UNIVERSITY OF NUEVA CACERES

COLLEGE OF BUSINESS AND ACCOUNTANCY

COMPREHENSIVE ACCOUNTING (BATCH 2019)

REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS

MADBOLIVAR

Handout 5

1.3. Sales
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 therefor a price certain in money or its
equivalent.
A contract of sale may be absolute or conditional.

KINDS OF CONTRACT OF SALE

(1) Absolute – when sale is not subject to any condition and the title immediately passes to the
purchaser upon delivery
(2) Conditional – ownership of the object remains with the vendor until fulfillment of the
condition/s

1.3.1 Nature, forms and requisites

The essence of a contract of sale is the transfer of ownership or that the recipient has the ability
to alienate the thing transferred to him.
ESSENTIAL ELEMENTS OF A VALID CONTRACT OF SALE
(1) Consent or meeting of the minds
Consent refers to seller’s consent to transfer ownership of, and deliver, a determinate thing, and
to buyer’s consent to pay the price certain.
Being a consensual contract, 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.
(2) Object or subject matter
Must be determinate or capable of being determinate, licit and within the commerce of man, and
possible
(3) Cause or consideration
Refers to “price certain in money or its equivalent.” It must be real, certain, and pecuniary.

NON-ESSENTIAL ELEMENTS OF A CONTRACT OF SALE

(1) Natural – those deemed to exist in certain contracts in the absence of any contrary
stipulations. (Ex. Warranty against eviction, hidden defects)
(2) Accidental – those which may be present or absent depending on the stipulations of the
parties. (Ex. Conditions, interest, penalty)

STAGES OF CONTRACT OF SALE

(1) Preparation, conception, negotiation, or generation stage – from the time the prospective
contracting parties indicate interest in the contract to the time the contract is perfected
(2) Perfection or “birth” of the contract – upon the concurrence of the essential elements of the
sale; and
(3) Consummation or “death” of the contract – begins when the parties perform their respective
undertakings under the contract of sale, culminating in the extinguishment thereof.
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CHARACTERISTICS OF A CONTRACT OF SALE
(1) Consensual – perfected by mere consent and without any further acts.
(2) Bilateral and Reciprocal – imposes correlative obligations on both parties to the relationship.
Consequently, power to rescind is implied.
(3) Principal – can stand on its own and does not depend on another contract for validity, as
contrasted from an accessory contract.
(4) Onerous – imposes valuable consideration as prestation, as distinguished from a gratuitous
contract. Consequence: all doubts in construing an onerous contract shall be resolved in that
which gives greater reciprocity of interests. [Art. 1378]
(5) Commutative – because a thing for value is exchanged for equal value, as contrasted from an
aleatory contract.
Test: As long as the party believes in all honesty that he is receiving equal for what he gave up
for, then commutative character is complied with.
(6) Nominate – given a particular name by law

SALE IS TITLE AND NOT MODE

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. When a contract
of sale is perfected, the seller is merely obligated to transfer ownership and to deliver the
property. Transfer of ownership is effected only upon delivery.

SALE DISTINGUISHED FROM OTHER CONTRACTS

Sale Donation
Onerous Gratuitous
Perfected by mere consent Must comply with the formalities required by
law.
Sale Barter
Consideration is price in money or its Consideration is another thing
equivalent
Sale Contract for a Piece of Work
Goods are manufactured or procured in the Goods are manufactured for customer upon his
ordinary course of business special order
For the general market, whether on hand or not For a specific Customer
Governed by Statute of Frauds Not within Statute of Frauds
Sale Dacion en pago
No pre-existing debt Pre-existing debt
Creates an obligation Extinguishes the obligation (mode of payment)
Price is more freely agreed upon, fixed by Price is value of the thing given
the parties
Buyer has to pay the price Payment is received by the debtor before
contract is perfected
Contract of Sale Contract to sell
Ownership is transferred upon delivery Ownership is only transferred upon full
payment of price
Non-payment is a resolutory condition Full payment is a positive suspensive
condition, hence non-payment would not give
rise to the obligation to transfer ownership
Conditional Contract of Sale Contract to sell
Sale is already perfected No perfected sale yet

