered to him.
In sale, the seller warrants; in an agency, the agent who
effects the sale assumes no personal liability as long as he acts
within his authority and in the name of the principal.115 However,
112Art. 1868, Civil Code.
113Arts. 1919 and 1920, Civil Code.
114Arts. 1891 and 1897, Civil Code.
115Art. 1897, Civil Code.
NATURE OF SALE
30 LAW ON SALES
it is legally possible for an agent or a broker to voluntarily bind
himself to the warranties of the seller.116
Finally, because of the fi duciary nature of the relationship,
in an agency to sell, the agent is disqualifi ed from receiving any
personal profi t from the transaction covered by the agency, and
any profi t received should pertain to the principal.117
b. Statutory Rule
Article 1466 of the Civil Code provides that “[i]n construing
a contract containing provisions characteristic of both the sale
and of the contract of agency to sell, the essential clauses of
the whole instrument shall be considered.” The Supreme Court
has identifi ed what constitute the “essential clauses” to warrant a
conclusion as to the proper nature of the contract in issue.
In Quiroga v. Parsons,118 plaintiff Quiroga granted to
defendant Parsons the right to sell as an “agent” the “Quiroga
beds” in the Visayas. Parsons was obliged under the contract to
pay for the beds within a specifi ed period after delivery even when
not yet sold, at a discount of 25% as commission for the sales.
Quiroga subsequently sought the rescission of the agreement
claiming that Parsons, as agent, had violated its obligation not
to sell the beds at higher prices than those of the invoices;
to open an establishment in Iloilo; to keep the beds on public
exhibition, and to pay for the advertisement expenses incurred;
and to order the beds in dozen and in no other manner. Except
for the ordering the beds in dozens, none of the other obligations
imputed to Parsons were expressly set forth in the contract to
serve as a basis for rescission based on substantial breach.
However, Quiroga insisted that Parsons was his agent, and that
said obligations were implied from the commercial agency or at
least were instructed and disobeyed; in other words, he invoked
the essential revocability of agency as his legal basis to rescind
the agreement.
116Schmid and Oberly, Inc. v. RJL Martinez, 166 SCRA 493
(1988).
117Art. 1891, Civil Code.
11838 Phil. 501 (1918).
31
Whether Quiroga could rescind (i.e., revoke) the contract
therefore depended on whether it was one of sale or agency to
sell. The Court found the arrangement to be one of sale since
the essential clause provides that “[p]ayment was to be made
at the end of sixty days, or before, at the plaintiff’s request, or in
cash, if the defendant so preferred, and in these last two cases
of agency to sell or to buy are essentially different from sales.
Nevertheless, because the object of the agency arrangement is
the purchase or sell of a determinate object, there is a tendency
to confuse one with the other.
From its very nature, sale is not unilaterally revocable;
whereas, a contract of agency to sell, because it covers an
underlying fi duciary relationship, is essentially revocable,113
even
in the presence of an irrevocability clause.
an additional discount was to be allowed for prompt payment.”
These conditions to the Court were “precisely the essential
features of a contract of purchase and sale” because there was
the obligation on the part of the plaintiff to supply the beds, and,
on the part of the defendant, to pay their price, thus:
These features exclude the legal conception of an
agency or order to sell whereby the mandatory or agent
received the thing to sell it, and does not pay its price,
but delivers to the principal the price he obtains from
the sale of the thing to a third person, and if he does
not succeed in selling it, he returns it. By virtue of the
contract between the plaintiff and the defendant, the
latter, on receiving the beds, was necessarily obliged to
pay their price within the term fi xed, without any other
consideration and regardless as to whether he had or
had not sold the beds.119
The Court also noted that merely because by their contract,
the parties designated the arrangement as an agency did not
mean the characterization to be conclusive, “[b]ut it must be
understood that a contract is what the law defi nes it to be, and
not what it is called by the contracting parties.”120
In Gonzalo Puyat & Sons, Inc. v. Arco Amusement
Company,121 Arco Amusement Company had engaged the
services of Gonzalo Puyat & Sons to purchase from the Starr
Piano Company in the United States specifi ed sound reproducing
equipment. Later, when Arco found out that Puyat had quoted
to Arco not the net price but the list price, and that Puyat had
received a discount from Starr Piano Company, it sought to
119Ibid, at p. 505.
120Ibid, at p. 506.
