ACCLAW

OBLIGATIONS
DEFINITIONS:
A. INCOMPLETE

• Article 1156, Civil Code: “An obligation is a juridical necessity to give, to do, or not
to do.”

Positive:
1. to give – when you are buying something, you are obliged to pay.
2. to do – your obligation, duties, and responsibility.
Negative:
3. not to do – those that are not ought to do.
Note: These are all important because they have a corresponding legal consequence
with respect to the performance of the obligation.
• Obligations with legal effect has a legal implication when it is failed to do.

B. COMPLETE
• Makati Stock Exchange vs. Campos (GR No. 138814, April 16, 2009):
“An obligation is a juridical relation whereby a person (called the creditor) may demand
from another (called the debtor) the observance of a determinative conduct (the giving,
doing or not doing), and in case of breach, may demand satisfaction from the assets of
the latter.”

Why “relation” instead of “necessity”?

- Because when you have obligation, it will be useless if there won’t be
corresponding right on the party of another party to demand that you perform your
obligation.
- the term relation is more fit with the concept because there are obligations that
are not necessary.

CREDITOR: demands the performance of the obligation, the conduct

DEBTOR: the one who is expected to act.

** failure to meet the contract allows the debtor to demand satisfaction.

ELEMENTS OF OBLIGATION:
1. JURIDICAL OR LEGAL TIE – this binds the creditor and debtor, the source of
obligation
2. THE ACTIVE SUBJECT – the creditor, who has the right to demand the
obligation (ex: student)
3. THE PASSIVE SUBJECT – the debtor, has the duty to give, to do, and not to
do.
4. OBJECT – ano yung nasa obligation
perspective of seller (creditor) – the item (car)
Perspective of buyer (debtor)– the payment (money)
5. CAUSE – direct reason for entering the obligation
**motive – remote or indirect reason for an obligation.
Example: hunger,
cause of obligation: for you to satisfy your hunger; to have custody sa food.
motive: because you are hungry, you will get food.

SOURCES OF OBLIGATION:
1. Law – the Philippine Jurisdiction, Constitution
2. Contracts – agreements between two parties about the fulfillment
3. Quasi-contracts – lawful, voluntary acts; the act is done voluntarily
ex: someone waters your plant, even though you did not say so. yung nagdilig may
right magdemand sa owner for reimbursement, yung mga nagastos niya sa act na
ginawa niya
4. Delicts – delikado, violation of the law (crime), the act is with intention
5. Quasi-delicts – negligent act that causes harm; the act contains a violation of a
law but it is unintentional. Ex: when the car bumped accidentally

A. CONTRACT AS SOURCE OF OBLIGATION

- Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. (Article 1159, Civil Code)

B. LAW AS SOURCE OF OBLIGATION

- The Philippine Jurisdiction or Constitution

1. National Laws and International Treaties & Agreements – acts, commonwealth

acts, batas Pambansa
2. Administrative Issuances to implement National laws – presidential
proclamations, letters of instructions, orders
3. Ordinances by Local Government Units – may supplement but not contradict
C. QUASI-CONTRACT AS SOURCE OF OBLIGATION
- When lawful, voluntary, and unilateral acts are performed, a juridical relation of
quasi-contract arises.
Basis: no one shall be unjustly enriched or benefitted at the expense of another
or solution benefitti

D. DELICTS AS SOURCE OF OBLIGATION

- Delicts is a crime the commission of an act or the omission of an act not
performing an act with evil intention. Because of that, someone incurs damaged.
If someone is convicted of robbery, there are two general types of obligation that
arise:

a. Penal obligation - consists of being in a prison

b. Civil obligation - damages, injury in the victim, value of destroyed
property

E. QUASI-DELICTS AS SOURCE OF OBLIGATION

- Quasi delicts - damage is caused by negligence or fault.

REQUISITES OF VALID OBLIGATION

1. Possible, physically and juridically - must be physically possible (physical
possibility), it has to be legal (juridical possibility),
2. Determinate or at least determinable - the parties has to be certain about what
the obligation is
a) determinate - obligation to sell a specific product
b) Determinable - not specific but can be identified
3. Has possible equivalent in money -obligation to deliver and pay for the car

CLASSIFICATION OF OBLIGATIONS
1. As to sanction: civil, natural, moral

Civil - obligation in the victim, payment of damages

Natural - natural obligation ex: parent to love children
Moral - when you lied, others may look down on you, it has moral consequences

2. Performance: positive (to give to do), negative (not to do)

3. Subject matter: personal (your personal property), real (house & lot)

4. Object: determinate (detailed) , generic, limited generic

 5. Persons obliged:
a. unilateral (if you promised to donate, one way, may binigay walang babalik,
b. bilateral (give and take obligation, mutual obligation)

6. Creation: legal (created due to law), conventional (created due to convention

or contract)

7. Existence of burden/condition: pure (no conditions) , conditional (with

conditions)

8. Character of responsibility: joint (partners) , solidary (only one)

Solidary: Keyword dito “I promise” or “I” lang, solidary mag isa lang. example I
promise to pay, solidary kaagad
Joint: Keyword dito “We promise” or “We”. Example, We promise to pay

9. Right to choose and substitution: alternative, facultative

Alternative: May options, may alternative. Example, may choice ako umorder ng
sapatos OR backpack

Facultative: For example, sa isang seller sapatos order mo pero may agreement
kayo na pag wala yung sapatos na inorder mo, backpack na lang. Dito pag
unavailable yung isa, yung isang item yung ibibigay

Conjunctive: Dalawang items na magkasama, wala na pipiliin

PART I. PURE AND CONDITIONAL OBLIGATIONS

Pure Obligation
- A pure obligation contains no term or condition whatever upon which depends
the fulfillment of an obligation contracted by the debtor. (Art. 1179, part. 1)
Example:
a. D obliges himself to pay C P1,000 – the obligation is immediately
demandable because there is no condition and no date is mentioned
for its fulfilment.
b. D binds himself to pay C P1,000 “upon demand of C”. the obligation
is immediately due and demandable.
Conditional Obligations
- A conditional obligation is one which is subject of a condition.
- A condition is every future and uncertain event upon which an obligation or
provision is made to depend. The condition, although uncertain, must be
possible. (Art. 1179, part. 1)
We do not know kung makakapasa ka, uncertain kasi it is not certain if you will
pass. Valid condition,
- A past event is not really a condition but more of a basis of the contract.
- Past event cannot happen, the knowledge that something happen in the past,
this can be a valid condition,

ex: debate where covid came from especially the coming about of covid is
something that happened already in the past, so the fact itself cannot be a
condition, but the precise knowledge of where it originated from can be
condition. WHO enters in a contract, obligations of the researchers where the is
the origin of covid, if it is known, then the WHO will compensate..
- What can be a condition is the future knowledge or proof of a past event
unknown to the parties, but not the event itself.

B. Kinds of Conditions

1. Suspensive and resolutory

Suspensive – is a condition that will give rise to an obligation; the

demandability of obligation is suspended until the happening of the
uncertain event which constitutes the condition. (obligation will be
demandable if the condition is fulfilled)

Ex. Mr. A sell the land to Mr. B if it is adjudicated to Mr. A in the division of
A’s decreased father’s estate. Mr. A is demandable only after the
condition is fulfilled – Mr. A becoming the owner of the land. In the
meantime, Mr. A is not liable.

The obligation is suspended until the condition is met.

Resolutory – one of the fulfillments of which will extinguish an obligation

already existing.

Ex: A, in payment of his debt to B, binds himself to give B P3,000 monthly

allowance until B graduates from college.
 Therefore, A’s obligation is demandable now but it shall be extinguished
or terminated upon the happening of the resolutory condition.

The moment the obligation is

Key differences:
a. In suspensive, when the condition is fulfilled, the obligation arises
while in resolutory, when the condition is fulfilled, the obligation is
extinguished.
b. The tie of the law does not appear in suspensive, while in resolutory,
the tie of the law is consolidated.
c. The existence of obligation in suspensive is in a mere hope while, in
resolutory, its effects flow but over it hovers the possibility of
termination.

2. Potestative, casual, mixed (Art. 1182)

Potestative – a condition suspensive in nature and which depends upon

the sole will of one of the contracting parties.

A. Where suspensive condition depends upon the will of the debtor

(1) Conditional obligation void – where the potestative condition

depends solely upon the will of the debtor, the conditional obligation
must be void because its validity and compliance is left to the will of
the debtor. And it cannot, therefore, be easily demanded. In order not
to be liable, the debtor will not just fulfill the condition. There is no
burden on the debtor and consequently, no juridical tie is created.

Ex: I will pay if I want.

I will pay you after I receive a loan from a bank.
I will pay you after I recover what X owes.

(2) Only the condition void – if the obligation is a pre-existing one, and
therefore, does not depend for its existence upon the fulfillment by the
debtor of the potestative condition, only the condition is void leaving
unaffected the obligation itself. Here, the condition is imposed not on
the birth of the obligation but on its fulfillment.

Ex: D borrowed P10,000 from C payable within two months.

Subsequently, D promised to pay C “after D sells his car” to which C
agreed. In this case, only the condition is void but not the pre-existing
obligation of D to pay C.
B. Where suspensive condition depends upon will of creditor.

If the condition depends exclusively upon the will of the creditor, the
obligation is valid.

Ex: I will pay you my indebtedness upon your demand.

The obligation does not become illusory. Normally, the creditor is

interested in the fulfillment of the obligation because it is for his benefit. It
is up to him whether to enforce his right or not.

C. Where resolutory condition depends upon will of debtor

If the condition is resolutory in nature, like the right to repurchase in a

sale with pacto de retro, the obligation is valid although its fulfilment
depends upon the sole will of the debtor (buyer). The fulfillment of the
condition merely causes the extinguishment or loss of rights already
acquired. The debtor is naturally interested in its fulfillment.
The position of the debtor when the condition is resolutory is exactly
the same as that of the creditor when the condition is suspensive.

Casual – if the suspensive condition depends upon chance or upon the

will of a third person, the obligation subject to it is valid.

Ex:

a. Where x, building contractor, obliges himself in favor of y, owner, to

repair at X’s expense any damage that may be caused to the building
by any earthquake occurring within 10 years from the date of the
completion of its construction.
b. Where S binds himself to sell his land to B if he wins a case which is
pending before Supreme Court.

Mixed - the obligation is valid if the suspensive condition depends partly

upon chance and partly upon the will of a third person.

Ex:
Where x, building contractor, obliges himself in favor of Y, owner to repair
at X’s expense any damage that may be caused to the building taking
place after an earthquake if found by a panel of arbitrators that
construction defects contributed in any way to the damage.

Both conditions must take place in order that X’s obligation will arise. The
decision of the panel (third party) must be accepted by X and Y as final
unless it can be shown that it was incompetent to act in that capacity or
was obviously biased favoring X or Y.

Summary:
Kinds of Conditions:

Pure - walang condition

Conditional - may condition yung obligation

• Resolutory - the obligation is terminated upon completing the

obligation
• Suspensive - obligation arises upon meeting the obligation = "if"
• Potestative condition- one which depends upon the will of one of
the contracting parties.
“ I promise to give you P1,000, if you build a house for me in three
months.
as to will ng debtor - conditional obligation void

= ikaw lang =
• Casual condition- depends exclusively upon chance or other
factors (upon the will of a third person), and not upon the will of the
contracting parties. “

I will give you my land if a war breaks out next month.”

= ikaw lang pero may third party =

• Mixed condition- one which depends upon the will of one of the
contracting parties and other circumstances, including the will of a
third person.

Example: “I will give you a house if you marry Carolina.”

= ikaw – binigyan mo siya kondisyon tapos may sinama ka pang

iba =

Retroactive - If you do work this week and you get paid next week for work
that has already been done, this is an example of getting paid retroactively.
 Physical impossibility – impossible mangyari
Kukunin ko yung buwan para sayo

Juridical – against the law

Payag ako kung mamatay man si Batman.

Negative condition – I will give you this, if you do not eat sweets ganern.
Effects of impossible conditions

(1) Conditional obligation valid – if the condition is negative, that is, not to
do an impossible thing, it is disregarded and the obligation is rendered
pure and valid. The condition is always fulfilled when it is not to do an
impossible thing so that it is the same as if there were no condition.
The negative condition may not be to give an impossible thing.
Ex:
I will sell you my land if you do not carry 20 cavans of palay on your
shoulder.
I will sell you my land if you do not give me a dog that talks.
=pure yung condition, pero kapag negative yung condition na
binigay, matic impossible mangyari=

(2) Only the affected obligation void – if the obligation is divisible, the part
thereof not affected by the impossible condition shall be valid.

Ex:
I will give you P10,000 if you sell my land, and a car, if you kill Pedro.

The obligation is to give P10,000 is valid but the obligation to give a

car is void because it is dependent upon an impossible condition.

3. Divisible and indivisible

4. Conjunctive and alternative
5. Positive and negative (Art. 1184 and 1185)
6. Express and implied
7. Possible and impossible (Art. 1183)

Formal answer in case na idiscuss uli ni maam next meeting:

QUIZ #2:

1. Ms. Anna was hired by Annlisse Corporation as a probationary

employee. Under the terms of the probationary employment contract, Ms. Anna
shall work with Annlisse Corporation for six (6) months with a monthly salary of
PhP40,000.00. Before the end of the 6-month period, Annlisse Corporation shall
conduct a performance evaluation of Ms. Anna. If Ms. Anna will not meet the
employment standards upon such performance evaluation, the probationary
employment will be terminated. The obligation of Annlisse Corporation to pay
Ms. Anna monthly salary involves what type of an obligation? Obligation with a
resolutory condition

OPTION B: It is a resolutory condition because there is an agreement which said that

when the employee did not meet their standards. Hence, the employment will be
terminated.

2. Mr. Mario is an employee of Marsman Inc. who is working from home. His
headset got damaged hence, he ordered a new one online. Upon payment by Mr.
Mario of the purchase price for the headset, Marsman Inc. is obligated to deliver the
headset to Mr. Mario. The obligation of Marsman Inc. to deliver the headset involves
what type of an obligation? Pure obligation

3. A Dutch court recently issued a decision ordering Shell to reduce its CO2
emissions by 45% in 2020. The obligation of Shell that arose by virtue of the Dutch
court decision involves what type of obligation? Obligation with a term

The obligation is a suspensive obligation because from the moment that the dutch court
has finally made the decision an obligation arises for the Shell which is to reduce its
CO2 emissions by 45%.
4. Dugas Corporation engaged AAA Accountants Co. to audit the 2020 financial
statements of Dugas Corporation. In the service proposal prepared by Dugas
Corporation, it was stated that the amount of the service fee to be paid to AAA
Accountants Co. for auditing services rendered will depend on the amount that will be
approved by the Board of Directors of Dugas Corporation. The obligation of Dugas
Corporation to pay AAA Accountants Co. for rendered services depends on a
potestative condition. True
True, because in potestative condition it depends upon the will of either one of the
parties.

5. Real Estate Corp. entered into a one-year Lease Agreement with AAA
Accountants Co. over a commercial condominium unit to be used by AAA Accountants
Co. as their office. The monthly rental for the commercial condominium unit is
PhP50,000.00. In the Lease Agreement, it is provided that on the 5th day of the first
month of the lease, AAA Accountants Co. shall pay to Real Estate Corp. the following:

a. rental for the 1st month of the lease

b. rental for the 2nd month of the lease
c. security deposit equivalent to rental for 1 month to cover possible future damages in
the unit or unpaid utility bills
The payment of the security deposit involves what type of an obligation? Obligation
with a suspensive condition

6. The PNP hired contractual workers to determine within one (1) month how may
kilograms of shabu and marijuana, both illegal drugs, were smuggled into Metro Manila
in 2016. The obligation of the contractual workers of PNP involves what type of an
obligation? Obligation with a term
This is considered as obligation with a term because the workers they are responsible
fulfill their work within a month.
7. Real Estate Corp. entered into a one-year Lease Agreement with AAA
Accountants Co. The obligation of Real Estate Corpo. as lessor under the one-year
Lease Agreement involves what type of an obligation? Obligation with a term – one
year
8. If you will become an accountant of a corporation, discuss the importance of
knowing whether or not an obligation of the corporation to pay monetary liability comes
with a term or condition.

It is important to know whether an obligation to pay a liability comes with a term or

condition because in a business perspective, obligation with a term may prove the
solvency of the business as it meets its long- or short-term financial obligations. While
as for obligation with condition, it would aid the company to assess how can the
obligation be settled depending on the condition agreed by both parties.
Kapag with a term, alam mo na kailangan mong magrecord ng liability because it is
certain the you’ll have to pay that liability. Pero kapag with a condition, ,malalaman mo
yung contingent liability.

C. Rules on Obligations with Condition

1. When the fulfillment of the condition depends solely on the will of the debtor, the
conditional obligation shall be void. (Art. 1182)

Ex: I will pay if I want.

I will pay you after I receive a loan from a bank.
I will pay you after I recover what X owes.

2. Impossible conditions, those contrary to good customs or public policy or those

prohibited by law shall annul the obligation which depends upon them. (Art.
1183)

1. Physical impossibility - when they, in nature of things, cannot exist or

cannot be done.
Ex: I will pay you P10,000, if it will not rain for one year in the Philippines.

2. Juridical impossibility – when they are in contrary in the law, illegal

Ex: A will give B P1,00 if B
a. Will kill C, (against the law)
b. Will be the common-law wife of X (against morals)
c. Will slap his father (against good customs)
d. Will publicly advocate the overthrow of the government (against
public order)
e. Will not appear as a witness against to A in a criminal case
(against public policy)
 3. The condition that some event happen at a determinate time shall extinguish the
obligation as soon as the time expires or if it has become indubitable that the
event will not take place. (Art. 1184) - resolutory
4. The condition that some event will not happen at a determinate time shall render
the obligation effective from the moment the time indicated has lapsed or if has
become evident that the event cannot occur. (Art. 1184)
5. The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment. (Art. 1186)
6. Retroactivity of obligation (Art. 1187)
7. Preservation of creditor’s rights (Art. 1188)
8. Rules when conditions have been imposed with the intention of suspending
efficacy of obligation to give (Art. 1189)
9. Rules when resolutory condition has happened (Art. 1190)

Part II. Obligations with a Term

A. Term or Period
- A term or period is a space of time which, exerting an influence on obligations as
a consequence of a juridical act, suspends their demandability or determines
their extinguishment.
- Requisites of period:
1. future,
2. certain,
3. possible
- Obligation with a term: if the debtor binds himself to pay when his means permit
him to do so.

B. Term/Period vs. Condition

Condition Term

1. As to fulfillment Uncertain event Must necessarily come

- Kasi di natin ala -nakatakda sa future kung
mano mangyayari ano dapat mong gawin
sa future
2. Influence on Gives rise to an obligation Affects the demandability
obligation or extinguishes one or performance of
already existing obligation

-either obligation will rise If suspensive, hindi

or terminated after doing maiiwasan na magkaroon
the condition ng obligation; resolutory,
hindi magbabago na may
obligation na nageexist
 3. As to time May refer to past event A period always refers to
unknown to parties the future

- Yung knowledge - Because sa future

pwede pa magamit pa yung obligation
mo
3. As to will of A condition on the sole will A period left to the will of
debtor of the debtor is void the debtor merely
empowers the court to fix
the period

C. Rules in Obligations with Term

1. Loss or improvement of thing before arrival of day certain, Art. 1194
2. Payment or delivery by mistake (Art. 1195)
3. Benefit of the term (Art. 1196)
4. Court may fix term (Art. 1197)
5. Loss of the term (Art. 1198)
Obligations Lectures Week 2 Part III.
Part III. Alternative Obligations
A. Definitions

Obligations with several objects:

1) conjunctive - I am selling red AND blue car.
2) alternative, - I am selling either red OR blue car depending on which of the
true cars are cleaned.
3) facultative - similar to alternative, one obligation, there is an option in the part
of the debtor who has the obligation to choose, to substitute. Ex: Buyer wants to
buy red car. My obligation is to deliver the red car. However, I tell my buyer, I am
not sure if the red car is available so if you are not very picky with the color, I
have the same car exactly the same specifications, my obligation is to deliver to
u the red car if upon checking with my shop I determined that someone already
bought it, then I have the option to substitute the red car with the blue car.

Conjunctive obligations: where the debtor has to perform several obligations,

it is extinguished only by the performance of all of them

Alternative obligations: several obligations being due, the fulfillment of one is

sufficient determined by the choice of the debtor who generally has the right of
election.
 Facultative obligations: only one thing is due but the debtor has reserved the
right to substitute it with another

{ obligations with not just one object, for example when you are selling a car then
you only have one object, in alternative obligation, you have two or more object
— you have a red and black car. When you have to objects, it can happen that
your obligation to deliver two or more objects is conjunctive, you have to perform
two or more obligations with several objects.}

{there are two or more objects I am selling shoes so with respect to my

obligation to deliver shoes this obligation can be conjunctive, alternative,
facultative, obligation with several obligations. What if I deliver the 2/3
shoes? The buyer will have to demand. Alternative, buyer says I’d like to
buy a pair of shoes it should be size 5 and then I looked at my stocks and I
have a red and a blue adidas both are size 5. If my buyer said both,
conjunctive pero kapag isa lang, it is only alternative, you have the
obligation to deliver only one facultative, only one obligation but there is a
right of the debtor to subs. I am an online seller, tapos I have a buyer, then I
have what you want but im not sure of its condityion so I can sell to you a
pair of blue shoes, I would like to substitute }
B. Rules in Alternative Obligations
1. Election by the debtor (Art. 1200) – the right of the debtor to elect or
identify which of the two obligation to perform. This is relevant by the
matter of election by debtor on which obligation to perform when it comes
to alternative or facultative. Alternative, it is usually the option of the debtor
or the obligation of the debtor, the right to choose on which obligation to
perform unless there is a contrary to the agreement. Facultative, the
debtor has the right to substitute.

I am selling vaping and shoes and my buyer says, I would like to buy
either one pero may oridnance na selling nagging illegal;
2. Notice of election (Art. 1201) – debtor does not have to the obligation to
notify first the creditor which of the ff facultative or alternative obligation to
perform unless there is an agreement.

3. Obligation becomes simple (Art. 1202) – simple- you only have one
obligation have an obligation to sell perform. Ex: I have an obligation to
sell a car or a vape shop. However, a law is passed making vaping illegal.
Thus, I can no longer sell vape shop (illegally impossible) kaya natitira
yung isa na lang.

4. Impossibility due to creditor (Art. 1203) - Pede rin kapag yung creditor
made it impossible for the debtor to perform obligation
 5. Loss by fault of debtor (Art. 1204) – if I have red and blue car and I lost the
blue car because of negligence, then it becomes simple obligation.
Creditor may claim for damagaes because of the loss

6. Selection by creditor (Art. 1205) – if agreed by both of the parties, by rule,

it is the right of the debtor to choose what facultative or alternative
obligation to perform.

C. Alternative vs. Facultative

Alternative Facultative

1. As to contents There are various Only principal

prestation which constitute prestation constitutes
parts of the obligation obligation the
accessory being only
- There are diff obli a means to facilitate
but only one to payment
perform
- The debtor has
the option to
perform what
obligation
2. As to nullity The nullity of one prestation The nullity of the
does not invalidate the principal prestation
obligation invalidates the
obligation
- Kapag Nawala yung
isa, magiging simple -may replacement
obligtion
3. As to choice The right to choose may be Only debtor can
given to creditor choose the substitute
4. As to effect of Only impossibility of all the Impossibility of
loss prestations due without principal prestation
fault of the debtor extinguishes
extinguishes obligation obligation

- Mawawala only - Kapag Nawala

kapag Nawala mga yung main obli
alt. options tsaka magiging
impossible
 D. Facultative Obligations
- Loss of substitute (Art. 1206)
- When substitution is effective

SA POV NG ACCOUNTING:
A. Importance malaman kung obligation is alt conj ,
It is important to determine whether obligation is conjunctive, alternative, and facultative
because for instance, in merchandising business, it can determine the factors which
contributes to the current income of the business. Alternative obligation aids to know the
difference of two products with same specifications through consumer preference. While
in facultative, the management may assess what items in the inventory are in good
conditions, what items are legally available for sale, or in such case, they can also
determine what items need to be restocked since the products are substituted.

B. Importance malaman kung JOINT and solidary

It is important to determine because when the accountants may determine the
who are liable in accounts to be received from the debtors and whether the
company has the right to demand to claim the whole or portion of the debt in
accordance with their agreement. With that, the creditor may guarantee that the
loan will be repaid. While, when the entity owes a debt, the accountants may
know the amount of loan payable to the creditors and in case, who among the
partnership is liable for the debt.

In joint obligation, debtor is more beneficial since is not burdensome. Creditor

only collects the amount based on the pro rata in which the creditor does not
have the right to demand more than the amount. If the debtor would be unable to
repay, then it is a loss for the creditor.

PART IV. JOINT AND SOLIDARY OBLIGATIONS – two or more subjects, active
subjects or passive subject, or both
Joint Obligations: one in which each of the debtors is liable only for a proportionate
part of the debt and each creditor is entitled only to a proportionate part of the credit.
Synonyms: mancommunada or pro rata
“We promise to pay” followed by 2 or more signatories

Each of the debtors of creditors, each of the debtors is liable only for a
proportionate part of the debt and each of the creditors is liable only for a proportionate
part of the credit. Ex: I give a P10,000 loan to Mr. a and Mr. b. There’s only one
creditor and that is me. Debtors are 2. The obligation of the debtors is to repay me the
loan. With respect to the obligation of Ms. A and Ms. B to repay me the loan, if we say
that the obligation is joint then Mr. A and Mr. B are liable to only pay me the
proportionate amount of loaned amount which means not the entire liability.
Proportionate is not only 50/50.

I and my friend, Reena, loaned 100,000 to A. 50 comes from me and the

other half is from Reena. There are two active subjects I and Reena. With respect
to the right to collect the obligation is joint then I and Rina can only collect
proportionate amount of the loan.

Rationale, the rule on joint obligation are yeard for the benefit of the
debtors
Solidary Obligations: each debtor is liable for the entire obligation and each creditor
is entitled to demand the whole obligation.
Synonyms: mancommunada solidaria, joint and several, in solidum

“I promise to pay” followed by 2 or more signatories; “individually and

collectively”, “individually liable”, “individually and jointly liable”

Have plurality of active or passive subjects but the obligation is different. In

joint, the debtors or creditors may be made to pay portion. The debtors
may be made liable to the entire obligation.

PASSIVE. I give an P10,000 to Mr. A and Mr. B. the obligation is solidary. Mr. A.
and Mr. B shall be made liable jointly and solidarity for the 10,000 loan by Atty.
Pagayatan. Because the obligation is solidary, I can go to Mr. A and collect the
entire P10,000. For instance if Mr. A lost his job, then I can go to Mr. B and
collect the entire 10,000. In that situation, I can go to either both of the debtors to
collect the entire P10,000. If I go to Mr. A and he paid me the entire 10,000, then
both of the debtors will now be deemed to have complied with their obligation to
repay me the amount that I have loaned. Hence, the obligation is terminated in
the creditor’s perspective. But as for mr. and mr. b, there is still an obligation of
Mr. A to reimburse Mr. B for the portion of his liability to be paid.

ACTIVE. Reena and I, we pulled our funds together and we loan to mr. a and
ms. B the 100,000. Obligation is solidary. The amount loaned is now due. Mr. A
she wants to be able to dispense the obligation because she wants to have
peace of mind. So, Ms. B went to me and repaid me the entire loan. So, in that
situation the obli of mr. a and ms. B has been terminated even if only one creditor
receives. But since the loan comprised both of our funds, I have an obligation to
Reena her share in the repaid loan amount.
B. Rules on Joint and Solidary Obligations

1. Joint character of obligations is presumed (Art. 1208)

- If it is not clearly stated on what is the nature of obligation, it is presumed to be
joint because it is not burdensome.
2. Effect of Joint Liability:
a. The demand by one creditor upon one debtor produces the effects of
default only with respect to the creditor who demanded and the debtor on
whom demand was made but not with respect to the others’
b. The interruption of prescription by the judicial demand of one creditor upon
a debtor does not benefit the other creditors nor interrupt the prescription
as to other debtors;
- Kapag lumagpas ka sa kasunduan may right na yung debtor magdemand
c. The vices of each obligation arising from personal defect of a particular
debtor or creditor does not affect the obligation of rights of the others;
because in joint obligation the obligation is pro rata, the defenses of the
other debtors may not be availed of by the defaulting debtor upon whom
demand has been made.
d. Insolvency of a debtor does not increase responsibility of the co-debtors;
and insolvency – liability falls due and not able to perform liability if debtor
cannot repay his debt then, hindi na sagot yun nung co-debtor. And
maaring di makuha ng creditor yung pinautang niya
e. In the joint divisible obligation, the defense of res judicata is not extended
from one debtor to another. Res judicata – the issue, there’s already a
case and this debtor and ruled in the court. It has been decided. If
favorable of the debtor, the defense cannot be avail of by other creditors.

3. Joint Indivisible Obligations: when there are several debtors or creditors but the
prestation is indivisible (such as delivery of a house or other determinate
thing),the obligation is joint, unless solidarity is stipulated. (Art. 1209)
Plurality of creditors: if there are several creditors and only one debtor, the
obligation can be performed only by delivering the object to all creditors
jointly.
Plurality of debtors: the indivisible obligation can be performed by them only
by acting together
4. Kinds of solidarity:
a. Active
b. Passive
c. Mixed – you have both two or more debtors and two or more creditors
5. Active Solidarity: each creditor has authority to claim and enforce
the rights of all
6. Passive Solidarity: each debtor can be made to answer for the
others with the right on the part of the debtor-payor to recover form
the others their respective shares
7. Each solidary creditor may do whatever is useful to the others but
cannot do anything prejudicial to the others (Art. 1212) – if the solidary creditor is
claiming prescription, then, he has the right to claim this but if the solidary creditor is
undertaking acts wgich are prejudicial to the others, then the effects of acts cannot
affect the others.
8. A solidary creditor cannot assign his rights without the consent of
the others (Art. 1213)
9. The debtor may pay any one of the solidary creditors but if any
demand has been made by one of them, payment should be made
to him. – with respect to payment of solidary debtors, as a rule solidary debtor
may repay to one of the creditors but if one of the solidary creditors made a demand
then ayun yung susundin mo.
10. Novation (when u change the element of the obligation), compensation,
confusion, or remission by any of the solidary creditors extinguishes obligation (Art.
1215).
11. The creditor may proceed against any one of the solidary debtors or some or all
of them simultaneously (Art. 1216)
12. Payment by one of the solidary debtors extinguishes the obligation. If two or
more solidary debtors offer to pay, the creditor may choose which offer to
accept (Art. 1217)
13. Payment by a solidary debtor shall not entitle him to reimbursement if payment
is made after the obligation has prescribed or become illegal (Art. 1218)
14. Remission of the whole obligation obtained by a solidary debtor does not entitle
him to reimbursement from the others (Art. 1220)
15. If the thing has been lost or if the prestation has become impossible without the
fault of the solidary debtors, the obligation shall be extinguished (Art. 1221)
16. If the thing is lost due to the fault of any of the solidary debtors, all shall be liable
to the creditor for the price and damages.
WEEK 4

Circumstances Affecting Obligations

Generic Thing - Indicated only by its kinds without being designated and distinguished
from others of the same kind.

- Ex: adidas shoe or Toyota fortuner 2018 color black, those Toyota fortuners that
corresponds to that general description would be called generic things cannot be
set part from others of their kind

Determinate Thing - One that is individualized and can be identified or distinguished

from others of its kind. Can be separated sa kauri niya

Ex: totyota fortuner with plate number ABL1381

3 Incidental Obligations in Delivery of Determinate Things

1. Obligation to preserve the thing with due care (Art. 1163) – you have to take care
with ordinary diligence

Illustration:

If Autobot Car Dealer’s obligation is to deliver a brand new Toyota Alphard to

Rody Dutz, Autobot can deliver any unit of Toyota Alphard as long as it is brand
new regardless of whatever conduction sticker, chassis number or engine
number the vehicle has. But if Autobot’s obligation is to deliver to Rody Dutz a
particular Toyota Alphard, like the one used by the Sultan of Brunei in the latest
APEC summit, Autobot cannot substitute it with another unit of Toyota Alphard
nor can Rody Dutz require Autobot to deliver a different Toyota Alphard without
Autobot’s consent although it may be of the same kind and value. determinate
upon its delivery.

2. Obligation to deliver the fruits (Art. 1164) – it could bear fruit in sense that u earn
interest
3. Obligation to deliver the accessions and accessories (Art. 1166) –
Accessions are the fruits of a thing or additions to or improvements upon a thing (the
principal). ATTACHED TO A PRODUCTS

Example:
House or trees on a land; rents or a building; air-conditioner in a car; profits or dividends
accruing from shares of stocks, etc.

2. Accessories are things joined to or included with the principal thing for the latter’s
embellishment, better use, or completion. –
Obligation to preserve the thing (Art. 1163)
Diligence required: diligence of a good father of a family (Art. 1173). - Ordinary
diligence
Effect of breach of obligation: damages

ABL1381 it comes with my obli to preserve it with ordinary diligence, the diligence of a
good father of a family. Extraordinary diligence – the diligence of the person who bears
in mind all the possible circumstances pertaining to obligation. Kapag dineliver mo nang
nagasgasan, you will be lible for damages

It is important to know the difference because you will be exposed to liability. Sleepy not
a defense and foggy the driver is expected to drive prepared in detia of extraordinary
obligation.
Right to fruits (Art. 1164)
The creditor is entitled to the fruits from the time the obligation to deliver arises.
However, real right over the fruits arise only until delivery is made. Ownership of things
is transferred not by mere agreements but by delivery.

oki
Real Right
The direct and immediate juridical power over a thing, which is susceptible of being
exercised not only against a determinate person but against the whole world.
Example: rights of ownership and possession
Your right in which you can exercise in the whole world. For instance, your right of
ownership. As owner of Toyota fortuner bl1381, u have the right to exclude other people
from your property. Against the entire world

Personal Right
The power belonging to one person to demand or another as a definite passive
subject the fulfillment of an obligation.
- It is a right you can enforce in a specific person. Ex: you have a contract of sale
and you are the seller so what is the personal right that u can enforce there. Your
right to collect the payment to whatever you are selling against the buyer – against
a specific person
If there is a breach upon delivering a determinate thing

The general rule is that the creditor has the right to the fruits of the thing from the time the
obligation to deliver it arises.
Ownership over the thing though, is only required when such an object is delivered to
him. The essential element therefore of ownership is delivery. Therefore, although the
creditor has the right has the right to the fruits of a thing from the time the obligation to
deliver the thing itself arises, his ownership will start when the thing is delivered to him.

Anne sold her dog to Janine for 15,000 pesos and while in the possession of Anne, the
dog gave birth to a puppy in which Janine is the one entitled to the puppy if Janine has
already paid the amount of 15, 000 pesos to Anne.
PERSONAL RIGHT is the right or power of a person to demand from another — to give,
to do, or not to do.
REAL RIGHT is a power over a specific thing (like the right of ownership or possession)
and is binding on the whole world.
Example:

If Mr. A was a creditor to a house and Mr. B was the debtor and both agreed that the
payment for the rent of the house would be monthly. Janine upon paying is what we call
REAL RIGHT. But upon Mr. A expecting Mr. B to pay every month is what we call
PERSONAL RIGHT.
Say you enter in a c
Remedies of Creditor ;egal actions available to you incase of non performance of
the party to u
1. Specific performance - The creditor can compel the debtor to specifically
perform the obli which was not performed or which may have been performed but
sub standardly.
Pag di ka binayaran edi singilin mo

2. Action to rescind or resolve - Rescind is to cancel the obligation

Di ka sumunod, edi cancelled
3. Action for damages - Can be enforced along with specific performance or action
to rescind
A. Specific Performance
1. If what is involved is generic thing, the delivery of anything belonging to the
same species is sufficient.
2. If what is involved is determinate thing, the thing itself should be delivered.

Imprisonment for Debt

Art. IV, par. 13 of the Constitution provides that no person shall be imprisoned for
debt. – walang makukulong sa hindi pagbayad ng utang hindi ka nagcommit ng estafa o
deceit, then the creditor cannot file criminal case. Pero you are made to suffer from civil
liability pa rin kasi u failed to pay your debt.
Bouncing checks, if u issue a check and the check that u issued bounces and then under
Delay and Fortuitous Event
If the obligor delays, he shall be responsible for any fortuitous event. Fous ma jur
– unforeseen or being the control of the obligor
An obligation to deliver a determinate thing as a general rule is extinguished if the thing
is lost due to fortuitous events. Whereas an obligation to deliver an indeterminate or
generic thing is not extinguished by fortuitous events.
ABC company contracted to deliver a vessel to ZZZ company on January 10, 2019. The
former failed to deliver on the stipulated period. On January 30, 2019 the vessel sunk
because of a raging storm. ABC company is not liable because the obligation was
extinguished. It does not commit legal delay.
 However, if there was demand for delivery of the vessel before January 10, 2019 and
ABC company failed to deliver and the vessel sunk on Jawnuary 30, 2019 by reason of
the storm, the company is liable. The obligation to deliver the vessel is converted into a
money claim for damages.

Because of the fortuitous event, it excuses the non performance of obligation hence
walang liability. However, if the obligation delayed, walang unexpected event, then it is
not
Right to accessions/accessories (Art. 1166)

Accessories: things which, destined for the embellishment, use or preservation of

another thing of more importance, have for the object the completion of the latter for which
they are indispensable or convenient.
Example: machinery in a factory, tools of a machine, keys with respect to a house.

Right to accessions/accessories (Art. 1166)

Accessions: include everything which is produced by a thing, or which is

incorporated or attached thereto, either naturally or artificially.
Example: machinery in a factory, tools of a machine, keys with respect to a house.
Diba may river, pag umulan malakas matatanggl yung lupa dadaloy mapupunta sa
iba kaya yon property na ng river b yung natnggal na lupa

B. Delay
Concept of delay (Art. 1166) – is not being late, it is the non fulfillment of obligation which
is time bound
Delay in the fulfillment of obligation, non-fulfillment with respect to time.
Monetary – penalty interest = damages

There can be delay only in positive obligations (to do and to give). There can be
no delay in negative obligations (not to do and not to give).
Kinds of delay (Art. 1166)

1. Delay on the part of the debtor – I take out a loan and supposed to end it in
June, end of June comes and theres a demand from me, I don’t pay.
2. Delay on the part of the creditor – I take out a loan from ms. A, im ready to [ay
end of June but nangghost si Ms. A
3. Delay of both parties in reciprocal obligations – im not ready to pay ms. A is also
not redi to receive the payment

Delay of debtor, requisites:

1. Obligation is demandable and liquidated – there is an obligtion in whch creditor
demand debtor to perform
2. Debtor delays performance
3. Creditor requires the performance judicially (file case for collection) or
extrajudicially (sends a letter for demand)

Demand is generally necessary even if there is a period fixed in the obligation.

When demand is not required:
1. Where there is an express stipulation to that effect – kapag sinabi na kahit hindi
siningil delay na
2. Where the law so provides
3. When the period is the controlling motive for the obligation
4. Where demand would be useless
Kelangan muna my demand sayo bago maconsider in delay except kung sinabi na
di required mag demand (1), kapag may law (2), I order bday cake for the 18th bday
of my daughter on april 6th, di na kailangan magdemand kasi obvious na kailangan
ko yung object sa date na yun (3), creditor has absconded, nangghost di na
nagparamdam (4)

Kailangan may demand – the creditor will ask for the performance of the creditor
Effects of delay of debtor:
 1. When it has for its object a determinate thing, the delay places the risks of the
thing on the debtor; kapag may delay, u procrastinated, so u planned to deliver it
tom kaso nasunog kotse so it is a wreck
2. The debtor becomes liable for damages for the delay.
Suppose that I am deliver the car that I sell today, I don’t deliver it today. Kapag
nasunog yung car, fault ko yun, sagot ko yun.
Basis of the creditor could have increased more moneyhave u paid the money on
time and the creditor that the money. Loss of opportunity – loss of profit
Delay of the creditor
The delay by the creditor in the performance of the necessary cooperation,
especially acceptance on his part.
Requisites for delay of creditor
1. An offer of performance by the debtor who has the required capacity
2. The offer must be to comply with the prestation as it should be performed
3. The creditor refuses the performance without just cause

Primary obligation ng creditor – acceptance; dapat may offer na katulad nung

napagkasunduan pero tinanggihan

Effects of delay of the creditor

1. The responsibility of the debtor for the thing is reduced and limited to fraud and
gross negligence
2. The debtor is exempted from the risks of loss of the thing
3. All expenses incurred by the debtor for the preservation of the thing after the
mora shall be chargeable to the creditor
4. If the obligation bears interest, the debtor does not have to pay from the moment
of delay
5. The creditor becomes liable for damages
6. The debtor may relieve himself of the obligation by the consignation of the thing.

Mutual delay of the creditor and debtor

 In reciprocal obligations, fulfillment must be simultaneous. Neither party incurs in
delay if the other does not comply with what is incumbent on him.
-neither of the would be liable kasi both parties naman may fault

- IT IS IMPORTANT TO KNOW WHETHER OT NOT YOUR OBLIGATION TO

DELIVER INVOLVES A GENERIC OR DETERMINATE THING BECAUSE YOU
INCIDENTAL OBLIGATION WHEN IT INVOLVES A DETERMINATE THING.
- How does delay affect the performance of obligations? It could lead to the payment
of damages on both part of the debtor and creditor. Depending on who is in delay
but take note of fortuitous event. The risks on the thing that is not delivered on time
remains on the obligor kahit na Nawala sa fortuitous event.

C. Fraud
Non-performance by fraud (Art. 1170) – there is intent to deceive – may panloloko
Fraud: voluntary execution of a wrongful act, or a willful omission, knowing
and intending the effects which necessarily arise from such act or omission. -
panloloko
- Omission or execution of an act with deceit, with knowing intent so you do or failed
to do something and you have a purposeful intent to harm another person
Party guilty of fraud is liable for damages. U know that by not doing that
thing you’ll going to cause harm on the creditor or another party. Pag guilty, liable
for damages,
Action for future fraud cannot be renounced. (Art. 1171)

Non-performance by negligence (Art. 1170)

Negligence: omission of the diligence which is required by the nature of the
obligation and corresponds with the circumstances of the persons, of the time and
of the place. – you fail to exercise the default negligence required or ordinary
diligence
If the law or contract does not state the diligence which is to be observed in
the performance, that which is expected of a good father of a family shall be
required.
 Negligence is a question of fact.
Delay – failed to do obligation on the time
Negligence- you do not exercise due care
D. Fortuitous Event
No responsibility for fortuitous event (Art. 1174)
Fortuitous event/force majeure: an event which takes place by accident
and could not have been foreseen
2 types of fortuitous events:
1. by nature – storms, storms,
2. by act of man – robbery, laptop deliver to buyer kaso nanakaw, fires,

- Happened by accident

Characteristics of fortuitous event (Art. 1174)

1. The cause of the fortuitous event must be independent of the human will
ex: earthquake, robbery – di mo naman kasalanan manakaw eh
2. It must be impossible to foresee the event which constitute the fortuitous
event – hard to foresee
3. The occurrence must be such as to render it impossible for the debtor to
fulfill his obligation in a normal manner – hindi mo na magagawa obli mo
4. The obligor must be free from any participation in the aggravation of the
injury resulting to the creditor. – Toyota fortuner, I was not careful, kapabayaan,
have I been more diligent, edi wala sana nangyari

E. Receipt of Principal/Interest
Provisions on loan (Art. 1176)
The receipt by the creditor of the principal without reservation regarding
interest gives rise to the presumption that the interest has been paid.

The receipt of a later installment of a debt without reservation as to prior

installments raises the presumption that the installments have been paid.

- When you have loan agreement you have the principal amount, the amount of
money you loaned to debtor with interest, the installment payment would be
comprised of two parts, P + I, if payment is made by debtor and the debtor and
creditor agrees that yes the payment is the principal and wala sa interest, then it
gave ris to the presumption na nabayaran na yung interest. Kapag installment
monthly, jan paid feb not pagdating ng march the debtor paid, kapag accept lang
march payment with receipt edi assumed na nabayaran na yung pang feb
- -subject to

Duties of Obligor in Obligations to Do or Not to Do

Performance at Debtor’s Cost (Art. 1167)
Execution of obligation at debtor’s cost:
1. If debtor fails to do his obligation – we have this rule of involuntary servitude
– forced labor you cannot compel someone to perdome service ex. May housemaid ka
for 2 years tas nagadvance siya sweldo tas nagleave hindi ka pwede magdemand kasi
forced labor nay un, slavery na yun you only need to return.pag carpenter, tas u
commissioned someone to make a dining set kaso di pasok sa standards it can be
undone you can pay for another tas yung binayaran mo nung una pwee mo singilin na
pangbayad to the other.
2. If debtor does the obligation contrary to the obligation
What was poorly done may be undone.
If only debtor can do the obligation, the only remedy is to recover damages.

Doing of Prohibited Thing (Art. 1168)

Liability of obligor:
1. It shall be undone at his expense
2. Damages

Kapag ginawa mo yung di dapat, it can be undone kapag pwede pag hindi edi lagot ka.

Some obligation cannot be undone but is should be undone plus the ever present
damages. The employee is liable.