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Sale Agency to sell
Buyer receives the goods as owner Agent receives good as goods of the principal
Seller warrants the thing sold Agent makes no Warranty
Sale Lease
Ownership transferred by delivery No transfer of Ownership
Permanent Temporary
Seller must be owner at time of delivery Lessor need not be owner
Sale Option Contract
By the contract of sale one of the contracting An accepted unilateral promise to buy or sell
parties obligates himself to transfer the supported by a consideration distinct from the
ownership and to deliver a determinate thing, price [Art 1479]
and the other to pay therefor a price certain in
money or its equivalent.
Bilateral Unilateral: gives right to buy or sell, but
imposes no obligation on the option-holder,
aside from consideration for the offer
Sale of property Sale of right to purchase
Sale on Approval Sale or Return
Exception to GR on Sale- Ownership does not Ownership passes to buyer on delivery and
pass upon delivery remaining with the seller subsequent return revests ownership in the
until buyer signifies his approval. seller.
Depends on the character or quality of goods Depends on the will of the buyer
Subject to a suspensive condition Subject to a resolutory condition
Risk of loss remains with the seller Risk of loss remains with the buyer

Sale of Things Having Potential Existence

Emptio Rei Speratei Emptio Rei Spei
Mere Hope Vain Hope
Sale of a thing expected or Sale of a MERE HOPE or Sale of a VAIN HOPE or
future thing expectancy expectancy
Valid GR: Valid EXC: Void
Example: Example: Example:
Sale of the grain a field may Sale of a valid lottery ticket Sale of a fake lottery ticket
grow in a given time
Deals with a future thing that Deals with a thing that currently exists – the hope or expectancy
is currently not in existence
Subject to the condition that Not subject to any condition; The contract comes into
the thing will exist existence immediately
Future thing is certain as to
itself, but uncertain as to
quantity and quality

WHEN SELLER IS NOT THE OWNER

General Rule: Ownership is not acquired by the buyer. One cannot give what one does not have.
[Art 1505]
Exceptions:
(1) Seller has a right to transfer ownership- Seller need not be the owner of the thing at the time
of perfection of the contract. It is sufficient that seller has a right to transfer ownership thereof at
the time it is delivered. [Art. 1459]

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One who sells something he does not own yet is bound by the sale when he acquires the thing
later.
(2) Estoppel: Owner is, by his conduct, precluded from denying the seller’s authority to sell.
[Art. 1434]
(3) Registered land bought in good faith
General rule: Buyer need not go beyond the Torrens Title
Exception: When he has actual knowledge of facts and circumstances that would impel a
reasonably cautious man to make further inquiry
(4) Order of courts; Statutory Sale In execution sale, the buyer merely steps into the shoes of the
judgment debtor
(5) When goods are purchased in Merchant’s store, Fair, or Market [Art 1505]

SALE BY PERSON HAVING A VOIDABLE TITLE

(1) True owner may recover the thing when the ff. requisites concur:
(a) Subject matter is movable
(b) Owner has either lost the thing or has been unlawfully deprived. [Art 559]
(2) Reimbursement is necessary before owner can recover when:
(a) Buyer acted in good faith
(b) Acquired at a public auction [Art 559]
(3) Recovery no longer possible when:
(a) Buyer in good faith
(b) Acquired it at a merchant’s store, fair or market. [Art 1506]

INADEQUACY OF PRICE
General Rule: Does not affect a contract of sale’s validity.
Exceptions:
(1) In Voluntary sales
(a) Where low price indicates a vice of consent, sale may be annulled.
(b) Where price is so low to be shocking to the conscience (fraud, mistake, undue influence),
then sale may be set aside.
(c) Where price is simulated such as when the real intention was a donation or some other
contract.
(d) Where the parties did not intend to be bound at all, sale is void.
(2) In Involuntary sales
A judicial or execution sale is one made by a court with respect to the property of a debtor for the
satisfaction of his indebtedness.
(a) Where price is so low to be shocking to the conscience, such that a reasonable mind
would not be likely to consent to it, then judicial sale will be set aside.
(b) If in event of a resale, a better price can be obtained.
(3) Rescissible contracts of sale - Inadequacy of price is a ground for rescission of conventional
sale under Art 1381 (a-b)