12172 Phil. 402 (1941).
NATURE OF SALE
32 LAW ON SALES
recover the same under the premise that being only its agent,
any benefi t or profi t received from the transaction must inure to
Arco, as the principal.122
In construing that the underlying contract between Arco and
Puyat was not an agency to buy, but rather a sale, the Court
looked into the provisions of their contract, and found that the
letters between the parties clearly stipulated for fi xed prices on
the equipment ordered, which “admitted no other interpretation
than that the respondent agreed to purchase from the petitioner
the equipment in question at the prices indicated which are fi xed
and determinate.”123 The Court held that “whatever unforeseen
events might have taken place unfavorable to the defendant
(petitioner), such as change in prices, mistake in their quotation,
loss of the goods not covered by insurance or failure of the Starr
Piano Company to properly fi ll the orders as per specifi cations,
the plaintiff (respondent) might still legally hold the defendant
(petitioner) to the prices fi xed.”124
The Court held that such stipulation “is incompatible with
the pretended relation of agency between the petitioner and the
respondent, because in agency, the agent is exempted from all
liability in the discharge of his commission provided he acts in
accordance with the instructions received from his principal.”125
Although under their agreement, Gonzalo Puyat & Sons was
entitled to receive 10% commission, the same did not necessarily
make it an agent, as the provision is only an additional price
which Arco bound itself to pay, and which stipulation was not
incompatible with the contract of purchase and sale.
Being a contract of sale and purchase, the Court also
did not sustain the allegation of fraud by Gonzalo Puyat &
Sons against Arco. Firstly, it held that “the contract is the law
between the parties and should include all the things they are
122Art. 1891 of the Civil Code provides: “. . . Every agent is bound
to render an
account of his transactions and to deliver to the principal whatever
he may have received
by virtue of the agency, even though it may not be owing to the
principal. Every stipulation
exempting the agent from the obligation to render an account shall
be void.”
12372 Phil. 402, 407 (1941).
124Ibid.
125Ibid.
33
supposed to have agreed upon. What does not appear on the
face of the contract should be regarded merely as ‘dealer’s’ or
‘trader’s talk,’ which can not bind either party.”126 Secondly, it
held that the fact that Gonzalo Puyat & Sons obtained more
or less profi t than the respondent calculated before entering
into the arrangement, was no ground for rescinding the contract
or reducing the price agreed upon between them: “Not every
concealment is fraud; and short of fraud, it were better that, within
certain limits, business acumen permit of the loosening of the
sleeves and of the sharpening of the intellect of men and women
in the business world.”127
In Ker & Co., Ltd. v. Lingad,128 the company entered into
a contract with an American company, whereby Ker & Co.,
specifi cally designated as “Distributor,” would receive products
from the American company by way of consignment, for sale in
the
Philippines. It was specifi cally stipulated in the contract that “all
goods on consignment shall remain the property of the Company
until sold by the Distributor to the purchaser or purchasers, but all
sales made by the Distributor shall be in his name.” It was further
stipulated that the contract “does not constitute the Distributor
the agent or legal representative of the Company for any purpose
whatsoever. Distributor is not granted any right or authority to
assume or to create any obligation or responsibility, express or
implied in behalf of or in the name of the Company, or to bind the
Company in any manner or thing whatsoever.”
The Commissioner of Internal Revenue assessed Ker & Co.
liable as commercial broker under the agreement. In fi nding for
the Commissioner, the Court held that in spite of the disclaimer
in the agreement, it was still an agent of the American company.
The decisive test for the Court was “the retention of the ownership
of the goods delivered to the possession of the dealer, like herein
petitioner, for resale to customers, the price and terms remaining
subject to the control of the fi rm consigning such goods.”129 It
also found signifi cant the stipulation in the agreement that
126Ibid, at p. 406.
127Ibid, at p. 409.
12838 SCRA 524 (1971).
129Ibid, at p. 525.
NATURE OF SALE
34 LAW ON SALES
the American company “at its own expense, was to keep the
consigned stock fully insured against loss or damage by fi re or
as a result of fi re, the policy of such insurance to be payable to it
in the event of loss.” Since insurable interest remained with the
American company, it clearly showed that ownership over the
goods was never transferred to Ker & Co., thus:
The transfer of title or agreement to transfer it for a
price paid or promised is the essence of sale. If such
transfer puts the transferee in the attitude or position of
an owner and makes him liable to the transferor as a
debtor for the agreed price, and not merely as an agent
who must account for the proceeds of a resale, the
transaction is a sale; while the essence of an agency
to sell is the delivery to an agent, not as his property,
but as the property of the principal, who remains the
owner and has the right to control the sale, fi x the price,
and terms, demand and receive the proceeds less the
agent’s commission upon sales made.130
Finally, in Victorias Milling Co. v. Court of Appeals,131 the
Court held that one of the factors that most clearly distinguishes
agency from other legal concepts, including sale, “is control; one
person — the agent — agrees to act under the control of direction
of another — the principal.” In that decision, it was held that when
an entity purchases sugar under a Shipping List/Delivery Receipt
from the original owner to the buyer, “for and in our behalf,” in
order to authorize the buyer to withdraw part of the merchandise
from the bailee, such did not establish an agency, since the letter
to the bailee of the original owner used clearly the words “sold
and endorsed” for the document of title, which meant clearly to
cover a sale, not an agency to sell.