ACCLAW QUIZZES
1. Corporation A, supplier, entered into a Supply Agreement with Corporation B, purchaser, for the
supply of office tables worth PhP1,000,000.00. The payment by Corporation B of
PhP1,000,000.00 for the office tables involves what kind of obligation, if any?
a) Obligation to give
b) Obligation to do
c) Obligation not to do
d) No obligation is involved

2. Marianita Mananita is a fresh college graduate who was employed by AC Energy. As a new hire,
Ms. Mananita signed a Confidentiality Agreement pursuant to which she is supposed to keep
confidential the trade secrets of AC Energy. What is the nature of the obligation of Ms.
Mananita under the Confidentiality Agreement, if any?
a) Obligation not to do
b) Obligation to do
c) Obligation to give
d) There is no obligation

3. What is the source of the obligation of Atty. Pagayatan to teach ACC-LAW101?

a) Contract
b) Law
c) Quasi-contract
d) Delict

4. Which of the choices below is a negative obligation?

5. Accountant A entered into an Audit Service Agreement with Corporation C for the internal audit
of Corporation C's books of accounts for fiscal year 2021. Accountant A's service fees for the
audit is PhP500,000.00. Which of the choices below refers to the object with respect to the
obligation to pay for the services of Accountant A under the Audit Service Agreement?
a) Accountant A
b) Corporation C
c) Audit Service Agreement
d) Php 500,000.00

6. The Court of Tax Appeals rendered a decision finding Gloria Macapal guilty of the crime of tax
evasion. Gloria Macapal was sentenced to 10 years imprisonment and PhP10,000,000.00 fine.
What is the source of the obligation of Gloria Macapal to pay the PhP10,000,000.00 fine?
a) Delict
b) Quasi-delict
c) Contract
d) Law

7. Which of the following is NOT a requisite of a valid obligation?

8. Kara is the bookkeeper of ACDC Corporation who was aked to prepare the Quarterly Income Tax
Return and compute the Income Tax due, if any. Kara computed PhP120,000.00 as Income Tax
due. The Treasurer of ACDC Corporation issued to Kara a check for PhP200,000.00 for payment
of the Income Tax due. What is the source of the obligation of Kara to return the excess of
PhP80,000.00 to ACDC Corporation? Quasi-contract solution indebiti
9. Accountant A entered into an Audit Service Agreement with Corporation C for the internal audit
of Corporation C's books of accounts for fiscal year 2021. Accountant A's service fees for the
audit is PhP500,000.00. Which of the choices below refers to the active subject with respect to
the obligation to pay the PhP500,000.00 service fees?
a) Accountant A
b) Corporation C
c) Audit Service Agreement
d) Books of Accounts for the Fiscal Year
10. What is the source of the obligation of company accountants not to steal money from the
companies they are working for?
- law
11. Ms. Anna was hired by Annlisse Corporation as a probationay employee. Under the terms of the
probationary employment contract, Ms. Anna shall work with Annlisse Corporation for six (6)
months with a monthly salary of PhP40,000.00. Before the end of the 6-month period, Annlisse
Corporation shall conduct a performance evaluation of Ms. Anna. If Ms. Anna will not meet the
employment standards upon such performance evaluation, the probationary employment will
be terminated. The obligation of Annlisse Corporation to pay Ms. Anna monthly salary involves
what type of an obligation?
A. Obligation with a resolutory condition
B. Obligation with a term
C. Obligation with a suspensive condition
D. Pure obligation

12. Mr. Mario is an employee of Marsman Inc. who is working from home. His headset got
damaged hence, he ordered a new one online. Upon payment by Mr. Mario of the purchase
price for the headset, Marsman Inc. is obligated to deliver the headset to Mr. Mario. The
obligation of Marsman Inc. to deliver the headset involves what type of an obligation? Pure
obligation

13. A Dutch court recently issued a decision ordering Shell to reduce its CO2 emissions by 45% in
2020. The obligation of Shell that arose by virtue of the Dutch court decision involves what type
of obligation? Obligation with a term

14. Dugas Corporation engaged AAA Accountants Co. to audit the 2020 financial statements of
Dugas Corporation. In the service proposal prepared by Dugas Corporation, it was stated that
the amount of the service fee to be paid to AAA Accountants Co. for auditing services rendered
will depend on the amount that will be approved by the Board of Directors of Dugas
 Corporation. The obligation of Dugas Corporation to pay AAA Accountants Co. for rendered
services depends on a potestative condition. true
15. Real Estate Corp. entered into a one-year Lease Agreement with AAA Accountants Co. over a
commercial condominium unit to be used by AAA Accountants Co. as their office. The monthly
rental for the commercial condominium unit is PhP50,000.00. In the Lease Agreement, it is
provided that on the 5th day of the first month of the lease, AAA Accountants Co. shall pay to
Real Estate Corp. the following:
a. rental for the 1st month of the lease
b. rental for the 2nd month of the lease
c. security deposit equivalent to rental for 1 month to cover possible future damages in
the unit or unpaid utility bills
A. Pure obligation
B. Obligation with a resolutory condition
C. Obligation with a suspensive condition
D. Obligation with a term

16. The payment of the security deposit involves what type of an obligation?
17. The PNP hired contractual workers to determine within one (1) month how may kilograms of
shabu and marijuana, both illegal drugs, were smuggled into Metro Manila in 2016. The
obligation of the contractual workers of PNP involves what type of an obligation? With a term
18. Real Estate Corp. entered into a one-year Lease Agreement with AAA Accountants Co. The
obligation of Real Estate Corpo. as lessor under the one-year Lease Agreement involves what
type of an obligation? With a term
19. If you will become an accountant of a corporation, discuss the importance of knowing whether
or not an obligation of the corporation to pay monetary liability comes with a term or condition.

QUIZ 3

1. Bela Inc. entered into a Service Agreement with Aries Co., a partnership of four (4) computer
engineering professionals. Under the Service Agreement, Aries Co. will create and host a
website for Bela Inc. However, Aries Co. has the option to create and host a mobile APP,
instead of a website. What is the nature of the obligation of Aries Co. under the Service
Agreement? Facultative because Aries Co. agreed to create and host a website but since the
website cannot be made, they chose an app as a substitute for the website.

2. "June 9, 2021, I promise to pay to Mr. Nagpa Utang the amount of PhP100,000.00 in 2 equal
monthly installments.

Signed:
 Ms. Umu Tang (Sgd.)

Signed:

Mrs. Nakau Tang (Sgd.)

"What is the classification of the obligation of Ms. Umu Tang and Mrs. Nakau Tang in the
above promissory note? Solidary obligation because they individually signed promised to
pay the loan of P100,000

3. AAA Accountants Co. will render external audit services to the YGK Group, which consists of five
(5) separate corporations. What is the classification of the obligation of AAA Accountants to
render external audit servivces? Joint obligation because when it is not clearly on what is the
nature of obligation, then the obligation is presumed to joint.

4. Maria was engaged by Anna and Kara to do their makeup on their joint birthday celebration. On
the other hand, Anna and Kara engaged Mario to style their hair, also on their joint birthday
celebration. Which of the choices below best describes the obligations of Maria, Mario, Anna,
and Kara? Each of Anna and Kara will pay Maria and Mario each the amount of PhP10,000.00
for their services. Joint obligation because Anna and Kara are liable to pay 10,000 each as a
payment for the services done.

5. Nesila Corp. is a manufacturing company that supplies infant milk formula and chocolates to a
local retailer. What is the classification of the obligation of Nesila Corp. as supplier? Conjuctive
because Nesila Corp has the obligation to supply the two objects which is the infant milk
formula and the chocoloates.

6. Shila, Inc., Petra Corp., and Calto Co. formed a consortium and entered into an agreement with
the Philippine government for the exploration and development of the Malampaya Natural Gas
reserves. What is the classification of the obligation of the consortium under the foregoing
circumstances? Passive solidary obligation because as 2 or more companies enters a
partnership or consortium they are made to be jointly and severally liable for the obligation
of exploring and developing of the Malampaya Natural Gas reserves.

7. Josiah breeds bulldogs and sells the bulldogs to pet lovers. He sold a female and a male bulldog
to Mr. Pet Addict. What is the nature of the obligation of Josiah to Mr. Pet Addict? Conjuctive
because Josiah sold both female and male bulldog.
MODULE 1 EXAM
Question 1
1 out of 1 points

Startup Corp. entered into a Building Construction Agreement with EEA Inc. for the
construction of a 10-storey building that will be used by Startup Corp. as its offices. The
turnover date was supposed to be June 1, 2021, however, as of that date, 90% of the
building was completed so far. Which of the following circumstances affecting obligations
applies in this case?

Question 2
0 out of 1 points

Real Estate Corp. entered into a one-year Lease Agreement with AAA Accountants Co.
over a commercial condominium unit to be used by AAA Accountants Co. as their office.
The monthly rental for the commercial condominium unit is PhP50,000.00. In the Lease
Agreement, it is provided that on the 5th day of the first month of the lease, AAA
Accountants Co. shall pay to Real Estate Corp. the following:

a. rental for the 1st month of the lease

b. rental for the 2nd month of the lease

c. security deposit equivalent to rental for 1 month to cover possible future damages in
the unit or unpaid utility bills

The payment of the rental for the 1st month involves what type of an obligation?
Question 3
1 out of 1 points

The PNP hired contractual workers to determine within one (1) month how may kilograms
of shabu and marijuana, both illegal drugs, were smuggled into Metro Manila in 2016.
The obligation of the contractual workers of PNP involves what type of an obligation?

Question 4
1 out of 1 points

Dugas Corporation engaged AAA Accountants Co. to audit the 2020 financial statements
of Dugas Corporation. In the service proposal prepared by AAA Accountants Co., it was
stated that the amount of the service fee to be paid to AAA Accountants Co. for auditing
services rendered will be PhP200,000.00, payable once the audit services are
satisfactorily completed. The obligation of Dugas Corporation to pay AAA Accountants
Co. for rendered services involves a resolutory condition.

Question 5
1 out of 1 points

Nesila Corp. is a manufacturing company that supplies ice cream, infant milk formula,
chocolates, and yogurt to a local retailer. What is the classification of the obligation of
Nesila Corp. as supplier?

Question 6
1 out of 1 points

Which of the choices below is a negative obligation?

Question 7
1 out of 1 points

Anita Banana is a fresh college graduate who was employed by AC Energy. As a new
hire, Ms. Banana signed a Non-compete Agreement pursuant to which she is supposed
to refrain from seeking employment with any of AC Energy's competitors upon termination
of her employment with AC Energy. What is the nature of the obligation of Ms. Banana
under the Non-compete Agreement, if any?

Question 8
1 out of 1 points

Mr. Mario is an employee of Marsman Inc. who is working from home. His headset got
damaged hence, he ordered a new one online. Upon payment by Mr. Mario of the
purchase price for the headset, Marsman Inc. is obligated to deliver the headset to Mr.
Mario. The obligation of Marsman Inc. to deliver the headset involves what type of an
obligation?

Question 9
0 out of 1 points

Startup Corp. entered into a Building Construction Agreement with EEA Inc. for the
construction of a 10-storey building that will be used by Startup Corp. as its offices. In
the course of the construction of the building, one of EEA Inc.'s workers was seriously
injured in the head when a brick fell on him due to the substandard helmet that EEA Inc.
provided its workers. Which of the following circumstances affecting obligations applies
in this case?

Question 10
1 out of 1 points

Real Estate Corp. entered into a one-year Lease Agreement with AAA Accountants Co.
The obligation of Real Estate Corpo. as lessor under the one-year Lease Agreement
involves what type of an obligation?
Question 11
1 out of 1 points

Corporation A, supplier, entered into a Supply Agreement with Corporation B, purchaser,

for the supply of office tables worth PhP1,000,000.00. The payment by Corporation B of
PhP1,000,000.00 for the office tables involves what kind of obligation, if any?

Question 12
1 out of 1 points

The Court of Tax Appeals rendered a decision finding Rodrigo Drogo guilty of the crime
of tax evasion. Rodrigo Drogo was sentenced to 10 years imprisonment and
PhP10,000,000.00 fine. What is the source of the obligation of Rodrigo Drogo to pay the
PhP10,000,000.00 fine?

Question 13
1 out of 1 points

Maria was engaged by Anna and Kara to do their makeup on their joint birthday
celebration. On the other hand, Anna and Kara engaged Mario to style their hair, also on
their joint birthday celebration. Which of the choices below best describes the obligations
of Maria, Mario, Anna, and Kara? Each of Anna and Kara will pay Maria and Mario each
the amount of PhP10,000.00 for their services.

Question 14
1 out of 1 points

Shila, Inc., Petra Corp., and Calto Co. formed a consortium and entered into an
agreement with the Philippine government for the exploration and development of the
Malampaya Natural Gas reserves.
What is the classification of the obligation of the consortium to explore and develop the
Malampaya Natural Gas reserves?

Question 15
0 out of 1 points

Startup Corp. entered into a Building Construction Agreement with EEA Inc. for the
construction of a 10-storey building that will be used by Startup Corp. as its offices. The
Building Construction Agreement states that the total amount payable by Startup Corp.
upon completion of the building is PhP100,000,000.00, with 1% (of PhP100,000,000.00)
for every month of delay. Turnover date was supposed to be April 1, 2021, however,
actual turnover was done on June 1, 2021. How much is the total amount payable by
Startup Corp. to EEA Inc. upon turnover of the building?

Question 16
1 out of 1 points

Bela Inc. entered into a Service Agreement with Aries Co., a partnership of four (4)
computer engineering professionals. Under the Service Agreement, Aries Co. will create
and host a website for Bela Inc. However, Aries Co. has the option to create and host a
mobile APP, instead of a website.

What is the nature of the obligation of Aries Co. under the Service Agreement?

Question 17
0 out of 1 points
What is the source of the obligation of corporations to file their tax returns and pay the
corresponding taxes on time through their accountants?

Question 18
1 out of 1 points

Accountant A entered into an Audit Service Agreement with Corporation C for the internal
audit of Corporation C's books of accounts for fiscal year 2021. Accountant A's service
fees for the audit is PhP500,000.00. Which of the choices below refers to the active
subject with respect to the obligation to pay the PhP500,000.00 service fees?

Question 19
1 out of 1 points

Accountant A entered into an Audit Service Agreement with Corporation C for the internal
audit of Corporation C's books of accounts for fiscal year 2021. Accountant A's service
fees for the audit is PhP500,000.00. Which of the choices below refers to the object with
respect to the obligation to pay for the services of Accountant A under the Audit Service
Agreement?

Question 20
0 out of 1 points

What is the source of the obligation of company accountants to prepare the tax returns
and ensure timely payment of the corresponding taxes for the companies they are
working for?

Question 21
1 out of 1 points

The Constitution provides that no person shall be liable for debt.

Question 22
1 out of 1 points

"June 9, 2021

I promise to pay to Mr. Nagpa Utang the amount of PhP100,000.00 in 2 equal monthly
installments.

Signed:

Ms. Umu Tang (Sgd.)

Signed:

Mrs. Nakau Tang (Sgd.)"

What is the classification of the obligation of Ms. Umu Tang and Mrs. Nakau Tang in the
above promissory note?

Question 23
1 out of 1 points

Ms. Anna was hired by Annlisse Corporation as a probationay employee. Under the terms
of the probationary employment contract, Ms. Anna shall work with Annlisse Corporation
for six (6) months with a monthly salary of PhP40,000.00. Before the end of the 6-month
period, Annlisse Corporation shall conduct a performance evaluation of Ms. Anna. If Ms.
Anna will not meet the employment standards upon such performance evaluation, the
probationary employment will be terminated. The obligation of Annlisse Corporation to
pay Ms. Anna monthly salary involves what type of an obligation?

Question 24
1 out of 1 points

Startup Corp. entered into a Building Construction Agreement with EEA Inc. for the
construction of a 10-storey building that will be used by Startup Corp. as its offices. The
turnover date was supposed to be June 1, 2021, however, as of that date, 90% of the
building was completed so far due to stoppage of construction for 1 whole month in March
2021 with the imposition of ECQ. Which of the following circumstances affecting
obligations applies in this case?

Question 25
1 out of 1 points

Kara is the bookkeeper of ACDC Corporation who was aked to prepare the Quarterly
Income Tax Return and compute the Income Tax due, if any. Kara computed
PhP120,000.00 as Income Tax due. The Treasurer of ACDC Corporation issued to Kara
a check for PhP200,000.00 for payment of the Income Tax due. What is the source of
the obligation of Kara to return the excess of PhP80,000.00 to ACDC Corporation?

Question 26
1 out of 1 points

AAA Accountants Co. will render external audit services to the YGK Group, which
consists of five (5) separate corporations. What is the classification of the obligation of
AAA Accountants to render external audit servivces?

Question 27
1 out of 1 points

A Dutch court recently issued a decision ordering Shell to reduce its CO2 emissions by
45% in 2020. The obligation of Shell that arose by virtue of the Dutch court decision
involves what type of obligation?

Question 28
1 out of 1 points

Startup Corp. entered into a Building Construction Agreement with EEA Inc. for the
construction of a 10-storey building that will be used by Startup Corp. as its offices.
Despite a provision in the Construction Agreement that only high quality materials will be
used, EEA Inc. purposely used substandard materials in the construction of the building
to gain more profit. Which of the following circumstances affecting obligations applies in
this case?

Question 29
1 out of 1 points

Which of the following is NOT a requisite of a valid obligation?

Question 30
1 out of 1 points

Josiah breeds bulldogs and sells the bulldogs to pet lovers. He sold a female and a male
bulldog to Mr. Pet Addict. What is the nature of the obligation of Josiah to Mr. Pet Addict?

EXTINGUISHMENT OF OBLIGATIONS
Modes of Extinguishment of Obligations
1. Payment or performance – once na makapagbayad na or naperform mo na
obligations mo resolved na

2. Loss of the thing debt – seller ka eh kaso nawala mo yung item, the remedy of the
buyer would be the buyer can ask for reimbursement sa loss

3. Condonation or remission of debt

a. Condonation – similar to waiver kapag may pinatawad ka. Kapos yung
pinagutangan mo edi binabaan mo yung price.
b. Remission – nagbayad na sayo yung kulang niya di mo na pinabayaran

4. Confusion or merger of the rights of the debtor and debtor - Nagmerge si creditor
at debtor
Ex: Ms. Ana beautiful young lady, borrows money to her matandang dalaga na tita,
tita lends her 1M the debtor is ana creditor is auntie, yung auntie namatay, nung
namatay napapamana na kay ms. Ana kasi nakalagay sa kasulatan siya yung heir,
yung heir, being the heir who inherits, siya yung nagkautang sa sarili niya kasi
napasa sa kanya yung property.

5. By compensation – in accounting, parang in exchange for property yan. Ms. A

loans 1M to Ms. B. Ms. B does not have money to compensate, Ms. A said that
she wants Ms. B’s car worth one million.

6. By novation - there is a change in element of obligation.

Papaltan ka , in your place sino magbabayad in your place

7. Others: annulment, rescission, fulfillment of resolutory condition, prescription

Prescription- if there is an obligation there is a corresponding right on the part of
the party who our rights are not forever there are given period for us to enforce our
 right. There is a promissory note, si ms b di siya nangolekta for 10 years. What
does ms a do now, may right na di na sa kanya mangolekta yung creditor. Know
that there is a period of time for our exercise of obligation

A. Payment or performance (Art. 1232)

Payment is the fulfillment of the prestation due.

All requisites should concur: person who pays, person to whom payment is made,
thing to be paid, manner/time/place of payment
Kinds of payment: normal – voluntary; abnormal – forced by means of a judicial
proceeding

The obligation of the seller – the fulfillment completion of the obligation,

The manner which is agreed, if there is an agreement based on time,

The payment should be by the person who has the obligation to perform payment
because if not,

Normal the obligor has perform the obligation voluntarily seller able to deliver
bibingka voluntary kapag abnormal – it does not pay the correct tax so
assessment occurs in the court of tax appeal. There is a deficiency in the payment.
Writ of execution there is a specific order of the tax payer. Tax payer will be

Two requisites for payment (Art. 1233):

1. Identity
2. Integrity – hindi kulang yung payment, sumusunod sa napagkasunduan
Substantial performance (Art. 1234):
If there is substantial performance in good faith, the obligor may recover as
though there has been strict and complete fulfillment.
There is substantial performance if there was an attempt in good faith to
perform without any willful or international departure therefrom.
Waiver of defect in performance (Art. 1235):
When the obligee accepts the performance knowing its incompleteness or
irregularity and without expressing any protest or objection, the obligation is
deemed fully complied with.

Performance by third party (Art. 1236):

 Creditor is not bound to accept payment or performance by a third person,
unless there is contrary stipulation. Mismong napagkasunduan
Whoever paid for another may demand for reimbursement, unless payment
was without the knowledge or against the will of the debtor. In such case, the
payor shall recover only insofar as the payment has been beneficial to the debtor.

Performance by third party (Art. 1238):

Payment by a third person who does not intend to be reimbursed is a
donation, which requires debtor’s consent.
However, the payment shall be valid as to the creditor who accepts it.

Incapacity to pay (Art. 1239):

In obligations to give, payment made by one who does not have free disposal
of the thing due and capacity to alienate it shall not be valid.
To whom payment is made (Art. 1240)
1. One in whose favor the obligation is constituted
2. To any authorized person

Payment to incapacitated (Art. 1241):

Payment to one who is incapacitated to administer his property shall be valid
if:
1. he has kept the thing delivered
2. insofar as payment is beneficial to him
Payment to 3rd person (Art. 1241): shall be valid insofar as it has redounded to the
benefit of the creditor

Payment to 3rd person (Art. 1241)

Benefit to creditor is not required to be proved:
1. If after payment, creditor acquires the creditor’s rights;
2. If the creditor ratifies the payment to the 3rd person; and
3. If by creditor’s conduct, the debtor has been led to believe that the third person
had authority to receive payment

Summary:
Modes of extinguishment of obligations:
1. Payment or performance
2. Loss of the thing debt
3. Condonation or remission of debt
4. Confusion or merger of the rights of the debtor and debtor
5. By compensation
6. By novation
 7. Others: annulment, rescission, fulfillment of resolutory condition, prescription
SECTION 1. – Payment or Performance
Article 1232. Payment means not only the delivery of money but also the performance,
in any other manner, of an obligation.

Example:
If D is obligated to give E a specific car, payment is made by delivering the car.
If C is obligated to repair the computer of F, payment is made by performing the service.

Article 1233. A debt shall not be understood to have been paid unless the thing or service
in which the obligation consists has been completely delivered or rendered, as the case
may be.

Example: Sioti promised to pay P1,500.00 to Nicco for a Ukulele. Sioti is only giving
P1,000.00 to Nicco. Nicco can refuse to accept the P1,000.00 because the fulfillment is
not complete.

Article 1234. If the obligation has been substantially performed in good faith, the obligor
may recover as though there had been a strict and complete fulfillment, less damages
suffered by the obligee.

Yung cake ni kuh meal

Example:
Serafin obliged himself to sell one thousand (1,000) bags of cement to Bert for a certain
price. However, despite diligent effort on his part, Serafin was able to deliver only nine
hundred fifty bags (950) because of the cement shortage. Serafin wants to comply with
his obligation to deliver the entire obligation but he could not do so for reasons beyond
his control.

Under the law, Serafin can recover as though there had been complete delivery less the
price of the fifty bags. Bert can not require Serafin to deliver first the remaining fifty bags
as a condition to his liability for the price. He must pay for the 950 bags and enforce his
right for damages for failure of Serafin to deliver the difference. It is incumbent upon
Serafin however to explain satisfactorily his failure to make complete delivery.

Article 1235. When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with.
 A availed of B’s services to stencil the name of his business on 3000 pcs of rosary
for donation using a particular font size. B delivers the 3000 pcs of rosary with the stencil
on each BUT using a different font style. A received the rosaries and distributed them to
the donees. Obligation is extinguised.

A availed of C’s services to renovate his house for the purpose of making it
soundproof. B renovated the house but the soundproofing was NOT effective. A texted B
that he is NOT satisfied with the latter’s work. Obligation is NOT fully extinguished.

Article 1236. The creditor is not bound to accept payment or performance by a third
person who has no interest in the fulfillment of the obligation, unless there is a
stipulation to the contrary.

Whoever pays for another may demand from the debtor what he has paid, except that if
he paid without the knowledge or against the will of the debtor, he can recover only insofar
as the payment has been beneficial to the debtor.

Right of third person to subrogation.

Whoever pays on behalf of the debtor is entitled to subrogation if the payment is
with the consent of the latter. (Arts. 1237, 1302[2].) If the payment is without the
knowledge or against the will of the debtor, the third person cannot compel the
creditor to subrogate him in the latter’s accessory rights of mortgage, guaranty,
or penalty.
May there be subrogation, if the creditor willingly permits the payor to be
subrogated in his rights? Since the provision of Article 1237 is for the benefit of
the debtor, the subrogation can only take place with his consent. The third
person who without necessity paid under such condition is amply protected by
his right to reimbursement.

Illustration
Kris borrowed from Gretchen P1,000.00. Bimby is the guarantor. Without the
knowledge or consent of Kris, Penoy paid Gretchen P1,000.00. In this case,
Peny can claim reimbursement from Kris for the whole amount of P1,000.00
inasmuch as Kris was benefited up to that amount.

Nangutang si kris kay hretchen bimby guarantor kahit di pinayagan ni kris si

penoy nagbayad ng utang ni kris na 1000. Penoy pede siningilin si Kris sa
binayad niya utang kapag di nakapagbayad si kris, hindi pwede singilin yung
guarantor kasi walang consent ni kris yung pagbayad ni penoy,
 If Kris cannot pay Penoy, the latter cannot proceed against Bimby, the guarantor
(even if Gretchen is willing) because, having paid without the consent of Kris,
Penoy is not entitled to subrogation. But if the payment was with the express or
tacit approval of Kris, Penoy would be entitled not merely to full reimbursement
but also to subrogation.

Suppose the obligation of Kris is secured by a mortgage of a land owned by her.

Payment by Penoy without the knowledge or against the will of Kris, cannot give
Penoy the right to foreclose the mortgage because he has no right to
subrogation. Penoy can recover only insofar as the payment has been beneficial
to Kris.

Article 1238. Payment made by a third person who does not intend to be reimbursed by
the debtor is deemed to be a donation, which requires the debtor’s consent. But the
payment is in any case valid as to the creditor who has accepted it.

Cardo owes Alyana P1,000.00. Without the intention of being reimbursed, Nena paid
Cardos’s obligation. Cardo had previously accepted Nenas’s generosity. In this case,
Cardo is not liable to Nena and his obligation to Alyana is extinguished. But if Cardo did
not consent to the donation, Nena may recover from Cardo since there has been no
donation, although originally Cardo did not intend to be reimbursed. Nevertheless, the
obligation of Cardo to Alyana is extinguished because the payment is valid as to Alyana
who has accepted it.

Incapacity to pay (Art. 1239):

In obligations to give, payment made by one who does not have free disposal of the thing
due and capacity to alienate it shall not be valid.

Suppose Ernesto a forty year old insane transfer the title of his land to Tomas, his
creditor for the satisfaction of his debt.

Such transfer is not valid since the insane has no legal capacity. However, further reading
of the law will tell us that not all the transactions of an insane person are invalid.
transactions done during the lucid intervals are valid.

Article 1240. Payment shall be made to the person in whose favor the obligation has
been constituted, or his successor in interest, or any person authorized to receive it.

FACTS: D owed C. Instead of paying C, D deposited the money in a bank in the

name and for the credit of C. All these were done without C’s permission.

ISSUE: Has the debt been extinguished?

HELD: No. But if after efforts had been made, the creditor could not be found, particularly
at the place were payment is supposed to be made, the debtor cannot be held guilty of
default.

Article 1241. Payment to a person who is incapacitated to administer his property shall
be valid if he has kept the thing delivered, or insofar as the payment has been beneficial
to him.

If A owes B, then the obligation matures, suddenly B got involved in a car accident that
caused him to suffer coma. Either A can choose to pay B by paying his medical expenses
or consign his payment to the court. A’s payment will be valid as long as the payment he
made will be beneficial to the incapacitated creditor.

SECTION 2. LOSS OF THE THING DUE

Article 1262. An obligation which consists in the delivery of a determinate thing shall be
extinguished if it should be lost or destroyed without the fault of the debtor, and before he
has incurred in delay.
When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the
thing does not extinguish the obligation, and he shall be responsible for damages. The
same rule applies when the nature of the obligation requires the assumption of risk.
Example:
In sales, after the perfection of the contract, the object is lost due to fortuitous event. The
debtor is freed if he has no participation; if NOT, he is liable for damages

Effect of partial loss of a specific thing.

Example:
Gloria obliged himself to deliver to Joseph a specific race horse. The horse met an
accident as a result of which it suffered a broken leg. The injury is permanent. Here, the
partial loss is so important as to extinguish the obligation.
If the loss is due to the fault of Gloria, she shall be obliged to pay the value of the horse
with indemnity for damages.
If the horse to be delivered is to be slaughtered by Joseph, the injury is clearly not
important. Even if there was fault on the part of Gloria, she can still deliver the horse with
liability for damages, if any, suffered by Joseph.
Article 1265. Whenever the thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault, unless there is proof to the contrary,
and without prejudice to the provisions of article 1165. This presumption does not
apply in case of earthquake, flood, storm, or other natural calamity.

(1) Ben borrowed the car of Bon. On the due date of the obligation, Ben told Bon that
the car was stolen and that he was not at fault. That is not enough to extinguish
Ben’s obligation. It is presumed that the loss was due to his fault. Hence, he is
liable unless he proves the contrary.
(2) Suppose the house of Ben was destroyed because of earthquake. It is admitted
that there was an earthquake and it was accidental and that the car was in the
house at the time it occurred. Here, Ben is not liable unless Bon proves fault on
the part of Ben.

Legal impossibility - Shakespeare agreed to construct a thirty two (32) story building for
Hamlet. Before the construction could be started a law was passed limiting the
construction of structures in the area up to ten (10) story for purposes of safe aviation.
The constructor is released from his obligation

Physical impossibility - Da Vinci has agreed to paint the countenance of his client Mona
Lisa. After the execution of the agreement, Da Vinci was involved i a car accident resulting
in the amputation of his hands. The prestation has thus become physically impossible to
perform. Subsequently, the painter is released from his obligation to paint.

Daniel stole Charity’s watch, Daniel has the obligation to return it to Charity. The obligation
of Daniel arises from an act punishable by law.

Even if the watch is lost without the fault of Daniel, he shall be liable for the payment of
the price of the watch. The exception to the rule is when is Charity in mora accipiendi. In
either case, Daniel is liable if the loss is due to his fault.
MORA ACCIPIENDI (mora of the creditor) – the delay of the obligee or creditor to accept
the delivery of the thing which is the object of the obligation.
 Bubuli promised to deliver a Ferrari car to Bibilu. The car was lost due to the fault of a
third person Bilulu. Bibilu has a right to recover the price of the car plus damages from
Bilulu.
SECTION 3. CONDONATION OR REMISSION OF DEBT

CONDONATION – implied forgiveness

REMISSION – a release from debt or claim (may be by will) gratuitous abandonment of
the creditor of his right against the debtor
- a form of donation in a negative form
- debtor is freed from obligation to make payment/delivery
a. Condonation – similar to waiver kapag may pinatawad ka. Kapos yung
pinagutangan mo kapos edi binabaan mo yung price.
b. Remission – nagbayad na sayo yung kulang niya di mo na pinabayaran

Effect of renunciation of principal debt on accessory obligation

Kris owes Bam $1 million with Noy as guarantor. The principal obligation is the debt of $1
million, while the accessory obligation is the guaranty of Noy.
The remission of the debt of Kris by Bam shall extinguish the guaranty of Noy. But if only
the guaranty of Noy is condoned, the obligation of Kris shall remain in force.

Article 1274. It is presumed that the accessory obligation of pledge has been remitted
when the thing pledged, after its delivery to the creditor, is found in the possession of the
debtor, or of a third person who owns the thing.

Harry delivers to Hermione his diamond ring in pledge to guarantee the payment of a
loan. If later on the ring is found in the possession of Harry, the presumption is that
Hermione agreed to the loan without the pledge. Hermione may prove that he returned
the ring to Harry upon the latter’s request to be delivered back to him.

SECTION 5. COMPENSATION
- Compensation shall take place when two persons, in their own right, are creditors
and debtors of each other.
Chowqueen owes MacBonald 10M. MacBonald on another occasion owed Chowqueen
15M pesos. MacBonald is liable to Chowqueen with 5M.
Article 1280 NCC | example: Notwithstanding the provisions of the preceding article, the
guarantor may set up compensation as regards what the creditor may owe the principal
debtor.

Arthur owes Ben ₱50,000 secured by a guarantor, Greg; Ben owes Arthur ₱10,000. When
both debts fall due and partial compensation should take place, with Arthur paying Ben
₱40,000 w/c fails due to Arthur’s insolvency, Ben may sue Greg. | Should Ben sue Greg
for the whole amt. of Arthur’s indebtedness of ₱50,000, Greg may set up partial
compensation as a defense, so that Greg may pay only ₱40,000.

Voluntary/conventional compensation
affords the parties the freedom to agree on terms
- Vic bought grocery items worth P30,000 from Aling Puring store under a line of
credit, with a maturity date of three months. Just after two months, both Vic and
Aling Puring agreed to settle the obligation.
Article 1283. If one of the parties to a suit over an obligation has a claim for damages
against the other, the former may set it off by proving his right to said damages and the
amount thereof.
Naruto owes Sasuke Php 10, 00. When Sasuke demanded payment, Naruto failed to pay.
In anger, Sasuke damaged the property of Naruto to the extent of Php 9, 000.

Naruto can set off the obligation of Sasuke to pay him damages in the amount of Php 9,
000 against his debt of Php 10, 000.

Compensation-It is a source of balancing two obligations. It is the extinguishment in the

concurrent amount of the obligations of those persons who are reciprocally debtors and
creditors of each other. It shall take place when two persons, in their own right, are
creditors and debtors of each other.

Example: Paragraph One (Consent and Notification by the debtor are essential)

Arlyn is indebted to Bryan P500, 000.00. Bryan in turn owes Arlyn P200, 00.00.
Because both debts are already due, and because all other requisites for legal
compensation are present, both debts are extinguished automatically up to the amount
of P 200, 00. Later, Brian with the consent of Arlyn, assigned his (Brian’s) P500, 00.00
credit to Carmi. How much can Carmi collect successfully from Arlyn?

Answer: Carmi can collect from Arlyn the whole P500, 000.00. Arlyn cannot set
up the defense of compensation as of the P200, 000.00 in view of his consent to the
assignment. However, Arlyn had reserved his right to the compensation, Arlyn to give
only P250, 000.00.

Example: Paragraph Two (Assignment Made with the Knowledge but Without the
Consent or Against the Will of the Debtor)

Effect: Compensation can be set up regarding debts previous to the cession or

assignment. This refers to debts previous to the cession or assignment.
Arah owes Bena P1, 000, 000. 00. Bena owes Arah P300,000.00. Both debts are already
due. Later, Bena, with the knowledge but without the consent of Arah, assigned the P1,
000, 000.00 credit to Caren. How much can Caren successfully collect from Arah?
Caren can collect only P700, 000.00 if she sets up the derense of partial
compensation as to previously maturing debts. There had already been compensation
with respect to the P300, 000.00.

Example 2: (Assignment before Communication)

Arah owes Bena P500,000.00 due on May 5. Bena owes Arah P150,000.00 due also on
May 5. On March 5 (when there was no legal compensation yet as if not yet due and
demandable), Bena assigned his P500, 000.00 credit to Crisel, with the knowledge but
without the consent of Arah. On May 5, how much can Crisel collect from Arah?
Answer: P500,000.00, compensation took place after the assignment not before that’s
why there would be no compensation here.

Example: Paragraph Three (Assignment Made Without the knowledge of the Debtor)
Effect: Debtor can set up compensation as a defense for all debts prior to his knowledge
of the assignment not prior or after the assignment.
Adrian owes Boyet P800,000.00. Boyet owes Adrian P300,000.00. Both debts are already
due. Later, Boyet assigns the P800,000.00 credit to Nelson, without the knowledge of
Adrian. The assignment was made on May 1. On May 15, a P150,000.00 debt of Boyet
in favour of Adrian matured. Adrian learned the assignment on August 1. On August 25,
a P100, 000.00 debt of Piolo in favour of Adrian matured. Later Nelson asks Adrian to
pay his debt. How much can Nelson collect from Adrian?
Answer: Nelson can collect P350,000.00 because Adrian cannot set up the defense of
partial compensation regarding the P300,000.00 and the P150,000.00 debts, debts which
had matured and were therefore already compensable prior to his knowledge of the
assignment. But Adrian cannot set up the last debt of P100,000.00 for partial
compensation because this matured only after he came to know of the assignment.
• To Subrogate" - means to substitute another in the place of the creditor to whose
rights he (the other person) succeeds in relation to the debt ( Gifts, Law Dictionary
p. 203)
SECTION 6. NOVATION
Novation is the total or partial extinction of an obligation through the creation of a new
one which substitutes it.
It is the substitution or change of an obligation by another, which extinguishes or modifies
the first, either by changing its object or principal conditions, by or substituting another in
place of the debtor, or by subrogating a third person in the rights of the creditor.

(1) CHANGING THEIR OBJECT OR PRINCIPAL CONDITIONS

Simon agreed to deliver to Ben a car. Later, they entered into another contract whereby,
instead of Simon delivering a car, he would deliver 10 air conditioners. The obligation to
deliver a car is extinguished by the obligation to deliver the 10 air conditioners. The
change may involve the principal terms of the obligation.

(2) SUBSTITUTING THE PERSON OF THE DEBTOR

If after the constitution of the obligation, both parties agreed that Cath will substitute for
Simon or that Dan will be subrogated in the rights of Ben, there is a personal novation. In
this case, Cath becomes the new debtor or Dan, the new creditor as the case may be.

(3) SUBROGATING A THIRD PERSON IN THE RIGHTS OF THE CREDITOR

If the agreement of the parties is that Simon will deliver to Dan the 10 air conditioners,
instead of Simon delivering a car to Ben, then there is a mixed novation because the
object of the obligation and the person of the creditor are changed.

Illustration:
Supposed Ben Executed a promissory note to pay George on March 30, 2019 the amount
of five hundred thousand pesos. However before the arrival of the agreed date of payment
Geroge upon sensing that Ben could not satisfy the obligation on the aforementioned date
approach Ben for the novation of the obligation that instead of paying the said amount.
He should pay it om four equal parts starting from the month of April to July. Ben agreed
to the new obligation.
Under this example it is not properto consider the obligation novated because it does not
alter its essence. He still oblige to pay the exact same amount. for novation to be effectual
the old and new obligations must be incompatible with each other.

Subrogation is the transfer to a third person of all rights appertaining to the creditor in
the transaction including the rights to proceed against the guarantors and similar others
subject to any applicable legal provision.

II. Meaning of Each Mode of Estinguishing an Obligation

1. Payment or Performance - Means not only the delivery or giving of money
but the performance of the obligation in any manner whatsoever. Hence, it
is synonymous to "performance"

ILLUSTRATION: Miss Tina Guan owes Miss Lina P. Tan P500 due on
February 29, 2000. If on February 29, 200, instead of paying in money
(P500), Miss Guan gave Miss Tan her watch worth P600, the obligation to
pay is extinguished by payment because payment has an extended
meaning and does not refer only to the giving of money.

2. Remission or Condonation - the gratuitous abandonment , by the creditor

of his right (Sanchez Roman).

ILLUSTRATION: Mr. I.O Yu owes Mr. Donut Fei P200 due on March 29,
2000. On March 29, 2000, Mr. Fei told Mr. Yu not to pay anymore the P200
and Mr. Yu replied Thank You. Mr. Yu’s obligation is extinguished by
remission or condonation.
 Ang remission cancel
3. Compensation- This takes place when 2 persons. in their own right, are
creditors and debtors of each other, (Art.1278). -It is a sort of balancing
(cum pondere- ' to weigh together between 2 obligations: it involves a
figurative operation of weighing 2 obligations simultaneously in order to
extinguish them to the extent in which the amount of one is covered by the
other. (4 paras, Civil Code of the Phil Page 422 1989 ed.) Citing Manresa).

ILLUSTRATION: Miss Mau U. Tang owes Capareho P5,000 due on April

29, 2000. On April 29, 2000. Miss Tang discovered that Mr. Capareho owes
her also P5,000 due January 29, 2000 which is not yet paid to her by Mr.
Capareho. The obligation of Miss Tang is extinguished by compensation.

4. Rescission It is a relief to protect one of the partied or a third person from

all injury and damages which the contract may cause, to protect some
preferential right (Aquino vs. Tanedo, 39 Phil. 517). It is a form or legal
remedy intended to restore things back to their original conditions prior to
the making of the contract which is defective because primarily of economic
injury.

ILLUSTRATION: Mr. Sal Vaje owes Tina K. Buhan P100,000. To avoid

payment, Sal transferred all his remaining properties to Miss Tina Go and
declared himself insolvent. Should Tina later discover the said transfer, she
can have it rescinded and once, the transfer is rescinded. Tina K. Buhan
could have the said properties of Sal Vaje sold so that she could be paid
out of its proceeds. Whatever obligations created by the transfer made
between Sal and Tina Go is extinguished by rescission.

5. Annulment- It is a legal remedy the purpose of which is to make a voidable

contract void and thus, inneffective.

ILLUSTATION: Malou Co. Deceived Nilo Co

. into buying a fake gold ring for P10,000. Should Nilo discovered the fraud,
he can have the contract of sale annulled. Once annulled, whatever
obligations created by the said contract of sale are extinguished by
annulment.

6. Prescription - Extinguishments of obligations thru lapse of time. The law

provides for a time limit within which a party can sue in court to enforce an
obligation. If the said party does not Sue within the period provided for by
law, he can no longerr sue because the obligation by then is already
extinguished by prescription.
 ILLUSTRATION: Mr. Cascasero drove his car recklessly and injure Mr.
Sugatan who was then crossing the street. If the incident happened on
January 1, 2000, Mr. Sugatan has 4 years counting from January 1, 2000
within from January 1, 2000, within which to recover damages against Mr.
Cascasero by filing a suit in court. If Mr. Sugatan delays the filing if the case
and the 4 year period elapses, he can no longer sue in court because Mr.
Cascasero's obligation to pay damages arising from quasi-delict is already
extinguished by prescription. (See Art. 1146)

WEEK 6

Concepts and Classifications of Contracts

Definition of Contract
Art. 1305, Civil Code:

A contract is a meeting of minds between two (2) persons whereby one binds
himself, with respect to the other, to give something or to render some service.

- In a contract, there must be at least two persons or parties, because it is impossible

for one to contract with himself
Contract vs. Obligation
- Contract is one of the sources of obligations while obligation is the legal tie or
relation itself that exists after a contract has been entered into.

- Hence, there can be no contract if there is no obligation accepted in return for

some benefit to be enjoyed. But an obligation may exist without a contract such as
the obligation imposed by law to pay taxes.

Contract vs. agreement

- Contracts are binding agreements enforceable through legal proceedings in case
the other party does not comply with his obligation under the agreement. To be
valid and enforceable, a contact must be lawful and all the requisites for its validity
must be present.
- Agreements which cannot be enforced by action in the courts of justice (going to
a dance party) are not contracts but merely a moral or social agreements
- - an agreements is broader than a contract because the former may not have all
the elements of a contract that create legally enforceable obligations
- All contracts are agreements but not all the agreements are contracts.
SM Land vs. BCDA:

It is a juridical convention manifested in legal form, by virtue of which one or

more persons bind themselves in favor of another or others, or reciprocally, to the
fulfillment of a prestation to give, to do, or not to do.

For reconsideration is the Decision of this Court dated August 13, 2014, which granted
the petition for certiorari filed by SM Land, Inc. (SMLI) and directed respondent Bases
Conversion Development Authority (BCDA) and its president to, among other things,
subject SMLI’s duly accepted unsolicited proposal for the development of the Bonifacio
South Property to a competitive challenge.
The gravamen of respondents’ motion is that BCDA and SMLI do not have a contract that
would bestow upon the latter the right to demand that its unsolicited proposal be subjected
to a competitive challenge. Assuming arguendo the existence of such an agreement
between the parties, respondents contend that the same may be terminated by reasons
of public interest.
- There exists a valid agreement between SMLI and BCDA
Sa SM vs. BCDA
It meets the essential requisites
a. Consent - manifested by the meeting of the offer and the acceptance upon
the thing and the cause which are to constitute the contract; the submission
of SMLI constituted an offer to undertake the development of the subject
property. BCDA then entered into negotiations with SMLI until the BCDA finally
accepted the terms of the final unsolicited proposal
b. Cause - s the essential reason which moves the parties to enter into the contract;
is their interest in the sale or acquisition and development of the property and
their undertaking to perform their respective obligations, among others, as
reflected in the Certificate of Successful Negotiations and in the Terms of
Reference (TOR) issued by BCDA
c. Object - refers to the subject matter of the contract. It is the thing to be delivered
or the service to be performed; accepting the unsolicited proposal also agreed to
subject SMLI proposal to competitive challenge hence BCDA shall, thus,
commence the activities for the solicitation for comparative proposals
The elements of a valid contract being present, there thus exists between SMLI and
BCDA a perfected contract, embodied in the Certification of Successful Negotiations,
upon which certain rights and obligations spring forth, including the commencement of
activities for the solicitation for comparative proposals
CHARACTERISTICS OF A CONTRACT

1. Relativity (Art. 1311, Civil Code) contract can take affect only between parties,
their assigns and heirs. Meaning they are only the ones who can have rights and
obligations.
- the effectivity is only between the parties, their assigns and heirs, except in case
where the rights and obligations arising from the contract are not transmissible by
their nature, or by stipulation or by provision of law.[5]

2. Obligatory and Consensual (Art. 1315) – contracts are perfected by a mere

consent hence upon agreement the force of law between the contracting parties
compel them to perform under the threat of civil action or lawsuit.
Obligatory - the force of law between the contracting parties compel them to
perform under the threat of civil action or lawsuit.
The moment the part agree to perform obligation they cannot unilaterally say they
change their minds because u already agreed. If u do not make sunod, may legal
consequences.
3. Mutuality (Art. 1308) – contract must bind both parties no situation where only
one is bound, if there is such, it is a violation of principle hence, void.

- the bind must involve both of the parties,so that the validity or compliance of a
contract cannot be left to the will of only one of them.[4]
Ex: If A agreed to sell his car to B. the contract binds both parties. The
stipulation of the contract will be invalid if A comply the obligation that he want
without the same privilege given to B.
4. Autonomy (Art. 1306) - valid contracts, freedom to contract - must be in
accordance to law , state may interfere when law is silent;
- such stipulations, clauses, terms and conditions are established by the contracting
parties as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.[3]
- the parties are free to agree to terms and conditions.
STIPULATIONS POUR ATRUI
Heirs and assigns are liable for a contract entered into by the decedent because generally
the rights and obligations are transmissible to them.
What a person can receive by way of inheritance, and therefore as an heir, cannot be
less than his legitime; neither can he be obliged to pay more on an inherited obligation
than the estate that he inherited.
General Rule: relativity of contracts; Third person has no rights and obligations under a
contract to which he is a stranger. Creditors are not affected by the contracts of their
debtors.

Instances where a third person may be affected by a contract:

• In contracts containing a stipulation in favor of a third person (stipulation pour trui)
• In contracts creating real rights
• In contracts entered into to defraud creditors
• In contracts which have been violated at the inducement of a third person

Example:
- Don Camello owes 50,000.00 to Don Facundo. If Don Camello dies, his daughter
Carmenchu has the obligation to pay Don Facundo but not beyond the value of the
property that she inherited from Don Camello.

- Papito ordered a cake for his daughter Papita from Mrs. Baker. Papita as the
daughter of Papito may demand the cake from Mrs. Baker.

- A is indebted to B for 10,000. A and B are the parties of contracts. If B dies then A
will pay to heirs of B if If B assign credit to C then A is liable to pay C.

- If A dies, then D is the heir. Then D is obliged to pay the debt however, he is not
liable beyond the value of property he inherits from A.
Exception: benefits deliberately conferred by parties to a contract upon third persons –
cases in which contracts are effective only between parties are when right and obligations
arising from the contract are not transmissible by their nature (personal qualifications,
stipulation, by provision of law)
Requisites:
1. Stipulation must be part, not whole of the contract
 2. Contracting parties must have clearly and deliberately conferred a favor upon
3rd persons
3. Third person must have communicated his acceptance
4. Neither of the contracting parties represent the 3rd person

Classifications of Contracts
1. Consensual – perfected by mere meeting of minds of parties
When Anne (an employer) hires Bryan (an employee), as soon as both have
agreed on the terms of employment, a contract commences.
A and B enters into contract where A binds himself to sell car to B for 100,000.
2. Real contracts – require delivery for perfection
A borrowed from B for Php 5,000. As A’s security for the debt, Xian promised to
pledge his diamond ring to Yanee.

Before the delivery of the ring to Yanee, the contract of pledge is not yet perfected.
If Xian later on refuses to pledge the ring, Yanee can demand the payment of the
obligation although it is with a period. But Yanee cannot require Xian to deliver the
ring as security because there is no real contract of pledge yet. There is merely a
consensual contract to constitute a pledge. What exists, is a personal right, the
right of action on the part of Yanee to demand the constitution of the pledge.
EFFECT OF PERFECTION OF THE CONTRACT

From the moment the parties come to an agreement on a definite subject matter
and valid consideration they are bound not only:

(1) to the fulfillment of what has been expressly stipulated

EXAMPLE

Anne sold a horse to Bryan for Php 15, 000. The details of this contract as regards
the place of delivery of the horse and payment of the price, the time of delivery and
 payment, etc. are not included. These details are furnished by law and have been
taken up in the various provision of the Code.