PRESUMPTION THAT A CONTRACT IS AN EQUITABLE MORTGAGE AND NOT

CONTRACT OF SALE (5P-R) [Art. 1602]
(1) Price unusually inadequate;
(2) Possession retained by the seller as lessee or otherwise;
(3) Period of redemption extended (or granted anew) upon or after the expiration of the right to
repurchase;
(4) Part of the purchase price retained by the seller;
(5) Payment of taxes on the thing sold borne by the seller;
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(6) Any other case where it may be fairly inferred that the Real intention of the parties is for the
transaction to secure a debt or other obligation.

In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as
an equitable mortgage.

RATIONALE BEHIND PROVISION ON EQUITABLE MORTGAGE- Circumvention of

prohibition against pactum commissorium – creditor cannot appropriate the things given by way
of pledge or mortgage since remedy is foreclosure.

1.3.2 Earnest money as distinguished from option money

Earnest Money – paid in advance of the purchase price agreed upon by the parties in a contract
of sale, given by the buyer to the seller, to bind the latter to the bargain.

Option Money Earnest Money

Separate and distinct consideration from Part of purchase price [Art 1482]
the purchase price
Given when sale is not yet perfected Given only when there is already a sale
When given, the would-be-buyer is not When given, the buyer is bound to pay the
required to buy, but may even forfeit it balance
depending on the terms of the option
Grantee of option is still undecided whether or Buyer manifests his earnest desire to buy the
not to buy or sell the property property

1.3.3 Rights/obligations of vendor and vendee

OBLIGATIONS CREATED
(1) For the SELLER: To transfer ownership and to deliver possession of the subject matter
(2) For the BUYER: To pay the price

OBLIGATIONS OF THE VENDOR IN GENERAL

(1) To transfer ownership of the thing [Art. 1495]
(2) To deliver the thing, with its accessions and accessories, if any [Arts 1164, 1166]
(3) To warrant against eviction and against hidden defects [Arts 1545-1581]
(4) To take care of the thing, pending delivery, with proper diligence [Art 1163]
(5) To pay for the expenses of the deed of sale [Art1487]

WHAT TO DELIVER
(1) Thing sold [Art. 1495]
(2) Fruits [Art. 1164 & 1537] – belong to the vendee from day of perfection.
(3) Accessions and accessories [Art. 1166 & 1537] – in the same condition they were in on day
of perfection
(a) Improvements by seller at his expense grants him a usufructuary right [Art 1138, 1189]
(b) No indemnification
(c) But he may remove it to the extent that there is no damage [Art. 1538]

KINDS OF DELIVERY
1. ACTUAL DELIVERY-Deemed made when the thing sold is placed in the control and
possession of the vendee

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2. CONSTRUCTIVE DELIVERY
a. Execution of public instrument- produces the same legal effects of actual delivery unless the
parties intended otherwise.
b. Symbolic Delivery- Ex. Delivery of keys of the place or depositary where the movable is
stored or kept.
c. Tradition Longa Manu (Long Hand)- Delivery of movable property by mere consent or
agreement, if the thing sold cannot be transferred to the possession of the buyer at the time of
sale. Example: Seller points to the property without actually transferring physical possession
thereof.
d. Tradition Brevi Manu (Short Hand)- Delivery of movable property by mere consent or
agreement, if the buyer already had it in his possession for any other reason. Ex. Happens when
the already has possession of the thing sold before the sale by virtue of another title (as lessee,
borrower, depositary, etc.)
e. Tradition Constitutum Possessorium- Seller continues to be in possession of the property sold
not as owner but in some other capacity, like as tenant or lessee.
f. Quasi-traditio- Mode of delivery of incorporeal things or rights. Delivery is effected:
(1) By execution of public instrument
(2) When such is not applicable, by placing the titles of ownership in the possession of the
buyer
(3) By allowing the buyer to use his rights as new owner with the consent of the seller

Delivery to a Common Carrier

General Rule: Delivery to the courier or carrier is tantamount to delivery to buyer, whether
carrier is named by buyer or not. The buyer assumes the risk of loss.
Exception- When the Seller reserved title through the any forms with intent to remain the owner.

