CHAPTER 1: NATURE AND CONTRACT OF SALE

What is a contract of sale?

Article. 1458

• One of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing; and

• the other to pay therefor a price certain in money or its equivalent

• May be absolute or conditional.

What are the seller’s obligation?

They are obligated to:

1. Transfer ownership

2. Deliver a determinate thing

What are the buyer’s obligation?

They are obligated to pay:

1. a price certain in money, or

2. its equivalent

What is ownership?

An independent and general power of a person over a thing for purposes recognized by law

What are the essential elements of a CoS? (Mnm. CSmP)

1. Consent — meeting of the minds to transfer ownership

2. Subject Matter

3. Price

What happens when all elements of the CoS are present?

The CoS is perfected.

What happens if some of the essential requisites are not present?

• It negates the existence of a perfected CoS.

• Simply put, the contract is void

What happens if all requisites are present, but there is a defect/illegality constituting such elements ?

The CoS is voidable through the vices of consent

What are the stages in the life of a CoS? (Mnm. PPC)

1. Policitation/ negotiation / preparation

2. Perfection

3. Consummation

What are the characteristics of a CoS (NpCBrOCS)

1. Nominate and principal

2. Consensual

3. Bilateral and reciprocal

4. Onerous

5. Commutative

6. Sale is a title, not a mode

Define nominate and principal contracts.

• Nominate — when a contract is given a particular name by law

• Principal — when a contract can stand on its own

In determining the nature of a contract, what should courts primarily consider?

The intention of the parties, not the name or nomenclature of the contract.

• This is determined through the words used in the contract and the parties’ actions before, during, and after its execution.

What are consensual contracts?

Those perfected by mere consent.

When is a sale valid and binding?

According to jurisprudence (Buenaventura v. CA)

• Once the parties agree on the object and the price,

• even if the price has not yet been paid or one party later breaches the contract.

What if the real price not stated in a contract of sale?

Sale is valid but subject to reformation or may be corrected to reflect the true price.

What if the price agreed upon a sale is simulated?

Then the sale shall be rendered void because there is no genuine consideration.

What is the effect of the perfection of a contract of sale?

Subjected to the rules on the forms of contracts both parties may reciprocally demand performance from each other, even if the contract is not yet in writing.

Is delivery of the thing required for the validity of a sale?

No, delivery is not required for a sale to be valid.

Is payment of the price required for the validity of a sale?

No, payment is not required for the sale to be valid.

Does failure to deliver the thing sold invalidate the sale?

No, failure to deliver does not invalidate the sale.

Does failure to pay the price invalidate the sale?

No, failure to pay does not invalidate the sale.

What is the legal effect of non-performance in a perfected sale?

It gives rise to remedies such as:

(1) specific performance

(2) rescission

Who is affected by the lack of a public instrument under Article 1358?

Only third parties, not the contracting parties themselves.

Does non-compliance with the requirement of a public instrument affect the rights and obligations of the parties?

No, it does not affect their contractual rights and obligations.

Who bears the burden of proof in alleging the existence of a contract of sale?

The party who alleges its existence.

What must be shown to prove the existence of a contract of sale?

The essential elements of a contract of sale.

Does an option to buy constitute a contract of sale?

No, an option to buy is not a contract of sale.

• This is because there is no meeting of minds to transfer ownership for a price.

What is the effect if the supposed agreement requires further approval or consent?

It is not yet a contract of sale.

What is meant by a contract of sale being bilateral and reciprocal?

It imposes obligations on both parties.

Why is a contract of sale considered reciprocal?

Because each party is both a debtor and a creditor of the other.

What are the legal effects of a sale being bilateral?

1. The power to rescind is implied

2. Neither party incurs delay if the other part does not comply or is not ready to comply

3. The moment the other fulfills  his obligation the default by the other begins without prior need of demand

When does the power to rescind arise in a contract of sale?

When one party fails to comply with his obligation.

Does delay arise if one party is not ready to comply with his obligation?

:No, neither party incurs delay if the other does not comply or is not ready to comply.

When does delay begin in a bilateral contract of sale?

The moment the other party fulfills his obligation.

Is prior demand necessary for delay to arise in a bilateral contract of sale?

No, delay begins without prior need of demand once the other party performs.

What does it mean that a contract of sale is onerous?

It imposes a valuable consideration consisting of a price certain in money or its equivalent.

• This is because both parties give something of value.

Is a sale still onerous if payment is suspensive or to be paid later?

Yes, the sale remains onerous because the buyer’s obligation to pay already exists. Instead, it is not yet due.

What does it mean that a contract of sale is commutative?

A thing of value is exchanged for what the parties believe to be equal value.

Is exact equivalence in market value required for a sale to be commutative?

No, exact market equivalence is not required.

When is a sale still considered commutative despite inadequacy of price?

When both parties honestly believe they are receiving fair value.

Does inadequacy of price by itself void a contract of sale?

No, inadequacy of price does not void a sale because consent may still be freely and knowingly given.

Why does a low price not convert a sale into a donation?