(2) to all the consequences which according to their nature, may be in keeping with
good faith, usage, and law. (Art. 1315.)

EXAMPLE

Anne agreed to sell his horse to Bryan. It was stipulated that Anne should deliver
the horse to Bryan the next day.

In this case, Anne has the obligation to deliver the horse the next day as expressly
stipulated in the contract. Anne has also the obligation to take care of the horse
pending delivery and to warrant that he has the right to sell the horse although
nothing is said about the obligation in the contract as this is in keeping with good
faith, usage, and law.

Article 1316. Real contracts, such as deposit, pledge and commodatum, are not
perfected until the delivery of the object of the obligation.

By: Bryan Glenn Fabiana

3. Solemn contracts – contracts which must appear in writing

- donations of real estate or movable worth PhP5,000
- transfer of large cattle
- stipulation to pay interest in loans
- partnership to which immovables are contributed
- Stipulation limiting carrier’s liability to less than extra-ordinary diligence

Essential Elements of a Contract

1. Consent - , is manifested by the meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the contract
 2. Object - subject matter of the contract. It is the thing to be delivered or the service
to be performed.
3. Cause - is the essential reason which moves the parties to enter into the contract.
It is the immediate, direct and proximate reason which justifies the creation of an
obligation through the will of the contracting parties
Flower – cause: to have possession of the flowers motive: to give it to my mudra
Consent- must be free and given by someone who is sui juris, or one who has capacity
to act. Therefore it must be freely given by the party and must be an intelligent consent,
the party must know what he is consenting.

If the consent of one party is not freely given because such consent was obtained through
fraud, violence intimidation, undue influence, the contract is voidable. This is when it is
said that the consent is vitiated.

Object of a contract-must be definite or determinate as to its kind; it must be lawful or it

must be within commence of man. It must like wise be possible, and not in any way
contrary to good customs, morals, public order or public policy.

Cause-it must be true and licit. A contract with an illicit cause produces no effect
whatsoever.

A contract with a false cause is void unless it, and lawful resets upon another cause which
is true.

Examples:

Consent

Ricky offers to buy Martin’s car. The offer is made over the phone. Unknown to Ricky, it
is not Martin at the other end of the line, but his younger brother Ariel who can perfectly
mimick his elder brother’s voice. Ariel accepts Ricky’s offer, successful at imitating his
elder brother’s voice. There is no contract here, because there was no consent on Martin’s
part.
Examples:

Object certain

A student enrolls in a university and when asked what course it is that she wishes to
register for, she answer “anything”. The registrar carelessly receives the form and causes
the entry of the student’s name in the register of the university. Again, there can be no
contract, because it is not certain what it is that the university must teach the student or
prepare her for.

Examples:

Cause

When Marsha envies John her house, there will be no way Marsha can have John’s
house, unless John’s donates it to her (in which case, John’s liberality or generosity would
be the cause of the contract). For a contract to exist between Marsha and John. Marsha
must offer John something John wishes in return (money, or some other piece of property)
which would then be the cause of the contract.

QUIZ:
• Question 1
Needs Grading
What is the connection of obligations with contracts?

• Question 2
3 out of 3 points
What are the 3 elements of a contract?

• Question 3
Needs Grading
What lesson or insight about contracts did you get from reading the case of SM Land vs. BCDA?

WEEK 7: ELEMENTS AND FORM OF CONTRACTS

Essential Elements of a Contract
1. Consent
2. Object
3. Cause
ELEMENTS OF CONSENT
1. Legal capacity of contracting parties
Who are legally capacitated to enter into contract?
- Persons who are of age. Therefore, minors who are below 18 years old are not
capacitated to enter into contracts. Other persons who are capacitated to enter
into a contract are those who are sound mind (sane person), so apart from being
adults of age 18 yrs. old and above. These persons who are able to enter into
contracts should have sound minds. Those who are insane or those who re
suffering from mental incapacity, they are not capacitated to enter into contracts.
Also, persons who are deaf or mute and who cannot read and write.
2. Manifestation of conformity of contracting parties
- It can be in a form of signature if it is a written contract. It could be in a form of
a verbal agreement. “Yes, I agree to buy your shoes.” Or it could be just in a
form of a handshake. It can be silent no form of written or verbal, but the parties
continue to execute the contract. Therefore, this would mean that the parties
give their consent to be part of the contracts.
3. Parties’ conformity to the terms and conditions of the contract must be
intelligent, spontaneous and free from all vices
What does intelligent mean?
- Intelligent means that there is no mistake as to the terms and conditions of a
contract. It should be spontaneous. Meaning, it should not have been forced.
So if one of the parties is forced to enter into the contract then, the consent of
that party who was forced to enter is not valid.
4. The conformity must be real
- If the consent is fake, there is actually no consent or even if there is consent,
the matters consented to is not really correctly reflected in the contract. So, in
that situation conformity is false. Therefore, there is something wrong with the
consent.

NOTE: There is no valid consent when any of these four requirements is not present.
REQUISITES OF VALID CONSENT
1. Intelligent (without error/mistake, fraud, violence, intimidation or undue influence)
- it was given without any mistake both parties and in the mind of both party it is
clear that let’s say they are agreeing to buy and sell a ball or they are agreeing
to lease a specific property. If you have a contract of lease and the lessor in his
mind is leasing property A, but in the mind of the lessee he is leasing property
B, then there is a mistake with respect to the object in the contract of lease.
Therefore, consent is not intelligent. So, there is a vice or a problem in the
consent.

- If the consent was procured through fraud, meaning, there was machinations
on one of the parties. Ex: A seller pretends to be selling gold watch, actually
the watch is not genuine. The fraud is where the misinterpretation of the object
of the contract is genuine gold. If the buyer agrees to buy the gold watch, Php
100,000 on the representation that it is genuine. Then, there is fraud. If the
buyer eventually finds out, the buyer can say, I did not give my consent. My
consent was not intelligent because you misrepresented the nature of the
object for contract. Therefore, my consent was not valid. The buyer will now
have certain remedies.

- Another incidence is when it is procured through violence. Ex: you forced

someone to buy something, to lease something, or to render service because
of violence. Let’s say you hurt that person, or you intimidate that person in order
for that person to give the consent to the contract. Hence, in that situation, the
consent is not validly given.

- Procured through undue influence. It means that the person exerting the undue
influence is in the position of influence over the other party to the contract. In
some instances the influence is in the form of moral ascendancy. Ex: a teacher,
a teacher would have been in a position to influence with respect to the students
because the teacher has the power to flaunt the students or give them low
grades. Therefore, if the teacher compels the students to buy the item that she
is selling, and the students are compelled to buy simply because of the fear
that they will be flaunt by the teacher then there is an undue influence in that
situation.
2. Free
3. Spontaneous
KINDS OF SIMULATED CONTRACTS
If the consent is false, then we could have a simulated contract:
1. Absolute
2. Relative

CONTRACT OF ADHESION
One party has already prepared form of a contract containing the stipulations he desires
and he simply asks the other party to agree to them if he wants to enter into the contract.
- Contracts with a lot of fine prints, usually a long type of contracts like a contract
of loan in a bank. An insurance contract. It is called a contract of adhesion
because only one party prepares the contract. There is already a template
prepared by that party and the other’s party option is to take it or leave it. What
happens is ex: a loan agreement in the bank, it is the application for loan is
approved by the bank, the bank will now send to the borrower a couple of
attachments like real estate mortgage, promissory note and so on. The only
thing that the borrower will do is to sign a contract. If the borrower do not agree
to the certain terms and conditions, the borrower could negotiate but basically
it is a done deal with respect to the terms and conditions of the contracts so all
the borrower has to do is to accept or not the contract.

Before consent is given, it usually starts with an offer, like in a contract of sale, it could
start with an offer to sell or offer to buy. In order for the offer will be valid it should be
definite.

ELEMENTS OF A VALID OFFER

1. Definite – it is clear what is being offered. Ex: it is clear that what is being offered
for a sale is a car and at this specific price.
2. Intentional – if it is tentative like you know I’m thinking of selling a car to you, then
it is not intentional with the use of the phase “you know I’m thinking of”.
3. Complete – if you are selling a car, it should be complete with the inclusion of what
specific car you are selling and the selling price. If there is no selling price then, it
is not complete.

WHEN OFFER BECOMES INEFFECTIVE

 1. Death, civil interdiction, insanity or insolvency of either party before
acceptance is conveyed because if the offer has been accepted then the offer has
already consent so even if the offeror dies after it has been accepted then you
already have a contract.
Even when there is an offer, that can be ineffective. Let’s say, Mr. X offer to
sell his car to his friend, and the friend says, let me think about it, I’ll get back to
you tomorrow. But that night, Mr. X dies. In that situation, the offer of Mr. X to the
friend, has become ineffective. There is no offer in the table.
Another instance is if there’s a conviction of a crime of one of the parties
either offeror or offeree, and with the conviction of a certain crime comes the
penalty of civil interdiction. Civil interdiction means that the person accused and
convicted of committing the crime apart from suffering the penalty of imprisonment
and may be penalty. This person convicted of a crime would also lose certain civil
rights — rights to manage his or her property. Therefore, if prior to the conviction
he offered to sell his car, then, upon his conviction, he does not have the right
anymore to sell his property. Hence, the offer which was given prior to his
conviction, and which has not yet been accepted prior to his conviction has
become ineffective.
2. Express or implied revocation of the offer by the offeree
- Revocation –“take it back” it can only be taken back once it is accepted.
3. Qualified or conditional acceptance of the offer, which becomes counteroffer.
- Ex: I offer Ms. Y to sell my car with the selling price of 1 Million pesos, but Ms.
Y say, Okay, I am buying your car but can you reduce the price by 100,000.
Yes, there is an acceptance but there is a qualified acceptance. Qualified by
the reduction of the offered price. Is there already a consent or contract at that
stage? Not yet. What’s on the table is now a counteroffer. A counteroffer to
purchase by Ms. Y to me that she will buy my car.
4. Subject matter becomes illegal or impossible before acceptance is
communicated.
Ex: Vape selling became illegal.

ELEMENTS OF A VALID ACCEPTANCE

1. Absolute, not a qualified acceptance. If it is a qualified acceptance. Then, it is a
counteroffer.
2. No specific form but when the offeror specifies a specific form, such must be
complied with – written in the form of signature on the solemn or written contract.
REQUISITES OF AN OBJECT
1. Determinate as to kind - it should be clear what exactly is the object of contract.
2. Existing or the potentiality to exist subsequent to the contract – as long as
there is a potential for the objects to exist then you have a valid object.
Ex: I’m a farmer and I’m about to plant cabbage in my farm. I offer to sell my future
crops to the buyer. The object is the cabbage which I expect to harvest. It is not
existing, but it has the potential to exist.
3. Licit or legal
4. Within the commerce of man – you cannot sell sun, moon, stars because it is
beyond the commerce of man.
5. Transmissible – you own it therefore you can transmit your right of ownership
over it. You cannot sell or lease something you do not own. You cannot transmit
Future inheritance – you are going to inherit the car of your lolo. You are planning
to sell that, you cannot because you do not own the car yet.

REQUISITES OF A CAUSE:
1. Exists
2. True
3. Licit

Kinds of Causes
1. Cause of onerous contracts – the prestation of promise of a thing or service by
the other
Onerous – economic value that is exchanged by the parties. Ex: contract of sale.
If I’m selling my car, what is my cause? The selling price because that is the thing
with economic value that I expect to get the car.
2. Cause of remuneratory contracts – the service or benefit remunerated
- It involves service. The cause is the service, If you are engaging a contractor
to build a house. Then, your cause as the owner of the lot which the house will
be built is the service by the contractor of building your house
3. Cause of gratuitous contracts – the mere liberality of the donor or benefactor
 - Ex: gratuitous is your donation. A donation contract. The cause is the liberality,
the good will.
4. Accessory – identical with cause of principal contract
- In a contract of loan from the bank, the bank usually require that you also sign
the accessory contract of the real estate mortgage because the bank usually
requires that you mortgage real property in order that the bank will have
security in case you are not able to pay loan. The accessory contract there is
the real estate mortgage. The cause of the accessory contract is the same as
principal contract. In a loan contract with the accessory contract with the real
estate mortgage the cause on the part of borrower will be the loan, the amount
sought to be loaned.

CAUSE VS. MOTIVE

FORM OF CONTRACTS

General Rule: contracts are obligatory regardless of form

- Contracts are valid. Contracts are obligatory regardless of form, verbal or
written. These are obligatory as long as you have the three elements.
Exception: Contracts must be in a certain form when the law requires that a contract be
in some form to be valid, enforceable or for the convenience of the parties.
The parties may compel each other to reduce the verbal agreement into writing.
- When the law provides for a specific form of contracts in that situation, then the
parties can compel each other to comply with the specific form as provided.

Acts that must appear in a public document:

Public document is not a document available for everyone to see. It is written, it is
notarized by the public so the signatures of the parties is duly acknowledged by the notary
public. This document is notarized by a duly commissioned public.
Examples of contracts that requires specific form to be followed:
-
1. Donation of real property
2. Partnership where immovable property or real rights are contributed to the
common fund
3. Acts and contracts which have for their object the creation, transmission,
modification or extinguishment of real rights over immovable property.
Ex: if you execute a contract of lease over a condominium unit or a contract of
lease over an empty lot, you are transmitting real rights over real property.
Therefore, it must not only be written, it should be notarized.
4. The cession, repudiation or renunciation of hereditary rights or of those of the
conjugal partnership of gains.

5. The power of administer property or any other power which has for its object an
act appearing or which should appear in a public document or should prejudice a
third person

- SP, Special power of an attorney, ex: Mr. x he’s going to live in Canda because
he took a teaching job but he is going to live behind an apartment complex he
owns and leases to the tenants. His concern is when he’s going to Canada he
is going to take care administer my apartment. What he does is he execute the
SPA allowing someone, relative or service provider, in SPA, Mr. X will now give
to this person the power to administer his apartment. The effect of SPA is to
make the appointed person be the agent be the representative of the person
executing the SPA. And because this person who is executing the SPA is
 seeding certain rights is empowering the representative with respect to
management, enjoyment, utilization of his property it should be in a public
document.

6. The cession of actions or rights proceeding from an act appearing in a public

document.
What contracts must be registered: should be registered with the register deeds.
1. Chattel mortgage – when you put up a security, personal or immovable
property like motor vehicle.
2. Sale or transfer of large cattle
Civil register – city hall register of deeds you go there to get copy of title of property.
Reformation of Contracts
Reformation of contracts is a remedy to conform to the real intention of the parties due to
mistake, fraud, inequitable, conduct, accident.
Prescriptive period for reformation of instruments: 10 years
- There are instances in which the parties put their agreement in writing but what
is put in the writing. Some terms and conditions ex: in the contract of sale and
the agreed selling price is 10 M but when they put in writing maybe they put a
mistake or with the intent of the other party to defraud the party, or due to
accident, the terms and conditions do not conform to the actual agreement of
the two parties. 10 M agreed but the secretary made a typographical error.
Unfortunately, both parties signed into contracts and they neglected to have it
corrected. Eventually, if they find out, they can now reform the contract.
- Reformation – amend the contract in order to reflect the agreement of both
parties. But there is no forever. There is a prescriptive period, a period where
the party can correct an error like with respect to object or cause. If there is a
delay, then they will be bound by a contract.

Requisites in reformation of instruments:

1. Meeting of minds to the contract
2. True intention is not expressed in the instrument
3. By reason of mistake, accident, relative simulation, fraud or inequitable conduct
4. Clear and convincing proof of the foregoing
WEEK 8

DEFECTIVE CONTRACTS
- In a sense that there may defective or missing elements
The opposite of valid is not void it can be any of defective contracts:
1. Void
2. Voidable
3. Rescissible
4. Unenforceable
5. Inexistent

A. Defective Contracts: Rescissible

Rescissible: those which have caused a particular economic damage either to one
of the parties or to a third person and which may be set aside even if valid. It may
be set aside in whole or in part, to the extent of the damage caused. The problem
is if we are going to pursue contract we are going to perpetuate an injury or
unfairness.

-“rescind” or to cancel, a contract is rescissible if it causes economic damage to

either one of the parties or to a third person and because of that economic damage,
the contract has to be cancelled or rescinded even if it is valid in a sense that all
elements are present, if it results in unfairness or there is an economic
disadvantage in the part of one of the parties or to a part of a third person then that
contract may be rescinded partially or in whole.

Types of Rescissible Contracts:

1. Entered into by persons exercising fiduciary capacity: meaning, there

is a representative rule

a. Entered into by guardian whenever ward suffers damage more than ¼ of value of
property

guardian and ward, ward – an adult but can be mentally incapacitated

Ex: guardians, if there is a minor and maybe parent or relatives a re appointed as
a guardian of a minor and the guardian enters into sales in the property of the
minor but the selling price is below the fair market value ang the difference
 between the fair market value and the selling price is more than ¼ for instance, in
a market if the property is worth 1 million pesos and the guardian sells the property
for only 50 Million pesos, it means that there is a damage suffered by the ward, by
the minor and the damage is more than ¼ value of the property. Therefore, the
sale entered into by the guardian pertaining to the property of the minor may be
set aside, may be rescinded. What is the consequence if the contract is rescinded?
It will be cancelled and therefore the parties will be returned to the state that they
were before the contract was entered into so the minor retains or gets back
ownership over the property and if the buyer has already paid for the purchase
price, then, this purchase price obviously would have to be returned

b. Agreed upon in representation of absentees, if absentee suffers lesion by more than

¼ of value of property

Ex: someone goes missing and this person leaves behind properties and the
relatives because of the long period of time when the absentee had been gone
they sell the properties but the selling price is a below market price but atleast
more than ¼ therefore, there is lesion, a damage suffered by virtue of the selling
price so the sale of the property of the absentee which is below ¼ the value of the
property which is the selling price which is lower by more than 1/4 , this sale can
be rescinded or cancelled.

c. Contracts where rescission is based on fraud committed on creditor

Ex: there is a sale of jewelry on the representation that the jewelry is genuine.
However, the jewelry is actually fake but because of the fraud or misrepresentation
that jewelry is genuine, it is sold in the price of a genuine jewelry for instance sold
at 100,000 when in reality the price is one thousand pesos because it is not really
genuine represented as made of gold but it is only gold-plated so there is lesion or
damage suffered by the buyer because while giving out 100,000 did not get the
jewelry with its value, the jewelry that the buyer got is way below the 100,000. This
case, if the buyer finds out the jewelry that he supposedly purchase is fake, then
the buyer can have the contract cancelled. The buyer can demand a return of the
100,000 and can also return the jewelry that he supposedly purchased.

d. Objects of litigation
- Other’s pending case in court let’s say involving title over property, there is a
conflict regarding to whether who owns this property so there is an action filed
in court in order that the court would determine who is the rightful owner and
while the court case is pending one of the party of the case sells the property.
The damage pertains to other party in the case as well as the third person the
buyer of the property, what if the court eventually say that the property is owned
by the other party who is not the person who is selling the property. Then, the
 buyer would now lose the right of the property, because the rightful owner could
say, I won the case in court, therefore, I am now going to claim my property.

e. Payment by an insolvent
- An insolvent person is someone whose liabilities falls due, however, this person
do not have enough asset to pay the liability if this insolvent person has several
creditors, what should be done is there would be a court case where the
liabilities of the insolvent person would be paid off based on priority. If this
person who is insolvent pays a creditor outside of the insolvency proceedings
in court, or if this insolvent person pays a creditor without the consent of the
court handling the insolvency proceedings, the payment would be rescissible
which means that the court can demand the creditor who receive the insolvent
payment to return the payment received on the insolvent.
Priorities: raxes - wages
2. Payments made in state of insolvency:
a. Plaintiff has no other means to maintain reparation -
b. Plaintiff must be able to return whatever he may be obliged to return due to
rescission
c. The things must not have been passed to third persons in good faith
d. Made within 4 years

Defective Contracts: Voidable – all elements of the contract are present, there is consent,
object, and cause. However, there is something wrong with one or more in the elements
usually the element that is defective in voidable contract is the consent.
Ex: the minor sells the property, the minor signs the contract of sale, because the minor
gives consent to the sale you have all elements present in the contract, the consent of
minor, object (property), cause(payment). However, there is something wrong with one
element of the contract — consent. Because a minor has no capacity to enter into contract
a minor cannot give legal consent. Even if the minor gives his consent, that consent is
defective. Therefore, a voidable contract
Characteristics of a voidable contract: they are valid until they are voided.
1. Effective until set aside it remains to be valid until it is set aside. That is why it is
called voidable, it can be voided, it can be set aside. But until it is voided or set
aside, it remains valid and effective.
What if the minor realizes that he sold the property at a very low price and
would want to set aside the contract, the minor can do so by filing a case in court. So it
involves filing a court case in order to declare the contract as voidable or in order to annul
the contract.
2. May be assailed or attacked only in an action for that purpose
3. Can be confirmed - if a minor upon reaching the age of 18, this person in the sell
of the property can now give consent and upon reaching age of 18 what the person
do he ratifies or confirm the contract.
4. Can be assailed only by the party whose consent was defective or his heirs of
assigns – who can file a case in the court in order to annult the contract, the party
whose consent was defective or his heirs of assigns. It can only be the minor not
the buyer who can declare the contract as void.

When is there a voidable contract:

1. When a party is incapacitated to give consent – minor, mental incapacitated,
insane, deaf or mute
2. When consent is vitiated – a consent is vitiated or the consent was given by virtue
of mistake

Parties incapacitated to give consent

1. Deaf-mutes who do not know how to read and write
2. Insane or demented persons
3. Minors, except:
- contracts for necessaires
- contracts by guardians and legal representatives, with court approval
- When the minor actively misrepresented his/her age
- Contracts of deposit with the bank provided the minor is over 7 years
- Upon reaching the age of majority, the minor ratifies the contract

Vitiated consent- consent that is given because of mistake

The vices of consent:
1. Mistake: substantial mistake, not just accidental.
 Ex: in a contract of sale, the buyer thought that he’s purchasing shoes, but the
seller was actually selling clothes. There is a substantial mistake because the
mistake pertains to the object of the contract. There is a difference in the object in
the mind of the two parties because one party, buyer, thinks that he is buying shoes
the seller is actually selling clothes then there is something wrong with the object.
They do not really gave consent to the rightful object.
2. Intimidation: an internal moral force operating in the will and inducing
performance of an act
Pertains to the application of a n internal moral force, there is no physical force
applied however, words actions may have been undertaken that would cause fear
in the mind of the other party that will also impel this person to enter into the
contract but without such words this person would not have enter into a contract.
3. Violence: an external, serious or irresistible physical force exerted upon a person
to prevent him from doing something or compel him to do an act
- There is a physical force, the physical force was external and it is serious or
irresistible because of the violence exerted the other party is force to give a
consent but without the violence it would not have enter into the contract.
4. Undue Influence: any means employed on a party which could not be resisted
and has the effect of controlling his actions
- Happens if there is an influence, the other party exerting the influence has
control or supervision is in the position to influence to affect the actions of the
other party. Ex: a teacher who gives failing mark and tell ipapasa kita kung bibili
ka sakin and because of that position the student compels to but the item being
sold the student’s consent is defective. The contract of student and the teacher
is voidable.
5. Fraud: use of i
6. words or machinations in inducing another party to enter into the contract
- If there is deception or misinterpretation, because of the misinterpretation
because of deception. The other party is induced to give consent to the
contract. But if truth is known, the other would have not enter into a contract at
first place.

Kinds of mistake:
1. Mistake of fact: when one or both parties believe that a fact exists when in fact it
does not, or that such fact does not exist when in fact it does.
 2. Mistake of law: when one or both parties arrive at erroneous conclusion or
interpretation of a question of law or legal effects of a certain act or transaction.
Mistake as a vice of consent refers to mistake of facts and not of law. Only mistake of
fact goves rise to a voidable contract.

When mistake of law makes a contract voidable:

1. Mistake is with respect to the legal effect of the agreement
2. It is mutual
3. The real purpose of the parties must have been frustrated

Requirements for intimidation:

1. One of the parties is compelled to give his consent by a reasonable and well-
grounder fear of an evil
2. The evil must be imminent and grave
3. The evil is unjust
4. The evil must be the determining cause for the party upon whom it is employed in
entering into the contract

Requirements for violence:

1. It is serious or irresistible
2. It is the determining cause for the party upon whom it is employed in entering into
the contract

Kinds of fraud in the perfection of contract:

1. Causal fraud (dolo causante) – selling fake gold jewelry
2. Incidental fraud (dolo incidente) – selling jewelry and it is genuine gold I tell the
buyer that the jewelry I sell is from Africa but actually it is from Japan. So, the
misinterpretation which is the source of the gold is not dolo causante it is simple
dolo incidente. Hence, the seller will only be liable for damages.
Ex: ono enter into a contract to deliver 500 cavans of rice to Rhea with a price per cavan
of 1,300 pesos, Gono delivered 300 cavans but withheld the delivery of the remaining,
stating that the price went up and priced the rice to 1,600 per cavan. The fraud here is
dolo incidental because it is committed to the existing contract.
 DOLO CAUSANTE (Art. 1338) DOLO INCIDENTE (Art. 1344)

Refers to fraud which is serious in character Refers to fraud which is not serious in character

It is the cause which induces the party to enter It is not the cause which induces the party to enter
into the contract into a contract

Renders the contract voidable Renders the party liable for damages

Causal fraud leads to a voidable contract.

Fraud in the performance of contract:
1. Fraud, insidious words or machinations must have been employed by one of
the contracting parties
2. It must have been serious
3. It induced the other party to enter into a contract
4. It should not have been employed by both contracting parties or by third
persons

DEFECTIVE CONTRACTS: UNENFORCEABLE or may not be enforced. An

unenforceable contract is valid however, it may not be implemented but it cannot be
implemented.
These contracts are unenforceable unless ratified:
1. Those entered into without or in excess of authority
ex: I appoint Therese to sell my car but then I tell her do not sell my car below
500,000 pesos but Therese sell my car at the selling price of only 400,000 pesos
so if you examine the contract I entered into with Therese as my agent and the
buyer it perfectly valid in a sense that there’s consent in the first place I gave
Therese the authority to sell my car and the buyer gave the consent, there is an
object, the car and the cause, the selling price of 400,000. However, therese
exceed her authority by seling the car below 500,000. Therefore, I can now tell
Therese and the buyer that I am not recognizing your contract we cannot
implement or enforce the contract you Therese my agent and the buyer who
entered into because therese exceeds her authority I gave her.
2. Those that do not comply with the Statute of Frauds, i.e., are not in writing nor
subscribed by the party charged or his agent
Statute of frauds pertains to a specific provision in a civil code which enumerates
contract that should be in writing otherwise, they will be unenforceable.
 Statute of Frauds: provides for unenforceability by action of the following
agreements unless the same or some note or memorandum thereof be in writing
and subscribed by the party charged and his agent.

3. Those where both parties are incapable of giving consent

Ex: two minors selling property, the seller is a minor the buyer is a minor since both
parties are not capable of giving consent, then it is unenforceable.

Contracts covered by Statute of Frauds:

a. Agreement which by its terms is not to be performed within a year from the
making thereof.

Ex: I am going to approach Kristine and tell Kristine, I plan to sell my car by
2023. Would you want to buy my car at 2023, I am selling it at 1,000,000
and Kristine said sige maam I graduated college by that time and I need a
car in order to be able to get around. Alright, I’ll buy your car at 1,000,000.
And then by 2023, at the time that Kristine and I agreed to buy my car we
don’t execute a document it is just verbal. By 2023, Kristine comes to me
and reminds me of our verbal agreement but then I told Kristine we didn’t
sign anything. Therefore, I acknowledge that we did have an agreement but
because we do not put it in writing you can’t compel to implement or enforce
our contract. With that situation of the contract terms will not be performed
within a year from the making thereof and should be subscribed to sign by
the parties.
b. Agreement for the sale of goods, chattels, or things in action, at a price not
less than Php500.00. - when you buy those item less than 500 you are given
a receipt and that official receipt contain the name of the seller, the item being
bought, the price and official receipt invoices nowadays provide for spaces, blanks
where the buyer can input his name or address. So the official invoices that you
get whenever you purchase would already be evidence of agreement, It would be
considered as written evidence so this will not make contract unenforceable, it is
a valid.
c. An agreement for the leasing for a longer period than one year or for the
sale of real property or of an interest therein.
- it has to be in writing especially in sale of real property if it is not in writing so the
parties only agree in the sale of real property verbally there will be difficulty in
forcing the contract because obviously if you are the buyer and you paid
10,000,000 you would want to transfer the title of the real property to your name
so which government agency would you go? To register of deeds. What is the first
document that register of deeds will ask for you, the contract of sale the deed of
absolute sale over a real property. So if you don’t show deeds of absolute sale, the
register of deeds will not transfer the title even of you show the payment, the
acknowledgement receipt signed by the seller. The property or lease for period of
more than one year should be written and notarized contract.
d. Special promise to answer for the debt, default or miscarriage of another.
– or guarantee, so when you guarantee for the debt of another person, it has to be
in writing
Evidence of the foregoing cannot be received without the writing or a secondary
evidence of contents (Art. 1403).

DEFECTIVE CONTRACTS: VOID CONTRACTS

– pertains to an agreement where there is one or more missing elements.
Void contracts lacking in essential elements:
1. Those which are absolutely simulated or fictitious
Ex: the absolutely and relative contracts simulated contracts, it is
only the absolutely simulated contracts that is considered void
because it don’t have all elements of a contract.
2. Those whose cause or object did not exist at the time of the
transaction it does not have a potential to exists
Ex: there is a contract between neighbors for the owner of an adult
dog to sell the puppies once it give birth but what if the dog is a boy,
therefore, there is no possibility for the dog to give puppies. At the
time of the transaction, the object (puppies) will not have the potential
to exist.
3. Those whose object is outside the commerce of man
Ex: you sell the sun, cadaver, your blood, or kidneys
4. Those which contemplate an impossible service
Physical and legal impossibility, contract for prostitution services is
impossible because it is illegal in the Philippines
5. Those where the intention of parties relative to the principal object of
the contract cannot be ascertained. – there’s an absolute
disagreement with respect to the object of the contract
 Contracts prohibited by laws:
1. Pactum commissorium: the creditor appropriates to himself the
things given by way of pledge or mortgage to fulfill the debt
Ex: I borrow money and in order that the lender would give me the
money its said, Alright pero you also have to give me the rolex watch
so if you don’t pay me the liability I forfeit the rolex watch. My rolex
watch as security for the money that I’m borrowing is called a pledge
so that if I do not pay my liability and the lender forfeits the watch this
is void.
2. Pactum de non alienando: an agreement prohibiting the owner
from alienating the mortgaged immovable
Ex: I own a parcel of land and I borrow money from Mr. X. You also
have to mortgage your parcel of land as security for loan and when I
agree to this I execute real estate mortgage. Then mr. X said, we
also have to include in the contract a provision that will prohibit you
the borrower from selling this land. That provision is void.
3. Pactum leonina: a stipulation in a partnership agreement which
excludes one or more partners from any share in the profits or losses
- Partneship when two or more persons pull their money property together in
order to engage in a profitable business activity and when these earns profit
they divide the profit themselves. So when in the partnership includes a
provision that they cannot share profit or losses then it is pactum leonina.

COMPARISON

VOID VOIDABLE

Absence of essential elements of a contract Consent is vitiated or there is incapacity to

give consent

No effect even if not set aside Valid contract until set aside

Cannot be ratified Can b ratified

 Nullity can be set up against any person Nullity can be set up only against a party
asserting right arising from it, and his thereto
successors in interest not protected by law

Action to declare nullity does not prescribe Action to annul contract prescribes in 4 years

VOID RESCISSIBLE

Defect is in the contract itself Defect is in its effects, either against one of
the parties or a third person

Nullity is a matter of law and public interest Based on equity and matter of private interest

No legal effects even if no action is filed to set Produces legal effects and remains valid if no
it aside action is filed

Action to declare its nullity does not prescribe Action to rescind prescribes within 4 years

Action to declare nullity does not prescribe Action to annul contract prescribes in 4 years

MODULE 3

SALES
A. Definition of Sale
Sale, defined (Art. 1458):
“Sale” is a contract whereby one of the contracting parties (the Seller) obligates
himself to transfer ownership of, and to deliver, a determinate thing; and the other party
(the Buyer) obligates himself to pay therefor a price certain in money or its equivalent.
Contract of sale may either be absolute or conditional.
A conditional contract of sale is also referred to as “Contract to Sell”, where ownership
or title is retained until fulfillment of a positive suspensive condition, normally the payment
of the purchase price.
Absolute — where the sale is not subject to any condition whatsoever and where title
passes to the buyer upon delivery of the thing sold. Thus, it has been held that a deed of
sale is absolute in nature although denominated as a “Deed of Conditional Sale” in the
absence of any stipulation that the title to the property sold is reserved in the vendor until
full payment of the purchase price nor a stipulation giving the vendor the right to
unilaterally rescind the contract the moment the vendee fails to pay within a fixed period.
In such case, ownership of the property sold passes to the vendee upon the actual or
constructive delivery thereof. Payment of the purchase price is not essential to the
transfer of ownership as long as the property sold has been delivered. Such delivery
operates to divest the vendor of title to the property which may not be regained or
recovered until and unless the contract is resolved or rescinded in accordance with law.
“I will sell my laptop to my friend this afternoon” because once payment has been made I
now have the obligation to deliver the laptop. – contract of sale
Conditional — where the sale contemplates a contingency, and in general, where the
contract is subject to certain conditions usually, in the case of the vendee, the full payment
of the agreed purchase. In sales with assumption of mortgage, the assumption of
mortgage is a condition to the seller-mortgagor’s consent to the sale so that without
approval by the mortgagee no sale is perfected and the seller remains the owner and
mortgagor of the subject property with the right to redeem in the case of foreclosure.
“My friend wants to buy my laptop but she does not have cash today yet, so the payment
will be tomorrow. Since we have an agreement, I should not sell the laptop to anyone and
if by tomorrow my friend was able to give me the payment then at the same time, I will
also have the obligation to deliver the laptop. The condition there is the payment of my
friend for the laptop. Contract to sell
B. Elements of Contract of Sale
2 sets of obligations created:
1. For seller: a) to transfer ownership, and b) to deliver possession of subject matter
2. For buyer: to pay the price
B. Elements of Contract of Sale (Art. 1475):
1. Consent or meeting of the minds to transfer ownership in exchange for the price;
2. Determinate subject matter; and
3. Price certain in money or its equivalent (check or e-money)

C. Parties to a Contract of Sale

1. General Rule on Capacity of Parties (Art. 1489)
Any person who has capacity to contract or to enter into obligations may enter into a
contract of sale.
For natural persons, the age of majority begins at 18 years.
 Juridical persons such as corporations, associations, partnerships, and cooperatives
have juridical personality separate and distinct from the shareholders, partners, or
members and have full legal capacity to obligate themselves and enter into valid
contracts.

2. Minors, Insane and Demented Persons (Arts. 1327, 1397, 1399, 1489)
Minors, insane and demented persons, and deaf-mutes who do not know how to
write, cannot be parties to a contract of sale.
The sale and delivery of necessaries to a minor or other person without capacity to
act is valid. Necessaries cover everything indispensable for sustenance, dwelling,
clothing, medical attention, education, and transportation.

3. Sales By and Between Spouses (Arts. 73, 96, 124, Family Code, Arts. 133, 1490,
1492)
Disposition of community property or conjugal property without authority of the
court or the written consent of the other spouse is void.
Spouses cannot sell property to each other except when there is separation of
property between the spouses. The reasons for the prohibition are:
a) to prevent a spouse from defrauding his/her creditors,
b) to avoid the dominant spouse from taking advantage of the other,
c) to avoid indirect violation of the prohibition against donation between spouses.

- The Philippines follows absolute community of property relations among

spouses - when two persons get married, if they do not sign a prenuptial
agreement where they designate their property relations as absolute
separation of properties the default property relations is absolute community of
property. Everything that is acquired during the marriage is considered as co-
owned or 50% owned by each of the spouses regardless of work in order that
that property will be acquired even if it is only the husband who is working and
its just by virtue of the husband’s salary for instance that they are able to
purchase a house and lot, that house and lot as a general rule will be
considered as 50% owned by the wife and 50% by the husband.

- Can people who are under the absolute community of partnership sell property
to each other? Let’s say the wife will sell her property to her husband, as a
general rule, spouses are prevented to sell property to each other because of
the ff reasons: (1) So that the spouse will not run away from his/her creditors
because it can happen that the spouse who is working has a business for
 instance and to avoid his creditors he sells his property to spouse so that if you
look at the registration of the property you won’t find the name of the spouse
but because of the prohibition of contract of sale between spouses that cannot
be done. (2) so that if you have dominant spouse this dominant spouse cannot
compel the other spouse to sell his or her property to the dominant spouse (3)
there is also prohibition of them donating from each other
4. Specific Incapacity to Enter Into Contracts of Sale (Art. 1491)
a) Agent, with respect to property whose administration or sale may have been
entrusted to him, unless consent of the principal has been given. Brokers do not
come within the coverage of the prohibition.
- This person who is the agent and whose function is to administer property
cannot be the buyer of property unless principal allows
b) The guardian, with respect to the property of the person who is under his
guardianship. – a guardian cannot purchase property who is his/her ward
c) Executor and administrator, with respect to the property under his administration.
– if someone dies with a property, the heirs appoints someone called executor
and administrator to administer the property, they cannot purchase any properties
of person who died

- These relationships are based on trust. There should be no temptation on the part of
the agent, etc. to neglect principal’s, etc. interest.
- Contracts entered into by guardians, agents, administrator may be ratified by execution
of a new contract.

d) Public officers and employees, with respect to property of the State or any
subdivision thereof, or of any GOCC, the administration of which has been
entrusted to them.
- There are also public office whose function is administration of public property
they cannot purchase these properties
e) Justices, judges, prosecuting attorneys, clerks of court, etc. with respect to the
property and rights in litigation; if there is a case in the court, hence parties are not
allowed to purchase property under litigation.
f) Lawyers with respect to the property and rights which may be the object of any
litigation in which they may take part by virtue of their profession.

The foregoing contracts are void, even with consent of protected person, except a
principal.
The reason behind this specific incapacitated person to enter into contract. All of these,
they exercise powers of influence over the other parties therefore, to prevent them from
abusing that power they are prohibited from purchasing the properties under their care.
D. Subject Matter of a Contract of Sale (Arts. 1459 to 1465)
1. Requisites of a Valid Subject Matter – possible, legal, determinate and
determinable
a. It must be possible such that it must be existing, have potential
existence, a future thing, or even contingent, or even subject of a
resolutory condition (Art.1462);

I. Emptio rei speratae (future things) – things having a potential existence

may be the object of a contract of sale (Art. 1461)

- a valid sale may be made of “the wine a vine is expected to produce; or the
grain a field may grow in a given time; or the milk a cow may yield during the
coming year; or the wool that shall thereafter grow upon a sheep; or what
may be taken at the next cast of a fisherman’s net; or the goodwill of a trade,
or the like. The thing sold, however, must be specific and identified. They
must be also owned by the vendor at the time
- For instance, the future piglets that will be given birth to by the mother pigs,
or future crops the at the time of the perfection of contract of sake, these
piglets, crops may not yet be present but because they have potential
existence it is possible for them to eventually exist, these future things may
be objects of a contract of sale, they can be valid subject matter of a contract
of sale
II. Emptio spei – sale of mere hope or expectancy
(1) S binds himself to sell for a specified price to B a parcel of land if he wins
a case for the recovery of said land pending in the Supreme Court. Here, the
obligation of S to sell will arise, if the “expected thing,’’ the land, will come into
existence, i.e., if he wins the case. Before a decision is rendered, there is only
“the mere hope or expectancy’’ that the thing will come into existence.

(2) B buys a sweepstakes ticket in the hope of winning a prize. Here, the object
of the contract is the hope itself. The sale is valid even if B does not win a prize
because it is not subject to the condition that the hope will be fulfilled.

- is not a valid contract of sale because it is simply mere hope or expectancy

This means that there is the big possibility that this subject matter will not come
about.

III. Contingent/Resolutory condition – things subject to contingent or

resolutory condition may be the object of the contract of sale (Art. 1465)

- If the condition happens, it may be the object of the contract of sale.

 EXAMPLES:
(1) S sold a parcel of land to B subject to the condition that S can
repurchase the property within two years from the date of sale. If S
exercises the right to repurchase, then the sale made by B to C
before the lapse of the two (2)-year period falls. The rule, however,
that a vendor cannot transfer to his vendee a better right than he had
himself, suffers an exception in case of property with Torrens title.

(2) For failure to pay his debt, the land of S (mortgagor) was sold to B,
the highest bidder and purchaser in an extrajudicial foreclosure of a
real estate mortgage. Under the law (Act No. 3135, as amended.),
the mortgagor may redeem the property at any time within one year
from and after the date of the registration of the sale. If S redeems
the property, then the sale made to B is extinguished. One of the
obligations of the vendor is to transfer the ownership of the thing
object of the contract. (Art. 1458.) If the resolutory condition attaching
to the object of the contract, which object may include things as well
as rights (Arts. 1427, 1347, par. 1.), should happen, then the vendor
cannot transfer the ownership of what he sold since there is no
object.
b. Subject matter must licit;
A thing is licit and may be the object of a contract when it is not outside the
commerce of men. When the subject matter is illicit, the contract of sale is void.
I. Sale of animals suffering from contagious diseases is void.
II. A contract of sale of animals shall be void if the use or service for which
they are acquired are stated in the contract and they are found to be unfit.

c. Subject matter must be determinate or determinable;

Determinate thing: a thing which is particularly designated or physically

segregated from all others of the same class.
Determinable thing: a thing is determinable if at the time the contract is
entered into, the thing is capable of being made determinate without the necessity of a
new or further agreement between the parties. The thing should be determinable at
the point of perfection of the contract.
- It is not yet known but there is a way for the parties to know based on the
provision of contract of sale. Let’s say I’m going to sell the pair of shoes that
will be judged in the Marikina shoefest contest as the best designed pair of
shoes at this moment, we don’t know yet what specific shoes I am selling but
 there’s a way to know what it will be by finding out who will be going to win in
the Marikina shoefest.
2. Sale of Undivided Interest (Art. 1463)
The sole owner of thing may sell an undivided interest therein, and there would
result co-ownership over the subject matter.
- Co-ownership, ex: house & lot and it’s inherited by two siblings, the two siblings
they co-owned that house & lot. They owned 50% each but their ownership is
undivided which means first child cannot say okay I own the second floor and
then you own the first floor. That cannot be done in a co-ownership precisely
because the ownership is undivided but can one of the co-owners can the first
child sell his co-ownership in the house & lot? Yes, it can be done but the one
that can be sold is only the undivided interest so the first child cannot say okay
buyer I am selling the first story because of the rule that in co-ownership what
the co-owners have is the undivided interest in the thing.
EX:
S is the owner of a parcel of land with an area of 1,000 square meters. As the sole owner,
S can sell to B the entire portion; or only 500 square meters of the land by metes and
bounds in which case he becomes the sole owner of the remaining 500 meters and B the
portion sold; or he may sell an undivided half of the land without specially designating or
identifying the portion sold, in which case they become co-owners.
As a co-owner, S or B can convey or transfer only the title pertaining to the undivided half
of the land, for vital to the validity of a contract of sale is that the vendor be the owner of
the thing sold. (Art. 1459.
3. Sale of Undivided Share in Mass (Art. 1464)
In sale of fungible goods, there may be sale of an undivided share of a specific
mass. The buyer becomes the owner-in-common of such share of the mass as the
number, weight, or measure of the mass. Such a sale therefore results in proportional
co-ownership over the mass.
- for instance, you have a warehouse, it is full of sack of rice so it is owned by those sacks
of which is estimated by 100 sacks of rice but it’s just an estimate, it is a specific mass
and it is owned by two persons and because the ownership is undivided each of the co-
owners cannot say okay my ownership and the rice in that warehouse pertains to those
that are from the bottom that cannot be possible because of the nature of the ownership
but can these owners of the rice sell their undivided share of the mass, of course, as with
the previous case.
(1) Meaning of fungible goods. — It means goods of which any unit is, from its nature or
by mercantile usage, treated as the equivalent of any other unit (Uniform Sales Act, Sec.
76.), such as grain, oil, wine, gasoline, etc.
(2) Effect of sale. — The owner of a mass of goods may sell only an undivided share
thereof, provided the mass is specific or capable of being made determinate. (Art. 1460.)
(a) By such sale, the buyer becomes a co-owner with the seller of the whole mass in the
proportion in which the definite share bought bears to the mass.
(b) It must follow that the aliquot share of each owner can be determined only by the
measurement of the entire mass. If later on it be discovered that the mass of fungible
goods contains less than what was sold, the buyer becomes the owner of the whole mass
and furthermore, the seller shall supply Art. 146441 whatever is lacking from goods of the
same kind and quality, subject to any stipulation to the contrary

S owns 1,000 cavans of palay stored in his warehouse. If S sells to B 250 cavans of such
palay which cavans are not segregated from the whole mass, B becomes a co-owner of
the said mass to the extent of 1/4. If the warehouse happens to contain only 200 cavans,
S must deliver the whole 200 cavans and supply the deficiency of 50 cavans of palay of
the same kind and quality. In the same example, the number of cavans in the warehouse
may be unknown or undetermined and S may sell only 1/4 share of the contents. The
legal effect of such a sale is to make B a co-owner in that proportion. It is obvious that in
such case, the obligation of the seller “to make good the deficiency” will not arise
4. Seller’s Obligation to Transfer Ownership Required at Time of Delivery (Art. 1459,
1462, 1505)
The seller need not be the owner of the thing sold at the time of perfection. It is
sufficient that he is the owner at the time of delivery of the object of the contract.
Where goods are sold by a person who is not the owner thereof, and who does not
sell them under authority or with the consent of the owner, the buyer acquires no better
title to the goods than the seller had, unless there is estoppel on the part of the owner.
- It is important that the seller has ownership over the subject matter at the time
that he is required to deliver. At the time that the parties are negotiating or agree
over the contract of sale, it is not necessary that the seller actually owns that
thing.
- For ex: I have a friend who grows broccoli in Baguio and I look for buyers of
broccoli here in manila but these buyers they but directly from me so the usual
process is I offer to sell broccoli to buyers here in Metro Manila and if there will
be a confirmed buyer I am now going to purchase broccoli from my friend in
Baguio city and deliver now the broccoli to buyer here in metro manila. Let’s
say I put out an ad on Facebook, 10 kilos of broccoli available in Baguio city
and then at that point in time I don’t own yet the broccoli, I don’t own it, yet I
haven’t purchase it from my friend. Then someone responds and said, I am
willing to buy broccoli for how much, okay I’m now going to remit the payment
when do you deliver it to me. At that point there is already a contract of sale but
 I am not yet the owner of broccoli at that point so we agree that I am going to
deliver the broccoli the following day so I now call my friend and inform I have
buyer for your 10 kilos of broccoli. I am now remitting my payment for the 10
kilos of broccoli. Upon your receipt of my payment, please deliver the broccoli
to me. So upon my payment, that is the time that we already have a contract of
sale between me and the mighty broccoli grower and then once I acquire now
the ownership of broccoli that is the time now that I can deliver because I cannot
deliver something that I do not own but I can sell I can enter into contracts of
sale over subject matter, broccoli, even if I don’t own yet broccoli what is more
important is that at the time that I deliver the broccoli I should have ownership,
and have the right to transfer ownership.