c. Other Practical Value of Being Able to Distinguish
Knowing whether the contract is one of sale or an agency to
sell is also important in considering the applicability of the Statute
of Frauds.
130Ibid, at p. 530.
131333 SCRA 663, (2000).
35
Lim v. Court of Appeals,132 held that an agency to sell
on commission basis does not belong to any of the contracts
covered by Articles 1357 and 1358 requiring them to be in a
particular form, and not one enumerated under the Statutes of
Frauds in Article 1403. Hence, unlike a sale contract which must
comply with the Statute of Frauds for enforceability, a contract of
agency to sell is valid and enforceable in whatever form it may
be entered into.
By way of exception, under Article 1874 of the Civil Code,
when the sale of a piece of land or any interest therein is through
an agent, the authority of the latter shall be in writing, otherwise,
the sale shall be void.
5. From Dacion En Pago
Dation in payment is one whereby property is alienated to
the creditor in full satisfaction of a debt in money;133 it constitutes
“the delivery and transmission of a thing by the debtor to the
creditor as an accepted equivalent of the performance of the
obligation.”134 By express provision of law, dation in payment is
governed by the Law on Sales,135 since it essentially involves the
transfer of ownership of a subject matter.
In Vda. De Jayme v. Court of Appeals,136 the Court observed
that in its modern concept, what actually takes place in dacion
en pago is an objective novation of the obligation where the
thing offered as an accepted equivalent of the performance of an
obligation is considered as the object of the contract of sale while
the debt is considered as the purchase price; that is why the
elements of sale must be present, including a clear agreement
that the things offered is accepted for the extinguishment of the
debt.137
132254 SCRA 170 (1996).
133Art. 1245, Civil Code.
134Philippine Lawin Bus Co. v. Court of Appeals, 374 SCRA 332
(2002); Yuson v.
Viton, 496 SCRA 540 (2007); Social Security System v. Atlantic
Gulf and Pacifi c Co. of
Manila, 553 SCRA 677 (2008).
135Art. 1245, Civil Code.
136390 SCRA 380 (2002).
137Reiterated in Technogas Phils. Mfg. Corp. v. PNB, 551 SCRA
183 (2008); Social
NATURE OF SALE
36 LAW ON SALES
It must be emphasized, however, that dacion en pago
considerations are not in the realm of perfection of contract, but
rather in the stage of consummation, for indeed dacion en pago
is by defi nition a special mode of payment, whereby the debtor
offers another thing to the creditor who accepts it as equivalent of
payment of an outstanding debt. Consequently, prior to delivery
of the subject matter to constitute the dation in payment, the
agreement does not necessarily constitute a separate contract,
but only an arrangement by which an existing obligation may be
extinguished.
Lo v. KJS Eco-Formwork System Phil., Inc.,138 holds that in
order that there be a valid dation in payment, there must be:
(a) Performance of the prestation in lieu of
payment (animo solvendi) which may consist
in the delivery of a corporeal thing or a real
right or a credit against the third person;
(b) Some difference between the prestation due
and that which is given in substitution (aliud
pro alio); and
(c) An agreement between the creditor and
debtor that the obligation is immediately
extinguished by reason of the performance
of a presentation different from that due.139
Lo also holds that in dacion en pago “[t]he undertaking really
partakes in one sense of the nature of sale, that is, the creditor
is really buying the thing or property of the debtor, payment for
which is to be charged against the debtor’s debt. As such, the
vendor in good faith shall be responsible, for the existence and
legality of the credit at the time of the sale but not for the solvency
of the debtor, in specifi ed circumstances.”140
The fi rst requisite of actual delivery is demonstrated in
Philippine National Bank v. Pineda,141 which held that dation in
Security System v. Atlantic Gulf and Pacifi c Co. of Manila, 553
SCRA 677 (2008).