Because consideration is still present.

When does inadequacy of price become a legal problem?

When there is fraud, mistake, or undue influence.

What distinguishes a contract of sale from a donation?

• A sale is onerous and consensual.

• A donation is gratuitous and solemn

Why is a donation considered gratuitous?

Because a person disposes of a thing or right without valuable consideration.

Does a valid sale diminish the estate of the seller?

No, it does not diminish the estate because the property sold is replaced by equivalent monetary consideration.

Why are heirs not prejudiced in a sale?

Because there is only a substitution of values, not a loss of estate.

Why may heirs be prejudiced in a donation?

Because the property is given away and may reduce their legitime.

What is the rule under Article 1471 regarding simulated price?

If the price is simulated, the sale is void.

What may a void sale with simulated price actually be treated as?

As a donation or another contract, depending on the real intention.

:If the true intention is to give the property gratuitously, how is the contract treated?

It is treated as a donation, not a sale.

What is a donation under Article 726?

When a thing or right is given for merits or non-demandable services, or when the burden imposed on the donee is less than the value of the thing given.

What do you call it when the burden imposed on the donee is less than the value of the thing given?

A partial donation

When is a transaction no longer considered a donation despite being labeled as one?

When the obligation imposed is worth more than the property received.

• Instead, it may be a sale or barter.

• The rules on donations no longer apply.

How is a sale distinguished from a barter?

• A sale involves money or its equivalent as consideration

• While a barter involves the exchange of one thing for another.

What is the doctrine of separate juridical personality

That the corporation is NOT the stockholder

How to determine if a contract is sales or barter if the contracts consists of both money and another thing?

The contract is characterized by the manifest intention of the parties.

If the thing is greater than the money, it is barter.

If the money is greater than the thing, it is sale.

What is dación en pago?

The payment of a money debt by transferring ownership of property to the creditor.

What obligation is extinguished in dación en pago?

A pre-existing monetary obligation.

How is dación en pago similar to a sale?

The property given is the subject matter and the extinguished debt is the price.

Does dación en pago automatically constitute a sale?

No, it is not automatically a sale.

What is/are required for dación en pago to be effective?

1. A pre-existing money debt

2. Consent of the creditor (very important)

3. Actual delivery and transfer of ownership

4. Agreement that the debt is extinguished

Why is dación en pago governed by the law on sales?

Because property is transferred as consideration for a price in the form of a debt.

What distinguishes a contract of sale from a contract for a piece of work?

The essence of a sale is the object or thing, while the essence of a piece of work is the service, labor, or skill.

When is the seller’s labor considered incidental?

When the contract is a sale.

When is labor or skill the principal consideration?

When the contract is for a piece of work.

If the thing would exist even without the buyer’s order, what is the contract?

It is a contract of sale.

If the thing would not exist without the buyer’s special order, what is the contract?

It is a contract for a piece of work.

What is the nature of goods in a contract for a piece of work?

They are custom-made and produced only because of the client’s specific order.

How does the Civil Code define sale and piece of work?

ART. 1467

• Sale — 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

• Piece of work — If the goods are to be manufactured specially for the customer and upon his special order, and not for the general market

What distinguishes a contract of sale from an agency to sell or buy?

If title passes and the transferee must pay the price as a debtor, it is a sale; if the transferee merely sells for the owner and must account for the proceeds, it is an agency.

Who pays the price in a contract of sale?

The buyer pays the price himself.

Does ownership transfer in a contract of sale?

Yes, ownership transfers to the buyer.

Who bears the risk in a contract of sale?

The buyer bears the risk.

Is a sale revocable once perfected?

No, a perfected sale is not revocable.

Does the agent pay the price in an agency to sell or buy?

No, the agent does not pay the price.

Does the agent become owner of the thing?

No, ownership remains with the principal.

What must the agent do with the proceeds of the sale?

The agent must deliver or account for the proceeds to the principal.

Is an agency to sell or buy revocable?

Yes, because it is a fiduciary relationship.

Can an agent keep secret profits?

No, the agent cannot keep secret profits.

What is a contract of lease?

A contract where the lessor binds himself to give the lessee the enjoyment or use of a thing for a price certain for a definite or indefinite period.

What is the key difference between lease and sale?

Lease is only use or enjoyment, while sale transfers ownership.

Does ownership transfer in a true lease?

No, ownership remains with the lessor.

What is a conditional sale disguised as a lease?

A lease that allows the lessee to buy the property for a small amount at the end of the lease or where ownership automatically transfers after full payment of rent.

Why are some conditional sales structured as leases with option to buy?

To avoid the application of the Recto Law.

When does a lease with option to buy become a sale?

When the agreement shows that ownership is intended to transfer upon completion of payments.

What characterizes a true lease?

The lessor allows use or enjoyment for a price without any intent to transfer ownership.

Does payment of rent alone transfer ownership in a lease?

No, payment of rent does not transfer ownership.

What determines whether a contract is a true lease or a conditional sale?

The intention of the parties, especially whether ownership is meant to transfer.