ILLUSTRATIVE CASE: Goods which seller warranted as already on the way did not
arrive. Facts: B, vendee, gave his consent to the purchase and sale of certain goods on
the assertion of S, vendor, stated in the contract, that the goods were already on the
way. The goods did not arrive. Issue: Has S the right to demand from B the payment
of the price? Held: No. The assertion made by S is a warranty (see Arts. 1545, 1546.),
the non-fulfillment of which constitutes a breach of contract and deprives him the
right to demand of B the payment of the price of the sale. Having elected to bind
himself in that way, S, as vendor, is responsible, even if the prompt transportation of
the goods does not depend upon him but upon the importers, for he who contracts
and assumes an obligation is presumed to know the circumstances under which it can
be complied with. (Soler vs. Chesley, 43 Phil. 529 [1922].

E. Price in a Contract of Sale (Arts. 1469 to 1474)

1. Requisites for a Valid Price:

a. Must be real (Article 1471)
Price is “real” when at the perfection of the contract, there is every intention on the
part of the buyer to pay the price and every expectation on the part of the seller to
receive such price as the value of the subject matter he obligates himself to deliver.

If the price is “simulated” (i.e., neither party had intention that the amount will be
paid), the sale is void but the act may be shown to have been in reality a
donation or some other contract. Simulated din yung price kapag may reduction.
EXAMPLE:
S sold to B a parcel of land worth P50,000.00 for only P30,000.00. This contract of
sale is valid although the price is grossly inadequate. However, if it is shown that
 B induced S to sell the land through fraud, mistake, or undue influence, the contract
may be annulled on that ground. If the price is simulated, B may prove another
consideration like the liberality of S and if such liberality is proved, then the contract
is valid as a donation; or B may prove that the act is in reality some other contract,
like barter and, therefore, the transfer of ownership is unaffected
If the price is “false” (i.e., the real price is not declared), the contract of sale is
valid, but the underlying deed is subject to reformation to indicate the real price.
For consideration in a contract of sale to be considered “real”, it would have
to be for “valuable consideration”. A contract of sale with a mere nominal price
would be considered void since the price would be considered fictitious.
Failure to pay the price does not cancel the sale for lack of consideration
b. Must be in money or its equivalent (Arts. 1458 & 1468)
The price in a contract of sale must be in money or its equivalent. A contract is not
a true contract of sale if the price consists of services.
However, if the contract consists partly in money, and partly in another thing, the
transaction can still be considered a contract of sale. At the very least, a true
contract of sale must have price (money or equivalent) as part of its consideration.
Cancellation of liabilities of seller had been held as valid consideration for a sale.
What if it is offsetting, for ex, I own money amounting to 10,000 to my friend and my friend
is selling a bag worth 10,000 can I say, okay just cancel my utang to you and deliver to
me my bag, is that valid? Yes, cancellation of liability is a valid consideration for a sale.
By the contract of barter or exchange, one of the parties binds himself to give one thing in consideration
of the other’s promise to give another thing. (Art. 1638.) On the other hand, in a contract of sale, the
vendor gives a thing in consideration for a price in money. (Art. 1458.)

EXAMPLES:
(1) S, a sugar miller, and B, a manufacturer and dealer of whisky, entered into an
agreement whereby S was to deliver sugar worth P20,000.00 to B who was to give 100
bottles of whisky worth also P20,000.00. This is a contract of barter.
(2) Suppose at the date of delivery, B had only 25 bottles of whisky. With the consent of
S, S paid the difference of P15,000 in cash. In this case, the contract is still barter. The
consideration for the sugar is not cash but the whisky, and the amount of P15,000.00 paid
by B is in consideration for the 75 bottles of liquor.
(3) Suppose, in the same example, B had no whisky at the stipulated date of delivery and
he paid S P20,000.00 instead of giving whisky. Did the contract become one of sale? No,
because the payment is in consideration of the value of the whisky, and not of the sugar.
The manifest intention of the parties was to enter into a contract of barter. But if B had
whisky at the date of delivery and he paid P20,000.00 with the consent of S, the contract
would become one of sale.
(4) Assume now that the contract between S and B was for S to deliver sugar to B who
agreed to give 100 bottles of whisky or to pay P20,000.00 cash. If B, instead of whisky,
paid P20,000.00 cash, it is clear that the resulting contract is that of sale, and not barter.
(5) If the obligation of B is to deliver 50 bottles of whisky and pay P10,000.00 cash, or 75
bottles of whisky and P5,000.00 cash, or 25 bottles of whisky and P15,000.00 cash, the
transaction shall be considered a barter or sale depending on the manifest intention of
the parties. Under Article 1468, if such intention does not clearly appear, the contract shall
be considered a Art. 1468 49 barter, where the cash involved is P5,000.00, or a sale, in
case it is P15,000.00, or either in case it is P10,000.00.
Sale distinguished from lease.
In the lease of things, one of the parties binds himself to give to another the enjoyment or
use of a thing for a price certain and for a period which may be definite or indefinite. (Art.
1643.) In other words, in a lease, the landlord or lessor transfers merely the temporary
possession and enjoyment of the thing leased. In a sale, the seller transfers ownership of
the thing sold.
Sale distinguished from dation in payment.
Dation in payment (or dacion en pago) is the alienation of property to the creditor in
satisfaction of a debt in money. (see Art. 1619.) It is governed by the law on sales. (Art.
1245.) As such the essential elements of a contract of sales, namely, consent: object
certain, and cause or considerations, must be present. The distinctions are the following:
(1) In sale, there is no preexisting credit, while in dation in payment, there is;
(2) In sale, obligations are created, while in dation in payment, obligations are
extinguished;
(3) In sale, the cause is the price paid, from the viewpoint of the seller, or the thing sold,
from the viewpoint of the buyer, while in dation in payment, the extinguishment of the
debt, from the viewpoint of the debtor, or the object acquired in lieu of the credit, from the
viewpoint of the creditor;11
(4) In sale, there is more freedom in fixing the price than in dation in payment; and
(5) In sale, the buyer has still to pay the price, while in dation in payment, the payment is
received by the debtor before the contract is perfected. (see 10 Manresa 16-17.)

S owes B P10,000.00. To pay his debt, S, with the consent of B, delivers a specific television set. If the value
of the television set, however, is only P8,000.00, S is still liable for P2,000.00 unless the parties have
considered the conveyance as full payment.
 c. Price must be certain or ascertainable at perfection (Art. 1469)
Price is certain when it has been expressed and agreed in terms of specific pesos
and/or centavos.
Price is ascertainable if it is so with reference to another thing certain, or that
the determination be left to the judgment of a specified person or persons.
If the price cannot be determined, the contract of sale is inefficacious.
d. Manner of payment must be agreed upon - cash or installment
The manner and terms of payment is an integral part of the concept of “price” due
to the time value of money.
A seller may be willing to accept a comparatively lower price if it is payable within
a short period of time and yet would be demanding a higher price if the
purchase price is to be paid over a long stretch of time.
Terms of payment do not always have to be expressly agreed when the law
supplies by default such term.
In general, under Art. 1179 of the Civil Code, price is deemed to be demandable
at once.
ILLUSTRATIVE CASES:
1. Price was fixed at 10% below the price in the inventory, at the invoice price, and
in accordance with the price list less 20% discount.
Facts: S sold to B a tobacco and cigarette factory together with the trademark “La
Maria Cristina,” the stocks of tobacco, machinery, labels, wrappers, etc. for a sum
subject to modification, in accordance with the result shown by the inventory to
be drawn up. In this inventory the value of each individual price of furniture was
fixed at 10% below the price in the partnership inventory. The value of the
tobacco, both in leaf and in process of manufacture, was fixed at the invoice price.
The value of tobacco made up into cigars was fixed in accordance with the price
list of the company less 20% discount.

Issue: Under the terms of the agreement, may the price of the property sold be
considered certain within the meaning of the law?

Held: The price may be considered certain. The articles which were the subject
of the sale were definitely and finally agreed upon. The price for each article was
fixed. It is true that the price of the tobacco, for example, was not stated in pesos
and centavos. But by its terms B agreed to pay therefor the amount named in the
invoices then in existence. The price could be made certain by a mere reference
to these invoices. (McCullough vs. Aenille & Co., 13 Phil. 258 [1909
2. Price was fixed at a certain amount subject to modifications based on known
factors. Facts: S contracted to sell large quantity of coal to B. The basic price
fixed in the contract was P9.45 per long ton but it was stipulated that the price
was subject to modifications “in proportion to variations in calories and ash
content and not otherwise.”

Issue: Is the price certain within the meaning of the law?

Held: By stipulation, the price could be made certain by the application of known
factors (Art. 1469.), and for the purposes of this case, it may be assumed that the
price was fixed at P9.45 per long ton. (Mitsui Bussan Kaisha vs. Manila B.R.R.
and L. Co., 39 Phil. 624 [1919].)

3. Price (compensation) promised was the cost of maintenance.

Facts: X rendered services as wet nurse and governess to Y’s infant daughter. Y
promised to compensate X for the services, providing for the maintenance of X,
her husband and her children during all the time that the services were required.
Y contends that there was no valid contract of lease of services because the price
thereof was not fixed.
Issue: Does the contract furnish a basis or measure by which the amount of
compensation may be ascertained?
Held: Yes. In this case, the cost of maintenance determines the compensation
according to the agreement of the parties. (Majarabas vs. Leonardo, supra.)

4. Price was fixed at “not greater than P210.00 per square meter.”

Facts: Under the contract of lease with option to buy entered into in 1975, the
lessee was given the option to purchase the parcel of land lease within a period
of 10 years from the date of signing of the contract “at a price not greater than
P210.00 per square meter.”

Issue: Is the price certain or definite?

Held: Yes, given the circumstances of the case. “Contracts are to be construed
according to the sense and meaning of the terms which the parties themselves
have used. In the present Art. 146953 dispute, there is evidence to show that the
intention of the parties is to peg the price of P210 per square meter. This was
confirmed by the petitioner [lessor] himself in his testimony as follows. Moreover
by his subsequent acts of having the land titled under the Torrens System, and
 in pursuing the back [lessee] manager to effect the sale immediately means that
he understood perfectly well the terms of the contract. He even had the same
property mortgaged to the respondent back sometime in 1979, without the
slightest hint of wanting to abandon his offer to sell the property at the agreed
price of P210 per square meter.’’ (Serra vs. Court of Appeals, 47 SCAD 55, 229
SCRA 60 [1994]

2. How Price is Determined:

a. By Third Person (Art. 1469)
If the 3rd party designated to fix the price is unable or unwilling to fix it, the
contract shall be inefficacious.
If the 3rd party designated to fix the price is unable to do so due to fault of the seller
or buyer, the party not in fault may undertake remedies against the party at fault.
Facts: S executed a document whereby he agreed to transfer to B “the whole of
the right, title, and interest” in a business. This whole was 4/173 of the entire net
value of the business. The parties agreed that the price should be 4/173 of the total
net value. The ascertainment of such net value was left unreservedly to the
judgment of the appraisers.
Issue: Is the price certain?
Held: Yes, for the minds of the parties have met on the thing and the price. Nothing
was left unfinished and all questions relating thereto were settled. This is an
example of a perfected sale. (Barretto vs. Santa Maria, 26 Phil. 200 [1913].)
Ex: I sell jewelry but I do not know the price, let the expert jeweler to decide how
much the price is, that case a third person determines the price and if this third
person is not able to fix the price or acts in bad faith, then the price will be settled
to the suggested retailed price of DTI next week. At the time that the buyer and I
agree, we do not agree on a fixed price yet but we refer to the suggested retailed
price of the DTI on the week that the jewelry will be delivered.
b. By the Courts (Art. 1469)
If the 3rd party designated to fix the price acts in bad faith or by mistake, the
courts may fix the price.
S sold to B a diamond ring. The determination of the price was left to C whom the
parties thought was a jeweler. If C acted by mistake, as when he is incompetent to
know the price of the diamond ring, or in bad faith, as when he connived with S,
the court may fix the price.
c. By Reference to a Particular Day, Exchange, or Market (Art. 1472)
 The price of securities, grain, liquids, and other things shall be considered certain
when the price fixed is that which the thing would have on a definite day, or in a
particular exchange or market, or when an amount is fixed above or below the
price on such day, or in such exchange or market, provided said amount is certain.
The price of a thing is certain by reference to another thing certain, such as to
certain invoices then in existence or known factors or stipulated formula.
d. Price Cannot be Determined Solely by One Party to the Contract (Arts. 1182, 1473)
The fixing of the price cannot be left to the discretion of one of the contracting
parties. Because it is unfair, kapag yung isang party pinush pero yung isa hindi, then they
can go to the court in order that the court will now be the one to fix the price

3. When There is Sale Even if No Price is Agreed Upon (Art. 1474):

If the thing or any part thereof has been delivered to and appropriated by the
buyer, he must pay a reasonable price therefor. What is reasonable price is a
question of fact and the courts have the authority to fix the reasonable
price.
The rationale for the foregoing rule is to prevent unjust enrichment of the buyer
who is not allowed to retain the subject matter without being liable to pay the price.
Ex: I go to my neighbor’s house and see a very nice plant and due to some
misunderstanding I thought that my neighbor is donating it to me so I take the plant
maybe the neighbor is wala dun yung kasambahay lang and when my neighbor gets
home and finds out that her plant was taken by me she calls me and tells me “I
understand you took the plant. I was not donating it to you I was just describing it to
you. It is not actually for sale.” In that case because I took the plant, the scenario is
like I should pay for it because it is actually held by sale by the neighbor so me taking
the plant even if because of the misinterpretation, I should return it. If I don’t want to
return it I will go and tell my friend I will just buy it and then that is the time now that
we are now going to agree on the price.
4. Inadequacy of Price (Art. 1470):
Gross inadequacy of price does not affect a contract of sale unless such
inadequacy of price indicates a defect in the consent or that the parties really
intended a donation or some other contract.
Although sale is an onerous and commutative contract, there is no requirement that
the price given is exactly the value of the subject matter delivered.
In a sale with right to repurchase, gross inadequacy of price raises a presumption
of equitable mortgage. The proper remedy of seller is to have the contract declared
a mortgage contract and pay the debt.
 - It can be deemed as adequate if it is sold below the fair market value but take
note that if the price is inadequate it does not mean that the contract is void or
voidable. But if there is an indication that the price is very low because the seller
was intimidated by the buyer. Then, this means that there is a defect in a
consent which now makes the contract as voidable.
ILLUSTRATIVE CASES:
1. Selling price is 1/26 of value of property.
Facts: S sold to B with pacto de retro (right to repurchase) a land valued at P26,000
for only P1,000.00.
Issue: May the contract be construed as an equitable mortgage? (see Arts. 1602,
1603.)
Held: As the price is so grossly inadequate, the contract will be interpreted to be one
of loan with equitable mortgage with the price paid as principal of said loan and the
land given merely as security. (Aguilar vs. Rubiato, 40 Phil. 570 [1919].)
2. Purchaser of property earned greater profit by its subsequent resale than that
earned by seller by the sale to such purchaser.
Facts: S bought a land for P870.00. One year later, he sold the same land to B for
P1,125.00. Subsequently, B sold 1/20 of the land for P681.00. S brought action to
have the sale annulled, claiming that the price of the land was “so inadequate as to
shock the conscience of men’’ as shown by B’s sale of 1/20 of the land for more
than half of what was paid to S.
Issue: Is the price of P870.00 grossly inadequate?
Held: Having sold the land to B for the sum of P1,125.00 one year after he had
purchased it for P870.00 at a profit of about 28%, S had no ground for complaint. A
sale may not be annulled simply because the purchaser subsequently resold the
property or a part of it at a greater profit than that earned by his vendor. (Alarcon vs.
Kasilag, [C.A.] 40 O.G. [Supp. 11] 203.)
3. Conveyance of property is for P1.00 and other valuable considerations.
Fact: S, for and in consideration of P1.00 and other valuable considerations,
executed in favor of B then a minor, a Quitclaim Deed whereby she transferred to B
all her rights and interests in the 1/2 undivided portion of a parcel of land. Later, S
claimed that the deed is null and void as it is equivalent to a Deed of Donation,
acceptance of which by the done is necessary to give it validity.
lssue: Is the Quitclaim Deed a conveyance of property with a valid cause or
consideration? Art. 1470 57
 Held: Yes. The cause or consideration is not the P1.00 alone but also other valuable
considerations. Although the cause is not stated in the contract it is presumed that
it is existing unless the debtor proves the contrary. (Art. 1354.) This presumption
cannot be overcome by a simple assertion of lack of consideration especially when
the contract itself states that consideration was given, and the same has been
reduced into a public instrument with all due formalities and solemnities. Moreover,
even granting that the Quitclaim Deed is a donation, Article 741 of the Civil Code
provides that the requirement of the acceptance of the donation in favor of a minor
by parents or legal representatives applies only to onerous and conditional
donations where the donee may have to assume certain charges or burdens. (Ong
vs. Ong, 139 SCRA 133 [1985].)
5. Earnest Money and Option Money (Arts. 1479 & 1482):
Whenever earnest money is given in a contract of sale, it is considered as part of
the price (Art. 1479).
Option money is the consideration paid by a person for the right to buy
merchandise or property within the agreed period and at a fixed price (Art. 1479, 2nd
par.)
- There is a house & lot being sold and there is an interested buyer but the
interested buyer wants to do more research and while doing his or her research
he would like the seller to not sell the property, but the seller says I might lose
the opportunity to be able to sell it for a good price so the buyer did, o sige in
consideration of the given period, you’re going to give to me whether or not to
purchase that house, I am going to give you an option money. Option money
is the consideration for an option contract, the giving of a period of time to the
respective buyer to consider kung bibilin. Option money is not part of purchase
price unless later on if the respective buyer agrees to eventually buy the thing
that is being offered by sale, the seller agrees to consider or credit option
money as part of purchase price.
Earnest money is something of value given by the buyer to the seller to show that
the buyer is really in earnest, and to bind the bargain. It is actually a partial payment
of the purchase price and is considered as proof of the perfection of the contract
- it is an indication that the buyer is buying what is being sold but the buyer does not
have enough money to pay for the full price so the earnest money is a lot like the
down payment, it is already part of the price, there is a contract of sale.
5. Distinction Between Earnest Money and Option Money (Arts. 1479 & 1482):
a) Earnest money is part of the purchase price; option money is given as distinct
consideration for an option contract;
b) Earnest money is given only where there is already a sale; option money applies
to a sale not yet perfected;
 c) When earnest money is given, the buyer is bound to pay the balance; when the
would-be buyer gives option money, he is not required to buy and he may even
forfeit it depending on the terms of the option.

F. Formation of Contract of Sale (Arts. 1475 to 1488)

Right of First Refusal

Concept of “Right of First Refusal”: a promise on the part of the owner that if he decides
to sell the property in the future, he will sell it to the promisee. It merely gives rise to a
preparatory juridical relation not governed by contracts because the exercise of the
right would be dependent on the promisor’s eventual intention to enter into a binding
contract but also on the terms, including the price, which are yet to be decided on.
- It is the right given to a person to be the one to who offer will be made first with
respect to the sale of property. It is the person who may have the right to refuse
to buy that thing first. You usually see this in a contract of lease, use of property
in a specific period of time and has a provision that upon termination of contract
of lessee and lessor, the lessee has the right of first refusal. In this case if the
lessor now decides to sell the property, the lessor should first offer the property
first to the lessee. If the lessee agrees, he will be the buyer. Otherwise, lessor
will sell to another buyer.

Requirement of enforceable “Right of First Refusal”: only rights of first refusal

embodied in a written contract, such as those attached to a contract of lease, give
rise to enforceable rights.

Effect of seller’s violation of “Right of First Refusal”: the contract of sale entered into
by seller in violation of right of first refusal is rescissible. Kapag binenta niya sa third
person nang hindi inaalok yung lessee, may Karapatan siya irescind yung kontrata.

4. Form of Sales
Form not important for validity of sale: a contract of sale may be made in writing, or by
word of mouth, or partly in writing and partly by word of mouth (Art. 1483).

Exception: contracts of sale required to be in writing:

a. The power to sell a piece of land or interest therein must be in writing, otherwise
the sale by the agent would be void (Art. 1874).
b. Sale of large cattle must be in writing, otherwise the sale is void.
c. Sale of land by non-Muslim hill tribe cultural minorities is void if not approved by
the NCIP.
Statute of Frauds: provides for unenforceability by action of the following agreements
unless the same or some note or memorandum thereof be in writing and subscribed by
the party charged and his agent:
a. Sale agreement which by its terms is not to be performed within a year from the
making thereof.
- I offer to sell my laptop to Ms. X but I am going to use this for 1 year so I am
going to sell it to you after 1 year.
b. Agreement for the sale of goods, chattels, or things in action, at a price not less
than Php500.00.
c. A sale of real property or of an interest therein.

Evidence of the foregoing cannot be received without the writing or a secondary evidence
of contents (Art. 1403).

EXAMPLES:
(1) S orally sold to B a parcel of land. The sale is valid but it is unenforceable because
the law requires that it be in writing to be enforceable.
(2) If the contract of sale above is in private writing, then it is valid and binding but only
as between the parties and their privies (and not as against third persons without notice
until the sale is registered in the Registry of Property. B has the right to compel S to put
the contract in a public instrument so that it can be registered to affect third persons.

Exceptions to Statute of Frauds: the following sales, even if not in writing, would still be
enforceable:
a. When there is a note or memorandum thereof in writing and subscribed by the
party charged or his agent (Art. 1403).
b. When there has been a partial consummation of the contract of sale (Art. 1403).
c. When there has been failure to object to presentation of secondary evidence as to
existence of contract (Art. 1403)
d. When sales are effected through electronic commerce.

Business forms to prove sale: order slips, delivery charge invoices, etc. may be
inadequate to establish the existence of a contract of sale but their probative weight must
be evaluated not in isolation but in conjunction with other evidence to prove the
transaction, such as testimony of a witness and demand letters.

Sales effected as electronic commerce: electronic documents shall have the legal effect,
validity or enforceability as any other document or legal writing provided the electronic
document maintains its integrity and reliability and can be authenticated.

G. Performance or Consummation (Arts. 1493 to 1506)

1. Obligations of Seller
a. To preserve thing sold: when the thing sold is a specific or determinate thing, the
seller, upon perfection and even prior to delivery, is obliged to take care of the thing
with the diligence of a good father of a family (Art. 1163). Failure of the seller to
preserve the determinate thing makes him liable for damages (Art. 1170).
b. To deliver the thing sold: the seller is bound to i) transfer the ownership of, and ii)
deliver the thing which is the object of sale to the buyer (Arts. 1495 & 1458). The
only means by which ownership of thing sold is transferred is by the mode of tradition
or delivery, actual or constructive.
c. To deliver fruits and accessories: the buyer has a right to the fruits of the thing sold
from the time the obligation to deliver it arises. However, the buyer acquires no real
right over the thing and the fruits until it has been delivered to him (Art. 1164 & 1537).

The seller is bound to deliver the accessions and accessories of the thing sold in
the condition in which they were upon the perfection of the contract (Art. 1166 & Art.
1537).
Basis: accessions and accessories always follow the principal
d. To warrant the thing sold: the buyer is obliged to warrant the thing which is the object
of the sale (Art. 1495).
An express warranty is an affirmation of fact or any promise by the seller relating to
the thing sold and the natural tendency of such affirmation or promise is to induce
the buyer to purchase the thing, with the buyer relying on the affirmation or promise.

2. Delivery/Tradition of Thing Sold

Tradition is a derivative mode of acquiring ownership by virtue of which one who

has the right and intention to alienate a corporeal thing, transmits it by virtue of a
just title to one who accepts the same.

a. Essence of delivery/tradition: ownership of the thing sold is a real right which the
buyer acquires only upon delivery of the thing to him. There is delivery if the thing
sold is placed in the control and possession of the buyer.

An important factor that gives effect to the act of delivery is the actual intention
of the seller to deliver and the acceptance by the buyer; it is a composite act.

Another important factor that gives effect to the act of delivery is that it is a
consequence of a valid contract.

b. Types of delivery:
 I. Actual or physical delivery: when the thing sold is placed in the control and
possession of the buyer (Art. 1497).
ILLUSTRATIVE CASE:
Bank (pledgee) took possession, as security, of the sugar sold and delivered by
unpaid seller to buyer (pledgor) who subsequently became insolvent.
Facts: S sold sugar to B. The sugar was delivered by S into B’s warehouse,
leaving it entirely subject to his control. B, however, failed to make payment after
completion of delivery as per agreement. C, a bank, took possession of the sugar
pursuant to a contract of pledge entered into between the bank and B to secure
the latter’s indebtedness of P20,000. Subsequently, B became insolvent.
Issue: Is S still the owner of the sugar as to entitle him to recovery of its
possession?
Held: No. When S delivered the sugar into B’s warehouse, leaving it entirely
subject to his control, it is difficult to see how S could have divested himself more
completely of the possession of the sugar, or how he could have placed it more
completely under the control of the buyer. The fact that the price has not yet been
paid, in the absence of stipulation, was not, nor could it be an obstacle to the
acquisition of ownership by B, without prejudice, of course, to the right of S to
claim payment of the sum due.

II. Constructive delivery: constructive delivery can take several forms and may
be in any manner signifying agreement that the possession is transferred
from the seller to the buyer (Art. 1496). Constructive delivery has the same
legal effect as actual or physical delivery.

c. Types of constructive delivery:

I. Execution of public instrument (Art. 1498): in the case of both movables and
immovables, if the sale is through a public instrument, execution thereof
shall be equivalent to the delivery of the thing which is object of the contract,
unless the contrary appears from the instrument.

- Proof of delivery, yung kontrata ng deed of sale na pinirmahan kasi ayun yung
ownership mo
In order that there is delivery through execution of public instrument, the buyer
should acquire control over the subject matter by virtue of the execution of the
instrument.
 The seller should have control over the subject matter for a reasonable period
so as to allow the buyer a reasonable opportunity to take over such control.

ILLUSTRATIVE CASES:

1. After delivery of possession coupled with execution of the deed of

sale of real property embodied in a public instrument but before its
registration and payment of the price, buyer is being made
responsible for the payment of the realty tax.

Facts: S (PSDC) and B (PHHC, a government corporation) entered

into a contract of sale embodied in a public instrument whereby S
conveyed unto B two parcels of land subject to certain terms and
conditions among which that S should register the deed of absolute
sale and secure a new title in the name of B before the latter can be
compelled to pay the purchase price. Prior to the signing of the deed,
B had acquired possession of the property with the consent of S. The
provincial treasurer requested B to withhold the amount of
P30,000.00 from the purchase price to be paid by it to S representing
the realty tax due on the property involved.

Issue: Who is liable to the payment of the real property tax, S or B?

Held: B. When the sale of real property is made in a public instrument

the execution thereof is equivalent to the delivery of the thing object
of the contract, if from the deed the contrary does not appear or
cannot clearly be inferred. (1) Vendee actually placed in possession.
— In the case at bar, there is no question that the vendor (S) had
actually placed the vendee (B) in possession and control over the
property sold, even before the date of the sale. (2) Payment of price
not essential to transfer of ownership. — The condition that S should
first register the deed of sale and Art. 1498 175 secure a new title in
the name of B before the latter shall pay the purchase price, did not
preclude the transmission of ownership. In the absence of an
express stipulation to the contrary, the payment of the purchase price
of the goods is not a condition precedent to the transfer of title to the
buyer, but title passes by the delivery of the goods. (3) Title
transferred to vendee. — Since the delivery of possession coupled
with the execution of the deed of absolute sale, had consummated
the sale and transferred title to B, the payment of the real estate tax
after such transfer is the responsibility of the purchaser.2 (Phil.
Suburban Dev. Corp. vs. The Auditor General, 63 SCRA 397 [1975].)
 II. Delivery of keys (Art. 1498): as to movables, there is constructive delivery
if the keys of the place or depository where the movables are stored or kept
are delivered to the buyer.

III. Constitutum possessorium (Art. 1500): after the perfection of the contract
of sale, the seller continues to hold physical possession of the thing sold,
no longer in the concept of an owner but as a lessee or any other form of
possession other than in the concept of an owner.

It takes place when the vendor continues in possession of the property

-
sold not as owner but in some other capacity, as for example, when the
vendor stays as a tenant of the vendee. In this case, instead of the
vendor delivering the thing to the vendee so that the latter may, in turn,
deliver it back to the vendor, the law considers that all these have taken
place by mere consent or agreement of the parties.
- The owner of the property sells the property but after the sale the seller will still
have possession on the thing that was sold and yet even if with the previous
owner or the seller, the ownership is still transferred to the buyer.
- Mr. A owns a hacienda a 10 hectare hacienda in tarlac, and then mr. a sells it
to mr. B, but Mr. A tells Mr. B can I be the care taker or can I lease the hacienda
from you. Yung owner si Mr. B pero si A hindi siya owner pero part pa rin siya
as a lessee.

IV. Traditio brevi manu (Art. 1499): before the contract of sale, the would-be
buyer was already in possession of the thing sold, say as a lessee, and
pursuant to sale, he would now hold possession in the concept of an owner.
It is the opposite of constitutum possessorium.

- This mode of legal delivery happens when the vendee has already the
possession of the thing sold by virtue of another title as when the lessor
sells the thing leased to the lessee. Instead of turning over the thing to
the vendor so that the latter may, in turn, deliver it, all these are
considered done by action of law.

- Someone who used the possessed property not as owner after the sale will
now possessed it as owner.

- Ex: I am leasing a condo unit then, I have the right of first refusal under contract
of lease the owner of the condo unit offers sale to me, I accept so I pay for the
price and then once I pay the price and signed the deed of sale, ako na owner,
and I continue the possession in the condo.
V. Traditio longa manu (Art. 1499): this is delivery of a thing merely by
agreement, such as when the seller points the property subject matter of
 the sale by way of delivery without need of actually delivering physical
possession.

- The first part of Article 1499 refers to traditio longa manu. This mode of
delivery takes place by the mere consent or agreement of the contracting
parties as when the vendor merely points to the thing sold which shall
thereafter be at the control and disposal of the vendee. It should be noted
that delivery “by the mere consent or agreement of the contracting parties”
is qualified by the phrase “if the thing sold cannot be transferred to the
possession of the vendee at the time of the sale.”
- You have a big parcel of land divided into 10 subdivisions, I buy one and
how does the seller delivers it to me turo niya? Turon niya?, turo mo don
HAHAHA, the lot which is closed to the river that is the lot that I am selling
to you.

VI. Negotiable document of title (Art. 1513 & 1514): a document of title
includes any bill of lading, warehouse receipt, etc. used in the ordinary
course of business in the sale or transfer of goods as proof of the
possession or control of the goods. A “negotiable” document of title states
that the goods referred to therein will be delivered to “bearer” or “to order”.

A person to whom a negotiable document of title has been negotiated

acquires title to such goods as the person negotiating the document to him
had.

VII. Delivery of incorporeal property (quasi-traditio) (Art. 1501): delivery of

incorporeal property, which has no physical existence:
- when the sale is made through a public instrument, the execution thereof
shall be equivalent to delivery of thing
- by the placing of the titles of ownership in the possession of the buyer
- the use by the buyer of his rights, with the seller’s consent
VIII. Delivery through carrier (Art. 1523): delivery of goods to a carrier for the
purpose of transmission to the buyer is deemed delivery to the buyer, unless
the contrary appears
Ex: I bought 10 tv from south Korea, Samsung, Samsung now transports
from its factory in Seoul transports the 10 tv set to a ship. Upon delivery to
that ship, Samsung is now deemed to have delivered the 10 tv sets to me
because this carrier is now bound to transport tv sets to me to manila.

A. F.A.S. (Free Alongside) Sales: the seller pays all charges and is subject
to risk until the goods are placed alongside the vessel

B. F.O.B. (Free on Board) Sales: the seller bears all expenses until the goods
are to be F.O.B. Accordingly, as to whether the goods are delivered
F.O.B. at point of shipment or point of destination determines where title
to the property passes to the buyer.

C. C.I.F. (Costs, Insurance, and Freight) Sales: the price covers not only
the costs of the goods but also the expenses for freight and insurance to
be paid by the seller.

2 schools of thought re: transfer of title in C.I.F. sales:

- carrier acts as agent of buyer who pays the freight, hence, delivery
to carrier is delivery to buyer
- seller takes on responsibility of insuring the goods and providing
shipment to buyer, hence, seller must continue to bear the risk of
loss during shipment period

• Where goods are sent to the buyer under circumstances in which the
seller knows that it is usual to insure, the seller must give notice to the
buyer so that buyer may insure them during transit. If seller fails to do
so, seller may be liable for goods during transit.
d. Completeness of delivery:
v) When delivery does not transfer title (cont.):
“Sale on Acceptance” (Art. 1502): when goods are delivered to the buyer on
approval, or on trial, or on satisfaction, the ownership passes to the buyer only
when a) he signifies his approval to the seller, b) buyer does not signify approval
but retains the goods without giving notice of rejection, then if a time has been
fixed for the return of the goods, upon expiration of such time, and if no time has
been fixed, on the expiration of a reasonable time
Ex: you have laptops, they are delivered to an office on trial — it is not yet deemed as
purchased. It will only be deemed as purchase after the trial.
Reservation of ownership (Art. 1503):
▪ where goods are shipped and by the bill of lading, goods are deliverable to seller
▪ where goods are shipped and by the bill of lading, the goods are deliverable to
the buyer but possession of the bill of lading is retained by the seller

When sale is not valid: when contract of sale is void and inexistent, no title over
the subject matter of the sale can be conveyed
When seller is not owner: based on the principle that nobody can dispose that
which does not belong to him
vi) When buyer refuses to accept: if buyer’s refusal is without just cause, title to the
goods passes
to him from the moment they are placed at his disposal (Art. 1588)

3. Double Sales
a. Rules on Double Sales Under Art. 1544:
Requisites for double sales:
o the 2 or more sales transactions are valid
o the 2 or more sales transactions pertain exactly to the same subject matter

o the 2 or more buyers claiming ownership of the subject matter represent

conflicting interests
o the 2 or more buyers claiming ownership of the subject matter have bought
from the very same seller
Movables: if the same movable is sold to different buyers, the ownership shall be
confirmed to the person who may have taken possession thereof in good faith
Immovables: if the same immovable is sold to different persons, the ownership shall
belong to the person who:
- in good faith first recorded it in the Registry of Property
- should there be no recording, the ownership shall pertain to the person who in
good faith was first in possession
- in the absence of the above, the person with oldest title
ex: a bag has been sold to 2 or more persons, movable, the possession is in the first
person who is in good faith not knowing that it has been sold to other. Immovable the
buyer who has it recorded in the register of deeds first. If di pa nagawa, the valid buyer
will be the first to possess.
Purchaser in good faith – one who buys the property of another without notice that some
other person has a right to or interest in such property and pays a full and fair price
for the same at the time of such purchase and before he has notice of the claim or
interest of some other person in the property
- would-be purchaser has obligation to investigate known facts, including adverse
possession and lis pendens
EXAMPLES:
(1) S sold to B a cash register. The register, however, was allowed to remain in the hands
of S. Subsequently, S sold the same register to C who bought it in good faith and took
possession thereof. Under the first paragraph of Article 1544, C should be considered as
the owner of the property sold. (see Olsen vs. Yearsly, 11 Phil. 178 [1908].)
(2) S sold a parcel of land to B. Later, S sold the same land to C who, in good faith, first
registered the deed of sale. In case of double registration, the title should remain in the
name of the person first securing registration in good faith. The remedy of B is to sue S
for breach of warranty against eviction. (Art. 1548.) If C had knowledge of the previous
unregistered sale to B, such knowledge is equivalent to registration. C is not a buyer in
good faith. To be considered a purchaser in bad faith, it is not required that C had actual
knowledge of the sale to B. It is sufficient that he has knowledge of facts which should
put him upon inquiry and investigation as to possible defects of title of S and he fails to
make such inquiry and investigation If neither sale was registered and C first took
possession of the land, in good faith, the ownership shall also belong to him. In the
absence of registration and possession by B and C, the ownership shall pertain to B, his
title being older than that of C.
(3) Suppose in the same example, S sold the parcel of land to B and then to C, who both
acted in good faith. After acquiring knowledge of the second sale to C, B registered the
sale. In this case, B, as the first vendee, has still a better right. His good faith when he
purchased the land subsisted and continued to exist when he registered the sale. Assume
now that it is C who registered the sale to him, but after he has acquired knowledge of
the previous sale to B. As second vendee, good faith at the time of purchase is not
sufficient. He must have also acted in good faith in recording his sale. Here, the rule of
caveat emptor applies. (Hence, the registration by C is considered registration in bad faith
and will not confer upon him any right.
*The rules on double sales provided under Art. 1544 do not overcome priority rules under
the Torrens System and auction rules under the Rules of Court.
Torrens System – registration is the operative act by which dealings on registered land,
whether they be voluntary or involuntary, shall be recognized as existing and binding.
- when 2 certificates of title are issued to different persons covering the same land, the
earlier in date must prevail; in case of successive registrations, the person holding a prior
certificate is entitled to the land as against a person claiming right under a subsequent
certificate

H. Performance or Consummation (Arts. 1493 to 1506)

4. Obligations of Buyer
a. Pay the price (Art. 1582):
The buyer is obliged to pay for the price of the thing sold at the time and place
stipulated in the contract.
b. Accept the delivery of thing sold (Art. 1582):
The buyer is bound to accept delivery of the thing sold at the time and place
stipulated. If the time and place has not been agreed upon, the acceptance must
be made at the time and place of the delivery of the thing sold.
In case of goods, the buyer is deemed to have accepted the goods when he
intimates to the seller that he has accepted them, or when the goods have
been delivered to him, and he does any act in relation to them which is
inconsistent with the ownership of seller, or when, after the lapse of a reasonable
time, he retains the goods without intimating to the seller that he has
rejected them (Art. 1585).
Sale by installments: unless agreed upon, the buyer of goods is not bound to
accept delivery by installments.
- in case of sale of goods to be delivered by installments, which are to be
separately paid for, and seller makes defective deliveries, or the buyer refuses
 without just cause to take delivery or pay for one or more installments, it depends
in each case on the terms of the contract whether the breach is so material as to
allow rescission and damages to the injured party or whether the breach is
severable (Art. 1583)

Goods as subject matter: the buyer who has not previously examined the
goods sold is not deemed to have accepted the goods unless he has had a
reasonable opportunity to examine the goods (Art. 1584)

C.O.D sales: where goods are delivered to carrier by the seller, upon the terms
that the goods shall not be delivered by the carrier to the buyer until he has
paid the price, the buyer is not entitled to examine the goods before payment of
the price (Art. 1584)

Effect of acceptance of goods: absent a contrary agreement, acceptance of

the goods by the buyer shall not discharge the seller from liability in damages for
breach of warranty. But, if, after acceptance of goods, the buyer fails to notify the
seller of breach of warranty within a reasonable time after the buyer knows of the
breach, the seller shall not be liable therefor (Art.1586)

LOAN

1. Loan, defined:
Commodatum: (gratuitous loan of a movable property) one of the parties delivers
to another, either something not consumable so that the latter may use the same for a
certain time and return it. Commodatum is essentially gratuitous. The bailor retains
ownership of thing loaned. (Art. 1868)
Terms:
Bailee - a person or party to whom goods are delivered for a purpose, such as custody or repair,
without transfer of ownership.
Bailor - a person or party that entrusts goods to a bailee.
Ex: L lends to B an oversized bottle of wine to be used as a sample or for advertisement
An example of commodatum involving real property is when a person allowed another to build
a warehouse on the former’s land so that the latter may use the property for a certain period without
any payment of rentals. If no time for use of the land is specified, the contract would be that specie of
commodatum called “precarium” expressly recognized in Article 1947. If rental is paid, the contract
would be one of lease.

Loan or mutuum: one of the parties delivers to another money or other

consumable thing, upon the condition that the same amount of the same kind and quality
shall be paid. Simple loan or mutuum may be gratuitous or with stipulation to pay interest.
Ownership of thing loaned passes to the borrower. (Art. 1868)
Ex: if A borrows money in the amount of P1,000.00 from B and B agrees, then the
contract of loan is perfected. But it is only when B gives P1,000.00 to A that the contract
of loan is consummated. So once it is consummated, B becomes obliged to deliver the
amount to A. a, on the other hand, is obliged to return the same amount of money to
John on the date agreed upon.
2. Commodatum:
a. Nature of commodatum: the bailee acquires use of the thing loaned, but not its fruits
(Art. 1935).
Consumable goods may be the object of commodatum, if the purpose of the
contract is not the consumption of the object, as when it is merely for exhibition.
Movable or immovable property may be the object of commodatum (Art. 1937).

b. Obligations of the bailee:

 a. To pay for the ordinary expenses for the use and preservation of the thing loaned
(Art. 1941).
b. To be liable for the loss of the thing loaned, even if it should be through a fortuitous
event, if:
- he uses it for a purpose other than for which it has been loaned
- he keeps it longer than period stipulated
- there is appraisal of the value of the thing loaned
- he lends the thing loaned to others
- he chooses to save his own property (Art. 1942).

c. Obligations of the bailor:

a. The bailor cannot demand return of the thing prior to expiration of period stipulated
or the accomplishment of the use for which commodatum was constituted, except
if he should have urgent need of the thing (Art. 1946) or the bailee commits acts of
ingratitude (Art. 1948).
b. The bailor may demand the return of the thing if (precarium):
- there is no stipulation on the period or the use for which the thing loaned should
be devoted
- the use of the thing is merely tolerated by owner (Art. 1947).
Precarium - one whereby the bailor may demand the thing loaned at will Art. 1936

ILLUSTRATIVE CASE:
Loan of a bull for breeding purposes was subject to payment of breeding fee by borrower
who used the bull after the period stipulated until its death due to force majeure.

Facts: B borrowed from L (Bureau of Animal Industry) three bulls for breeding purposes
for a period of one year, later on renewed for another year as regards one bull. The loan
was subject to the payment by the borrower of breeding fee of 10% of the book value of
the bulls. B kept and used the bull (the loan of which was renewed) for four years after
the period stipulated in the contract until it was killed during a Huk raid by stray bullets. B
contends that the contract was commodatum, and that, for that reason, as L retained
ownership or title to the bull, it should suffer the loss.
Issue: As the death of the bull was due to force majeure, is B relieved from the duty of
paying its value?
Held: No. A contract of commodatum is essentially gratuitous. If the breeding fee be
considered compensation, then the contract would be a lease of the bull. Under Article
1671 of the Civil Code, the lessee would be subject to the responsibilities of a possessor
in bad faith because she had continued possession of the bull after the expiration of the
contract. And even if the contract be commodatum, still B is liable under Article 1942
3. Simple Loan or Mutuum:
A person who receives a loan of money or other fungible thing acquires the
ownership thereof and is bound to pay the creditor an equal amount of the same
kind a quality (Art. 1953).
No interest shall be due unless it has been expressly stipulated in writing (Art.
1956).
Interest due and unpaid shall not earn interest (except legal interest). The
contracting parties may, however, capitalize the unpaid interest. (Art. 1959).
Example:
Commodatum – I own a house in Tagaytay and I tell my friend you can stay for 1 month
for you to unwind or relax. Only for a month because my sister will use that house when
she goes home. My friend upon staying, has the obligation to pay for the utility bills. If
there’s a vase that is broken by her, she will be liable for damages. Now, for ex, my
sister goes home ahead of time I have to right to demand my friend to leave the house
ahead of time because it is urgent.

DEPOSIT

1. Deposit, in general:
There is deposit if a person receives something belonging to another, with the
obligation of safely keeping it and of returning the same (Art. 1962).
A deposit is a gratuitous contract, except if there is agreement to the contrary or
if the depositary is engaged in the business of storing goods (Art. 1965).
Only movable things may be the object of a deposit (Art. 1967).
2. Voluntary deposit:
a. General provisions:
There is voluntary deposit if delivery is made by the will of the depositor (Art.
1968).
A contract of deposit may be entered into orally or in writing (Art. 1969).
b. Obligations of depositary:
The depositary is obliged to keep the thing safely and to return it, when required
to the depositor, or his heirs or successors, or to the person who may have been
designated in the contract (Art. 1972).
The depositary cannot deposit the thing with a third person (Art. 1973).
The depositary cannot use the thing deposited without the express permission of
the depositor (Art. 1977).
Fixed, savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions on loan (Art. 1980).
The depositary cannot demand that the depositor prove ownership of the thing
deposited (Art. 1984).
If depository discovers that the thing deposited has been stolen and who its true
owner is, he must advise the latter of the deposit. If the latter does not claim the
thing deposited within 1 month, the depositary may return the thing to the
depositor (Art. 1984).
If the depositary has reasonable grounds to believe that the thing has not been
lawfully acquired by depositor, the depositary may return the same to the depositor
(Art. 1984).

- arises without any such calamity, from the mere consent or agreement of the
parties.

3. Necessary deposit:
Instances of necessary deposit (Art. 1996):
a. When it is made in compliance with a legal obligation;
b. When it takes place on the occasion of any calamity.
 Deposit of things of travelers in hotels or inns shall be considered necessary
deposit and keepers of inns and hotels are responsible for the things of the travelers
as depositaries (Art. 1998).
The hotel is liable for the vehicles, animals, and articles placed in the annexes of
the hotel (Art. 1999).
- such as arises from pressing necessity; for instance, in case of a fire, a
shipwreck, or other overwhelming calamity
Voluntary and necessary deposits distinguished.
The chief difference between a voluntary deposit and a necessary deposit is that in the
former, the depositor has complete freedom in choosing the depositary, whereas in the
latter, there is lack of free choice in the depositor. (see 11 Manresa 674.)
4. Judicial deposit or sequestration:
There is judicial deposit or sequestration when an attachment or seizure of
property in litigation is ordered.

Deposit distinguished from mutuum.

The distinctions are as follows:
(1) In deposit, the principal purpose is safekeeping or mere custody, while in mutuum,
the consumption of the subject matter;
(2) In deposit, the depositor can demand the return of the subject matter at will, while in
mutuum, the lender must wait until the expiration of the period granted to the debtor;
and
(3) In deposit, both movable and immovable property may be the object, while in
mutuum, only money and any other fungible thing.
Deposit distinguished from commodatum.
The following are the distinctions:
(1) In deposit, the principal purpose is safekeeping, while in commodatum, the transfer
of the use;
(2) Deposit may be gratuitous, while commodatum is essentially and always gratuitous;
and
(3) In (extrajudicial) deposit, only movable (corporeal) things may be the object, while in
commodatum, both movable and immovable property may be the object.

GUARANTY
1. Nature and extent of guaranty:
By guaranty, a person, called the guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the latter should fail to do so. If the person
binds himself solidarily with the principal debtor, the contract is called a suretyship (Art.
2047).
A guarantee is gratuitous, except if there is contrary stipulation (Art. 2048).
A guarantor may bind himself for less, but not for more than the principal debtor
(Art. 2054).
A guaranty must be express (Art. 2055).
Suretyship may be defined as a relation which exists where one person (principal or
obligor) has undertaken an obligation and another person (surety) is also under a direct
and primary obligation or other duty to a third person (obligee), who is entitled to but
one performance, and as between the two who are bound, the one rather than the other
should perform
2. Effects of guaranty:
a) Between guarantor and creditor: the guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the properties of the debtor and has
resorted to all legal remedies against the debtor (Art. 2058).
b) Between debtor and guarantor: the guarantor who pays for a debtor must be
indemnified by the debtor with the total amount of the debt, the legal interest,
expenses incurred by guarantor, and damages, if any (Art. 2066).
The guarantor is subrogated to all the rights of the creditor against the debtor
(Art. 2067).
c) Between co-guarantors: when there are two or more guarantors of the same
debtor and for the same debt, the one among them who has paid may demand of
each of the others the share which is proportionally owing from him (Art. 2073).
Sub-guarantor: is responsible to the co-guarantors if the guarantor for whom he
bound himself is insolvent (Art. 2075).