DOUBLE SALES [ART. 1544]

General Rule: Prior tempore, prior jure (“First in time, priority in right”) applies.
Requisites
(1) 2 or more valid sales;
(2) Same subject matter;
(3) 2 or more buyers with conflicting interests over the rightful ownership of the thing sold;
(4) Same seller.
RULES:
Sale of Movables
Ownership shall be transferred to the person who may have first taken possession in good faith.
Sale of Immovables
Ownership belongs to the person who:
(1) In good faith first recorded the sale in the Registry of Property; or
(2) If there is no inscription of sale on the title, ownership passes to the person who in good faith
was first in possession; or
(3) In the absence thereof, to the person who presents the oldest title, provided there is good
faith.

Risk of Loss & Deterioration

RES PERIT DOMINO- Owner bears risk of loss and deterioration
Basis: Ownership is not transferred until delivery.

Extinguishment of Sale- Generally, extinguished by the same causes as all other obligations.

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1.3.4 Warranties (in relation to consumer laws)
A statement or representation made by the seller contemporaneously and as part of the contract
of sale, having reference to the character, quality, or title of the goods, and by which he promises
or undertakes to ensure that certain facts are or shall be as he then represents.

Not every false representation voids the contract, only those matters substantially affecting the
buyer’s interest, not matters of opinion, judgment, probability, or expectation. When the buyer
undertakes his own investigation, and the seller does nothing to prevent it from being as full as
the buyer chooses, the buyer cannot afterwards allege misrepresentations.

Condition vs. Warranty

Condition Warranty
Pertains to and affects the existence of the Goes into the performance of an obligation and
obligation may, in itself, be an obligation
Non-happening does not amount to breach Non-fulfillment constitutes breach of contract
of contract
Must be stipulated Stipulation or operation of law
May attach either to the seller’s duty to Always relates to the subject matter or the
deliver thing or some other circumstance seller’s obligations as to the subject matter

EXPRESS WARRANTIES
For there to be express warranty, the following requisites must concur:
(1) An affirmation of fact or any promise relating to the thing sold;
(2) The natural tendency of such affirmation or promise is to induce the buyer to buy;
(3) The buyer buys the thing relying thereon.
(4) Made before the sale not upon delivery or any other point.
IMPLIED WARRANTIES
An implied warranty is derived by law by implication or inference from the nature of the
transaction or relative situation, or circumstances of the parties, irrespective of any intention of
the seller to create it.
(1) Implied Warranty of Title
(a) Warranty of Seller’s Right to Sell
(b) Warranty against Eviction: seller warrants that buyer, from the time ownership passes,
shall have and enjoy legal and peaceful possession of the thing.
(2) Implied Warranty against Encumbrance/ Non-Apparent Servitudes
(3) Implied Warranty against Hidden Defects
(a) Implied warranty as to Merchantable Quality and Fitness of Goods
(b) Implied warranty against Redhibitory Defect in the Sale of Animals
The following sales are void [Art. 1575]
(1) Sale of animals suffering from contagious diseases
(2) Sale of animals unfit for the purpose for which they are acquired as stated in the
contract
Seller liable if animal dies within 3 days after its purchase due to a disease that
existed at the time of sale.
(c) Quality and Fitness of Goods in Sale by Sample or Description
(4) Other Warranties

EFFECTS OF WARRANTIES
(1) Natural tendency is to induce buyer to purchase the subject matter
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(2) Buyer purchases subject matter relying thereon
(3) Seller liable for damages in case of breach

1.3.5 Installment sales

1.3.5.1 Personal property – Recto Law

Applies in cases of:
(a) Sale of movables in installment
The rule is intended to apply to sales of movables, the price of which is payable in two or more
installments, but not to straight-term sales where the price is payable in full, after making a down
payment because the law aims to protect improvident buyers who may be tempted to buy beyond
their means.
(b) Lease of personal property with option to buy