138413 SCRA 182 (2003).
139Reiterated in Aquintey v. Tibong, 511 SCRA 414 (2006).
140413 SCRA 182, 187 (2003).
141197 SCRA 1 (1991).
37
payment requires delivery and transmission of ownership of a
thing to the creditor as an accepted equivalent of the performance
of the obligation. When there is no such transfer of ownership in
favor of the creditor, as when re-possession of the subject matter
of a trust receipt is only by way of security, there is no dacion.
The third requisite that there must be an agreement that the
delivery of the property is in lieu of payment is best demonstrated
in Philippine Lawin Bus Co. v. Court of Appeals,142 where the
Court held that a transfer of property between debtor and creditor
does not automatically amount to a dacion en pago, since it is
essential that the transfer must be accompanied by a “meeting of
the minds between the parties on whether the loan ... would be
extinguished by dacion en pago.”143
The legal effects of a dacion en pago come into effect only
when both the debtor and creditor agree to the terms thereof,
for consent to dacion is an essential elements.144 But once the
creditor agrees to a dacion, it ought to know, especially when it
is a bank, and must abide by the legal consequence thereof; that
the pre-existing obligation is thereby extinguished.145
In one case,146 the Court held that the execution by the
borrower-mortgagor of dacion en pago covering the mortgaged
property in favor of the lender-mortgagee effectively constitutes
a waiver by the mortgagor-transferor of the redemption period
normally given a mortgagor.
It must be noted that there is an implication in Social Security
System v. Atlantic Gulf and Pacifi c Company of Manila, Inc.,147
that would consider the mere agreement to dacion en pago
identifying a particular parcel of land as the means to extinguish
an obligation as already constituting a new contract of sale that is
subject to specifi c performance. Quoting from the earlier decision
142374 SCRA 332 (2002).
143See also Filinvest Credit Corp. v. Philippine Acetylene Co.,
Inc., 111 SCRA 421
(1982); Vda. De Jayme v. Court of Appeals, 390 SCRA 380
(2002).
144Bank of Philippine Islands v. SEC, 541 SCRA 294 (2007).
145Estanislao v. East West Banking Corp., 544 SCRA 369
(2008).
146First Global Realty v. San Agustin, 377 SCRA 341 (2002).
147553 SCRA 677 (2008).
NATURE OF SALE
38 LAW ON SALES
in Vda. De Jayme v. Court of Appeals,148 Atlantic Gulf which part
held:
... In its modern concept, what actually takes place in
dacion en pago is an objective novation of the obligation
where the thing offered as an accepted equivalent of
the performance of an obligation is considered as the
purchase price. In any case, common consent if an
essential prerequisite, be it sale or novation, to have the
effect of totally extinguishing the debt or obligation.149
The Court in Atlantic Gulf went on to rule that “This
statement unequivocally evinces its consent to the dacion en
pago ... The controversy, instead, lies in the non-implementation
of the approved and agreed dacion en pago on the part of the
SSS. As such, respondents fi led a suit to obtain its enforcement
which is, doubtless, a suit for specifi c performance and one
incapable of pecuniary estimation beyond the competence of
the Commission.”150 It should be noted that Atlantic Gulf did not
categorically rule that a mere agreement to effect a dacion en
pago which has not been implemented can successfully be the
subject of an action for specifi c performance, since the ruling only
centered around which tribunal had jurisdiction on such cause of
action.
6. From Lease
In a contract of lease, the lessor binds himself to give to
another (the lessee) the enjoyment or use of a thing for a price
certain, and for a period which may be defi nite or indefi nite.151
A conditional sale may be made in the form of a “lease with
option to buy” as a device to circumvent the provisions of the
Recto
Law governing the sale of personal property on installments.152
It
may be stipulated in such contract that the lessee has the option
148390 SCRA 380 (2002).
149553 SCRA 677, at p. 686; underscoring supplied.
150553 SCRA 677, at pp. 686-687.
151Art. 1643, Civil Code.
152Arts. 1484 and 1485, Civil Code.
39
to buy the leased property for a small consideration at the end of
the term of the lease, provided that the rent has been duly paid;
or if the rent throughout the term had been paid, title shall vest
in the lessee. Such contract are really conditional sales and are
deemed leases in name only.
Filinvest Credit Corp. v. Court of Appeals,153 holds that when
a “lease” clearly shows that the rentals are meant to be installment
payments to a sale contract, despite the nomenclature given by
the parties, it is a sale by installments.
The importance of distinguishing a true lease from a sale
on installments is considered in Chapter 10 on discussions in the
Recto Law.