3. Extinguishment of guaranty:
The obligation of the guarantor is extinguished at the same time the debtor’s
obligation is extinguished and for the same cases as all other obligations (Art.
2076).
 If creditor accepts immovable or other property in payment of debt, the guarantor
is released (Art. 2077).
An extension granted to the debtor by the creditor, without the consent of the
guarantor, extinguishes the guaranty (Art. 2079).

PLEDGE, MORTGAGE, ANTICHRESIS

1. Provisions Common to Pledge and Mortgage:
Essential requisites in contracts of pledge and mortgage:
a. The pledge and mortgage are constituted to secure the fulfillment of a
principal obligation;
b. The pledgor or mortgagor is the absolute owner of the thing pledged or
mortgaged;
c. The persons constituting the pledge or mortgage have the free disposal of
their property (Art. 2085).
In pledge and mortgage, when the principal obligation becomes due, the things
pledged or mortgaged may be alienated for payment of creditor (Art. 2087).

2. Pledge:
In a contract of pledge, a movable is delivered to the creditor who has the right to
retain the thing in his possession until the debt has been paid (Art. 2098).
All movables, as well as incorporeal rights, which are within commerce may be
pledged (Art. 2094).
The thing pledged should be placed in the possession of the creditor or a third
person by common agreement (Art. 2093).
Pledge is a contract by virtue of which the debtor delivers to the creditor or to a
third person a movable (Art. 2094.) or document evidencing incorporeal rights for the
purpose of securing the fulfillment of a principal obligation with the understanding that
when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and
accessions
3. Mortgage:
Only the following property may be the object of a contract of pledge:
a. immovables;
b. alienable real rights imposed upon movables.
Movables may be the object of a chattel mortgage (Art. 2124).
 In order that a mortgage may be constituted, the document in which it appears
must be recorded in the Registry of Property (Art. 2125).
The mortgage directly and immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the fulfillment of the obligation for whose
security is was constituted (Art. 2126).
Mortgage (otherwise known as “real estate mortgage” or “real mortgage’’) is a contract
whereby the debtor secures to the creditor the fulfillment of a principal obligation,
specially subjecting to such security immovable property or real rights over immovable
property which obligation shall be satisfi ed with the proceeds of the sale of said
property or rights in case the said obligation is not complied with at the time stipulated.

Pledge and real mortgage distinguished. The following are the distinctions.
(1) Pledge is constituted on movables (Art. 2094.), while mortgage, on immovables.
(2) In pledge, the property is delivered to the pledgee, or by common consent to a third
person (Art. 2093.), while in mortgage, delivery is not necessary (Legaspi & Salcedo vs.
Celestial, 66 Phil. 372 [1938].); and
(3) Pledge is not valid against third persons unless a description of the thing pledged
and the date of the pledge appear in a public instrument (Art. 2096.), while mortgage is
not valid against third persons if not registered. (Art. 2125.
4. Antichresis:
- by the contract of antichresis, the creditor acquires the right to receive the fruits
of an immovable of his debtor, with the obligation to apply them to the payment of
the interest, if owing, and thereafter, to the principal of his credit.

Antichresis and pledge compared.

The distinctions are as follows:

(1) Antichresis refers to real property, while pledge, to personal property; and

(2) Antichresis is perfected by mere consent, while pledge is perfected by the delivery of
the thing pledged; and

(3) Antichresis is a consensual contract, while pledge is a real contract. Both are similar
in that the debtor loses control of the subject matter of the contract.

Antichresis and real mortgage compared.

The following are the distinctions:

(1) In antichresis, the property is delivered to the creditor, while in mortgage, the debtor
usually retains possession of the property;

(2) In antichresis, the creditor acquires only the right to receive the fruits of the property;
hence, it does not produce a real right, while in mortgage, the creditor does not have
any right to receive the fruits, but mortgage creates a real right over the property which
is enforceable against the whole world;

(3) In antichresis, the creditor, unless there is a stipulation to the contrary, is obliged to
pay the taxes and charges upon the

LEASE

Lease, general definition:

Lease is a consensual, bilateral, onerous, and commutative contract by virtue of

which one person binds himself to grant temporarily the use of a thing or to render some
service to another who undertakes to pay some rent, compensation or price.

- Someone obligates himself to temporarily allow the use of a thing if it is lease of

things.

2 general types of lease (Art. 1642):

1. lease of things

2. lease of service – rendition of service with compensation

Consensual – contracts perfected by mere meeting of minds

Bilateral – gives rise to reciprocal obligation

 Commutative contract - when undertaking of one of the party is considered the
equivalent of that of the other – give and take

A. Definitions

Lease of things, defined (Art. 1643):

One of the parties binds himself to give to another the enjoyment or use of a
thing for a price certain, and for a period which may be definite or indefinite. However,
no lease for more than 99 years shall be valid.

What can be leased? Real property, clothes, land, and vehicles (movable).

Attributes or elements of ownership of property:

1. the right to enjoy – to use, enjoy the fruits, consume (transferred to lessee)

2. the right to dispose or alienate or even destroy (remains with the owner or
lessor)

3. the right to vindicate or action to recover property (remains with the owner or
lessor)

Lease of work or service, defined (Art. 1644):

One of the parties binds himself to execute a piece of work or to render to the
other some service for a price certain but the relation of principal and agent does not
exist between them.

Ex: you become accountants and your firm is going to be hired by a company to audit
their books of accounts. — lease of service

Lease of things and lease of work, distinguished:

1. as to object

2. as to obligation of lessor

3. remedies in case of breach

B. LEASE OF THINGS
Time and Place of Payment for Lease (Arts. 1521 & 1679):

1. Time and place of payment for lease shall be as stipulated by the parties.
2. If no place of payment has been agreed upon, it shall be the domicile, the place of
residence, of the debtor (lessee).
3. If no time of payment has been agreed upon, the custom (ex: monthly basis) of the
place shall be applied.

Assignment of Lease (Art. 1649):

The lessee cannot assign the lease without the consent of the lessor, unless there is a
contrary stipulation. Someone else takes over as lessee
I am leasing condo unit and I have a one-year lease contract to be the lessee of the
condo unit and in the middle of the term of the lease, I migrate to Canada and then,
because I’m already bound by the one-year lease I assign my right as lessee which
means I now have someone else in my behalf. That as a rule cannot be done without
the consent of the lessor. I cannot just assign my right as lessee without getting the
consent of lessor first.
Sublease (Arts. 1650, 1651, 1652):
1. The lessee may sublease the thing leased, in whole or in part, unless there is an
express prohibition in the contract.
2. The sublessee is bound to the lessor for all acts which refer to the use and
preservation of the thing leased, in manner agreed upon between lessor and lessee.
3. The sublessee is subsidiarily liable to the lessor for any rent due from the lessee, but
only up to the amount of rent due from him.
Sublease- you have another person that is enjoying the use of the thing that is being
leased pursuant to an agreement with the initial lessee.
Ex: I am leasing a condo unit but the condo unit is too big, I decided that I divide it into
two and then, I lease in turn, I sub lease the other half. For instance, my rental for the
entire condo unit is 50,000. I sub-;ese half of the unit to another person and charge that
person 25,000. What happens there is the main lease agreement is between me and
the owner of the condo unit and then there is another smaller sublease between me and
my own lessee.
Sublessee enters into sublease under the rights of the main lessee. But in the
assignment of lease, the new lessee takes over.
Warranty of Lessor (Art. 1653):
Provisions governing warranty in sales shall be applicable to the contract of lease.
- Warranties pertains to the right of the seller, the commitment or the promise of
the lessor that the buyer will not be dispossess of what is being bought.
Hence, the following implied warranties would be applicable in a contract of lease:
a) warranty of right to lease,
b) warranty against eviction – the warranty or promise of the lessor that the lessee can
enter into possession and enjoy the use of the thing being leased freely and without the
fear that someone will come and say I own this property, so you have to leave —
eviction
c) warranty against non-apparent servitudes –
servitudes –
Ex: condo building unit behind the statue of Rizal park. Some government sectors and
other patriotic sectors are claiming that it impinges on the servitude of view which is that
this is a park. Rizal park was built that monument of Rizal was built there for relaxation
and aesthetic purposes which means we go to the park to enjoy the fresh air as well as
the view. Now, as alleged, because of the presence of this government park, there is a
servitude (obligation) on the part of the surrounding buildings to ensure that the view
around Rizal park will not be impinged.
Right of way is the right of property owners located behind a property that usually is in
front of a major road. This property owner because of the presence of other lots behind
this property, meron siyang servitude or obligation to allow right of way. Karapatan ng
may ari ng property sa likod to demand na padaanin mo kami. Right of way, you have the
right to demand to make way in your property for us to pass through.
If you are leasing a property, one of the obligations of the lessor is to inform you kung
merong right of way or servitude that you have to know of with respect to the property.
Otherwise, the lessor will now be deemed that he violated such warranty.

d) warranty against hidden defects

Where the return of the price is required, reduction shall be made in proportion to the
time during which the lessee enjoyed the thing.

OBLIGATIONS OF THE LESSOR (ARTS. 1654, 1656, 1661, 1664):

1. To deliver the thing leased in such condition as to render it fit for the use intended;
2. To make on the same during the lease all necessary repairs in order to keep it
suitable for the use to which it has been devoted;
3. To maintain the lessee in the peaceful and adequate enjoyment of the lease for the
duration of the contract;
4. For a lessor of a business or industrial establishment, to continue engaging in same
business or industry to which the lessee devotes the thing leased;
Ex: the lessee is engaged in operation of business in the mall, it’s the lessors obligation
to continue operation of the mall so that the lessee would be able to use the leased
units.
5. Not to alter the form of the thing leased in such a way as to impair the use to which
the thing is devoted under the terms of the lease.
Lessor is not obliged to answer for a mere act of trespass of a 3 rd person on the thing
leased. “Mere act of trespass” means the third person claims no right whatsoever.
Trespass - a third person enters without authority to the property being leased. Can the
lessee hold the lessor liable ex, the trespasser broke into units and stole the property of
the lessee? No, provided that the trespasser did not get in the unit because of
negligence of the lessor.

Obligations of the Lessee (Art. 1657, 1662, 1st par., 1663, 1665, 1666, 1667, 1668):
1. To pay the price of the lease according to the terms stipulated;
2. To use the thing leased as a diligent father of a family, devoting it to the use
stipulated;
3. To pay the expenses for the deed of lease (cost of notarization);
4. To tolerate the urgent repairs needed to be done on the thing leased, although it
may be annoying to him, and although during the same, he may be deprived of a
part of the premises;
Urgent repairs – kailangan agad kasi di magagamit ng lessee yung property;
Necessary – di kailangan agad
5. To immediately inform the lessor about any usurpation (attempt to get ownership
of property) or untoward act which a 3rd person may have committed or is openly
preparing to carry out upon the thing leased;
6. To immediately inform the lessor of necessary repairs on the thing leased;
7. To return the thing leased, upon end of the lease, just as he received it, except
what may have been lost or impaired by the lapse of time, or by ordinary wear
and tear, or from inevitable cause;
8. To answer for the deterioration or loss of the thing leased, except if lessee proves
absence of fault on his part; and except if it is not fault of lessee
 9. To answer for deterioration caused by members of his household and by guests
and visitors.

If lessee fails to immediately inform lessor of threat to, or needed repairs on the
property, lessee shall be liable for damages that may be suffered by lessor.
The law presumes that lessee received the thing leased in good condition, unless there
is contrary proof.

OPTIONS AND REMEDIES OF LESSOR AND LESSEE

1. In General (Art. 1659): if lessor or lessee should not comply with their obligations
under Articles 1654 and 1657, the aggrieved party may ask for a) rescission, with
damages, or b) damages only, allowing the contract to remain in force.

2. In Case of Destruction of Leased Thing Due to Fortuitous Event (Art. 1655): if the
thing leased is totally destroyed, the lease is extinguished. If the destruction is
partial, the lessee may choose between a) proportional reduction of rent – return of
payment and b) rescission of lease.

3. In Case of Failure of Lessor to Make Repairs (Art. 1658): lessee may suspend
payment if lessor fails to make the necessary repairs or to maintain the lessee in
peaceful and adequate enjoyment of the property leased.

4. If Leased Premises is Unfit for Habitation (Art. 1660): if a dwelling place intended
for human habitation is in such a condition that its use brings imminent and serious
danger to life or health, the lessee may terminate the lease at once, even if at the
time the contract was perfected, the former knew of the dangerous condition or
waived the right to rescind the lease due to this condition.

5. In Case of Urgent Repairs on Leased Premises (Art. 1662, 2nd and 3rd par., Art.
1663, 4th par.): a) if repairs last for more than 40 days, rent may be reduced in
proportion to the time the lessee has been deprived of use of property, b) if the
work is such that a portion of the property used for dwelling becomes
uninhabitable, lessee may rescind the contract if the main purpose of the lease is
to provide a dwelling place for the lessee, c) if lessor fails to make urgent repairs,
lessee may order the repairs at lessor’s cost, in order to avoid an imminent danger

6. In Case of Trespass (Art. 1664): lessee may have direct action against an intruder
 7. In Case of Deterioration (Arts. 1667 and 1668): lessee is presumed liable for
deterioration or loss of thing leased, except if the deterioration or loss is due to
earthquake, flood, storm or other natural calamity

8. Judicial Ejectment of Lessee (Arts. 1673, 1674, 1677): the lessor may judicially
eject a lessee if: a) the lease period has expired, b) lessee does not pay the price
for the lease, c) lessee violates any of the conditions in the contract, d) lessee
devotes the thing leased to other uses not stipulated on causing its deterioration

9. In Case of Improvement by Lessee (Art. 1678):

a. If lessee makes useful improvements which are suitable to the use for which
the lease is intended, without altering the form or substance of the property
leased, the lessor shall pay lessee ½ of the value of the improvements made.
If the lessor refuses to make the reimbursement, the lessee may remove the
improvements, even though the principal thing may suffer damage. – essential
for the use of the thing being leased

b. If lessee incurs ornamental expenses, the lessee shall not be entitled to

reimbursement. Lessee may remove the ornaments, provided no damage is
caused to the thing leased and lessor does not choose to retain them by
paying their value at the time the lease is extinguished.

AGENCY
A. Nature, Form, and Kinds of Agency
1. Agency, defined:
By the contract of agency, a person binds himself to render some service or to do
something in representation or on behalf of another, with the consent or authority of the
latter (Art. 1868).
- Refers to an arrangement where you have a person called the principal who has
something that needs to be done and asks an agent to do this thing for and on
behalf of the principal.
A contract of agency excludes the relationship of employer and employee
(dependent), of master and servant, and of employer and independent contractor.
The agent’s power to affect the principal’s contractual relations with 3rd persons
differentiates the agent from the employee, the servant, or the contractor.
Agency is both a contract and a representative relation.
Employee & employer – the employee is engaged to work for the principal.
Agent & Principal – agent is engaged by the principal to act for and on behalf of the
principal.
However, without a contract or a consideration, there can be an agency or
agency powers, such as when one person acts for another without authority and the
latter ratifies it.
Representation constitutes the basis of agency. The acts of the agent on behalf
of the principal within the scope of his authority produce the same legal and binding
effects as if they were personally done by the principal.

Essential elements of agency:

a. There is consent, express or implied, of the parties;
b. The object is the execution of a juridical act in relation to third persons;
c. The agent acts as a representative and not for himself;
d. The agent acts within the scope of his authority.

KINDS OF AGENCY:
A. As to manner of creation:
a. express – one where the agent has been actually authorized by the
principal, either orally or in writing (Art. 1869) – agency contract

b. implied – one which is implied from the acts of the principal, from his
silence or lack of action (Art. 1869), or his failure to repudiate
the agency knowing that another person is acting on his behalf, without
authority (Art. 1869), or from the agent’s acts which carry out the
agency or the agent’s silence or inaction according to the
circumstances (Art. 1870)

B. As to character:
a) gratuitous – one where the agent receives no compensation for his services
(Art. 1875)

b) compensated or onerous – one where the agent receives compensation for his
services (Art. 1875)

C. As to extent of business covered:

 a. general – one which comprises all the business of the principal (Art. 1876)
(going abroad leaving the business to the agent)

b. special - one which comprises one or more specific transactions (Art. 1876)
(agent is only appointed to a specific task, ex: as a cooker in a restaurant but
with respect to deposits in the bank account it is not the agent’s function)

ACCEPTANCE OF AGENCY:
a. Form of acceptance:
Acceptance may be express or implied from the agent’s acts which carry out
the agency, or from his silence or inaction according to the circumstances (Art. 1870).

b. Acceptance between persons present: (not relevant)

There is implied acceptance of agency if the principal personally delivers his
power of attorney to the agent and the latter receives it without any objection (Art.
1871).
Power of attorney – an instrument in writing by which one person appoints
another as his agent

c. Acceptance between persons absent:

There is implied acceptance of agency if:
a. the principal transmits his power of attorney to the agent who receives it
without any objection; or

b. the principal entrusts to him by letter or telegram a power of attorney with

respect to the business in which he is habitually engaged as an agent and
he did not reply to the letter or telegram (Art. 1872).

COMPENSATION FOR AGENCY:

It is presumed that agency is with compensation, unless there is contrary proof
(Art. 1875).
The fact that an agent is acting without compensation has no effect upon his
rights and duties with reference to the principal and to third parties.
 The principal must pay the agent the compensation agreed upon or the
reasonable value of the agent’s services if no compensation was specified.
The liability of the principal to pay commission presupposes that the agent has
complied with his obligation as such to the principal.

SCOPE OF AGENT’S AUTHORITY:

An agent must act within the scope of his authority. He may do such acts as may
be conducive to the accomplishment of the purpose of the agency (Art. 1881).
Kinds of authority of an agent:
a. actual – when it is actually granted
b. apparent or ostensible – authority by estoppel; there is no actual
authority
c. express – when it is directly conferred by words
d. implied – when it is incidental to the transaction or reasonably necessary
to accomplish the purpose of the agency
If an agent, being authorized to act on behalf of the principal, acts in his own
name, the agent shall be directly liable to the person with whom he had
contracted as if the transaction were his own. Therefore, the principal cannot
have a right of action against the third person nor the third person against him
(Art. 1883).
An agent acts beyond his authority – ex: the agent accepts payment from buyer
upon selling the land. The owner of the proper can tell the buyer that in the
document where I appointed my agent, it does not state that he is authorized to
receive payment. I am not going to authorize your payment you have to pay me
again. In this case, the buyer can demand the agent to return the payment.
However, if in the above situation, the contract entered into by the agent involves
things belonging to the principal, the contract is considered entered into between
the principal and the third person (Art. 1883).

Instances When Special Powers of Attorney are Necessary (Art. 1878):

SPA – a document where you appoint someone for and on your behalf
a. To make payments which are not considered acts of administration (to pay
for property you are buying); acts of administration – (day-to-day activities)
b. To effect novation to put an end to obligations already in existence;
 c. To compromise, to submit to arbitration, to renounce the right to appeal
from judgment, to waive objections to venue of an action, or to abandon a
prescription already acquired;
d. To gratuitously waive any obligation;
e. To enter into any contract by which ownership of an immovable is
transmitted or acquired;
f. To make gifts, except customary ones for charity or those made to employees in
the business managed by the agent;
g. To loan or borrow money, unless the need for money is urgent and
indispensable for preservation of the things which are under administration;
h. To lease real property to another person for more than 1 year;
i. To bind the principal to render some service without compensation;
j. To bind the principal in a contract of partnership;
k. To obligate the principal as a guarantor or surety;
l. To create or convey rights over immovable property;
m. To accept or repudiate an inheritance;
n. To ratify or recognize obligations contracted before the agency; and
o. Any other act of strict dominion.
A special power to compromise does not authorize submission to arbitration (Art. 1880).
SALE OF LAND THROUGH AGENT:
When a 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 (Art. 1874).
A special power to sell excludes the power to mortgage; and a special power to
mortgage does not include the power to sell (Art. 1879).

B. OBLIGATIONS OF THE AGENT

1. OBLIGATIONS OF AGENT, IN GENERAL:
a. Loyalty to the principal – it is the duty of the agent to act with the outmost
good faith and loyalty for the furtherance and advancement of the interests
of the principal (Arts. 1868, 1884). Agent should not prioritize his interests
over the principal.

b. Obedience to principal’s instructions - an agent must obey all lawful

instructions of the principal within the scope of the agency (Art. 1887). If he
fails to do so, he becomes liable for any loss the principal incurs even
though he can show he acted in good faith or exercised reasonableness
(Art. 1884). In the absence of instructions of the principal, an agent is bound
to exercise diligence of a good father of a family as required by the business
(Art. 1887).
 c. Exercise of reasonable care – the agent undertakes that he is reasonably
competent for the performance of the service, and that in performing his
undertaking, he will exercise reasonable care, skill and diligence. Hence,
an agent shall not carry out an agency if its execution would manifestly
result in loss or damage to the principal (Art. 1888).

2. SPECIFIC OBLIGATIONS OF AGENT:

a. To advance necessary funds – if the contract states that the agent shall
advance the necessary funds, the agent is bound to do so, except when the
principal is insolvent (Art. 1886). Ex: Agent is tasked to deliver a car, if the
agent needs to advance the toll fee or expense to be able to bring the car,
then agent has to do that.

b. Not to prefer his own interests to those of principal – if there is a conflict of

interests between the agent and the principal and the agent prefers his own,
he shall be liable for damages (Art. 1889).

c. Not to loan to himself – if the agent has been authorized to lend money at
interest, he cannot be the borrower without the consent of the principal. If
the agent has been authorized to borrow money, he may himself be the
lender at the current rate of interest (Art. 1890). If the agent is authorized to
receive payment, this payment received by an agent in cash the agent
should not borrow this money.

d. To render accounts – the agent shall account for and deliver to the principal
all money and transactions which may have come into his hands by virtue
of the agency, even those not owing to the principal. A stipulation that the
agent is exempted from rendering an account shall be void (Art. 1891).
Agent should turn over proof of payment

e. Liability for interest – an agent who used the funds of the principal for his
own use is liable to pay interest as indemnity. If, after the expiration of the
agency, an agent fails to give an amount still due to the principal, the agent
shall also be liable for interest (Art. 1896).

f. Liability for Fraud and Negligence – the agent is responsible to the principal
for fraud and negligence in the performance of his obligation. The
circumstance that the agency is or is not for a compensation shall be
 considered by the courts in fixing the liability of the agent for negligence
(Art. 1909).
g. Obligations to Third Parties –
a) If an agent expressly binds himself to the party with whom he
contracts as an agent, he obligates himself personally (Art. 1897).
b) An agent who exceeds his authority is personally liable if he did not
give notice of his powers to the other party (Art. 1897).
c) An agent who exceeds his authority is personally liable if the principal
does not ratify the contract and the party with whom he enters
into a contract is not aware of the scope of his powers. If the other
party is aware of the agent’s powers, the contract is void (Art. 1898).
d) An agent who exceeds his authority is personally liable if he promised
to secure the principal’s ratification of the contract (Art. 1898).
e) An agent who exceeds the limits of his authority according to a
secret understanding with the principal is not personally liable if
the act or transaction is within the terms of a written power of
attorney (Art. 1900).

3. OBLIGATION OF PERSON WHO DECLINES AN AGENCY :

In case a person declines an agency, he is bound to observe the diligence of a

good father of a family in the custody and preservation of the goods forwarded to him
by the owner. However, the owner must appoint an agent or take charge of the goods
as soon as possible (Art. 1885).

4. SUBSTITUTE AGENT:
A substitute agent (or sub-agent) is a person to whom the agent delegates, as
his agent, the performance of an act for the principal which the agent has been
empowered to perform.

Ex: I am appointed by my auntie to negotiate or sell her property because she is going
to migrate in Canada. She signed SPA for and on her behalf. Because I am busy, I
appoint in turn an agent to look for a buyer. The one whom I called is the substitute
agent because he/she is appointed by me, the main or primary agent.
If the principal designates the sub-agent, the agent is not liable for the acts of the
sub-agent.
 If the principal authorized the agent to appoint a sub-agent and the principal did
not designate the sub-agent to be appointed, the agent is not responsible for the acts of
the sub-agent, unless the person appointed is notoriously incompetent or insolvent (Art.
1892)
An agent shall be responsible for the acts of the sub-agent that he may appoint, if
the principal did not authorize the agent to appoint a sub-agent but did not prohibit the
agent from so appointing a sub-agent either (Art. 1892).
If the principal prohibited the agent from appointing a substitute, the acts of the
substitute shall be void (Art. 1892).
If the principal did not prohibit the appointment of a sub-agent, the principal may
bring an action against the substitute with respect to the contracts undertaken by the
substitute (Art. 1893).

5. TWO OR MORE AGENTS:

If two or more agents are appointed by the principal, it is presumed that the
agents are jointly liable, unless solidary obligation of the agents is expressly stipulated
(Art. 1894).
If the agents are solidarily liable, each agent is responsible for the non-fulfillment
of the agency, and for the fault or negligence of his fellow agents (Art. 1885).
Even if the agents are solidarily liable, an agent is not liable for the fault or
negligence of a fellow agent who acted beyond the scope of his authority (Art. 1895).

6. COMMISSION AGENTS:
A factor or commission agent is one whose business is to receive and sell goods
for a commission and who is entrusted by the principal with the possession of goods
to be sold, and usually selling in his own name. He may act in his own name or in that
of the principal.
- It is sold to the commission agent, this commission agent receives goods from
manufacturer. Upon receipt, he now sells the goods under his own name and not
under the manufacturer’s name.
A commission agent is responsible for any damage or deterioration suffered by
goods consigned to him, unless he makes a written statement of the damage and
deterioration of the damage and deterioration, if the condition of the goods received by
him do not conform to the description in the consignment (Art. 1903).
 A commission agent who handles goods of the same kind and mark, which belong
to the same owners, shall distinguish them by counter marks, and designate the
merchandise respectively belonging to the same principal (Art. 1904).
A commission agent can only sell on credit with the express or implied consent of
the principal. If the commission agent sells on credit without the consent of the principal,
the principal may demand from him payment in cash. However, the agent shall be entitled
to any interest or benefit from such sale on credit (Art. 1905).
If the commission on agent sells on credit, with authority of the principal, the agent
is required to inform the principal about the sale with a statement of the names of the
buyers. If the commission agent fails to so inform the principal, the sale shall be deemed
to have been on cash basis insofar as the principal is concerned (Art. 1906).
A commission agent who receives a guaranty commission in addition to ordinary
commission shall bear the risk of collection and shall pay the principal the proceeds of
the sale on the same terms agreed upon with the principal (Art. 1907).
A guarantee commission is one where in consideration of an increased
commission, the commission agent guarantees to the principal the payment of debts
arising through his agency. A guarantee commission applies to both cash and credit
sales.
- You have someone who sells good on commission plus, he guarantees that the
goods will be sold in a week. Because there is a guarantee that it will be sold, the
payment for the sale of the goods will be higher but there is a bigger obligation.
A commission agent who made an authorized sale on credit must collect the
credits due the principal at the time they become due and demandable. If he fails to do
so, the agent shall be liable for damages unless he can show that the credit could not be
collected notwithstanding exercise of due diligence on his part (Art. 1908).

C. OBLIGATIONS OF THE PRINCIPAL

1. Obligations of the Principal, In General:
a. To comply with the obligations which the agent may have contracted within the
scope of his authority (Art. 1910).
b. To comply with the obligations contracted by the agent in excess of his power, if
the principal ratifies the act of the agent (Art. 1910). The principal is solidarily
liable with the agent for acts of the agent which exceed his authority if the
principal allowed the agent to act as though he had full powers.

2. Specific Obligations of the Principal:

a. Upon request of the agent, the principal shall advance to the agent the funds
necessary for the execution of the agency (Art. 1912).
 b. If the agent advanced the funds necessary for execution of the agency, the
principal shall reimburse the agent, even if the undertaking was not successful,
provided the agent is free from fault. The reimbursement shall include interest on
the sums advanced, from the day on which the advance was made (Art. 1912).
c. The principal must indemnify the agent for all damages which the execution of
the agency may have caused the agent, without fault on the latter’s part (Art.
1913).

Broker vs. Agent

Broker is a middle person who does not have an agreement with any of the parties.
Being a middle person, he is more independent compared to the agent. An agent
has a contract with a buyer, being an agent, he has authorities that he should follow
from the principal (obligation of loyalty). A broker has a freedom. In terms of
compensation, there is a similarity in a sense that usually the fee of broker and an
agent will depend on the purchase price of real property.

ACCLAW102
MODULE I:
INTRODUCTION TO BUSINESS ORGANIZATIONS, SOLE PROPRIETORSHIPS,
COOPERATIVES
I. CONCEPT OF BUSINESS ORGANIZATION

Definitions:

A business organization refers to a group of individuals systematically united for the

accomplishment of a common purpose or undertaking for profit in any of the several
ways allowed and regulated by law.

The term “business organization” refers to how a business is structured.

Main Types of Business Organizations:

1. Sole Proprietorship
2. Partnership
3. Corporation
4. Cooperative

What is your business? Business activity

What is you business organization? Structure
 Factors in Identifying Type of Business Organization:
1. Setting-up requirements
2. Regulatory/legal requirements
3. Taxation – if you want to set up small grocery you have to know the tax
8% gross receipts tax – sole proprietor
20% - Micro Small and Medium Enterprise (MSME); 25% corporation
4. Liability

Register first your business.

Option to convert business structure:
a) Sole proprietorship to partnership
b) Sole proprietorship to corporation
c) Partnership to corporation

II. SOLE/SINGLE PROPRIETORSHIP

Sole/single proprietorship defined: .

A sole proprietorship is the oldest, simplest, and most prevalent form of business
enterprise. It is an unorganized business owned by one person. The sole proprietor is
personally liable for all the debts and obligations of the business. (Excellent Quality
Apparel vs. Win Multi Rich, G.R. No. 175048 dated 10 February 2009)
A sole proprietorship does not possess a juridical personality separate and distinct from
the personality of the owner of the enterprise. The law merely recognizes the existence
of a sole proprietorship as a form of business organization conducted for profit by a
single individual and requires its proprietor or owner to secure licenses and permits,
register its business name, and pay taxes to the national government. The law does not
vest a separate legal personality on the sole proprietorship or empower it to file or defend
an action in court. (Mangila vs. CA, 435 Phil. 870)
Even the personal assets are used to settle liability.
No separation between the owner and the business. TIN (Taxpayer Identification
Number) of sole proprietorship is the same with the TIN of the owner.
Setting-up of Sole Proprietorship:

1. Registration with DTI

2. Secure Mayor’s Permit with LGU
3. Registration with the BIR –
book of accounts= manual or electronic empty journal and ledgers – before you can
make entry in the transactions; get stamped (manual or electronic)
 ATP – authority to print OR/ SI
Trade – inventory books
Taxation of a sole/single proprietorship:

4. Other registrations: SSS, Philhealth, Pag-ibig

Rules on taxation of the individual owner apply.

Financial statements of sole/single proprietorships.

Advantages of a sole/single proprietorship:

1. Easiest to register
2. Owner has full control/authority
3. Highly flexible
4. Lesser reportorial/compliance requirements

Disadvantages of a sole/single proprietorship:

1. Limited capitalization
2. Limited growth/business activities
3. Liability of owner extends to personal assets

III. COOPERATIVES

Republic Act No. 9520:

PHILIPPINE COOPERATIVE
CODE OF 2008

Cooperative: an autonomous and duly registered association of persons, with a

common bond of interest, who have voluntarily joined together to achieve their social,
economic, and cultural needs and aspirations by making equitable contributions to the
capital required, patronizing their products and services and accepting a fair share of the
risks and benefits of the undertaking in accordance with universally accepted cooperative
principles.

- Not primarily for profit but for the common interest

• **Autonomous – A cooperative, or coop for short, is an independent organization.

This means it is not affiliated with any political, social, religious, or whatever kind
of group. However, cooperatives may partner with the government, NGOs, and
other coops to achieve their goals.
 • Duly registered – Legitimate cooperatives are registered with the Cooperative
Development Authority (CDA), the government agency that regulates cooperatives
in the Philippines.
• Association of persons with a common bond of interest – People sharing the
same social, economic, and cultural needs come together to form and run a
cooperative. To meet their shared goals, members finance their coop by
contributing to the coop’s pooled capital and use the coop’s products and services.
They also share in the benefits and risks of coop ownership.

Requirements for organization of a primary cooperative:

1. Fifteen (15) or more natural persons;
2. Filipino citizens;
3. Of legal age;
4. Have a common bond of interest; and
5. Are actually residing or working in the intended area of operation

Types of cooperatives:
1. Credit Cooperative: is one that promotes and undertakes savings and lending
services among its members

Examples: Mutual Savings and Credit Cooperative of the Philippines, PLDT Employees
Credit Cooperative, and U.P. Credit Cooperative

2. Consumers Cooperative: is one of the primary purpose of which is to procure and

distribute commodities to members and non-members A consumers cooperative is
owned and controlled by consumers who buy goods and services they need
through their coop. Consumers coops procure and distribute products at better
prices, quality, and delivery service to members and non-members.

Examples: Baguio Teachers Camp Consumers Cooperative, Basao Farmers

Consumers Cooperative, and Tiwi Indigenous Peoples Asenso Consumers Cooperative

3. Producers Cooperative: is one that undertakes joint production whether

agricultural or industrial
Examples: Sulu Indigenous Resource Cooperative, Nueva Ecija Goat and Sheep
Raisers Association Producers Cooperative, and Calinog Small Sugarcane Planters and
Farmers Producers Cooperative
4. Marketing Cooperative: is one which engages in the supply of production inputs to
members and markets their products
5. Service Cooperative: is one which engages in medical and dental care,
hospitalization, transportation, insurance, housing, labor, electric light and power,
communication, professional and other services
6. Multipurpose Cooperative: is one which combines two (2) or more of the business
activities of these different types of cooperatives
7. Advocacy Cooperative: is a primary cooperative which promotes and advocates
cooperativism among its members and the public through socially-oriented projects,
education and training, research and communication, and other similar activities to
reach out to its intended beneficiaries
8. Agrarian Reform Cooperative: is one organized by marginal farmers majority of
which are agrarian reform beneficiaries
9. Cooperative Bank: is one organized for the primary purpose of providing a wide
range of financial services to cooperatives and their members
10. Dairy Cooperative: is one whose members are engaged in the production of fresh
milk which may be processed and/or marketed as dairy products
11. Education Cooperative: is one organized for the primary purpose of owning and
operating licensed educational institutions
12. Electric Cooperative: is one organized for the primary purposed of undertaking
power generations
13. Financial Service Cooperative is one organized for the primary purpose of
engaging in savings and credit services and other financial services
14. Fishermen Cooperative: is one organized by marginalized fishermen in localities
whose products are marketed either as fresh or processed products
15. Health Services Cooperative: is one organized for the primary purpose of
providing medical, dental and other health services
16. Housing Cooperative: is one organized to assist or provide access to housing for
the benefit of its regular members
17. Insurance Cooperative: is one engaged in the business of insuring life and poverty
of cooperatives and their members
18. Transport Cooperative: is one which includes land and sea transportation, limited
to small vessel
19. Water Service Cooperative: is one organized to own, operate and manage waters
systems for the provision and distribution of potable water for its members and their
households
20. Workers Cooperative is one organized by workers, including the self-employed,
who are at same time the members and owners of the enterprise

Cooperative Code of 2008, Article 52(2):

“The accountant or the bookkeeper of the cooperative shall be responsible for the
maintenance of the cooperative in accordance with generally accepted accounting
practices. He shall also be responsible for the production of the same at the time of audit
or inspection.”

“The audit committee shall be responsible for the continuous and periodic review of the
books and records of account to ensure that these are in accordance with generally
accepted accounting practices. He shall also be responsible for the production of the
same at the time of audit or inspection.”

“Duly registered cooperatives under this Code which do not transact any business with
non-members or the general public shall not be subject to any taxes and fees
imposed under the internal revenue laws and other tax laws. Cooperatives not falling
under this article shall be governed by the succeeding section.”

Withholding tax exempt – tax na binabayaran ng cooperative kasi may employees

WEEK 2:

HOW TO START/REGISTER A COOPERATIVE IN THE PHILIPPINES

As a juridical entity, a cooperative is similar to a corporation. However, while corporations

are registered and supervised by the Securities and Exchange Commission (SEC),
cooperatives are registered and supervised by the Cooperative Development Authority
(CDA). This is pursuant to the Philippine Cooperative Code of 2008

ORGANIZING A COOPERATIVE
Fifteen (15) or more natural persons who are Filipino citizens, of legal age, having a
common bond of interest and are actually residing or working in the intended area of
operation, may organize a primary cooperative. A prospective member of a primary
cooperative must have completed a Pre-Membership Education Seminar (PMES).

ARTICLES OF COOPERATION
Corporations which seek to register must file its Articles of Incorporation, while
cooperatives file its Articles of Cooperation, which must be signed by each of the
organizers and acknowledged before a notary public. The Articles of Cooperation shall
contain:

1. The name of the cooperative. The name must include the word “cooperative”.
2. The purpose or purposes and scope of business for which the cooperative is to be
registered. [See Types of Cooperatives]
3. The term of existence of the cooperative. A cooperative shall exist for a period not
exceeding 50 years from the date of registration unless sooner dissolve or unless said
period is extended.
4. The area of operation and the postal addresses of its principal office.
5. The names, nationality, and the postal addresses of the registrants.
6. The common bond of membership.
7. The list of names of the directors who shall manage the cooperative. The Board of
Directors is entrusted with the management of the affairs of the cooperative under its
articles of cooperation and bylaws.
8. The amount of its share capital, the names and residences of its contributors and a
statement of whether the cooperative is primary, secondary, or tertiary. At least 25% of
the authorized share capital must be subscribed, and at least 25% of the total
subscription has been paid. In no case shall the paid-up share capital be less than
P15,000.00.

BYLAWS OF THE COOPERATIVE

The bylaws, which is filed at the same time as the Articles of Cooperation, shall provide
the following:

1. The qualifications for admission to membership and the payment to be made or interest
to be acquired as a conditions for the exercise of the right of membership;
2. The rights and liabilities of membership;
3. The circumstances under which membership is acquired, maintained and lost;
4. The procedure to be followed in cases of termination of membership;
5. The conditions under which the transfer of a share or interest of the members shall be
permitted;
6. The rules and procedures on the agenda, time, place and manner of calling, convening,
conducting meetings, quorum requirements, voting systems, and other matters relative
to the business affairs of the general assembly, board of directors, and committees;
7. The general conduct of the affairs of the cooperative, including the powers and duties
of the general assembly, the board of directors, committees and the officers, and their
qualifications and disqualifications;
8. The manner in which the capital, may be raised and the purposes for which it can be
utilized;
9. The mode of custody and of investment of net surplus;
10. The accounting and auditing systems;
11. The manner of loaning and borrowing including the limitations thereof;
12. The method of distribution of net surplus;
13. The manner of adopting, amending, repealing, and abrogating bylaws;
14. A conciliation or mediation mechanism for the amicable settlement of disputes among
members, directors, officers and committee members of the cooperative; and
15. Other matters incident to the purposes and activities of the cooperative.

TREASURER CERTIFICATION
Certification under oath by the treasurer, showing that at least 25% of the authorized
share capital must be subscribed, and at least 25% of the total subscription has been
paid.

OFFICERS’ BOND
The Articles of Cooperation must be accompanied with the bonds of the accountable
officers.
GENERAL STATEMENT
An applicant must prepare and submit a general statement describing, among others the
structure and purposes of the proposed cooperative. The structure and actual staffing
pattern of the cooperative shall include a bookkeeper. The applicant shall not be allowed
to operate without the necessary personnel and shall also submit an economic survey,
indicating therein the area of operation, the size of membership, and other pertinent data
in a format provided by the CDA.

FILING WITH THE CDA

Prospective cooperatives must submit their application to the CDA Extension Office
where the principal office of the cooperative is located.

All applications for registration shall processed within 60 days from filing. The application
is deemed approved in case the CDA fails to act within the 60-day period. In case of
denial of the application, an appeal may be filed with the Office of the President within 90
days from receipt of notice of such denial. If the President fails to act within 90 days, the
application is deemed approved.

CERTIFICATE OF REGISTRATION
A cooperative acquires juridical personality from the date the CDA issues a Certificate of
Registration.

STEPS IN REGISTERING TO DTI:

The steps in registering business to the DTI are first go to the DTI website and click
register now. Read the terms and conditions and click I agree to proceed. For the
business name registration, owner’s information is required to be filled in which the one
is asked whether he or she is a stateless and refugee person together with the owner’s
personal details. After confirming, it will proceed to the business scope, for instance if the
business’ scope is within regional, then the fee is P1,000. The business’ name and
business name descriptor are also inputted in this section in which its availability would
be checked. Take note that status should all be passed. Otherwise, it cannot proceed
with the next step. It also includes reminders in the applicant’s responsibility in the
proposed business name. Then, reference code would appear that will be used in all
transactions. Business address and personal information is required to be filled up before
the summary is shown. Once approved, it will lead to undertaking which asks for the
applicant’s consent. Lastly, the applicant will now choose payment method to proceed
with payment.
WEEK 3 - PARTNERSHIP: BASIC CONCEPTS

Social media influencers may register their business structure as sole proprietorship.
Jamill -> either sole proprietorship (separately) or partnership as a couple.

I. PARTNERSHIP: BASIC CONCEPTS

A. DEFINITIONS:

By the contract of partnership, two or more persons bind themselves to contribute

money, property, or industry to a common fund, with the intention of dividing the profits
among themselves.

Partnership does not necessarily mean that they are only two of them, it can be 100.
There is contribution of capital among each partner of partnership capital which can be in
a form of money — the easiest to account for. The amount of contribution does not have
to be equal or the same with each partner. Property can also be contributed by a partner
or may contribute industry. Industry or industrial partner, I don’t have money, funds, or
property but I can contribute my services. I will take care of the administrative functions
for our partnership. Yet, a partner could say I cannot contribute property, services, and
money, but I can refer clients because I am well connected. That is fine, it is still
considered as industry. Silent partners – do not involve in day-to-day operations of
partnership but they refer clients, the reign makers. The division of the profits, this will
now be the return of the investment of each of the partners.

Essential elements of a contract:

1. Consent
2. Subject matter
3. Cause or legal tie

A partnership is a juridical entity created by the contract of two or more persons who bind
themselves to contribute money, property or industry to a common fund for the purpose
of dividing profits among themselves.

Artificial person - other term for juridical persons right so partnerships also corporations
are called juridical or artificial persons because unlike us, who has physical manifestation,
but there is other person who is existing in this world who are even more able to undertake
big undertakings such as partnership and corporation but they affect the world so much.
They are fictional.
A partnership becomes a person by virtue of recognition given to it by the law, by virtue
of the contract entered into by partners, by virtue of the recognition of the SEC (Securities
and exchange commission) gives certificate of registration to such partnership.

Summary: Partnership can both be a contract and a person — juridical, fictional, or

artificial person.

Elements of a partnership:
1. An intent to form a partnership
- There has to be intention, because after all we've seen earlier that a partnership
is a contract. You can’t have an accidental partnership. Ex: you have Mr. A has two sons
and Mr. A die leaving behind a big business, a conglomerate company, And because his
only heirs are the two sons what happens is that the two sons inherits. They now become
the owners of the businesses that they inherited from their father Mr. A. Now with these
two sons being the owners of their deceased father, they have not become partners.
Why? Because it was accidental, them being owners of that business them being co-
owners of that business, they did not really intend to do business together, they did not
really intend to form a partnership.

2. The partners participate in the profits and losses, generally

- When we say that the partners will have to share in the losses number one,
remember that the partners would have contributed to the partnership capital. If the
business incurs losses, they will not be able to receive any profits they cannot expect a
return of their investments so for the partners who contributed money for the partnership
capital they can say goodbye to the money that they contributed.

The partners is general partner, and all of the assets of the partnership have been used
up right to pay for the liabilities of the partnership. Then even the personnel assets of the
general partner so even the House and lot the personal car of the general partner may
be used or may be sold to pay for the liabilities of the partnership.

3. The partners have a community of interest that would allow each of them to
make contract, manage the business, and dispose of the whole property.

- Common interest -> making profit. For them to be able to make profits you have to
undertake the business activity of the partnership, and in undertaking the business
activity of the partnership, they will need to perform different acts, different
functions so one would be tasked to handle the purchasing of supplies right, so
this partner who is tasked to handle the purchasing of supplies would have the
authority to do a canvas of what supplies would be good for their business and
also consider the you know the proper pricing quality. So that with this partner
being given that authority to enter into contracts for the supplies of the partnership,
 then whatever has act would be should bind the partnership and the other partners
so it's a lot like the act of one will redound to the partnership and the other partners
so that the partnership should recognize that act of that partner as long as that of
course is within the authorized activity authorized task because they share interest.

Basic features of a business partnership:

1. Voluntary agreement – intentional, the partners agree to be part of partnership

2. Association for profit

3. Contribution to common fund

4. Lawful purpose
- Pharmally na nagdefraud sa government, overprice PPE, face shield, and masks ->
unlawful. Hence, the government can go after the owners because if it is for unlawful
purpose in effect, it does not exist. There’s no business partnership.

5. Mutual agency – partners asking for and behalf of the partnership and then
the other partners.

6. Articles must not be kept secret because it deals with the public

7. Separate juridical personality

- when you register a partnership it's like you're giving birth to an entirely new person,
so this partnership that will be registered with the SEC will have its own tax identification
number. It will have its own address when it enters into contracts, it will enter into such
contract like it's a separate person an entirely separate person, although it's artificial
separate from the partners, separate from the employees.

Illustrations:
Money
Property
Industry

Partnership distinguished from co-ownership:

Co-ownership: There is co-ownership whenever the ownership of an undivided thing

or right belongs to different persons.

A partnership is not a co-ownership. The sons who inherited the business of Mr. A who
died, end up being in a co-ownership. Briefly speaking, co-ownership is when there are
more than one owner of a property so the property in the case of Mr. A are his businesses
so when he passed on. Ownership over those properties over those businesses have
now been shifted now been transferred to his sons, so the songs become co-owners.

There is co-ownership, when you have property or property is owned by two or more
persons and the ownership undivided. Undivided means for example, conjugal property,
it is a property owned by married persons. Our conjugal ownership of our House and lot
is what is called co-ownership because my husband and I myself and my husband's
ownership of our House and lot is undivided So when I say undivided, we have this House
and not a two story house or in a 200 square meter property and we are the owners if
you're going to look at the title, you will see a Mr. Pagayatan married to Ma’am Froilyn.
But after that, what’s indicated is that 50% of property is owned by husband and other
half is for the wife. It is not always equal. We only know that is the spiritual share or
percentage of ownership.

if you now want to actually partition, you now want to actually assign specific parts of the
own property to each of the co-owners. What if they now want to actually divide, to actually
assign specific parts of the inherited property to each other, so they now have to partition
the property. They now have to enter into an agreement Okay, which will go to you, which
were, which is your 50% called project of partition. A court case you need to file a case in
court in order to actually divide or partition co-owned property.