ALTERNATIVE REMEDIES OF THE UNPAID SELLER UNDER RECTO LAW

(a) Specific Performance
(b) Cancellation of sale: If vendee fails to pay 2 or more installments. When the seller cancels the
sale by repossessing the property sold, he is barred from exacting payment for its price. It can
only be carried out when he who demands rescission can return whatever he may be obliged to
restore.
(c) Foreclosure of Chattel Mortgage: If vendee fails to pay 2 or more installments - If seller
chooses this remedy, he shall have no further action to recover any unpaid balance, and any
stipulation to the contrary shall be void. The purpose of the law is to remedy the abuses
committed in foreclosure of chattel mortgages. It prevents mortgagees from seizing the
mortgaged property, buying it at foreclosure sale for a low price and then bringing the suit
against the mortgagor for a deficiency judgment. The almost invariable result of this procedure
was that the mortgagor found himself minus the property and still owing practically the full
amount of his original indebtedness.

Remedies are ALTERNATIVE, not cumulative. The exercise of one remedy bars the exercise
of the others.

1.3.5.2 Real Property – Maceda Law

RA 6552 (Maceda Law) does NOT apply to:
(1) Industrial lots
(2) Commercial buildings
(3) Sale to tenants under Agricultural Reform Code [RA 3844]
(4) Sale of lands payable in straight terms
Maceda Law applies to sale or financing of real estate on installment.
Rights of the Buyer:
(1) If buyer has paid at least 2 years of installments:
- Buyer is awarded a grace period of 1 month per year of installments paid, within which he may
pay without additional interest.
- May be used once every 5 years of the life of the contract or any of its extensions
- If contract is to be cancelled, seller must first:
(1) Give a 30-day notice of cancellation, and
(2) Refund cash surrender value (CSV) to buyer;

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 (3) CSV is equivalent to 50% of total payments made including deposits, options and
down-payments plus 5% for every year in excess of 5 years of the life of the contract or any
of its extensions. BUT total CSV should not be greater than 90% of total amount paid.

(2) If buyer has paid less than 2 years of installments:

- Grace period of at least 60 days
- Notice of cancellation or demand for rescission by notarial act, effective 30 days upon receipt
thereof

During the grace period, the buyer shall also have the right:
(a) To sell or assign his rights, evidenced in a notarial instrument
(b) To update his account
(c) To pay in advance any installment, or the full unpaid balance of the price, without any
interest, and to have such full payment of the purchase price annotated in the certificate of title
covering the property.

1.3.5.3 PD 957 / Condominium Act

DEFINITION OF A CONDOMINIUM
[SECTION 2]
A condominium is an interest in real property consisting of separate interest in a unit in a
residential, industrial or commercial building and an undivided interest in common, directly or
indirectly, in the land on which it is located and in other common areas of the building. A
condominium may include, in addition, a separate interest in other portions of such real property.
Title to the common areas, including the land, or the appurtenant interests in such areas, may be
held by a corporation specially formed for the purpose (hereinafter known as the "condominium
corporation") in which the holders of separate interest shall automatically be members or
shareholders, to the exclusion of others, in proportion to the appurtenant interest of their
respective units in the common areas.

NON-FORFEITURE OF PAYMENTS
(SECTION 23, PD 957)
No installment payment made by a buyer in a subdivision or condominium project for the lot or
unit he contracted to buy shall be forfeited in favor of the owner or developer when the buyer,
after due notice to the owner or developer, desists from further payment due to the failure of the
owner or developer to develop the subdivision or condominium project according to the
approved plans and within the time limit for complying with the same. Such buyer may, at his
option, be reimbursed the total amount paid including amortization interests but excluding
delinquency interests, with interest thereon at the legal rate.

FAILURE TO PAY INSTALLMENTS

[SECTION 24, PD 957]
The rights of the buyer in the event of this failure to pay the installments due for reasons other
than the failure of the owner or developer to develop the project shall be governed by Republic
Act No. 6552 [Maceda Law].

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