Partnership distinguished from co-ownership

1. In terms of existence of juridical personality – A co-ownership does
not have separate juridical personality, TIN, and address. In partnership, it is the
opposite.
2. In terms of cause of existence – contracts for cause of existence in
partnership. In case of co-ownership, it depends on the situation. When two persons
agreed, contract. In the case of sons who inherits, it is the law.
3. In terms of disposition of interest – A partner withdraws on the
partnership results in dissolution.

What if the other partners would like to continue the business of the partnership?
What they should do is now go to the SEC and remove the name of the partner
who died or who has withdrawn and what is the effect now you have a totally different
partnership get that's why what I said earlier, is still true the old partnership.

In co-ownership, if A decides to withdraw from co-ownership to B. then A, can sell

his 50% ownership. But with the right of first refusal, if A wants to get out from the share,
A should offer first to B to be the buyer of his share.
4. In terms of succession – co-ownership, heirs. There is no succession in
partnership.
5. In terms of purpose partnership is for business, co-ownership is not
necessarily for business.
Partnership distinguished from business trust:
Trust: legal relationship between one person having equitable ownership over a certain
property and another having legal title thereto.
Trustor – equitable owner - real owner
Trustee – legal owner - owner on paper
Beneficiary – person for whose benefit the trust has been created.
Trust department of a bank – Ex, pharma corporation has a lot of employees at least 1000
employees and many of these employees will be retiring in 10 years. Under the law, if a
company who have been retiring and who have been with the company for at least 10
years and are at least 60 years old, at the time of retirement, the company is a corporation
is mandated other than the record to be that time it be to be retiring employees and how
much is the retirement pay. One half the equivalent of one-half month salary for every
year of service. Imagine if you have a retiree employee the salary of the time of retirement
is 200,000 pesos and this employee had been with the company for at least 30 years.
The amount that the company should pay is 3 million pesos. The company do is to set up
a retirement trust fund, they come up with an initial fund which they will put in a trust
department of the bank with the fund.

When the trust or transfers the legal ownership over his property or money to the trust me
he still retains ownership over it, it's only on paper that the ownership of it is transferred
to the trustee.

Ex: you have government official who is corrupt, being a corrupt government official, he
gets us kickbacks millions and millions of pesos to purchase house and lot in Tagaytay.
But COA and ombudsman checks on this official we have lifestyle checks. They compare
SALN Statement of Assets liabilities of Net worth vs. the actual property owned by the
government officials.

Partnership distinguished from conjugal partnership:

Conjugal partnership: the husband and wife place in a common fund the proceeds or
income from their separate properties and those acquired by either or both spouses
through their efforts or by chance and upon dissolution of the marriage, the net gains or
benefits obtained shall be divided equally between them.

Conjugal property is not for business.

Property of relations:
• Absolute community of property – property acquired before and during marriage
will be 50% co-owned by spouse.
 • Conjugal partnership of gains – property acquired prior to the marriage will be
excluded.

• Separation of property – all properties will only be owned by them.

Rules in determining whether a partnership exists:

1. Persons who are not partners as to each other are not partners as to third
persons.
2. Co-ownership or co-possession does not establish a partnership.
3. Sharing of gross returns does not itself establish partnership.
4. Receipt by a person of a share in the profits is prima facie evidence that he is
a partner, except if payment is for:

Rules in determining whether a partnership exists (cont.):

1. Debt
2. Wages
3. Annuity to a widow or representative of dead partner
4. Interest on loan
5. Consideration for sale of goodwill or a business or other property

B. PARTNERS
Who may be partners:
1. Natural persons with legal capacity and not prohibited by a provision of law
2. Corporations, provided:
a) All corporation-partners are managing partners; and
b) Their Articles of Incorporation expressly allow the corporations to enter into
partnerships.

Factors to consider in choosing partner/s:

1. Financial capacity
2. Integrity and reputation
3. Health and age
4. Character, disposition, and ability to get along with people
5. Experience, ability, and training

C. PARTNERSHIP CAPITAL

Partnership capital: may consist not only of actual cash, lands, or goods, but may
also include the rendition of personal services, the use of property owned by one or more
of the partners, or the partners’ mutual exertion of influence in each other’s favor.
1. Money or property – refers to anything that has value in use or value in exchange. It
refers to both tangible and intangible property, such as any right, whether of
ownership, or use, or of usufruct.

2. Industry – includes all human faculties susceptible of useful application, whether

intellectual, moral or physical. There must be active exertion or contribution of efforts,
not merely working for a salary.

D. SEPARATE JURIDICAL PERSONALITY

A duly constituted partnership has a juridical personality separate from that of each of
the partners.

Would a duly constituted partnership still have juridical personality even if the
partnership is not registered with the SEC?

Attributes of having juridical personality:

1. Capacity to enter into contracts
2. Capacity to acquire properties
3. Capacity to sue and be sued

It is the substance, and not the name of the arrangement between the parties, that
determines whether a partnership exists.
Other names for partnerships: joint venture, consortium
Sometimes, the contract may just be entitled “Memorandum of Agreement”.

E. FORMAL REQUIREMENTS

1. If immovable property is contributed by a partner, the partnership must be registered

with the SEC and there must be an inventory of the property signed by the partners and
attached to the Articles of Partnership. Otherwise, the partnership is void.

WEEK 4 - PARTNERSHIP: TYPES AND REGISTRATION

A. Types of Partnerships

As to object:

1. Universal Partnership
 i. partnership of all present property – a partnership in which all the
partners contribute all the property which actually belonged to them to the
common fund with the intention of dividing the same among themselves, as
well as the profits.
- properties will belong to the partnership
- burdensome because all present property will be given to partnership
ii. partnership of profits – comprises all that the partners may acquire by
their work or industry during the existence of the property
- fruits of property will belong to the partnership
- less burdensome, fairness

Because you get to this which of your properties will contribute as partnership capital, so
the point of view, only cash right and the partnership cannot leave anything on your car
or your House in La for any other purpose.

BIG 3 ACCOUNTING FIRMS:

Ernst & Young – Affiliates of Accounting firm, SGV & Co – partnership
PWC (Price water housecookers) Affiliates in ph -> Lipana
KPMG -> Manabat – affiliates in the Philippines

LAW FIRMS:
Baker McKenzie/ QT
ACCRA; Villaraza Angangco
2. Particular Partnership – has for its object determinate things, their use or fruits, or
a specific undertaking, or the exercise of profession.

Property acquired subsequently by inheritance, legacy or donation cannot be included in

the universal partnership of property.
- Contingency – Migo and grandfather, Migo will only get the inheritance when his
grandfather dies, otherwise void.
- To prevent bad faith
Presumption in favor of universal partnership of profits.

Persons prohibited from giving donation to each other cannot enter into universal
partnerships.

Reasons why spouses cannot donate:

a) to prevent a spouse from defrauding his/her creditors,
b) to avoid the dominant spouse from taking advantage of the other,
c) to avoid indirect violation of the prohibition against donation between spouses.

A particular partnership has for its object determinate things, their use or fruits, or a
specific undertaking, or the exercise of profession or vocation.
As to liability of the partners:

1. General partnership - In a general partnership, all partners are liable for the
contracts and obligations of the company pro-rata with their individual private or personal
property after the exhaustion of partnership assets. A general partnership will never have
a limited partner.

2. Limited partnership

A limited partnership has one or more general partners, and one or more limited partners.
The limited partner is only liable to the extent of the capital he contributed for the contracts
and obligations of the partnership.

As to term:

1. Partnership at will - A partnership at will has an indefinite term of existence. It

may be dissolved at will by any partner, at any time he pleases and at a moment's
notice.

2. Partnership with a fixed term - a period of duration is fixed by the partners

B. Registration of Partnerships

When SEC registration is required:

1. If immovable property (real property) is contributed by a partner, the partnership

must be registered with the SEC and there must be an inventory of the property
signed by the partners and attached to the Articles of Partnership. Otherwise, the
partnership is void.

2. If a partnership has a capital of Php3,000 or more, in money or property, it should

be registered with the SEC.

- Joint ventures (JV); consortium

- unregistered in SEC

1. SEC Registration

Basic Requirements
- Name Verification Slip
- Articles of Partnership
 - Affidavit of a partner undertaking to change partnership name (not required if Articles
of Partnership has provision on this commitment)

Additional requirements:
- Endorsement/clearance from other government agencies, if applicable
- For partnership with foreign partners
- SEC Form No. F-105
- Bank certificate on the capital contribution of the partners
- For foreign partners who want to register their investments with the BSP: Proof
of remittance

a. Name:
- The partnership name shall bear the word “Company” or “Co.”
- If it is a limited partnership, the word “Limited” or “Ltd” should be added to
the partnership name.
- Review SEC guidelines
b. Address: include specific address of the partnership and the partners - Review SEC
guidelines.
c. Minimum paid-up capital - Review SEC guidelines.
d. Endorsements/clearances - Review SEC guidelines
1,000,000 minimum paid-up capital for school 1,000,000,000 for insurance
Energy Regulatory Commissions – permission in operating powerplant
e. Foreign partners - SEC Form F-105
f. Registration fees -
Basic fee – 1/5 of 1% of the partnership’s capital but not less than Php1,000.00
Name verification fee – Php40.00
Legal Research fee – 1% of filing fee

The Electronic Simplified Processing of Application for Registration of Company (SEC –

ESPARC)

2. LGU Registration Check Quezon City requirements and procedures.

3. BIR Registration
- File BIR Form 1903 (Application for Registration) with the Revenue District Office
having jurisdiction over the place of business of the partnership.
- Register as well the books of accounts.
- Apply for authority to print (ATP) receipts and invoices.
5. SSS, PHIC Registrations
A stock corporation has authorized capital stock divided into shares of stock either with
or without par value. It's engaged in income-generating activities and authorized to
declare dividends.

A non-stock corporation has no authorized capital stock. It's organized for charitable,
religious, educational, professional, cultural, fraternal, literary, scientific, social civil
service, or similar purposes.

Title IX. - PARTNERSHIP

CHAPTER 1
GENERAL PROVISIONS

Art. 1767. By the contract of partnership two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing
the profits among themselves.

Two or more persons may also form a partnership for the exercise of a profession.
(1665a)

Art. 1768. The partnership has a judicial personality separate and distinct from that of
each of the partners, even in case of failure to comply with the requirements of Article
1772, first paragraph. (n)

Art. 1769. In determining whether a partnership exists, these rules shall apply:

(1) Except as provided by Article 1825, persons who are not partners as to each other
are not partners as to third persons;

(2) Co-ownership or co-possession does not of itself establish a partnership, whether

such-co-owners or co-possessors do or do not share any profits made by the use of the
property;

(3) The sharing of gross returns does not of itself establish a partnership, whether or not
the persons sharing them have a joint or common right or interest in any property from
which the returns are derived;

(4) The receipt by a person of a share of the profits of a business is prima facie
evidence that he is a partner in the business, but no such inference shall be drawn if
such profits were received in payment:

(a) As a debt by installments or otherwise;

(b) As wages of an employee or rent to a landlord;

(c) As an annuity to a widow or representative of a deceased partner;

(d) As interest on a loan, though the amount of payment vary with the profits of the
business;

(e) As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise. (n)

Art. 1770. A partnership must have a lawful object or purpose, and must be established
for the common benefit or interest of the partners.

When an unlawful partnership is dissolved by a judicial decree, the profits shall be

confiscated in favor of the State, without prejudice to the provisions of the Penal Code
governing the confiscation of the instruments and effects of a crime. (1666a)

Art. 1771. A partnership may be constituted in any form, except where immovable
property or real rights are contributed thereto, in which case a public instrument shall be
necessary. (1667a)

Art. 1772. Every contract of partnership having a capital of three thousand pesos or more,
in money or property, shall appear in a public instrument, which must be recorded in the
Office of the Securities and Exchange Commission.

Failure to comply with the requirements of the preceding paragraph shall not affect the
liability of the partnership and the members thereof to third persons. (n)

Art. 1773. A contract of partnership is void, whenever immovable property is contributed

thereto, if an inventory of said property is not made, signed by the parties, and attached
to the public instrument. (1668a)

Art. 1774. Any immovable property or an interest therein may be acquired in the
partnership name. Title so acquired can be conveyed only in the partnership name. (n)

Art. 1775. Associations and societies, whose articles are kept secret among the
members, and wherein any one of the members may contract in his own name with third
persons, shall have no juridical personality, and shall be governed by the provisions
relating to co-ownership. (1669)

Art. 1776. As to its object, a partnership is either universal or particular.As regards the
liability of the partners, a partnership may be general or limited. (1671a)

Art. 1777. A universal partnership may refer to all the present property or to all the profits.
(1672)

Art. 1778. A partnership of all present property is that in which the partners contribute all
the property which actually belongs to them to a common fund, with the intention of
dividing the same among themselves, as well as all the profits which they may acquire
therewith. (1673)

Art. 1779. In a universal partnership of all present property, the property which belongs
to each of the partners at the time of the constitution of the partnership, becomes the
common property of all the partners, as well as all the profits which they may acquire
therewith.

A stipulation for the common enjoyment of any other profits may also be made; but the
property which the partners may acquire subsequently by inheritance, legacy, or donation
cannot be included in such stipulation, except the fruits thereof. (1674a)

Art. 1780. A universal partnership of profits comprises all that the partners may acquire
by their industry or work during the existence of the partnership.

Movable or immovable property which each of the partners may possess at the time of
the celebration of the contract shall continue to pertain exclusively to each, only the
usufruct passing to the partnership. (1675)

Art. 1781. Articles of universal partnership, entered into without specification of its nature,
only constitute a universal partnership of profits. (1676)

Art. 1782. Persons who are prohibited from giving each other any donation or advantage
cannot enter into universal partnership. (1677)

Art. 1783. A particular partnership has for its object determinate things, their use or fruits,
or specific undertaking, or the exercise of a profession or vocation. (1678)

MODULE II:
PARTNERSHIP: OBLIGATIONS OF THE PARTNERS

A. COMMENCEMENT OF PARTNERSHIP OBLIGATIONS

- from the moment of execution of contract (Memorandum of Partnership or Articles of
Partnership) , unless otherwise stipulated

B. TERMINATION OF PARTNERSHIP OBLIGATIONS

- continuation of a partnership for a fixed term or particular undertaking after the
termination of such term or undertaking
The Articles of Partnership was signed on August 8, 2017. The SEC Certificate of
Registration was issued on September 8, 2017. The obligations of the partners
commences on August 8, 2017. Yes or No.

- continuation of business without settlement or liquidation is prima facie evidence (at

first look) of continuation of partnership.

C. OBLIGATIONS REGARDING CAPITAL CONTRIBUTION

1. Assumption: partners contribute equal shares

2. A partner is a debtor to the partnership for his promised contribution.
- If a partner failed to contribute the capital agreed, other partners may demand to
collect.
• If partners contributed different amounts or property with different amount
compared to the cash contributed by other partners, there will be corresponding
implication on profit/loss sharing.

• With respect to contribution of capital, when a partner fails to contribute when he

is demanded by other partners to make the contribution, he now becomes a debtor.
Meaning, the other partners can file a case in order to compel this partner to do
his share and to contribute what he is obliged to pay. Otherwise, he has no right
to be a partner anymore. Other implication if a partner did not pay the capital
contribution on time is when partners could collect interest on the unpaid amount.

- warranty in case of eviction, with regard to specific and determinate things

Mr. A owns commercial condo unit which is registered in his name, and then he
establishes partnership with his friends. He contributes that unit as his contribution to the
partnership capital which will intend to be used as its office. They proceed in establishing
partnership and Mr. A turn over the commercial condominium unit to the partnership. One
day, they received a notice which hereby demanded to vacate the premises because you
have no right to use this premises. This unit is owned by Mr. B. It turns out that there is
an issue regarding the ownership of Mr. A in the commercial unit. Mr. A and Mr. B are
actually siblings who inherits the commercial condominium unit in which they should have
equal ownership to the unit but Mr. A he was able to register the unit by only his name.
Mr. B file and won the case about cancellation of title. The moment he receives the
decision of the court saying ownership must be shared, Mr. B will now send the letter of
eviction — being asked to vacate the premises because you do not have any right to
possess those premises. With respect to Mr. A to contribute the property to the
partnership, it came with a promise(warranty, guarantee) that he has the right to
contribute that property to partnership and that the partnership can use the commercial
property as its office, and that the partnership will not be evicted and demanded to leave
the unit by other person who may be claiming the property. If the partnership receives the
notice of eviction, the partnership may have recourse against Mr. A.
**Eviction – asked to vacate because you have no right to possess.

- liability for fruits from promised delivery date

Ex. Farm land, it comes with the additional obligation to include its fruits in the
delivery.

Partner A and Partner B are partners in Part Co. The capital of Part Co. is PhP1,000,000. It
is assumed that Partner A contributed PhP500,000 and Partner B contributed PhP500,000. TRUE

- preservation of properties with the diligence of a good father of a family

- indemnification of partnership for retention of property or delay in contribution (can be
in form of damages or interest)

3. Contribution of goods
- appraisal shall be as prescribed in the contract or by experts if there is no
stipulation – to identify the value of contribute goods ex. Jewelry to properly identify
the amount of contribution to the partnership of partners. It is important to know how much
of the share of profits will the partner contribute.
- subsequent changes in the appraised value of the property shall be for the
account of partnership

If the appraised value of goods decreased or increased, the impact on the value of assets
of partnership will also be reduced or increased.

4. Contribution of money
- liable for the interest and damages in case of failure to contribute
- liability applies to partner who appropriates partnership money

5. Obligation in case of imminent loss of business

- refusal to contribute additional capital shall warrant obligation to sell interest to
other partners, except industrial partner

There is an agreement among majority of the partners that they should contribute
additional capital to prevent loss but if a partner refuses to contribute additional capital,
then the remedy would be the additional partners who are willing to contribute additional
capital to save partnership should now purchase interest in effect they should ask
unwilling partners to withdraw from partnership. The reason behind selling interest
because it loses common interest of the partnership.
Partnership Co. consists of Partner A, Partner B, and Partner C. Partners A and B
contributed capital and Partner C, just her connections. Partnership Co. is in danger of
losing, hence, Partner A can compel Partner C to sell her interest in the partnership. Yes
or No (because C is an industrial partner).

6. Obligation in case of insolvent debtor (1792 & 1793)

7. Risk of specific and determinate things (1795, par. 1)
8. Risk of fungible or deteriorating things (1795, par. 2)
9. Risk of things for sale
10. Risk of things appraised (1787)

D. MANAGEMENT OF PARTNERSHIP
- apportionment of payment by common debtor
Managing partner – manages partnership
- powers of management: all acts of administration despite objection of other
partners, unless with bad faith
See: Goquiolay, et al vs. Sycip, et al., L-11840; Heirs of Jose Lim vs. Juliet Villa Lim,
G.R. 172690

- revocation of power of management: by partners with controlling interest

- two or more partners as managers: vote of majority in case of disagreement
- unanimity (all of the partners are managing partners) in management
- rules if management was not agreed upon:
- all partners are agents, and each may bind partnership
- no important alteration in the immovable property, without consent of others

E. LIABILITY FOR DAMAGES

- as a general rule, if the damages incurred because of an act that is within the authority
of the partner because of an act that is attributable to regular operation of the partnership,
as a rule, it should be the partnership that should be liable.

F. LIABILITY OF PARTNERSHIP FOR AMOUNTS DISBURSED BY PARTNERS

- from time of disbursement
- obligations contracted in good faith

A partner advances money for the partnership. Ex: The partnership decides to go into an
outing in Boracay so the treasurer prepares the corresponding cash unfortunately, when
they are in Boracay, they were engaged in a boat man to go island hopping, because of
the number of parties, boat man charges huge amount of money but the treasurer said
that the money is insufficient as the money brought is only for expected expenses. One
of the partners volunteered to advance the amount being asked by the boat man. Because
of the advancement, the partnership is liable to reimburse him.
G. PROFIT SHARING

- based on their agreement

- without agreement:
- based on capital contribution
- industrial partners get an equitable share -> based on time charges converted to
collected fees

See: Jarantilla, Jr. vs. Jarantilla, et. al, G.R. No. 154486.

Profit: 100,000,000

SHARE IN
PARTNERS CONTRTIBUTION PRO RATE
PROFITS
A 1,000,000 1/5 or 20% 20,000,000
B 1,000,000 1/5 or 20% 20,000,000
C 1,000,000 1/5 or 20% 20,000,000
D 2,000,000 2/5 or 40% 40,000,000
5,000,000 5/5 100,000,000
Industrial partner – equitable shares -- 20,000,000; 100 hrs = 200,000
Rainmaker = 20% of all collection

H. Losses Sharing

- based on their agreement

- based on profit sharing ration
- based on capital contribution
* exclusion of one of the partners from sharing in the profits or losses is void (pactum
leonina)
*entrustment of sharing in profits and losses in a third person

I. PARTNERSHIP BOOKS AND INFORMATION

- books to be kept at principal place of business
- right of the partners to inspect
- duty of voluntary disclosure

Partners has the right to inspect books of account to prevent defrauding profits.

J. RESTRICTIONS ON CAPITALIST PARTNERS

II. PARTNERSHIP: PARTNERS’ OBLIGATIONS TO 3RD PERSONS

A. Firm Name
- a partnership should operate under a firm name
- firm name may or may not include the name of one or more of the partners
- those who are not partners but include their names in the firm name are subject to
liability of a partner (Firm name.doc)
**the face of partnership

- use of deceased partner’s name

(In Re: +Sycip, Salazar, Feliciano, Hernandez) +deceased
Code of Professional Responsibility:
- a deceased partners’ name may be used provided the firm indicates in its
communications that said partner is deceased
(Peper.Supreme Court Order.19-March-2010.pdf)

B. Liability to Third Parties

- loss vs. liability
Loss relates to capital. For ex. Partner A contributes 1M unfortunately at loss, thus
partnership has to go down. It incurs loss because the contributed capital did not get back.

Liability involves 3rd person (creditors). Despite the fact that it has to pay the partners, it
also has to pay bank, with all assets have been used up, general partners are liable to
pay the creditors.

- all partners, including industrial partners, are liable pro rata with all their property
and after all partnership assets have been exhausted, for contracts entered into in the
name of the partnership and by a person authorized to act for the partnership except,
limited partners.

- meaning of pro rata and subsidiary liability

- any stipulation contrary to the pro rata liability of partners is void, except as among
the partners
- industrial partners are not exempt from liability to third persons
C. PARTNERS AS AGENTS OF THE PARTNERSHIP

- every partner is an agent of the partnership for the purpose of the business
- an agent is someone who does something in representation of another or on behalf
of another with the consent or authority of the latter.

D. CONVEYANCE OF REAL PROPERTY OF PARTNERSHIP

1. Title to real property in the partnership name may be conveyed by any partner
through conveyance in the partnership name.
- recovery of the property by partnership, except if the partner’s act binds the
partnership or the holder for value has no knowledge of the lack of authority of the
conveying partner

E. ADMISSION OR REPRESENTATION OF A PARTNER

- admission or representation of any partner about partnership affairs within the scope
of his authority is evidence against the partnership

Ex: Pharmally is a partnership. A partner admits that there were documents which implied
an admission of med supplies, they signed delivery of documents worth million of pesos.
Thus, the partnership can be held accountable because of a single statement of a partner.

F. CONSTRUCTIVE NOTICE TO PARTNERSHIP

- notice to partner is notice to partnership
 - except: in case of a fraud on the partnership, committed by or with the consent
of the partner expected to communicate to acting partner

G. LIABILITY FOR WRONGFUL ACTS OR OMISSIONS

- a partnership is liable to the same extent as the acting partner if:
- acting partner acts in the ordinary course of business of partnership or with
authority of the other partners; and
- acting partner acts wrongfully or omits to act
- the wrongful act or failure to act results in injury to a third person or penalty

G. Liability for Loss

- a partnership should make good a loss if:
- a partner acting within his authority receives money or property from a third
person and misapplies it; or
- the partnership in the course of its business receives money or property of a
third person and the money is misapplied by a partner while in the custody of the
partnership.

* Partners are solidarily liable with the partnership for liability arising from loss and
wrongful act or omission. liability of any one debtor among two or more joint debtors to
pay the entire debt if the creditor so chooses

H. LIABILITY OF PARTNER BY ESTOPPEL

Estoppel: preclusion of a person from asserting a fact, by previous conduct

inconsistent therewith, conduct on his own part or on the part of those under whom he
claims, or by adjudication on his rights, which he cannot be allowed to call in question.
While estoppel does not make valid the thing complained of, it closes the mouth of the
complainant. It is a doctrine for the prevention of injustice and is for the protection of those
who have been misled by that which on its face was fair and whose character, as
represented, parties to the deception will not, in the interest of justice, be heard to deny.

Partners by estoppel
- Misinterpretation of partner that is actually not a partner and did not stop the
misinterpretation, hence, will be held liable.

A partner by estoppel is someone who:

1. Represents himself to anyone as a partner in an existing partnership or with one or
more persons not actual partners; or
2. Consents to another representing him to anyone as a partner in an existing
partnership or with one or more persons not actual partners; or
3. Publicly represents himself or consents to another representing him to anyone as a
partner in an existing partnership or with one or more persons not actual partners
 A partner by estoppel becomes liable if someone gives credit to the actual or apparent
partnership on the faith of the representation by or with the consent of the partner by
estoppel.

J. PREFERENCE OF PARTNERSHIP’S AND PARTNERS’ CREDITORS

- regarding partnership property, creditors of the partnership shall be preferred
over the creditors of each of the partners
- without prejudice to the foregoing, creditors of the partners may ask for the
attachment and public sale of the share of the latter in the partnership assets.

II. PARTNERSHIP: DISSOLUTION AND WINDING UP (WEEK 6)

Dissolution: the point in time when the partners cease to carry on the business together;
it is the change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on of the business
- Stop doing the operations of the business; first step in terminating the life or closing
the partnership

Ex: Automatic center – partners decided not to open the store but it does not mean that
affairs will also end because it leads to settling of accounts (payment of advances, profits,
liabilities, and collection of sales)

Winding Up: the process of settling partnership affairs after dissolution; liquidation
- Settling of accounts

Termination: the point in time when all partnership affairs are wound up
- Life of partnership is terminated
A. CAUSES OF DISSOLUTION OF PARTNERSHIP
1. Without violation of agreement:
a. Termination of definite term or particular undertaking
agreed for 10 years, 10th year mawawala
b. Express will of any partner acting in good faith in a partnership at will
- even with just one partner, as long as every one agreed
c. Express will of all partners whose interests have not been assigned or charged
d. Bona fide (good faith) expulsion of any partner – one of the partners violated
rules -> expelled in the partnership, the old partnership will be dissolved

2. With violation of agreement, by express will of any partner at any time

3. Any event which would make it unlawful for the partnership to be carried on or for
the members to carry it on in the partnership
 - Ex: Partnership operates Radio station, a radio station only operates upon grant
of a franchise similar to ABS CBN, if this radio is not granted or if the franchise has
not renewed, then, its continual operation would be unlawful.

4. Loss of a thing promised by a partner before delivery to the partnership or loss of a

thing only the use or enjoyment of which was transferred by a contributing partner

5. Death of any partner

6. Insolvency of any partner or of the partnership – not able to pay liabilities as they
fall due and you don’t have assets to pay for them

7. Civil interdiction of any partner – prohibited to exercise civil rights

- parental authority or guardianship
- marital authority
- right to manage and dispose of property
*Punishable at least 10 years imprisonment

8. Judicial decree of dissolution, upon application by or for a partner:

a) Declaration of insanity of a partner
b) A partner becomes incapable of performing his part of the partnership contract
c) A partner is guilty of a conduct that prejudicially affects carrying on of business
of the partnership
d) A partner willfully or persistently commits a breach of the partnership agreement
e) The business can only be carried on at a loss
f) Other circumstances that would render dissolution equitable
- If all agreed, there is no need to go to court. Court order

9. Judicial decree of dissolution, upon application of purchaser of partner’s interest:

a. After termination of specified term or particular undertaking
b. Anytime if the partnership is a partnership at will at the time of assignment
or charging of interest

B. Termination of Authority of Partners

General Rule: dissolution terminates all authority of any partner to act for the
partnership
- Ordinary tasks will be extinguished.

Exception: acts that may be necessary to wind up partnership affairs or complete

transactions begun but not then finished

C. Discharge of Liability of a Partner

 Dissolution does not discharge liability of a partner. Relevant for general partners
because personal assets of general partners may be used to pay for the liabilities.

Exception: if the partnership or another person will continue the business of the
partnership and there is an agreement that a partner shall be discharged from liability
upon dissolution among the partner sought to be discharged, the partnership creditor and
the partnership or another person who will continue the business

Deceased partner’s individual property: shall be liable for payment of the deceased
partner’s separate debts first. Only the remaining property of the deceased partner shall
be liable for partnership liability incurred while the deceased was a partner.

D. Rules in Settling of Accounts

Establish inventory of the assets of partnership – all properties of the partners,

contributions to find out how much is the remaining cash for the purpose of
payment of liabilities.

1. Assets of the partnership:

- partnership property
- contributions of partners for payment of debts

2. Order of payment of liabilities

- creditors
- partners other than for capital and profit
- partners in respect of profits (allocation)
- partners in respect of capital (remaining -> return of capital)

3. Order of payment of liabilities of insolvent partner or insolvent estate of deceased

partner:
- separate creditors
- partnership creditors
- partners’ contribution
* Rules in settling of accounts, first is to establish an inventory of assets of the
partnership to determine how much is the remaining cash available for the payment of
liabilities of the business then proceed in order of payment of liabilities, first are the
creditors, then partners other than capital and profit next is allocation of profit then the
remaining will be for return of capital.
II. PARTNERSHIP: LIMITED PARTNERSHIP

A. Limited Partnership Defined

- a limited partnership has as members one or more general partners and one or
more limited partners
- the distinguishing characteristic of a limited partnership is that the limited partners are
not liable with their separate properties to obligations of the partnership

Reason for limited partnership: secure capital from others who do not want to take
part in the management or running of the business

Benefits of a limited partner:

- liable only up to the amount of investment
- may not be made a party to suits filed by or against the partnership

B. Formal Requisites for a Limited Partnership

1. Signed and sworn Certificate of Limited Partnership; and

2. Filing of the Certificate of Limited Partnership with the SEC.

Contents of the Certificate of Limited Partnership

C. Name of a Limited Partnership

1. Shall have “Ltd.”;
2. A limited partner’s name shall not appear in the partnership name, except:
- it is also a surname of a general partner;
- the business was carried on in that name prior to the limited partner’s becoming
a limited partner.

D. Rights of a Limited Partner

1. Exemption from partnership liability- unless he participates in control of the
business (Art. 1848)
2. Right to give written consent or ratification to acts of dominion of general
partners. (Art. 1850)
3. The same rights of general partners:
- partnership books
- information and accounting
 - petition for dissolution and winding up
- right to receive profits

E. Contributions and Liabilities of a Limited Partner

1. A limited partner cannot contribute services. (Art. 1845)

- because if they are allowed in operation, it can happen the liabilities arise because of
negligence. Being a limited partner, they can say that their personal assets should not be
used upon payment of these liabilities which can be unfair for the partnership.

2. A limited partner is liable to the partnership for:

- difference between his actual contribution and the amount stated in the Certificate
- any unpaid contribution which he agreed in the Certificate to make in the future
(Art. 1858)

3. A limited partner is trustee of the partnership for:

- specific property which was not contributed by him or which was wrongfully
returned
- money or other property wrongfully paid or conveyed to him on account of his
contribution
* if a limited partner promises to contribute property but failed to do so, he becomes a
trustee. The moment he signed agreement, his obligation to transfer ownership to the
property is valid and binding at that moment, the partnership has the right to demand the
transfer of property such that if he fails to do so, and continues his possession over that
property, he will now be considered as possessing such property simply as trustee of the
partnership.

F. Admission of additional and substitute limited partners

- admission of additional and substitute limited partners shall be subject to
amendment of the Certificate of Articles in the SEC (Art. 1849, 1859)
- substitute limited partner: a person admitted to all the rights of a limited partner
who has died or has assigned his interest in the partnership (Art. 1859)
• a limited partners died, before he died he had signed an agreement that says
Mr. A will take over the rights of this limited partner. Mr. A will be the substitute
partner. Or, it can be Mr. B is a limited partner then he assigns his interest to Mr.
C.
- substitute limited partner: rights, effect on liability of assignor

G. General Partner and Limited Partner, Simultaneously (Art. 1853)

- rights and powers

H. Limited Partner as Creditor (Art. 1854)

• a limited partner may loan money and transact other business with the partnership
 • a limited partner cannot:
- receive or hold as collateral security any partnership property
- receive from partnership payment or release from liability if assets of the
partnership is not sufficient to cover liabilities to creditors

I. Entitlement of Limited Partner to Profits and Return of Contribution

- agreement on priority of one or more limited partners over other limited
partners (Art. 1855)
- a limited partner may receive his contribution when:
- all liabilities of the partnership to 3rd parties have been paid [Art. 1857(1)]
-consent of all members is secured [Art. 1857 (2)]
- Certificate is cancelled or amended as to set forth withdrawal or reduction [Art.
1857 (3)]

- a limited partner may demand return of his contribution:

- upon dissolution
- when date specified in the Certificate has arrived
- after 6 months notice in writing for the return of contribution or dissolution of
partnership

J. Death of Limited Partner

- death of a limited partner does not cause dissolution of a partnership, unless there is
only one limited partner

K. Priority in Settling of Accounts After Dissolution (Art. 1863)

1. Creditors
2. Limited partners, in respect to their share of the profits
3. Limited partners, in respect to their capital contributions
4. General partners, other than for capital and profits
5. General partners, in respect to profits
6. General partners, in respect to capital

WEEK 7: CORPORATIONS GENERAL PROVISIONS

I. General Provisions

1. Definition of a corporation:

(a) A corporation is an artificial being

(b) Created by operation of law
(c) With right of succession
(d) Only has powers, attributes and properties expressly authorized by law or incident to
its existence

- A partnership is created by contracts so that you can have a partnership even if it is

not registered in the SEC. But not so in the corporation, it is the corporation code that
creates all corporation, and it is implemented by submitting the articles of
incorporation to the SEC for the SEC to evaluate if the contents of the article of
incorporation comply with the requirement of the corporation code. And a corporation
being an artificial being also has the right of succession which means that a
corporation can assign its properties, it can also acquire properties, it can donate or
can be the donee. Because it creates by the operation of law, it only has powers that
are allowed to it and that are granted to it by law. With respect to the specific business
activities, or the primary purpose, only the primary purpose approved by the SEC,
indicated in the articles of incorporation, is only the activity of the corporation.

- Ultra vires – beyond its power as a corporation, it is not within it approved primary
purpose

a. A corporation is an artificial being

Art. 44, Civil Code: The following are juridical persons:

(3) Corporations, partnerships and associations for private interest or purpose to which
the law grants a juridical personality, separate and distinct from that of each shareholder,
partner, or member.

Art. 46, Civil Code: Juridical persons may acquire and possess property of all kinds, as
well as incur obligations and bring civil or criminal actions, in conformity with the laws and
regulations of their organization.

Piercing the veil of corporate entity – when the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, the separate identity of
the corporation will be disregarded.

- When you create a corporation, you create an entirely new person and that
entirely new person is separate. There is that veil that separates the entity, the
corporation, and the owner, stockholders. Unlike with the case of sole
proprietorship where there is no separation between the sole proprietor and
the business. In a corporation, there is that separation which means that if a
corporation has liabilities and all of its assets have been used up, it does not
have anymore assets, then such liabilities cannot be paid with the personal
 assets of the shareholders. The shareholders cannot be made to pay for the
liabilities of the corporation.
- If the corporation is found out that they are undertaking illegal activity, for ex, it
used to scam the government or other people, then the separation of the
shareholders, the owners of the corporation, and the corporation itself, is
disregarded. If there is a case that will be filed such cases can be filed directly
against the stockholder.

b. Creation by operation of law

A corporation comes into being upon issuance by the SEC of its Certificate of
Incorporation.
- life of corporation begins upon receipt of certificate of incorporation, upon the issuance
of the SEC with Certificate of Incorporation.

c. With right of succession

d. Only has powers, attributes and properties expressly authorized by law or

incident to its existence

With respect to what a corporation can do especially with globalization, foreign

investments, it is very important to know there are certain limitation with respect to what
foreign corporation can do in the Philippines.

incorporation rule: a private corporation is a national, citizen, resident, or inhabitant of

the country or state, by or under the laws of which it was created or organized.
- a private corporation is a national, citizen, of a country that issued is certificate
of registration; under which it is organized.

For instance, Google US, Google US is registered in the US, its certificate of incorporation
had been issued by the United States’ SEC. It sets up a fully owned domestic corporation
here in the Philippines — Google Philippines. The certificate of registration of the Google
Philippines is issued by our Philippine SEC but the sole majority stockholder owning
99.99% of the shares of the Google Philippines is the Google US, the parent company.
Based on the incorporation rule, the foreign corporation in the perspective of the
Philippines is the Google US, because of its nationality. All corporations that are
registered in the Philippines even if it is fully foreign owned, such corporation is called as
domestic corporation or fully foreign owned domestic corporation. It is not
appropriate to call it Filipino corporation as it refers to ownership.

Importance of test:
 - Whoever own shares the corporation, will be able to control such corporation.
If such corporation would be controlled by a foreigner, for example, DITO
telecommunication was allowed to build its tower closed to Camp Crame, the
concern was it is connected to China, since we have a dispute with China with
regards to the West Philippine Sea, it might use its control to the
telecommunication company in order to invade or spy.

control test: shares belonging to corporations or partnerships at least 60% of which is

owned by Filipino citizens shall be considered as of Philippine nationality.
- if it engaged in the nationalized or partly nationalized activities then, these tests
are applied.
- Control test is the more lenient test, it is less strict compared to the grandfather
rule. In the control test, you’re going to look at the parent company.
- Nationalized activities – activities where no foreign participation is allowed.

- Nationalized and partly nationalized activities in the Philippines:

https://www.officialgazette.gov.ph/downloads/2018/10oct/20181029-EO-65-RRD.pdf

For instance, PLDT PHILS. has a subsidiary, Synergy Inc., the shareholders of the
synergy inc. is Indophil.

Shareholder A Shareholder A
PLDT Phils. Indo Phil
60% 40%

Synergy Inc.

Is Synergy Inc a Filipino corporation applying the control test?

- For the purposes of determining if it can engage in telecommunications
business, a public utility business. If we apply the control test, look at the
immediate parent company, since 60% of the synergy inc. shares are
owned by the Filipino corporation, PLDT Philippines, it is a Filipino
corporation. It can proceed to operate the telecommunication business.

grandfather rule: the citizenship of the individual shareholders is considered in order to

determine citizenship of the corporation.
- Not limited to the immediate parent companies
 Shareholder A.1 Shareholder A.2 Shareholder A.2
MVP Indo Indo
60% 40% 100%

Shareholder A Shareholder A
PLDT Phils. Indo Phil
60% 40%

Synergy Inc.

What is the percentage of foreign equity in Synergy, does it exceed 40%?

Filipino equity:

60% X 60% = 36% -> percent owned by Filipino in the shareholder (parent subsidiary) ng
subsidiary x percent owned by Filipino shareholder in the subsidiary

Foreign equity:
40% + (60% x 40%) = 64%
40% -> percent owned by foreign (Indo phil) sa subsidiary (Synergy)
(60% x 40%) – portion ng foreign equity sa shareholder ng PLDT

Conclusion, foreign equity of Synergy because it exceeds the maximum amount of

required foreign equity, 40%. Therefore, there can be ground for the registration of the
corporation.

No foreign equity:
2. Advantages and Disadvantages of a Corporation

a. Advantages of a corporation
I. Transferability of shares – ease in transferring ownership because if
you want to get out of the corporation of the shareholder, you only need
to sell your shares to someone or to the corporation itself. Unlike with the
partnership, it results to the dissolution of partnership.
Listed corporation – traded in stock exchange
Ex: You purchase listed San Miguel shares SMC shares type A at a lower price when the
price became higher, you sell. The stockbroker will facilitate the sale. The selling price
will then be transferred to your account.

II. Continuity of existence – going concern; continuous succession ->

replaced by units

III. Capacity to act as a legal unit -> rules

IV. Centralized management -> Board of directors to Executive officers

negati
V. Standardized methods -> the SEC heavily supervised corporation to
comply with code of corporate governance

VI. Feasibility of greater and bigger undertakings

b. Disadvantages of a corporation
I. Limited credit
II. Incompatible and conflicting interests – lead to intracorporate
disputes
III. Minority shareholders are subservient to majority shareholders –
pag maliit lang share mo limited lang authority to control
IV. Ownership is separate from management – Shareholders -> Board of
directors and Executive officers
V. Shareholders’ right to vote is theoretical – the shareholder’s decision
only has two options, do you approve the change of option or not
VI. Subject to government regulations – because of SEC
VII. Double taxation – corporation operate business operation and earns
income that is subjected to corporate income tax at 20%-25%. If taxes
are paid, there will also be surplus profits that will not be distributed as
dividends to the shareholders. The dividends received by the individual
shareholders will be subject to tax — at the level of the individual
shareholders; final tax of 15%.
VIII. Activity is limited to purpose/s in the AOI.

Corporation compared with a partnership:

CORPORATION PARTNERSHIP
Created under general law Created by agreement
At least 5 incorporators / OPC At least 2 partners
 Transfer of shares w/o consent Transfer of interest w/ consent
Managed by board of directors Managed by partner/s
Death of shareholder does not dissolve Death of general partner dissolves
corporation partnership
Shareholders liable only up to amount of General partner’s personal property may
subscription be used to pay debt
Term is 50 years, subject to extension May exist beyond 50 years

2. Classes of corporations:

a. Stock – capital stock is divided into shares and are authorized to distribute to the
holders of the shares dividends on the basis of the shares held; composed of
stockholders and directors
- They issue stocks or shares
b. Non-stock – its income is not distributable as dividends to its members, trustees, or
officers; composed of members and trustees
- Non government organization

Other classes of corporations:

a. Quasi-corporations, quasi-public, GOCCs
b. Domestic and foreign
 c. Corporation aggregate and corporation sole
d. Religious sole or aggregate
e. Ecclesiastical and lay
f. Eleemosynary and civil
g. Multinational
h. Non-profit
i. Corporations by estoppel
j. De jure and de fact
k. Corporations by prescription

3. Corporations created by special laws or charters

- governed primarily by the special law or charter creating them
- provisions of the Corporation Code are applied supplementally
- examples: TRANSCO, PSALM

4. Corporators – those who compose a corporation:

a) Stockholders – stock corporation
b) Incorporators – mentioned and signatories in the Articles of Incorporation
c) Members – non-stock corporation

5. Classes of shares:

(a) Common
(b) Preferred
(c) Redeemable
(d) Treasury
(e) Founders’ shares

Corporation:

Founders’ shares:
a. Founders’ shares may be given special preference not only as to voting rights but also
as to dividend payments
b. If the exclusive privilege is to vote and be voted for in the election of directors, this must
be for a period not exceeding 5 years, subject to approval by SEC.

Redeemable shares:
a. Redeemable shares may be purchased or taken up by the corporation upon the
expiration of a fixed period, regardless of the existence of unrestricted retained earnings
b. Terms and conditions affecting the redeemable shares are required to be provided for
in the articles of incorporation and to be stated on the certificate of stock

Treasury shares:
a. Treasury shares are shares of stock which have been issued and fully paid for but
subsequently reacquired by the issuing corporation by purchase, redemption, donation or
through some other lawful means.
b. Treasury shares may again be disposed of for a reasonable price fixed by the board of
directors.

Matters even non-voting shares are entitled to vote on:

1. Amendment of AOI
2. Adoption and amendment of by-laws
3. Sale, lease, or other disposition of substantially all of the properties
4. Incurring or increasing bonded indebtedness
5. Increase or decrease of capital stock
6. Merger or consolidation of the corporation
7. Investment of corporate funds in other corporations
8. Dissolution
Control test: shares belonging to corporations or partnerships at least 60% of the
capital of which is owned by Filipino citizens shall be considered as of Philippine
nationality.

Grandfather Rule: but if the percentage of Filipino ownership in the corporation or

partnership is less than 60%, only the number of shares corresponding to such
percentage shall be counted as of Philippine nationality
WEEK 8: Corporations General Provisions

4. Components of a corporation:
a) Subscribers – original purchasers of shares in the corporation
b) Incorporators – names appear on articles of incorporation
* there are incorporators who are not subscribers but subscribers are incorporators
c) Stockholders/members –
Stockholders - subsequent purchasers of shares of corporation
Members – take part in non-stock corporation

5. Classes of shares:
Capital stock :
Authorized stock – available for issue; number of shares and the equivalent in money ,
totality of shares in peso that is available for sale by the corporation
Subscribed capital - purchased shares
Paid up – number of shares that are fully paid in subscription
(a) Common
(b) Preferred
(c) Redeemable
(d) Treasury
(e) Founders’ shares

a) Rules regarding shares:

Voting rights are important because it will decide on who will be the directors managing
the corporation.
The more shares acquired, more authority in the corporation.
If shares do not have par value, it only means that there is no fixed purchased price.
Price will depend on economic activity.

a. Any or all of the shares or series of shares may have a par value or have
no par value
b. There will always be a class or series of shares which have complete
voting rights No share may be deprived of voting rights, except preferred
and redeemable shares
c. Banks, trust companies, insurance companies, public utilities, and building
and loan associations shall not be permitted to issue no-par value shares
– requires a lot of capitalization; important that they are liquid, must have cash flow
because they are finance institutions. Otherwise, liquidity could suffer.
d. Shares issued without par value shall be deemed fully paid and non-
assessible
e. Shares without par value may not be issued for a consideration of less
than the value of Php5.00 per share
f. The consideration received by the corporation for its no-par value shares
shall be treated as capital and shall not be available for distribution as
dividends
Common shares
- Default shares
- They have complete voting rights
Preferred shares:
a) Preferred shares may be given preference in the distribution of the assets of the
corporation in case of liquidation and distribution of dividends
b) Preferred shares may be issued only with a stated par value
c) The Board of Directors may fix the terms and conditions of preferred shares

Founders’ shares:
a) Founders’ shares may be given special preference not only as to voting rights
but also as to dividend payments
b) If the exclusive privilege is to vote and be voted for in the election of directors,
this must be for a period not exceeding 5 years, subject to approval by SEC.

Redeemable shares:
a) Redeemable shares may be purchased or taken up by the corporation upon the
expiration of a fixed period, regardless of the existence of unrestricted retained
earnings
b) Terms and conditions affecting the redeemable shares are required to be provided
for in the articles of incorporation and to be stated on the certificate of stock
- Shareholder – giveback the shares
- Corporation – redeeming or getting back the shares

If you are a shareholder of corporation, the more regular way to dispose shares is to
sell the shares.
Irregular mode: if you are holder of redeemable share, you can only have redeemable
shares if stated by articles of incorporation, the, once purchased, terms and condition
includes the option after a fixed period of time to surrender the shares in exchange for
subscription price plus accumulated dividends. When surrendered, you will get the return
of investment or income from shares in corporation.
Treasury shares:
 a) Treasury shares are shares of stock which have been issued and fully paid for but
subsequently reacquired by the issuing corporation by purchase, redemption,
donation or through some other lawful means.
b) Treasury shares may again be disposed of for a reasonable price fixed by the
board of directors.
- Can be cancelled which may not be issued anymore.

Matters even non-voting shares are entitled to vote on:

1. Amendment of AOI – acts of dominion = fundamentals
2. Adoption and amendment of by-laws
3. Sale, lease, or other disposition of substantially all of the properties
4. Incurring or increasing bonded indebtedness
5. Increase or decrease of capital stock
6. Merger or consolidation of the corporation
7. Investment of corporate funds in other corporations
8. Dissolution

INCORPORATION AND ORGANIZATION

1. Number and qualifications of incorporators:

a. Natural persons
b. Not less than 5 but not more than 15
c. Majority should be residents of the Philippines
d. Each incorporator should own at least one (1) share of the capital stock
- revised corporation code 2019
2. Corporate term:

a) The corporate term shall be 50 years from date of incorporation, unless sooner
dissolved or extended
b) The corporate term shall be extended for a period of not over 50 years in any
single instance
c) No extension shall be made earlier than five years prior to the original or
subsequent expiry date

3. Minimum capital stock:

There is no minimum capital stock, except as may be required by law.

4. Amount of Subscribed and Paid-up Capital Stock

Subscribed: at least 25% of the authorized capital stock.
Paid-up: at least 25% of the subscribed capital stock.
In no case shall the paid-up capital be less than Php5,000.00
5. Contents and Form of Articles of Incorporation

6. Amendment of Articles of Incorporation

Required vote of board:
Required vote of shareholders:
Effectivity of the amendments

7. Grounds for Disapproval of Articles of Incorporation

a) Not in accordance with prescribed form
b) Purpose is patently unconstitutional, illegal, immoral, or contrary to regulations
c) Treasurer’s Affidavit regarding capital stock is false
d) Required percentage of capital stock to be owned by Filipino citizens has not
been complied with
Required indorsements:

8. Corporate Name
Grounds for disallowance of corporate name:
a. Patently deceptive
b. Confusing
c. Contrary to existing laws

9. Commencement of Corporate Existence

A corporation is deemed to have corporate existence and juridical personality
from the date of issuance by the SEC of the Certificate of Incorporation.

10. De Facto Corporations

Elements for de facto corporations to exist:

a) Valid law under which it is incorporated
b) Attempt to incorporate
c) Assumption of corporate powers
d) A certificate of incorporation was issued despite defect in its incorporation.

The due incorporation of a de facto corporation shall not be inquired into collaterally in
any private suit. Such inquiry may be made by the Solicitor General in a quo warranto
proceeding.

11. Corporation by Estoppel

Elements for corporation by stopel to exist:

 a) Persons assume to act as a corporation
b) The corporation is not duly registered with the SEC
c) The lack of registration with the SEC is known to the persons who assume to act
as a corporation

The persons who assume to act as a corporation shall be liable as general partners for
liabilities and damages incurred.

If the corporation by estoppel is sued on any transaction entered into by it or on any tort
committed by it, it shall not be allowed to use as a defense the lack of corporate
personality.

12. Non-use of charter

A corporation is issued its certificate of registration but it does not formally organize
and commence business.
Effect: the corporation shall be deemed dissolved

13. Continuous inoperation

A corporation commenced its operations but becomes continuously inoperative for a

period of 5 years.
Effect: suspension or revocation of corporate franchise or certificate
* Exception

II. BOARD OF DIRECTORS

1. Functions of the Board of Directors

a. Exercises the corporate powers of the corporation
b. Conducts the business of the corporation
c. Controls and holds the property of the corporation
Election of board of directors or trustees
Term of the board of directors
Minimum number of shares of directors
Residency requirement for directors

2. Election of the Board of Directors

a. Quorum requirement – owners of majority of outstanding capital stock, in person
or by proxy
b. Manner – by ballot, if requested by stockholder/member
c. Voting – every stockholder has the right to vote the number of shares standing in
his own name in the books of the corporation
d. Delinquent stock – cannot be voted
e. Voting rules for stock corporations
 - number of votes that may be cast by a shareholder: no. of shares owned x no. of
directors to be elected
- a stockholder may vote his shares for as many persons as there are directors to
be elected
- in the alternative, a stockholder may CUMULATE his votes
- candidates receiving the highest number of votes shall be elected
f. Voting rules for non-stock corporations
- members may cast as many votes as there are trustees to be elected
- members may not cast more than one vote for one candidate; in other words,
cumulative voting is not allowed in non-stock corporations

3. Corporate Officers
President – shall be a director
Treasurer – may or may not be a director
Secretary – shall be a resident and citizen of the Phils.
Any two (2) or more positions may be held concurrently by the same person except:
a. President and Secretary
b. President and Treasurer

4. Quorum and Voting at Directors’ Meetings

a. Quorum: majority of the number of directors fixed in the articles
b. Voting: majority of the directors present at which there is a quorum
c. Election of officers: majority of all members of the board
d. Directors or trustees cannot attend or vote by proxy at board meetings

5. Filing of General Information Sheets

Within 30 days after the election of the directors, trustees, and officers, the
secretary of the corporation shall submit to the SEC the names, nationalities, and
residences of the directors, trustees, and officers.

6. Disqualification of Directors, Trustees, Officers

a. Conviction by final judgment of an offense punishable by imprisonment for a
period exceeding 6 years
b. Violation of the Corporation Code committed within 5 years prior to the date of
election or appointment

7. Removal of Directors or Trustees

Required vote: 2/3 of the outstanding capital stock or 2/3 of the members entitled to vote

Ground for removal: with cause or without cause, except that removal without cause may
not be used to deprive minority stockholders of the right to representation
8. Filling of Vacancies in the Board

Vacancies to be filled by a vote of stockholders or members:

a. Removal of a member of the board of directors/trustees
b. If the remaining members of the board do not constitute a quorum
c. Expiration of term of a director
d. Vacancy due to increase in the number of directors

9. Compensation of Directors
Reasonable per diems, unless there is a provision on compensation of directors in
the by-laws.
Requirements for valid compensation of directors:
a. granted by a vote of the shareholders representing at least a majority of the
outstanding capital stock at a regular or special meeting
b. the total yearly compensation shall not exceed 10% of the net income
before income tax of the corporation during the preceding year

10. Liability of Directors

Directors are jointly and severally liable for all damages arising from the following:
a. Willfully voting for or assenting to patently unlawful acts of the corporation
b. Gross negligence or bad faith in directing the affairs of a corporation
c. Acquiring personal or pecuniary interest in conflict with their duty as such
directors

Penalty for conflict of interest: if a director attempts to or acquires any interest adverse to
the corporation in respect of any matter which has been reposed to him in confidence, he
shall be liable as a trustee for the corporation and must account for the profits which would
have accrued to the corporation.

11. Contracts with Directors

A contract of a corporation with one or more of its directors/trustees or officers
should comply with the following:
a. The presence of the director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such
meeting;
b. The vote of the director or trustee was not necessary for the approval of the
contract;
c. The contract is fair and reasonable under the circumstances;
d. In case of an officer, the contract with the officer has been previously authorized
by the board of directors.

12. Interlocking Directors

 A contract between two or more corporations having interlocking directors shall not
be invalidated except if:
a. there is fraud;
b. the contract is fair and reasonable under the circumstances
If the interlocking director has nominal shares, the requirements for a valid contract
between a corporation and its director shall be complied with.
Nominal shares: stockholding not exceeding 20% of the outstanding capital stock

13. Disloyalty of a Director

A director who, by virtue of his office, acquires for himself a business opportunity
which should belong to the corporation, is required to refund to the corporation the profits
he received, even if he risked his own funds in the venture.
Exception: if the director’s act has been ratified by a vote of the stockholders
owning 2/3 of the outstanding capital stock.

14. Executive Committee

Composition: not less than 3 members of the board, to be appointed by the board
Functions: act my majority vote on specific matters within the competence of the
board, except:
- approval of actions for which shareholders’ approval is also required;
- filling of vacancies in the board;
- amendment or repeal of by-laws
- amendment or repeal of resolution of the board
- distribution of cash dividends to shareholders
III. POWERS OF CORPORATIONS
1. Powers of corporations
- To sue and be sued in its corporate name
- Of succession by its corporate name
- To adopt and use a corporate seal
- To amend its articles of incorporation
- To adopt by-laws and to amend or repeal the same
- In case of stock corporations, to issue or sell stocks
- To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
and otherwise deal with real and personal property
- To enter into merger or consolidation with other corporations
- To make reasonable donations
- To establish pension, retirement and other plans for the benefit of its directors,
trustees, officers and employees
- To exercise such powers as may be essential or necessary to carry out its
purpose

2. Extension or shortening of corporate term

- With approval of majority of the board of directors/trustees
- With ratification by stockholders representing at least 2/3 of the outstanding
capital stock or by 2/3 of the members, for non-stock corporations
- In case of extension of corporate term, a dissenting stockholder may exercise his
appraisal right

3. Increase or decrease of capital stock and creation or increase of bonded

indebtedness
- With approval of majority of the board of directors/trustees
- With ratification by stockholders representing at least 2/3 of the outstanding
capital stock or by 2/3 of the members, for non-stock corporations

4. Denial of pre-emptive rights

• pre-emptive right: is the shareholder’s right to subscribe to all issues of shares of
any class in proportion to their present stockholding
• pre-emptive rights shall not extend to:
- shares to be issued in compliance with laws requiring stock offering or minimum
stock ownership by the public
- shares issued in good faith in exchange for property needed for corporate
purposes
- shares issued in payment of previously contracted debts

5. Sale or other disposition of assets

with approval of majority of the board of directors/trustees and stockholders owning 2/3
of the outstanding capital stock or 2/3 of the members
subject to exercise of appraisal right
sale of substantially all assets – corporation would be incapable of continuing its business
or accomplishing its purpose

6. Acquisition of own shares

condition precedent: unrestricted retained earnings
purposes for acquisition of own shares:
- eliminate fractional shares
- to purchase delinquent shares
- to pay dissenting or withdrawing stockholders

7. Power to invest in another corporation or business

- with approval of majority of the board of directors or trustees and ratified by
stockholders representing at least 2/3 of the outstanding capital stock or by at least
2/3 of the members
- if investment is reasonably necessary to accomplish the primary purpose, the
approval of the stockholders or members shall not be necessary
- subject to appraisal right

8. Power to declare dividends

- unrestricted retained earnings is required before dividends may be declared
- with approval of stockholders owning 2/3 of the outstanding capital stock
- delinquent shares:
- cash dividends shall be applied to the unpaid balance
- stock dividends shall be withheld until full payment of the subscription
- stock corporations cannot retain surplus profits in excess of 10% of the paid-in capital
stock
- exemptions

9. Power to enter into management contract

- with approval of majority of the board of directors and by stockholders owning at
least the majority of the outstanding capital stock of BOTH the managing and
managed corporation
- voting requirement for stockholders shall be 2/3 if:
- both the managed and managing corporation are owned by
stockholder/stockholders owning at least 1/3 of the outstanding capital stock;
or
- majority of the members of the board of the managing and managed
corporations are the same persons
*Management contracts shall not exceed 5 years per term.
10. Ultra vires acts
- Corporations shall exercise only powers that are conferred in the Corporation Code
and in its articles of incorporation as well as powers which are necessary or
incidental to the exercise of the powers so conferred.
- Requirements for ratification of ultra vires acts:
- act is consummated;
- creditors are not prejudiced or all of them have given consent;
- the rights of the public or the State are not involved
 - all stockholders have given their consent

IV. BY-LAWS
1. Adoption
- when should by-laws be adopted
- voting requirements

2. Contents
- regular and special meetings of directors and shareholders
- quorum in meetings
- proxies
- qualifications, duties, compensation, appointment of directors, trustees, officers
- elections
- penalties for violations of the by-laws

3. Amendment, adoption, repeal

- amendment or repeal of by-laws or adoption of new by-laws shall be with the approval
of the majority of the board of directors/trustees and shareholders
- the delegation of power to amend or repeal to the board of directors shall be subject to
approval of 2/3 of shareholders/members

V. MEETINGS

1. Kinds of meetings
- Regular
- annual shareholders meeting: on the date fixed in the by- laws or if there is
none, any date in April
- monthly directors meeting
- Special

2. Waiver of Notice of Meeting

- stockholders and directors may waive notice of meetings, expressly or impliedly

3. Place and Time of Meetings

- stockholders meetings shall be held in the city or municipality where the principal
office of the corporation is located, and if practicable, in the principal office of the
corporation
- meetings of the directors or trustees may be held anywhere in or outside of the
Philippines, unless the by-laws provide otherwise

5. Pledged and Mortgaged Shares

- the pledgor or mortgagor shall have the right to attend and vote at meetings of
shareholders
 - executors, administrators, receivers and other legal representatives shall have the
right to attend and vote in behalf of the stockholder

6. Joint Ownership of Shares

- in case of joint ownership of shares of stock, the consent of all the stockholders
shall be necessary
- shares in an “and/or” capacity shall be may be voted by any one of the
shareholders

7. Treasury Shares
- treasury shares shall have no voting rights

8. Proxies
- stockholders may vote by proxy, which shall be in writing, signed by the
shareholder, and filed before the scheduled meeting with the corporate secretary
- no proxy shall be valid and effective for a period longer than 5 years at any one
time

9. Voting Trust
- a voting trust is created by one or more stockholders to confer upon a trustee or
trustees the right to vote and other rights pertaining to the shares for a period of
not exceeding 5 years; except for a voting trust required for a loan agreement
which shall not expire until full payment of a loan

VI. STOCKS AND STOCKHOLDERS

1. Subscription Contract
- any contract for acquisition of unissued stock in an existing corporation
- pre-incorporation subscription

2. Consideration for stocks

- cash
- property
- services
- previously incurred indebtedness
- amounts transferred from retained earnings
- outstanding shares in case of reclassification or conversion
* Watered stocks: issued at below par value

3. Certificate of stock
- form
- issuance
- transfer
- validity of transfer
 - delinquent shares

4. Unpaid subscriptions
- rights: voting, dividends, stock certificates
- interest
- payment of balance of subscription
- delinquent shares

5. Delinquency sale
- notice and publication

6. Lost or destroyed certificates

VII. CORPORATE BOOKS AND RECORDS

1. Books to be kept
- records of all business transactions and minutes of any meeting
- open to inspection of any director, trustee, stockholder or member stock and
transfer book

2. Right to financial statements

- within ten (10) days from receipt of a written request of any stockholder or member,
the corporation shall furnish to him its most recent financial statement, which shall
include a balance sheet and a profit or loss statement
- if the paid-up capital is less than Php500,000, the financial statements may be
certified under oath by the treasurer or any responsible officer of the corporation

VIII. MERGER AND CONSOLIDATION

1. Merger
There is merger when two or more corporations (constituent corporations) combine into
a single corporation, which shall be one of the constituent corporations (surviving
corporation).
2. Consolidation
There is consolidation when two or more corporations form into a new single corporation.

3. Plan of merger and consolidation

- names of the constituent corporations
- terms of the merger or consolidation and the mode of carrying it into effect
- statement of the changes, if any, in the articles of incorporation of the surviving
corporation in case of merger; and in case of consolidation, all the statements
required to be set forth in the articles of incorporation for the new corporation

4. Approval requirements
- Board of directors/trustees: majority
- Stockholders/members: 2/3 of outstanding capital stock/members
- Subject to exercise of appraisal right
- The articles of merger or of consolidation shall be subject to approval by the
Securities and Exchange Commission

5. Effects of merger and consolidation

- The constituent corporations shall become a single corporation
 - The separate existence of the constituent corporations shall cease, except that of
the surviving corporation
- The surviving or the consolidated corporation shall possess all the rights,
privileges, immunities, and franchises of each of the constituent corporations
- The surviving or consolidated corporation shall be liable for all liabilities and
obligations of each of the constituent corporations

IX. APPRAISAL RIGHT

1. Appraisal right, defined
- Appraisal right is the right of a stockholder to dissent and demand payment of the
fair value of his shares in the following instances:
a. In case any amendment of the articles of incorporation has the effect of
changing or restricting the rights of any stockholders or class of shares
b. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets
c. In case of merger or consolidation

2. Exercise of appraisal right

- The shareholder who voted against the proposed corporate action shall make a
written demand on the corporation within 30 days after the date on which the vote
was taken for payment of the fair market value of his shares
- from the time of demand for payment of the fair value of the shares until either the
abandonment of the corporate action or the purchase of the shares, the rights
accruing to said shares, including voting and dividend rights shall be suspended.

X. DISSOLUTION

1. Methods of dissolution
- Voluntary, by filing the proper application with the SEC
- Involuntary, upon verified complaint filed with the SEC
- Expiration of term
- Shortening of corporate term
- Failure to organize and commence business
- Legislative dissolution

2. Voluntary dissolution
- If creditors will not be affected, the dissolution may be approved by majority vote
of the board of directors/trustees and by resolution of 2/3 of the outstanding capital
stock/members
- If creditors will be affected, a petition for dissolution of a corporation shall be filed
with the SEC

3. Involuntary dissolution
Upon filing of a verified complaint, the SEC may dissolve a corporation on any of the
following grounds:
a. continuous inactivity of the corporation for at least 5 years
b. commission by the corporation of ultra vires or illegal acts
c. the corporation was illegally organized
d. serious dissension in the corporation
 MODULE 3

REVISIONS TO THE CORPORATION CODE

** - notes

I. GENERAL PROVISIONS

Subject Matter Old Corporation Code Revised Corporation Code

The rights, privileges or The classification of shares, their

restrictions of the classes corresponding rights, privileges, or
or series of shares may be restrictions, and their stated par value, if any,
Classes of Shares stated in the articles of MUST be indicated in the articles of
incorporation. (Sec. 6) incorporation. (Sec. 6)

The exclusive right to vote and be voted for

in election of directors shall not be allowed if
Founders’ Shares in violation of Anti-Dummy Law, the Foreign
Investments Act of 1991, and other laws.
(Sec. 7)

II. INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS

Subject Matter Old Corporation Code Revised Corporation Code

 Incorporators Not less than 5 but not Any person, partnership, association or
more than 15 natural corporation, singly or jointly with others
persons who are of age but not more than 15 in number.
and majority are residents.
(Sec. 10) Natural persons and
partnerships/associations
**Citizenship = licensed/organized to practice a profession
nationalized and partly may not organize a corporation, unless
nationalized activities of allowed under special laws. (Sec. 10, par. 1)
corporations **(appraisers; real estate)

A corporation with a single stockholder is a

One-Person Corporation (Sec. 10, par. 3)

**

Under the old corporation code prior to 2019, if you needed to incorporate a corporation you need at
least five natural persons, 5 but not more than 15, and majority should be residents of the Philippines.
However, under the revised corporation code, with respect to incorporators before, it is now not
required that incorporators are residing in the Philippines.

Citizenship is important in nationalized and partly nationalized activities of corporations.

One-Person Corporation – you have one stockholder or incorporator.

Regular corporation – 5 stockholder

Revised corporation now allows that we setup even if the incorporators are juridical entities like
partnership or another corporation. Before only natural persons can be incorporators, now, it can be
any person natural or juridical. However, for those who are engaged to practice their professions —
CPAs, Lawyers, doctors, or their partnerships or association, the revised corporation code does not
allow them these professional to form a corporation for the purpose of engaging the practice of their
profession unless allowed under special laws such as appraisers, real estate agents.

Corporate Term 50 years (Sec. 11, par. 1) Perpetual existence. Corporations

registered prior to Revised Corporation
Code shall notify SEC of election to retain
specific corporate term. (Sec. 11, par. 1)
Extension of corporate tem
shall be made not earlier Extension of specific corporate term shall be
than 5 years prior to expiry made not earlier than 3 years prior to expiry
of corporate term (Sec. 11, of corporate term (Sec. 11, par. 2)
par. 2)

**
Corporate term refers to the period of time that a corporation can exist and undertake its primary
purpose. Prior to 2019, a corporation has limit of 50 years for the life of the corporation in which it
exists and undertake its activity subject to extension of corporation for another 50 yrs.

But if a corporation would like to extend its term was established 2000, and the term, 50-year period
is going to end by 2050 so the corporation wants to extend its life for another 50 yrs, it should file an
application to amend it articles of incorporation and extend its term for 50 years and such application
to extend the term should not be made earlier than 5 yrs prior to the expiry of corporate term. If that’s
the rule then, the corporation which was established 2000 and will end its corporate term in 2050,
then the extension of the corporate term shall not be made earlier than 5 years prior to the expiry of
corporate term. In this case, the corporation cannot file extension before year 2045.

However, under revised corporation code, the term of the life of corporation has been made
perpetual. Meaning, there is no limitation anymore. It won’t have to file the extension of its term by
2045 or 2050. It can exists as long as it wants to. The period for application for extension of specidic
corporate term shall be made not earlier than 3 years.

Revival of Corporate A corporation whose term has expired may

Existence apply for revival of corporate existence.
Application for revival of existence of banks,
quasi-banking institutions, preneed,
insurance and trust companies, NSSLAs,
pawnshops, and other financial
intermediaries shall be accompanied by
favourable recommendation of appropriate
agency (Sec. 11, pars. 3-4)

**

This refers to corporation whose registration has been revoked because of failure to comply with
reporting requirements. Under revised corporation, these corporation whose registration had been
revoked may now apply for the revival of the corporate existence.

Subscribed and Paid- At least 25% of the Stock corporations shall not be required to
up Capital Stock authorized capital stock have minimum capital stock, unless
shall be subscribed and at otherwise specifically required under the
least 25% of the total law. (Sec. 12)
subscription must be paid.
In no case shall the paid-
up capital be less than
PhP5,000.00.(Sec. 13)

**
Under the revised code, what is required only is the minimum paid up capital should not be lower
than 5,000 pesos.

Treasurer’s Sworn Required for SEC No longer required.

Statement acceptance of articles of
incorporation (Sec. 14)

**

Before as proof that the corporation’s treasurer has received the payment for subscribed capital
stock, attached to the application for registration of corporation is the Treasurer’s Sworn Statement,
a page which affirms that the payment was received. This sworn statement being sworn will be
notarized by the notary public and is attached in the article of incorporation and submitted to the SEC
for the purposes of application of the register of the corporation. Under the revised corporation code
beginning 2019, SEC no longer require submission of treasurer’s sworn statement.

Observation: ease of doing business

Arbitration An arbitration agreement may be provided

Agreement in the articles of incorporation. (Sec. 13)
**arbitration – alternative
dispute resolution
arbiter/ arbitrator = resolve
the conflict
– less formal, shorter time
- less adversarial (less hurt
feelings, less damaged
relationship)

** Arbitration Agreement a contract among shareholders, directors officers where they agree that
in the event of conflict (intracorporate dispute) before the only way for the dispute to be settled
would be for the parties to file a case in court particularly in corporate courts which deals with
corporate issues. Filing a case in court includes engaging lawyers, paying for filing fee. Hence will
consume a vast amount of time and money.

Now, under revised corporation code, arbitration can be the alternative dispute resolution in which
arbitrator will resolve the conflict. Hence, less formal then, it takes shorter time for the resolution of
the issue. If an issue is settled through arbitration, it is less adversarial. Meaning, hurt feelings
among parties will be lessened and there is less damaged relationship among parties because
they are able to deal with the issue face to face on a personal level.
 Filing of articles of The articles of incorporation and
incorporation and applications for amendments thereto may
amendments be filed with the SEC in the form of an
electronic document (Sec. 13).

**you can now register a corporation simply by opening an account in SEC website and fill up form
attached the required documents.

Government agency Required for banks, Required for banks, banking and quasi-
endorsement banking and quasi-banking banking institutions, preneed, insurance and
institutions, building and trust companies, NSSLAS, pawnshops,
loan associations, trust and other financial intermediaries. (Sec.
companies and other 16)
financial intermediaries,
insurance companies,
public utilities,
educational institutions, NSSLAS – nonstock savings and loan
and other corporations association
governed by special laws.
(Sec. 16)

**ERC (ENERGY Pawnshops – BSP – Banko Sentral ng

REGULATORY Pilipinas
COMMISSION) -> public
Insurance company – IC – Insurance
utilities
commission

** University - CHED

**

Before financial institutions, public utilities, educational institutions, and other corporations
governed by special laws, for these type of corporations, they need to get an endorsement from the
applicable government agency. They need to attach such endorsement to the application for
registration to the SEC.

Under the revised corporation code, it no longer requires public utilities, educational institutions to
get government agency endorsement. For example, if you are going to put up a gasoline station
you do not have to get endorsement to Energy Regulatory Commission. The new provision only
includes financial institutions, NSSLAS, pawnshops, and other financial intermediaries.

Corporate Name Not allowed: Not allowed:

1. Identical or deceptively or 1. Not distinguishable from that already

confusingly similar to that reserved or registered for the use of
of any existing another corporation;
corporation or any other
name already protected 2. Already protected by law;
by law;
3. Use is contrary to existing law, rules,
2. Patently deceptive, and regulations
confusing or contrary to
existing laws **ex: Bulacan Corporation, Philippine Corp.

**name verification

Power of the SEC to summarily order the

corporation to cease and desist from using a
name not allowed.

SEC’s power of contempt and power to hold

corporation and directors administratively,
civilly, and criminally liable. (Sec. 17)

Registration and Corporate existence shall Procedure for incorporation:

Commencement of commence upon issuance
Corporate Existence of certificate of 1. Name reservation;
incorporation (Sec. 19)
2. Submission of articles of
incorporation and by laws;

3. Issuance of certificate of
incorporation (Sec. 18)
Non-use of Charter Non-use of charter: 2 Non-use of charter: 5 years (Sec. 21)
years (Sec. 22)
** non-filing of GIS, AFS

General information sheets, audited financial

statement

May result in suspension or The corporation shall be placed under

Continuous revocation of certificate of delinquent status. A delinquent corporation
Inoperation incorporation (Sec. 22) shall have 2 years to resume operations.
(Sec. 22)
(when penalties are not
paid)

Non-use of Charter

Pertains to a corporation is registered but it does not operate, from SEC perspective, failure to file or
non-filing of GIS (General information sheets), AFS (audited financial statement), and it does that for
the next 5 years. From SEC, it will mean that you are not doing business, SEC will consider you as
non-use of charter. Hence, SEC can revoke registration.

Continuous Inoperation

A corporation is registered in 2020, in 2021, it files GIS and AFS, but in 2020 + 5 years it does not
file reports, because it at least filed in the beginning, t is considered as continuous inoperation.

Board of Directors/Trustees and Officers

Board of Directors – stock
- Approve changes in signatories to bank accounts, court case (Board Resolution);
acts of dominion
Board of Trustees – non-stock
Officers – CEO, COO, Treasurer – CFO; Comptroller

Subject Matter Old Corporation Code Revised Corporation Code

 ** listed corporation, Corporations vested with public interest shall
looking out for interest of have independent directors constituting at
public in general least 20% of such board. (Sec. 22)
Independent directors

**
Independent directors represents the amount of shareholders in the publicly listed corporations.
They are supposed to be looking out for interest of public in general.

In person or by Stockholder or member may participate in the

representative. (Sec. 24) meeting through remote communication or
**proxy - representative of in absentia. (Sec. 23) **through online
absent member
The non-holding of elections shall be reported
**annual meeting as to the SEC within 30 days. The new date for
Election of stated in the by-laws if election shall be not later than 60 days from
Directors/Trustees not, not earlier than April the scheduled date.
15
The SEC may summarily order the holding of
an election. (Sec. 25)

**
Election of Directors/Trustees is held on annual meeting as stated in the by-laws if not stated, it
will be on a date not earlier than April 15.
- It is on the annual meeting where shareholders or members in the case of a nonstock
corporation meet to elect directors or trustees. Election can now be done through remote
communication or in absentia. (video conferencing tool)
A majority of the directors No such requirement.
or trustees of all
corporations organized
under this Code must be
Qualifications of
residents of the
Directors
Philippines. (Sec. 23)

**majority – 50%+1
 1. Conviction of an 3. Convicted by final judgment: offense
offense punishable by punishable by imprisonment for a period
imprisonment exceeding 6 years; for violating the
exceeding 6 years Corporation Code; for violating the
Securities Regulation Code
Disqualification of 2. Violation of the
Directors, Trustees or Corporation Code 4. Found administratively liable for any
Officers committed within 5 offense involving fraud acts
years prior to date of
election (Sec. 27) 5. Convicted by a foreign court or
equivalent foreign regulatory authority
for acts and violations similar to the
above. (Sec. 26)

** SEC can step in The Commission shall, motu proprio or upon

verified complaint, and after due notice and
hearing, order the removal of a director or
trustee elected despite the disqualification, or
**without cause – simply whose disqualification arose or is discovered
do not like subsequent to an election. (Sec. 27)
Removal of Directors, With cause – gross
Trustees or Officers negligence, fraud, crime
The Commission shall, motu proprio or upon
verified complaint, and after due notice and
hearing, order the removal of a director or
trustee elected despite the disqualification, or
whose disqualification arose or is discovered
subsequent to an election. (Sec. 27)
 ** through the calling of When the vacancy is due to term expiration,
special election the election shall be held no later than the
day of such expiration at a meeting called
for that purpose. When the vacancy arises as
a result of removal by the stockholders or
**dies or incapacitated members, the election may be held on the
same day of the meeting authorizing the
removal and this fact must be so stated in the
Vacancies in the agenda and notice of said meeting.
Office of Director or
Trustee (Sec. 27)

In all other cases, the election must be held no

later than forty-five (45) days from the time the
vacancy arose. (Sec. 27)

** if there are not enough However, when the vacancy prevents the
directors, convene the remaining directors from constituting a quorum
emergency board and emergency action is required to prevent
grave, substantial, and irreparable loss or
damage to the corporation, the vacancy may
be temporarily filled from among the officers
of the corporation by unanimous vote of the
remaining directors or trustees. (Sec. 28)
Emergency Board
The action by the designated director or trustee
shall be limited to the emergency action
necessary, and the term shall cease within a
reasonable time from the termination of the
emergency or upon election of the
replacement director or trustee, whichever
comes earlier. (Sec. 28)
**
A new provision in the corporation code. The directors crucial for the operation such that if
there are no directors the corporation cannot stand still especially for signatories in
accounting transaction with banks. If there are not enough directors to constitute a quorum
and there is something urgent that should be done. For ex, the corporation needs fund,
convene the emergency board.

** remaining directors or trustees elects the emergency board

 For directors, should not Directors or trustees shall not participate in the
exceed ten (10%) percent determination of their own per diems or
of the net income before compensation. (Sec. 29)
income tax of the
corporation during the Corporations vested with public interest shall
preceding year. (Sec. 30) submit to their shareholders and the
Commission, an annual report of the total
Compensation of **Directors fees compensation of each of their directors or
Directors or Trustees trustees. (Sec. 29)

Corporations vested with public interest shall

submit to their shareholders and the
Commission, an annual report of the total
compensation of each of their directors or
trustees. (Sec. 29)
Requirements: Additional requirement:
1. That the presence of (5) In case of corporations vested with public
such director or trustee in interest, material contracts are approved by at
the board meeting in least two-thirds (2/3) of the entire membership
which the contract was of the board, with at least a majority of the
approved was not independent directors voting to approve the
necessary to constitute a material contract (Sec. 31)
quorum for such meeting;

2. That the vote of such

director or trustee was not
Dealings of Directors,
necessary for the
Trustees or Officers
approval of the contract;
with the Corporation
3. That the contract is fair
and reasonable under the
circumstances; and

4. That in case of an
officer, the contract has
been previously
authorized by the board of
directors.
(Sec. 32)
The by-laws of a The board of directors may create special
corporation may create an committees of temporary or permanent nature
executive committee, and to determine the members’ term,
Executive Committee composed of not less than composition, compensation, powers, and
three members of the responsibilities. (Sec. 34)
board, to be appointed by
the board. (Sec. 35)
Cause of creation
• Emergency board - vacancy in the BOD/BOT constitute quorum
- it is contingent because , there is no quorum
• Executive committee – mundane day-to-day decision making; created by-laws
- Permanent
- All are directors, a little board which has jurisdiction to decide on specific matters
assigned to the in the by laws so that

POWERS OF CORPORATIONS

Subject Matter Old Corporation Code Revised Corporation Code

To enter into merger or To enter into a partnership, joint venture, merger,

consolidation with other consolidation, or any other commercial
corporations. (Sec. 36) agreement with natural and juridical persons.
(Sec. 35)

To make reasonable donations, including those for

Corporate Powers and
the public welfare or for hospital, charitable,
Capacity
cultural, scientific, civic, or similar purposes:
Provided, That no foreign corporation shall give
donations in aid of any political party or candidate
or for purposes of partisan political activity. (Sec.
35)

Merger: Corporation B (Dissolved entity) -> Corporation A (Surviving entity)

One of the constituent corporations has to survive and maintains its corporate entity. The other corporation
will be dissolved. Always involves two or more corporation. It involves the constituent corporations being
dissolved and with the dissolution, since the corporation B will be dissolved, instead of stockholders getting
their shares, the assets of corporation B (dissolved entity) will become property of corporation A. The
shareholders of Corporation B will get the shares from corporation A, the surviving entity. Hence, shareholders
of corporation B will have an ownership to Corporation A. Meanwhile, the original shareholders of surviving
entity will decrease their share on entity.

Consolidation: CORP A + CORP B = CORP C

In consolidation the constituent corporations are dissolved, their assets will be transferred to the newly formed
entity. The shareholders of the new corporation will be the former shareholders of the constituent
corporations.
Power to Increase or The application with the Commission shall be
Decrease Capital made within six (6) months from the date of
Stock approval of the board of directors and
stockholders, which period may be extended
for justifiable reasons. (Sec. 37)

**
TO INCREASE -> increase authorized capital stock if there is an increase it should amend its
article of incorporation
TO DECREASE – because of winding up, going other venture, subject to approval by the SEC

Sale or Other Subject to the provisions of Republic Act No.

Disposition of 10667, otherwise known as “Philippine
Assets Competition Act”, and other related laws (Sec.
39)

The determination of whether or not the sale

involves all or substantially all of the
corporation’s properties and assets must be
computed based on its net asset value, as
shown in its latest financial statements. (Sec.
39)

If the sale pertains to all of the properties then there is a need to notify SEC, and to comply
with the bulk sales law if not, then it is a crime.

5 years -> 1 term

Management No management contract shall be entered into
Contract for a period longer than five (5) years for any
one (1) term. (Sec. 43)
For instance hotels and hospitals, many hospitals are actually managed by not owner of the
structure itself but managed by corporation who is expert in operating a hospital.

BY-LAWS

Subject Matter Old Corporation Code Revised Corporation Code

Contents of By-laws The modes by which a stockholder,
member, director, or trustee may attend
meetings and cast their votes (Sec. 46)

An arbitration agreement may be provided

in the bylaws pursuant to Section 181 of this
Code.

Detailed administrative matters

- Fiscal year
- - annual meetings
- -executive committee
- Officers and functions
- quorum

MEETINGS

Subject Matter Old Corporation Code Revised Corporation Code

Regular and Special Regular meetings of Regular meetings of stockholders or
Meetings of stockholders or members members shall be held annually on a date
Stockholders or shall be held annually on a fixed in the bylaws, or if not so fixed, on
Members date fixed in the by-laws, or any date after April 15 of every year
if not so fixed, on any date in (Sec. 49)
April of every year (Sec. 50)
Written notice of regular meetings shall be
Written notice of regular sent to all stockholders or members of
meetings shall be sent to all record at least twenty-one (21) days prior
stockholders or members of to the meeting (Sec. 49)
record at least two (2) weeks
prior to the meeting.
Regular meeting – indicated with by-laws annual meeting for the election of directors or trustees.
Special meetings – are contingent
Matters Discussed The minutes of the most recent regular
at Regular Meetings meeting
of Stockholders or
Members A members’ list for non-stock corporations
and, for stock corporations, material
information on the current stockholders, and
their voting rights

A detailed, descriptive, balanced and

comprehensible assessment of the
corporation’s performance, which shall
include information on any material change
in the corporation’s business, strategy, and
other affairs

A financial report for the preceding year

An explanation of the dividend policy and
the fact of payment of dividends or the
reasons for nonpayment thereof

Director or trustee profiles (Sec. 49)

Regular and Special The right to vote of stockholders or

Meetings of members may be exercised in person,
Stockholders or through a proxy, or when so authorized in
Members the bylaws, through remote communication
or in absentia. (Sec. 49)

Place and Time of Stockholder’s or member’s That any city or municipality in Metro Manila,
Meetings meetings, whether regular or Metro Cebu, Metro Davao, and other
special, shall be held in the Metropolitan areas shall, for purposes of this
city or municipality where section, be considered a city or
the principal office of the municipality. (Sec. 50)
corporation is located, and
if practicable in the principal
office of the corporation:
Provided, That Metro Manila
shall, for purposes of this
section, be considered a city
or municipality. (Sec. 51)
 Directors or trustees who cannot physically
Regular and Special attend or vote at board meetings can
Meetings of participate and vote through remote
Directors/Trustees communication such as videoconferencing,
teleconferencing, or other alternative modes
of communication that allow them
reasonable opportunities to participate.
Directors or trustees cannot attend or
vote by proxy at board meetings.
(Sec. 52)

Presiding Officer Who shall preside at The chairman or, in his absence, the
meetings. – The president president shall preside at all meetings of the
shall preside at all meetings directors or trustees as well as of the
of the directors or trustee as stockholders or members, unless the
well as of the stockholders or bylaws provide otherwise. (Sec. 53)
members, unless the by-laws
provide otherwise. (Sec. 54)

Proxies Stockholders and members When so authorized in the by-laws or by a

may vote in person or by majority of the board of directors, the
proxy in all meetings of stockholders or members of corporations
stockholders or members. may also vote through remote
(Sec. 58) communication or in absentia. (Sec. 57)

STOCKS AND STOCKHOLDERS

Subject Matter Old Corporation Code Revised Corporation Code

Consideration for 1. Cash Additional:
Stocks 2. Property
3. Labor performed 7. Shares of stock in another corporation;
4. Previously incurred and/or
indebtedness 8. Other generally accepted form of
5. Amounts transferred from consideration. (Sec. 61)
unrestricted retained
earnings
6. Outstanding shares
exchanged for stocks in
case of reclassification or
conversion. (Sec. 62)
 CORPORATE BOOKS AND RECORDS

Subject Matter Old Corporation Code Revised Corporation Code

Books to be Kept Any stockholder who shall abuse the rights

granted under this section shall be
penalized under Section 158 of this Code,
without prejudice to the provisions of
Republic Act No. 8293, otherwise known
as the “Intellectual Property Code of the
Philippines,” as amended, and Republic
Act No. 10173, otherwise

known as the “Data Privacy Act of 2012”.

(Sec. 73)

Right to Financial If the paid-up capital of the If the total assets or total liabilities of the
Statements corporation is less than corporation is less than Six hundred
P50,000.00, the financial thousand pesos (P600,000.00), or such
statements may be certified other amount as may be determined
under oath by the treasurer or appropriate by the Department of Finance,
any responsible officer of the the financial statements may be certified
corporation. under oath by the treasurer and the
president. (Sec. 74)
(Sec. 75)

APPRAISAL RIGHT

Subject Matter Old Corporation Code Revised Corporation Code

Instances of 1. In case of amendment to Additional ground:
Appraisal Right the articles of incorporation; 4. In case of investment of corporate funds
2. In case of sale, lease, for any purpose other than the primary
exchange, transfer, purpose of the corporation. (Sec. 80)
mortgage, pledge of
corporate property;
3. In case of merger and
consolidation (Sec. 81)

EDUCATIONAL INSTITUTIONS
 Subject Matter Old Corporation Code Revised Corporation Code
Pre-requisites to Except upon favorable No requirement of prior DepEd or CHED
incorporation recommendation of the endorsement.
Ministry of Education and
Culture, the Securities and
Exchange Commission shall
not accept or approve the
articles of incorporation and
by-laws of any educational
institution. (Sec. 107)

ONE PERSON CORPORATION

Subject Matter Revised Corporation Code

Definition A One Person Corporation is a corporation with a single stockholder:
Provided, That only a natural person, trust, or an estate may form a One
Person Corporation.

Banks and quasi-banks, pre-need, trust, insurance, public and publicly-

listed companies, and non-chartered government-owned and -controlled
corporations may not incorporate as One Person Corporations

A natural person who is licensed to exercise a profession may not organize

as a One Person Corporation for the purpose of exercising such profession
except as otherwise provided under special laws. (Sec. 116)

Capital Stock
A One Person Corporation is a corporation shall not be required to have a
minimum authorized capital stock except as otherwise provided by special
law. (Sec. 117)

Additional (a) If the single stockholder is a trust or an estate, the name, nationality,
Requirements for and residence of the trustee, administrator, executor, guardian,
Incorporation conservator, custodian, or other person exercising fiduciary duties together
with the proof of such authority to act on behalf of the trust or estate

(b) Name, nationality, residence of the nominee and alternate nominee,

and the extent, coverage and limitation of the authority. (Sec. 118)

One Person Corporation shall indicate the letters “OPC” either below or at
the end of its corporate name. (Sec. 120)
By-laws A One Person Corporation is not required to submit and file corporate by-
laws. (Sec. 119)
Stockholder, The single stockholder shall be the sole director and president of the One
Director, and Person Corporation. (Sec. 121)
President
Treasurer, Within fifteen (15) days from the issuance of its certificate of incorporation,
Corporate the One Person Corporation shall appoint a treasurer, corporate secretary,
Secretary, and and other officers as it may deem necessary, and notify the Commission
Other Officers thereof within five (5) days from appointment.
Corporate The single stockholder may not be appointed as the corporate secretary.
Secretary
Additional special functions:
1. Maintain minutes book and records of the corporation;
2. Notify the nominee or alternate nominee of the death or incapacity
of the stockholder
3. Notify the SEC of the death of the stockholder
4. Call the nominee or alternate nominee and the known legal heirs to
a meeting on the election of a new director, etc.
Treasurer A single stockholder who is likewise the self-appointed treasurer of the
corporation, shall give a bond to the Commission in such a sum as may be
required: Provided, That, the said stockholder/treasurer shall undertake in
writing to faithfully administer the One Person Corporation’s funds to be
received as treasurer, and to disburse and invest the same according to
the articles of incorporation as approved by the Commission. The bond
shall be renewed every two (2) years or as often as may be required. (Sec.
122)
Nominee and The single stockholder shall designate a nominee and an alternate
Alternate Nominee nominee who shall, in the event of the single stockholder’s death or
incapacity, take the place of the single stockholder as director and shall
manage the corporation’s affairs. (Sec. 124)
When the incapacity of the single stockholder is temporary, the nominee
shall sit as director and manage the affairs of the One Person Corporation.
(Sec. 125)
Nominee and In case of death or permanent incapacity of the single stockholder, the
Alternate Nominee nominee shall sit as director and manage the affairs of the One Person
Corporation until the legal heirs of the single stockholder have been lawfully
determined, and the heirs have designated one of them or have agreed
that the estate shall be the single stockholder of the One Person
Corporation.

The alternate nominee shall sit as director and manage the One Person
Corporation in case of the nominee’s inability, incapacity, death, or refusal
to discharge the functions as director and manager of the corporation. (Sec.
125)
 The single stockholder may, at any time, change its nominee and alternate
nominee by submitting to the Commission the names of the new nominees
and their corresponding written consent. For this purpose, the articles of
incorporation need not be amended. (Sec. 126)

Minutes Book and A One Person Corporation shall maintain a minutes book which shall
Records contain all actions, decisions, and resolutions taken by the One Person
Corporation. (Sec. 127)

When action is needed on any matter, it shall be sufficient to prepare a

written resolution, signed and dated by the single stockholder, and
recorded in the minutes book of the One Person Corporation. The date of
recording in the minutes book shall be deemed to be the date of the
meeting for all purposes under this Code. (Sec. 128)
Reportorial Audited annual financial statements certified by an independent CPA. If the
Requirements total assets or total liabilities of the corporation are less than Six Hundred
Thousand Pesos (P600,000.00), the financial statements shall be certified
under oath by the corporation’s treasurer and president. (Sec. 129)

Report containing explanations or comments by the president on every

qualification, reservation, or adverse remark or disclaimer made by the
auditor in the latter’s report.

A disclosure of all self-dealings and related party transactions between the

One Person Corporation and the single stockholder
Other reports as the Commission may require. Other reports as the
Commission may require
Liability The principles of piercing the corporate veil applies with equal force to One
Person Corporations as with other corporations.
Where the single stockholder cannot prove that the property of the One
Person Corporation is independent of the stockholder’s personal property,
the stockholder shall be jointly and severally liable for the debts and other
liabilities of the One Person Corporation. (Sec. 130)
Conversion from When a single stockholder acquires all the stocks of an ordinary stock
an Ordinary corporation, the latter may apply for conversion into a One Person
Corporation to a Corporation (Sec. 131)
One Person
Corporation
Conversion from a In case of death of the single stockholder, the nominee or alternate
One Person nominee shall transfer the shares to the duly designated legal heir or estate
Corporation to an within seven (7) days from receipt of either an affidavit of heirship or self-
Ordinary Stock adjudication executed by a sole heir, or any other legal document declaring
Corporation the legal heirs of the single stockholder and notify the Commission of the
transfer. Within sixty (60) days from the transfer of the shares, the legal
heirs shall notify the Commission of their decision to either wind up and
 dissolve the One Person Corporation or convert it into an ordinary stock
corporation. (sec. 132)

DISSOLUTION

Subject Matter Old Corporation Code Revised Corporation Code

Automatic Upon approval of the In the case of expiration of corporate term,
Dissolution amended articles of dissolution shall automatically take effect
incorporation of the expiration on the day following the last day of the
of the shortened term, as the corporate term stated in the articles of
case may be, the corporation incorporation, without the need for the
shall be deemed dissolved issuance by the Commission of a
without any further certificate of dissolution. (Sec. 136)
proceedings, subject to the
provisions of this Code on
liquidation. (Sec. 120)
Involuntary A corporation may be The following may be grounds for
Dissolution dissolved by the Securities involuntary dissolution:
and Exchange Commission 1. Non-use of charter;
upon filing of a verified 2. Continuous inoperation;
complaint and after proper 3. Lawful court order dissolving the
notice and hearing on the corporation;
grounds provided by existing 4. Final judgment that the corporation
laws, rules and regulations. procured its incorporation through
(Sec. 121) fraud;
5. Final judgment that the corporation:
was created for committing
securities violations, smuggling, tax
evasion, money laundering, or graft
and corrupt practices. (Sec. 138)

FOREIGN CORPORATIONS

Subject Matter Old Corporation Code Revised Corporation Code

Securities Deposit Securities deposit with an Securities deposit with an actual market
actual market value of at least value of at least Five hundred thousand
one hundred thousand (P500,000.00) pesos and additional
(P100,000.00) pesos and securities deposit or financial instruments
additional securities deposit equivalent in actual market value to two
equivalent in actual market (2%) percent of the amount by which the
value to two (2%) percent of licensee’s gross income for that fiscal year
the amount by which the exceeds Ten million pesos
licensee’s gross income for (P10,000,000.00). (Sec. 143)
that fiscal year exceeds five
million (P5,000,000.00)
pesos. (Sec. 126)

INVESTIGATIONS, OFFENSES, PENALTIES

Subject Matter Old Corporation Code Revised Corporation Code

Power of the SEC The Commission may investigate an
to Investigate alleged violation of this Code, rule,
regulation, or order of the Commission.
(Sec. 154)

The Commission, through its designated

officer, may administer oaths and
affirmations, issue subpoena and
subpoena duces tecum, take testimony in
any inquiry or investigation, and may
perform other acts necessary to the
proceedings or to the investigation. (Sec.
155)

Subject Matter Revised Corporation Code

Unauthorized Use The unauthorized use of a corporate name shall be punished with a fine
of Corporate Name ranging from Ten thousand pesos (P10,000.00) to Two hundred thousand
pesos (P200,000.00). (Sec. 159)

Violation of When, despite the knowledge of the existence of a ground for

Disqualification disqualification as provided in Sec. 26 of this Code, a director, trustee, or
Provision officer willfully holds office, or willfully conceals such disqualification, such
director, trustee, or officer shall be punished by a fine ranging from Ten
thousand pesos (P10,000.00) to Two hundred thousand pesos
(P200,000.00) at the discretion of the Court, and shall be permanently
disqualified from being a director, trustee or officer of any corporation.
When the violation of this provision is injurious or detrimental to the public,
the penalty shall be a fine ranging from Twenty thousand pesos
 (P20,000.00) to Four hundred thousand pesos (P400,000.00). (Sec. 160)

MISCELLANEOUS PROVISIONS

Subject Matter Old Corporation Code Revised Corporation Code

Arbitration No provision An arbitration agreement may be provided
Agreement in the articles of incorporation or by-laws
of an unlisted corporation. When such an
agreement is in place, disputes between
the corporation, its stockholders or
members, which arise from the
implementation of the articles of
incorporation or by-laws, or from
intracorporate relations, shall be referred
to arbitration. A dispute shall be non-
arbitrable when it involves criminal
offenses and interests of third parties.
(Sec. 181)

ACCLAW103

I. INTRODUCTION TO COMMERCIAL LAW

Commercial Law, Defined:

Commercial law is that branch of private law that provides for the rules that govern
the rights, obligations, and relations of persons engaged in commerce or trade, and
necessarily includes the purchase, sale, exchange, traffic, or distribution of goods,
commodities, productions, services or property, tangible or intangible, including the
instrumentalities and agencies by which they are promoted and the means and
appliances by which they are carried on.
**Importance of commercial law: to comply with the rules and regulations engaged in
business transactions.
Cause in perspective of creditor: price; Cause in perspective of debtor: ownership.
Why is it important to know when a contract is perfected?
For accounting purposes, example, you are doing an accounting for the seller in order
that you can now recognized income. You need to know whether or not the goods you
are purchasing have already been delivered for accounting purposes like you are doing
the accounting for the buyer. You need to know, are the goods purchased already
delivered in order that you can now make the proper entry in the books of accounts. That
is why you need to refer to the contract, how much did we buy it for, your primary source
document will now be the contract.

A. Historical Background
Before the new Civil Code took effect, the Code of Commerce was the governing
law.
Upon its effectivity on August 30, 1950, the new Civil Code repealed provisions of
the Code of Commerce pertaining to: partnership, agency, guaranty, loan, sales, deposit.
The Code of Commerce is still applicable to the following: maritime commerce,
transportation, bill of lading, letters of credit, crossed checks, etc.

B. Electronic Commerce Act (RA 8792) (enacted 2001)

- relevant because many of the transactions, sales, lease, service transaction particularly
payment are now taken online. Even contracts now are signed electronically. You have
electronic signatures where contracts especially the contract is with an entity purchased
abroad which falls well within the scope of electronic commerce act.
- it is a law that recognizes the validity of electronic documents and electronic signatures
as similar to the wet signatures of the signatories. The Electronic Commerce Act was
passed in order to facilitate commercial transactions. Without the Electronic Commerce
Act, no sale/lease contract would be considered as perfected without the wet signatures
of the signatories but with the Electronic Commerce Act recognizing the electronic
signatures. These commercial transactions may now be deemed as perfected even if they
were signed by the signatories not face-to-face and even if the signatures were not in an
actual wet signatures with ink or pen, but the signatures were put there via computer.
Because of this, the contract can now be perfected.
Objectives of the Act:
To facilitate domestic and international transactions and contracts through the use
of electronic or optical medium and technology.
Salient Features of the Act:
Legal recognition and recognition as original documents of electronic data
messages, electronic documents, and electronic signatures.
Sample Provision:
An offer, acceptance of an offer, and other elements of a contract may be
expressed through electronic documents.

Transactions or contracts: perfected, consummated, conducted in general through

electronic means
Documents in sales, lease, etc.: may include e-mail messages, SMS, facsimile
messages, etc.

C. Omnibus Investments Code (E.O. 226)

Provisions, in General:
1. Preferred areas of investments – IPP Midterms\2011-Investment-Priorities-
Plan.pdf
2. Regional or area headquarters, regional operating headquarters
3. MNCs establishing warehouses (Multinational Corporation)
4. Special investor’s resident visa – US$75,000.00
5. Philippine Economic Zone Authority – establishment of export processing
zones in order to encourage and promote foreign commerce; is a government
owned and control corporation that regulates export industries
*A corporation can be fully foreign owned.
- all of these businesses have no restrictions in foreign equity so you can have
these businesses be owned fully by foreigners.

Entity/person involved in the transaction – particularly foreign persons and entities

PEZA transactions – considered as outside Philippine territory
D. Foreign Investments Act (FIA)
Main feature of FIA:
Introduced the concept of “Negative Lists” under the policy that foreigners can
now invest in all activities in the Philippines, except those covered in the negative lists.
Midterms\Philippine Foreign Investment Negative List.docx
Did away with the requirement of a prior BOI registration. In lieu of the BOI
registration, SEC or DTI (BTRCP) registration is required. Midterms\F-105.DOC
- If your business is not on the negative lists, it can be fully foreign owned it is
required that you register the business under foreign investment acts.
- FIA: Registration of Corporation
1. Name verification
2. Complete the AOI and by-laws
3. Evaluation and approval of SEC
4. Issuance of Certificate of Registration

However, a notice from the SEC pertaining that fully foreign owned corporation
has not registered with FIA, the corporation will register with SEC except that this
will require as an additional step in the registration with the SEC if the corporation
is fully foreign owned. Fill-up Form 105-F and it is very important to disclose the
paid-in capital.

- There will be a minimum paid-in capital. If your business is engaged the local or
domestic market (financial consultancy, yung customer mo dito sa Pilipinas),
Under the FIA, the minimum paid in capital for business should be the equivalent
of $200,000 ~ P8,000,000. You have to show proof that you have met the minimum
paid in capital.

- If your business is foreign market or export (BPOs Business Processing

Outsourcing, dealing mainly with customer care, data processing, accounting,
finance or other technical work ), whether services or goods, no need for
compliance with the minimum equivalent of $200,000 as minimum paid-in capital.

- If it fails to comply with the FIA, it will be subjected to penalties.

E. Retail Trade Liberalization Act

1. Scope and Definition of “Retail Trade”:
“Retail trade” covers any act, occupation, or calling of:
a. habitually selling merchandise, commodities, or goods;
 b. to the general public;
c. for consumption.
- Retail is an act of selling on a regular basis. Commodities for consumption or household
use.
2. Meaning of “Consumer Goods”:
Those which directly satisfy human wants and desires and are needed for home
and daily life.

3. Meaning of “General Public”:

Sale to the “general public” means that the activities of the seller must be such that
the target clientele are not only a particular person or group of persons.

4. Four (4) Categories of Retail Trade Enterprises:

a. Category A – Enterprises with paid-up capital of Php equivalent of less than
US$2.5 M;

- If the grocery store is owned by a foreigner it needs to have at least in the

equivalent of $2.5 million. (Korean supermarkets). It is possible not to meet the
$2.5 M only if the owner is Filipino.

b. Category B - Enterprises with paid-up capital of Php equivalent of US$2.5M to

less than US$7.5 M and investment per store should not be less than Php
equivalent of US$30,000.00.

c. Category C – Enterprises with paid-up capital of Php equivalent of US$7.5 M and

investment per store should not be less than Php equivalent of US$30,000.00.

d. Category D - Enterprises specializing in high-end or luxury products with paid-up

capital of Php equivalent of US$250,000.00 per store.
“High-end or luxury goods” refer to goods which are not necessary for life maintenance
and whose demand is generated in large part by the higher income groups such as:
jewelry, branded or designer clothing and footwear, wearing apparel, leisure and sporting
goods, etc.”
- Back then, when Retail Trade Liberalization Act was inexistent only Filipinos are
engaged in retail. With the Retail Trade Liberalization Act, we can now have foreigners
come to the Philippines and sell goods to the general public.
6. Aliens Investing or Engaging in Retail Trade in the Philippines:
Alien individuals, foreign partnerships, associations and corporations, and foreign-
owned domestic corporations may not engage or invest in retail trade enterprises under
Category A. However, such aliens may engage or invest in retail trade enterprises under
Categories B, C, and D.

II. SALES
A. Definition of Sale
Sale, defined (Art. 1458):
“Sale” is a contract whereby one of the contracting parties (the Seller) obligates
himself to transfer ownership of, and to deliver, a determinate thing; and the other party
(the Buyer) obligates himself to pay therefor a price certain in money or its equivalent.
Contract of sale may either be absolute (Deed of conditional sale’ contract of sale)
or conditional.
A conditional contract of sale is also referred to as “Contract to Sell”, where
ownership or title is retained until fulfillment of a positive suspensive condition, normally
the payment of the purchase price.

- In leasing, the possession is transferred to the buyer, temporarily. While in sales,

the ownership and possession are transferred to the buyer.

- A contract of sale could be absolute, “Contract of Sale”, which means that there is
a transfer of ownership. But if the contract of sale is worded in such manner,
“Contract to Sell”, transfer of ownership does not happen yet because there is
condition. Usually, that condition is the payment of the price.

- Contract of Sale: Sale of real property whereas the selling price is huge. Example,
the house and lot are being sold at 10,000,000 you already have a definite buyer.
The buyer said to seller that, for you to not look for another buyer, let’s sign a
contract. In sale of real property, it usually involves a big amount of consideration
for the selling price. Now, the buyer says I am going to make 25% down payment,
give me a month. After one month I will pay the remaining the 75% balance. If the
selling price for the real property is 10,000,000, the 25% down payment will be
P2,500,000. Hence, mere acknowledgment receipt is not acceptable, the reason
why a contract is executed. The normal procedure is that they sign a contract to
sell which entails the agreement of buyer and the seller, the buyer is going to buy
a P10M total consideration of the property. Along with the consideration of the
 contract to sell, would be the payment of 25% purchase price, P2.5M. But the
balance will be paid one month from now at a certain time and place for the
execution of the contract of sale and payment of the balance by the buyer.

- That day they sign the contract to sell (notarized), acknowledgement receipt is also
signed, the buyer now will pay 2.5M to the seller. But the property is not deemed
to be sold because the seller will not transfer ownership, will not give the owner’s
duplicate copy of the property as the purchase price is not yet paid by the buyer
completely. There is no compliance on the obligation of the buyer to the contract
yet. Once paid, contract of sale will be signed. Since the buyer complied, the seller
now has to perform the obligation to deliver and transfer ownership.

- transfer of ownership: subject to condition

B. Elements of Contract of Sale
2 sets of obligations created:

1. For seller: a) to transfer ownership, and b) to deliver possession of subject matter

2. For buyer: to pay the price
B. Elements of Contract of Sale (Art. 1475):
1. Consent or meeting of the minds to transfer ownership in exchange for the price;
2. Determinate (or determinable) subject matter; and
3. Price certain in money or its equivalent. -> consideration in contract of sale

C. Sale Distinguished From Other Contracts

1. Donation- donation is an act of liberality (consideration) whereby a person disposes

gratuitously of a thing or right in favor of another person, who accepts it.
Sale is an onerous contract while donation is a gratuitous contract.
It is important to know the distinction between sale and donation in situations when
the consideration for the transfer or alienation of a subject matter is not certain as to
ensure that it is valuable consideration in money to constitute a valid sale.

2. Barter – in a barter, one of the parties binds himself to give one thing in
consideration of the other’s promise to give another thing. In sale, the consideration
is money or its equivalent.
If the consideration is partly in money and partly in another thing and the intent of
the parties is not clear, it is a barter if the value of the thing given as part of the
consideration exceeds the amount of the money given. It is a sale if the value of the thing
given as part of the consideration equals or is less than the amount of money given.

3. Contract for Piece–of-Work – in a contract for piece-of-work, the contractor binds

himself to execute a piece of work for the employer, in consideration of a certain price or
compensation; the contractor may either employ only his labor or skill, or also furnish the
material.
In both contract for piece-of-work and contract of sale, the client or customer walks
away from the transaction bringing with him an object.
What determines whether a contract is one of work or of sale is whether the thing
has been manufactured specially for the customer and upon his special order.
Example, I want a customized dining set, in a customized dining set these are my
specifications, the owner of furniture shop says okay ma’am w will be able to finish that
in one month. After one month, come back here and get your dining set. I came back after
one month and pay worth P100,000. It is a contract for piece-of-work because what you
essentially pay for is the service or workmanship not just the thing. There will be nuisance
for the parties particularly in the contractor (differences on obligation of parties like
warranty when materials are requested by the principal).

4. Agency to Sell – 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.
In sale, the buyer himself pays for the price of the object; 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.
In sale, the buyer, after delivery, becomes the owner of the subject matter. In an
agency to sell, the agent does not become the owner of the thing even if the object is
delivered to him.
- In agency to sell, agency on commission, which manufacture clothing, the agent will get
a portion from the sales. The purchase price when you have buyer from these clothes, it
will still go the manufacturer but the buyer hands in the payment to the agent first.
- still there will be differences when it comes to obligation.
5. Dacion En Pago – or dation in payment is one whereby one property is alienated to
the creditor in satisfaction of a debt in money.
A sale gives rise to the obligation of the seller to transfer ownership and the
obligation of the buyer to pay the price. On the other hand, dation in payment
extinguishes a pre-existing obligation and changes the relationship into a sale, which
is already at the executed stage.
Dation in payment is governed by the law on sales.
- There is a pre-existing liability. Example, I borrowed from Kristine worth 10,000
pesos. I offer Kristine, I have bags that also worth P10,000. If Kristine took the
deal, the bag will be turned over. Instead of Kristine paying 10,000 for the bag, my
initial loan of 10,000 which I borrowed will be written off. The first contract is a
contract of loan while the second is a contract of sale. In the first contract, the
borrower is me who has an obligation to pay P10,000, the lender is Kristine. For
the second contract, the seller is me and the buyer is Kristine who has the
obligation to pay. Since both has an obligation to pay, Dacion En Pago will occur.
Instead of collecting P10,000, the bag is bought, in which I will also be deemed
that I paid the borrowed money.
- The obligation to pay, in a form of money, was converted by paying in the form of
a thing.

6. 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 definite
or indefinite. (temporary)
A conditional sale may be made in the form of a “lease with option to buy” in which
the lessee has the option to buy the leased property for a small consideration at the end
of the term of the lease, provided the lease has already been paid.
When the rentals are meant to be installment payments to a sale contract, it is a
sale by installments.

D. Parties to a Contract of Sale

1. General Rule on Capacity of Parties (Art. 1489)
Any person who has capacity to contract or to enter into obligations may enter into
a contract of sale.
For natural persons, the age of majority begins at 18 years.
Juridical persons such as corporations, associations, partnerships, and
cooperatives have juridical personality separate and distinct from the shareholders,
partners, or members and have full legal capacity to obligate themselves and enter into
valid contracts.
- Persons who are of age. Therefore, minors who are below 18 years old are not
capacitated to enter into contracts. Other persons who are capacitated to enter into a
contract are those who are sound mind (sane person), so apart from being adults of age
18 yrs. old and above. These persons who are able to enter into contracts should have
sound minds. Those who are insane or those who re suffering from mental incapacity,
they are not capacitated to enter into contracts. Also, persons who are deaf or mute and
who cannot read and write.
-
2. Minors, Insane and Demented Persons (Arts. 1327, 1397, 1399, 1489)
Minors, insane and demented persons, and deaf-mutes who do not know how to
write, cannot be parties to a contract of sale.
The sale and delivery of necessaries to a minor or other person without capacity
to act is valid. Necessaries cover everything indispensable for sustenance, dwelling,
clothing, medical attention, education, and transportation.

3. Sales By and Between Spouses (Arts. 73, 96, 124, Family Code, Arts. 133, 1490,
1492)
Disposition of community property or conjugal property without authority of the
court or the written consent of the other spouse is void.

Spouses cannot sell property to each other except when there is separation of
property between the spouses. The reasons for the prohibition are: a) to prevent a spouse
from defrauding his/her creditors, b) to avoid the dominant spouse from taking advantage
of the other, c) to avoid indirect violation of the prohibition against donation between
spouses.
- The Philippines follows absolute community of property relations among spouses
when two persons get married, if they do not sign a prenuptial agreement where they
designate their property relations as absolute separation of properties the default property
relations is absolute community of property. Everything that is acquired during the
marriage is considered as co-owned or 50% owned by each of the spouses regardless of
work in order that that property will be acquired even if it is only the husband who is
working and its just by virtue of the husband’s salary for instance that they are able to
purchase a house and lot, that house and lot as a general rule will be considered as 50%
owned by the wife and 50% by the husband.

- Can people who are under the absolute community of partnership sell property to
each other? Let’s say the wife will sell her property to her husband, as a general rule,
spouses are prevented to sell property to each other because of the ff reasons: (1) So
that the spouse will not run away from his/her creditors because it can happen that the
spouse who is working has a business for instance and to avoid his creditors he sells his
property to spouse so that if you look at the registration of the property you won’t find the
name of the spouse but because of the prohibition of contract of sale between spouses
that cannot be done. (2) so that if you have dominant spouse this dominant spouse cannot
compel the other spouse to sell his or her property to the dominant spouse (3) there is
also prohibition of them donating from each other
4. Specific Incapacity to Enter Into Contracts of Sale (Art. 1491)
a. Agent, with respect to property whose administration or sale may have been
entrusted to him, unless consent of the principal has been given. Brokers do not
come within the coverage of the prohibition.
- This person who is the agent and whose function is to administer property cannot
be the buyer of property unless principal allows

b. The guardian, with respect to the property of the person who is under his
guardianship.
- Kahit hindi relative, basta appointed by court

c. Executor and administrator, with respect to the property under his administration.
– if someone dies with a property, the heirs appoints someone called executor
and administrator (named in the last willing testament) to administer the
property, they cannot purchase any properties of person who died

- These relationships are based on trust. There should be no temptation on the

part of the agent, etc. to neglect principal’s, etc. interest.

- Contracts entered into by guardians, agents, administrator may be ratified by

execution of a new contract.

d. Public officers and employees, with respect to property of the State or any
subdivision thereof, or of any GOCC, the administration of which has been
entrusted to them

- There is also public office whose function is administration of public property they
cannot purchase these properties

e. Justices, judges, prosecuting attorneys, clerks of court, etc. with respect to the
property and rights in litigation;
f. Lawyers with respect to the property and rights which may be the object of any
litigation in which they may take part by virtue of their profession.
The foregoing contracts are void, even with consent of protected person, except a
principal.
 -“rescind” or to cancel, a contract is rescissible if it causes economic damage to
either one of the parties or to a third person and because of that economic damage,
the contract has to be cancelled or rescinded even if it is valid in a sense that all
elements are present, if it results in unfairness or there is an economic
disadvantage in the part of one of the parties or to a part of a third person then that
contract may be rescinded partially or in whole.

Voidable – all elements of the contract are present, there is consent, object, and
cause. However, there is something wrong with one or more in the elements
usually the element that is defective in voidable contract is the consent.

These relationship are based on trust. There should be no temptation on the part of the agent,
etc. to neglect principal’s, etc. interest.

Contracts entered into by guardians, agents, administrator may be ratified by execution of a new
contract.

1. Requisites of a Valid Subject Matter

a. It must be possible such that it must be existing, have potential existence, a future
thing, or even contingent, or even subject of a resolutory condition (Art.1462); (possible
and lic
i. Emptio rei speratae (future things) – things having a potential existence may
be the object of a contract of sale (Art. 1461); not yet inexistence has a
possible existence in
- a valid sale may be made of “the wine a vine is expected to produce; or the
grain a field may grow in a given time; or the milk a cow may yield during the
coming year; or the wool that shall thereafter grow upon a sheep; or what
may be taken at the next cast of a fisherman’s net; or the goodwill of a trade,
or the like. The thing sold, however, must be specific and identified. They
must be also owned by the vendor at the time
- For instance, the future piglets that will be given birth to by the mother pigs,
or future crops the at the time of the perfection of contract of sake, these
piglets, crops may not yet be present but because they have potential
existence it is possible for them to eventually exist, these future things may
be objects of a contract of sale, they can be valid subject matter of a contract
of sale

ii. Emptio spei – sale of mere hope or expectancy

(1) S binds himself to sell for a specified price to B a parcel of land if he wins
a case for the recovery of said land pending in the Supreme Court. Here,
 the obligation of S to sell will arise, if the “expected thing,’’ the land, will
come into existence, i.e., if he wins the case. Before a decision is rendered,
there is only “the mere hope or expectancy’’ that the thing will come into
existence.

(2) B buys a sweepstakes ticket in the hope of winning a prize. Here, the
object of the contract is the hope itself. The sale is valid even if B does not
win a prize because it is not subject to the condition that the hope will be
fulfilled.

- is not a valid contract of sale because it is simply mere hope or

expectancy This means that there is the big possibility that this subject
matter will not come about.
iii. Contingent/Resolutory condition – things subject to contingent or resolutory
condition may be the object of the contract of sale (Art. 1465)

(1) S sold a parcel of land to B subject to the condition that S can

repurchase the property within two years from the date of sale. If S exercises
the right to repurchase, then the sale made by B to C before the lapse of
the two (2)-year period falls. The rule, however, that a vendor cannot
transfer to his vendee a better right than he had himself, suffers an
exception in case of property with Torrens title.
b. Subject matter must licit;
A thing is licit and may be the object of a contract when it is not outside the
commerce of men. When the subject matter is illicit, the contract of sale is void.
I. Sale of animals suffering from contagious diseases is void.
II. A contract of sale of animals shall be void if the use or service for which they
are acquired are stated in the contract and they are found to be unfit.

c. Subject matter must be determinate or determinable;

Determinate thing: a thing which is particularly designated or physically
segregated from all others of the same class.
Determinable thing: a thing is determinable if at the time the contract is entered
into, the thing is capable of being made determinate without the necessity of a new or
further agreement between the parties. The thing should be determinable at the point of
perfection of the contract.
- It is not yet known but there is a way for the parties to know based on the provision
of contract of sale. Let’s say I’m going to sell the pair of shoes that will be judged in the
Marikina shoefest contest as the best designed pair of shoes at this moment, we don’t
know yet what specific shoes I am selling but there’s a way to know what it will be by
finding out who will be going to win in the Marikina shoefest
2. Sale of Undivided Interest (Art. 1463)
The sole owner of thing may sell an undivided interest therein, and there would
result co-ownership over the subject matter.
- Co-ownership, ex: house & lot and it’s inherited by two siblings, the two siblings
they co-owned that house & lot. They owned 50% each but their ownership is undivided
which means first child cannot say okay I own the second floor and then you own the first
floor. That cannot be done in a co-ownership precisely because the ownership is
undivided but can one of the co-owners can the first child sell his co-ownership in the
house & lot? Yes, it can be done but the one that can be sold is only the undivided interest
so the first child cannot say okay buyer I am selling the first story because of the rule that
in co-ownership what the co-owners have is the undivided interest in the thing.
Ex:
S is the owner of a parcel of land with an area of 1,000 square meters. As the sole owner,
S can sell to B the entire portion; or only 500 square meters of the land by metes and
bounds in which case he becomes the sole owner of the remaining 500 meters and B the
portion sold; or he may sell an undivided half of the land without specially designating or
identifying the portion sold, in which case they become co-owners.
As a co-owner, S or B can convey or transfer only the title pertaining to the undivided half
of the land, for vital to the validity of a contract of sale is that the vendor be the owner of
the thing sold. (Art. 1459.

3. Sale of Undivided Share in Mass (Art. 1464)

In sale of fungible goods, there may be sale of an undivided share of a specific
mass. The buyer becomes the owner-in-common of such share of the mass as the
number, weight, or measure of the mass. Such a sale therefore results in proportional
co-ownership over the mass.
- for instance, you have a warehouse, it is full of sack of rice so it is owned by those sacks
of which is estimated by 100 sacks of rice but it’s just an estimate, it is a specific mass
and it is owned by two persons and because the ownership is undivided each of the co-
owners cannot say okay my ownership and the rice in that warehouse pertains to those
that are from the bottom that cannot be possible because of the nature of the ownership
but can these owners of the rice sell their undivided share of the mass, of course, as with
the previous case.
4. Seller’s Obligation to Transfer Ownership Required at Time of Delivery (Art. 1459,
1462, 1505)
 The seller need not be the owner of the thing sold at the time of perfection. It is
sufficient that he is the owner at the time of delivery of the object of the contract.
Where goods are sold by a person who is not the owner thereof, and who does not
sell them under authority or with the consent of the owner, the buyer acquires no better
title to the goods than the seller had, unless there is estoppel on the part of the owner.
- It is important that the seller has ownership over the subject matter at the
time that he is required to deliver. At the time that the parties are negotiating or agree
over the contract of sale, it is not necessary that the seller actually owns that thing.
- For ex: I have a friend who grows broccoli in Baguio and I look for buyers of broccoli
here in manila but these buyers they buy directly from me so the usual process is I offer
to sell broccoli to buyers here in Metro Manila and if there will be a confirmed buyer I am
now going to purchase broccoli from my friend in Baguio city and deliver now the broccoli
to buyer here in metro manila. Let’s say I put out an ad on Facebook, 10 kilos of broccoli
available in Baguio city and then at that point in time I don’t own yet the broccoli, I don’t
own it, yet I haven’t purchase it from my friend. Then someone responds and said, I am
willing to buy broccoli for how much, okay I’m now going to remit the payment when do
you deliver it to me. At that point there is already a contract of sale but I am not yet the
owner of broccoli at that point so we agree that I am going to deliver the broccoli the
following day so I now call my friend and inform I have buyer for your 10 kilos of broccoli.
I am now remitting my payment for the 10 kilos of broccoli. Upon your receipt of my
payment, please deliver the broccoli to me. So upon my payment, that is the time that we
already have a contract of sale between me and the mighty broccoli grower and then
once I acquire now the ownership of broccoli that is the time now that I can deliver
because I cannot deliver something that I do not own but I can sell I can enter into
contracts of sale over subject matter, broccoli, even if I don’t own yet broccoli what is
more important is that at the time that I deliver the broccoli I should have ownership, and
have the right to transfer ownership.
5. Legality of Subject Matter (Arts. 1409, 1458, 1461, 1462, 1575)
a. Subject matter is prohibited
b. Completely simulated sale
c. Illegal motive- does not record the contract void.

F. PRICE IN A CONTRACT OF SALE (ARTS. 1469 TO 1474)

1. Requisites for a Valid Price:

a. Must be real (Article 1471)
 Price is “real” when at the perfection of the contract, there is every
intention on the part of the buyer to pay the price and every expectation on the part
of the seller to receive such price as the value of the subject matter he obligates
himself to deliver.
If the price is “simulated” (Reducing price) (i.e., neither party had intention that
the amount will be paid), the sale is void but the act may be shown to have been in reality
a donation or some other contract. – pag walang pambayad
Status: void

If the price is “false” (i.e., the real price is not declared) – can be void, the contract
of sale is valid but the underlying deed is subject to reformation to indicate the real
price. Pag due to mistake, pwede pa mareform yung contract
For consideration in a contract of sale to be considered “real”, it would have to be for
“valuable consideration. A contract of sale with a mere nominal price would be
considered void since the price would be considered fictitious.
Failure to pay the price does not cancel the sale for lack of consideration. (only
buyer’s failure to perform his obligation)
b. Must be in money or its equivalent (Arts. 1458 & 1468)
The price in a contract of sale must be in money or its equivalent. A contract is
not a true contract of sale if the price consists of services.
However, if the contract consists partly in money, and partly in another thing,
the transaction can still be considered a contract of sale. At the very least, a true contract
of sale must have price (money or equivalent) as part of its consideration.
Cancellation of liabilities of seller had been held as valid consideration for a
sale.
Bumili ka car worth 1,000,000, nag pay ka cash 800,000 tas yung natirang 200,000 in
kind. -> contract of sale
Bumili ka car worth 1,000,000, nag pay ka cash 200,000 tas yung natirang 800,000 in
kind. -> barter
Bumili ka car worth 1,000,000, as a buyer nag pay ka cash 500,000 tas yung natirang
500,000 in kind. -> contract of sale
c. Price must be certain or ascertainable at perfection (Art. 1469)
Price is certain when it has been expressed and agreed in terms of specific
pesos and/or centavos.
 Price is ascertainable if it is so with reference to another thing certain, or that
the determination be left to the judgment of a specified person or persons.
If the price cannot be determined, the contract of sale is inefficacious.

d. Manner of payment must be agreed upon

The manner and terms of payment is an integral part of the concept of “price”
due to the time value of money.
A seller may be willing to accept a comparatively lower price if it is payable within
a short period of time and yet would be demanding a higher price if the purchase
price is to be paid over a long stretch of time.
Terms of payment do not always have to be expressly agreed when the law
supplies by default such term.
In general, under Art. 1179 of the Civil Code, price is deemed to be demandable
at once.

2. How Price is Determined:

a. By Third Person (Art. 1469)
If the 3rd party designated to fix the price is unable or unwilling to fix it, the contract shall
be inefficacious.
If the 3rd party designated to fix the price is unable to do so due to fault of the seller or
buyer, the party not in fault may undertake remedies against the party at fault.
Ex: I sell jewelry but I do not know the price, let the expert jeweler to decide how
much the price is, that case a third person determines the price and if this third
person is not able to fix the price or acts in bad faith, then the price will be settled
to the suggested retailed price of DTI next week. At the time that the buyer and I
agree, we do not agree on a fixed price yet but we refer to the suggested retailed
price of the DTI on the week that the jewelry will be delivered.

b. By the Courts (Art. 1469)

If the 3rd party designated to fix the price acts in bad faith or by mistake, the courts may
fix the price.
S sold to B a diamond ring. The determination of the price was left to C whom the
parties thought was a jeweler. If C acted by mistake, as when he is incompetent to
 know the price of the diamond ring, or in bad faith, as when he connived with S,
the court may fix the price.

c. By Reference to a Particular Day, Exchange, or Market (Art. 1472)

The price of securities, grain, liquids, and other things shall be considered
certain when the price fixed is that which the thing would have on a definite day, or
in a particular exchange or market, or when an amount is fixed above or below the
price on such day, or in such exchange or market, provided said amount is certain.
The price of a thing is certain by reference to another thing certain, such
as to certain invoices then in existence or known factors or stipulated formula.

d. Price Cannot be Determined Solely by One Party to the Contract (Arts. 1182,
1473)
The fixing of the price cannot be left to the discretion of one of the contracting parties.
Because it is unfair, kapag yung isang party pinush pero yung isa hindi, then they can go
to the court in order that the court will now be the one to fix the price
3. When There is Sale Even if No Price is Agreed Upon (Art. 1474):
If the thing or any part thereof has been delivered to and appropriated by the
buyer, he must pay a reasonable price therefor. What is reasonable price is a question
of fact and the courts have the authority to fix the reasonable price.
The rationale for the foregoing rule is to prevent unjust enrichment of the
buyer who is not allowed to retain the subject matter without being liable to pay the
price.
I go to my neighbor’s house and see a very nice plant and due to some misunderstanding
I thought that my neighbor is donating it to me so I take the plant maybe the neighbor is
wala dun yung kasambahay lang and when my neighbor gets home and finds out that her
plant was taken by me she calls me and tells me “I understand you took the plant. I was
not donating it to you I was just describing it to you. It is not actually for sale.” In that case
because I took the plant, the scenario is like I should pay for it because it is actually held
by sale by the neighbor so me taking the plant even if because of the misinterpretation, I
should return it. If I don’t want to return it I will go and tell my friend I will just buy it and
then that is the time now that we are now going to agree on the price.
4. Inadequacy of Price (Art. 1470):
Gross inadequacy of price does not affect a contract of sale, unless such
inadequacy of price indicates a defect in the consent or that the parties really intended
a donation or some other contract.
 Although sale is an onerous and commutative contract, there is no
requirement that the price given is exactly the value of the subject matter delivered.
In a sale with right to repurchase, gross inadequacy of price raises a
presumption of equitable mortgage. The proper remedy of seller is to have the
contract declared a mortgage contract and pay the debt.
- It can be deemed as adequate if it is sold below the fair market value but take note
that if the price is inadequate it does not mean that the contract is void or voidable.
But if there is an indication that the price is very low because the seller was
intimidated by the buyer. Then, this means that there is a defect in a consent which
now makes the contract as voidable.

5. Earnest Money and Option Money (Arts. 1479 & 1482):

Whenever earnest money is given in a contract of sale, it is considered as
part of the price (Art. 1479). – is like a downpayment
Option money is the consideration paid by a person for the right to buy
merchandise or property within the agreed period and at a fixed price (Art. 1479, 2nd
par.)
- There is a house & lot being sold and there is an interested buyer but the interested
buyer wants to do more research and while doing his or her research he would
like the seller to not sell the property, but the seller says I might lose the
opportunity to be able to sell it for a good price so the buyer did, o sige in
consideration of the given period, you’re going to give to me whether or not to
purchase that house, I am going to give you an option money. Option money is
the consideration for an option contract, the giving of a period of time to the
respective buyer to consider kung bibilin. Option money is not part of purchase
price unless later on if the respective buyer agrees to eventually buy the thing that
is being offered by sale, the seller agrees to consider or credit option money as
part of purchase price.
Earnest money is something of value given by the buyer to the seller to show that
the buyer is really in earnest, and to bind the bargain. It is actually a partial payment
of the purchase price and is considered as proof of the perfection of the contract
- it is an indication that the buyer is buying what is being sold but the buyer does not
have enough money to pay for the full price so the earnest money is a lot like the
down payment, it is already part of the price, there is a contract of sale.
*it some instances option money can be part of purchase price when parties agreed
Distinction Between Earnest Money and Option Money (Arts. 1479 & 1482):
 a. Earnest money is part of the purchase price; option money is given as distinct
consideration for an option contract;
b. Earnest money is given only where there is already a sale; option money applies
to a sale not yet perfected;
c. When earnest money is given, the buyer is bound to pay the balance; when the
would-be buyer gives option money, he is not required to buy and he may even
forfeit it depending on the terms of the option.
*may contract of sale na sa earnest money sa option money may option contract
G. FORMATION OF CONTRACT OF SALE (ARTS. 1475 TO 1488)

1. Stages in Life of Contract of Sale:

a. Negotiation/preparatory: period of negotiation and bargaining, ending at the
moment of agreement of the parties.
- Pwede rin sa buyer manggaling yung offer

b. Perfection/birth: the moment the parties come to agree on the terms of the
contract.
- Execution of a contract of sale, you now have all three elements of a contract
(object, consent, consent), signing of contract

c. Consummation/death: the process of fulfillment or performance of the terms

agreed upon in the contract.

-doing the obligation, paying the price

a. Negotiation/preparatory stage
Offer – formally initiates the negotiation stage and is subject to the complete will of the
offeror. The offeror has the right to fix the time, place, and manner of acceptance (Art.
1321). The offeree has only the choice to accept or reject the offer in its entirety (Art.
1319).
General rule: an unaccepted unilateral promise to buy or to sell, prior to acceptance,
does not give rise to any obligation or right.

“Freedom of contract” – the right to choose with whom to contract.

Counter-offer – considered as a rejection of the original offer and, therefore, replaces the
original offer.
Ineffective offer – an offer becomes ineffective upon death, civil interdiction, insanity,
or insolvency of either party before acceptance is conveyed and received by offeror
(Art. 1323).

“Contract to Sell” – a promise to buy and sell a determinate thing for a price certain is
reciprocally demandable. – conditional sale, the condition is the full payment of the price
for the thing
“Option contracts” – an accepted unilateral promise to buy or to sell a determinate thing
for a price certain is binding upon the promissor if the promise is supported by a
consideration distinct from the price (Art. 1479, 2nd par.)
- Preparatory contract to contact of sale

b. Perfection/birth stage
Perfected contract of sale: a contract of sale is perfected when a person, called
the seller, obligates himself, for a price certain, to deliver and to transfer ownership of a
thing or right to another, called the buyer, over which the latter agrees and obligates
himself to pay the price.
Consent: manifested by the meeting of the offer and the acceptance upon the thing
and the cause which are to constitute the contract. The offer must be certain and
acceptance absolute (Art. 1319).

Business advertisements: business advertisements are not definite offers but mere
invitations to make an offer, unless it appears otherwise (Art. 1325).
*false advertising – the obligation could pertain to a compliance with DTI rules with respect
to advertising you can file a case with a company. But insisting to buy this thing , is
different because you are basing your right on a contract which clearly is not yet present.
Advertisements for bidders: these are simply invitations to make proposals, and the
advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears
(Art. 1326).
Absolute acceptance: the acceptance should be plain and unconditional and without any
new proposition. However, acceptance coupled with deviations or amendments which are
not material may still give rise to a valid contract of sale.
- I am buying that thing at that price.
Manner of acceptance: acceptance may be express or implied
Acceptance by letter or telegram: binds the offeror only from the time the acceptance
came to his knowledge (Art. 1319).
Sale subject to suspensive condition: there is no perfected contract of sale as perfection
takes place from the moment the condition is fulfilled.
Sales at auction: sale by auction is perfected when auctioneer announces its perfection
by the fall of the hammer or in other customary manner. Where goods are put up for sale
by auction in lots, each lot is subject of a separate contract. A right to bid may be reserved
by or on behalf of the seller (Art. 1476).
Earnest money: earnest money in a contract of sale is considered part of the purchase
price and is proof of perfection of the contract (Art. 1482). In the absence of a specific
stipulation, seller cannot keep the earnest money received in the event the contract is
rescinded due to fault of buyer (Art. 1385).
Place of perfection: generally, it is the place where there is a meeting of offer and
acceptance; however, for acceptance through letter or telegram, it is the place where the
offer was made (Art. 1319).

Expenses of execution and registration: borne by seller, unless there is contrary

stipulation (Art. 1487). Expenses for putting goods into deliverable state shall be borne
by the seller (Art. 1521). The duty to withhold taxes due on the sale is imposed on the
seller.
- Sale of real property:
Income tax:
capital gains tax, capitalized withholding tax (ordinary income tax) – seller
VAT – passed on buyer
DST (Documentary Stamp Tax) – buyer
Local transfer tax: buyer
Registration: buyer
Notary fees: buyer
Performance does not affect perfection: the ability of the parties to perform their obligation
in a contract, such as the buyer’s payment of the price, does not affect the perfection of
the contract. – seller will have remedies to the buyer
*perfection leads to valid and binding contracts which rises the obligation
2. Option Contract
Elements of a valid option contract:
a. Consent of the parties
b. Subject matter – the option right to buy a determinate object for a price
certain, including manner of payment, within a given period
 c. A consideration separate from purchase price for the determinate object
offered for sale
The consideration in an option contract may be anything or undertaking of value,
as when the option is integrated in a lease contract.
- There is a house & lot being sold and there is an interested buyer but the interested
buyer wants to do more research and while doing his or her research he would like the
seller to not sell the property, but the seller says I might lose the opportunity to be able to
sell it for a good price so the buyer did, o sige in consideration of the given period, you’re
going to give to me whether or not to purchase that house, I am going to give you an
option money. Option money is the consideration for an option contract, the giving of a
period of time to the respective buyer to consider kung bibilin. Option money is not part
of purchase price unless later on if the respective buyer agrees to eventually buy the thing
that is being offered by sale, the seller agrees to consider or credit option money as part
of purchase price.
Earnest money is something of value given by the buyer to the seller to show that the
buyer is really in earnest, and to bind the bargain. It is actually a partial payment of the
purchase price and is considered as proof of the perfection of the contract
- it is an indication that the buyer is buying what is being sold but the buyer does not have
enough money to pay for the full price so the earnest money is a lot like the down
payment, it is already part of the price, there is a contract of sale.
Obligation of offeror/seller: the seller of the determinate thing subject of the option
contract cannot sell the thing to another or withdraw the offer to sell prior to the period
granted for the exercise of the option.
Option without separate consideration: the offer may be validly withdrawn prior to
acceptance. If the offer is accepted prior to withdrawal, a valid contract of sale would
arise.

Exercise of the option: the party who has the option may just notify the offeror of his
exercise of the option. Notification need not be coupled with payment of the price for the
thing or property, provided such payment is delivered to the seller upon the latter’s
performance of his part of the agreement.

Effect of exercise of option: the exercise of the option would give rise to a valid contract
of sale.
Option Contract vs. Contract to Sell:
An option contract is an unaccepted or unexercised contractual offer which states the
terms and conditions on which the owner is willing to sell the thing or property, if the holder
elects to accept them within the time given.
- There is yet no agreement pertaining to the specific property being sold, from
that period of time
A contract to sell fixes definitely the rights and obligations of both parties at the time of its
execution and leaves no choice to either party whether to withdraw or proceed with the
contract.
- The buyer as agreed to buy that thing being

3. Right of First Refusal

Concept of “Right of First Refusal”: a promise on the part of the owner that if he
decides to sell the property in the future, he would sell it to the promisee. It merely gives
rise to a preparatory juridical relation not governed by contracts because the exercise of
the right would be dependent on the promisor’s eventual intention to enter into a binding
contract but also on the terms, including the price, which are yet to be decided on.
- It is the right given to a person to be the one to who offer will be made first with
respect to the sale of property. It is the person who may have the right to refuse
to buy that thing first. You usually see this in a contract of lease, use of property
in a specific period of time and has a provision that upon termination of contract
of lessee and lessor, the lessee has the right of first refusal. In this case if the
lessor now decides to sell the property, the lessor should first offer the property
first to the lessee. If the lessee agrees, he will be the buyer. Otherwise, lessor will
sell to another buyer.

Requirement of enforceable “Right of First Refusal”: only rights of first refusal embodied
in a written contract, such as those attached to a contract of lease, give rise to enforceable
rights.
Effect of seller’s violation of “Right of First Refusal”: the contract of sale entered into
by seller in violation of right of first refusal is rescissible (status). Kapag
binenta niya sa third person nang hindi inaalok yung lessee, may Karapatan siya
irescind yung kontrata.

4. Form of Sales
 Form not important for validity of sale: a contract of sale may be made in writing,
or by word of mouth, or partly in writing and partly by word of mouth (Art. 1483).
Exception: contracts of sale required to be in writing:
a. The power to sell a piece of land or interest therein must be in writing,
otherwise the sale by the agent would be void (Art. 1874).
b. Sale of large cattle must be in writing, otherwise the sale is void.
c. Sale of land by non-Muslim hill tribe cultural minorities is void if not approved
by the NCIP.
Statute of Frauds: provides for unenforceability by action of the following agreements
unless the same or some note or memorandum thereof be in writing and subscribed by
the party charged and his agent:
a. Sale agreement which by its terms is not to be performed within a year from
the making thereof.
- I offer to sell my laptop to Ms. X but I am going to use this for 1 year so
I am going to sell it to you after 1 year.

b. Agreement for the sale of goods, chattels, or things in action, at a price not
less than Php500.00.
c. A sale of real property or of an interest therein.
Evidence of the foregoing cannot be received without the writing or a secondary
evidence of contents (Art. 1403).

Exceptions to Statute of Frauds: the following sales, even if not in writing, would still be
enforceable:
a. When there is a note or memorandum thereof in writing and subscribed by the party
charged or his agent (Art. 1403).
b. When there has been a partial consummation of the contract of sale (Art. 1403).
c. When there has been failure to object to presentation of secondary evidence as to
existence of contract (Art. 1403)
d. When sales are effected through electronic commerce.

Business forms to prove sale: order slips, delivery charge invoices, etc. may be
inadequate to establish the existence of a contract of sale but their probative weight
must be evaluated not in isolation but in conjunction with other evidence to prove the
transaction, such as testimony of a witness and demand letters.
Sales effected as electronic commerce: electronic documents shall have the legal effect,
validity or enforceability as any other document or legal writing provided the electronic
document maintains its integrity and reliability and can be authenticated.

H. PERFORMANCE OR CONSUMMATION (ARTS. 1493 TO 1506)

1. Obligations of Seller
a. To preserve thing sold: when the thing sold is a specific or determinate thing, the
seller, upon perfection and even prior to delivery, is obliged to take care of the thing
with the diligence of a good father of a family (Art. 1163). Failure of the seller to
preserve the determinate thing makes him liable for damages (Art. 1170).
b. To deliver the thing sold: the seller is bound to i) transfer the ownership of, and ii)
deliver the thing which is the object of sale to the buyer (Arts. 1495 & 1458). The
only means by which ownership of thing sold is transferred is by the mode of tradition
or delivery, actual or constructive.
c. To deliver fruits and accessories: the buyer has a right to the fruits of the thing
sold from the time the obligation to deliver it arises. However, the buyer acquires
no real right over the thing and the fruits until it has been delivered to him (Art. 1164
& 1537).

The seller is bound to deliver the accessions and accessories of the thing sold in
the condition in which they were upon the perfection of the contract (Art. 1166 &
Art. 1537).

Basis: accessions and accessories always follow the principal

d. To warrant the thing sold: the buyer is obliged to warrant the thing which is the object
of the sale (Art. 1495).

An express warranty is an affirmation of fact or any promise by the seller relating to

the thing sold and the natural tendency of such affirmation or promise is to induce
the buyer to purchase the thing, with the buyer relying on the affirmation or promise.

- Selling of secondhand items: “wala po kaming warranty dito” => wrong, because
warranty as a rule we are talking about obligation of seller in a contract of sale, lahat
ng sellers, lahat may warranties which will suit the purpose of what is being
purchased.

2. Delivery/Tradition of Thing Sold

a. Essence of delivery/tradition: ownership of the thing sold is a real right which the buyer
acquires only upon delivery of the thing to him. There is delivery if the thing sold is
placed in the control and possession of the buyer.

An important factor that gives effect to the act of delivery is the actual intention of the
seller to deliver and the acceptance by the buyer; it is a composite act.

Another important factor that gives effect to the act of delivery is that it is a consequence
of a valid contract.

b. Types of delivery:
I. Actual or physical delivery: when the thing sold is placed in the control and
possession of the buyer (Art. 1497).
II. Constructive delivery: constructive delivery can take several forms and may be in
any manner signifying agreement that the possession is transferred from the
seller to the buyer (Art. 1496). Constructive delivery has the same legal effect as
actual or physical delivery.

c. Types of constructive delivery:

i) Execution of public instrument (Art. 1498): in the case of both movables and
immovables, if the sale is through a public instrument, execution thereof shall be
equivalent to the delivery of the thing which is object of the contract, unless the contrary
appears from the instrument.
In order that there is delivery through execution of public instrument, the buyer should
acquire control over the subject matter by virtue of the execution of the instrument.
The seller should have control over the subject matter for a reasonable period so as to
allow the buyer a reasonable opportunity to take over such control.

- Proof of delivery, yung kontrata ng deed of sale na pinirmahan kasi ayun yung
ownership mo

ii) Delivery of keys (Art. 1498): as to movables, there is constructive delivery if the keys
of the place or depository where the movables are stored or kept are delivered to the
buyer.
iii) Constitutum possessorium (Art. 1500): after the perfection of the contract of sale, the
seller continues to hold physical possession of the thing sold, no longer in the concept
 of an owner but as a lessee or any other form of possession other than in the concept
of an owner.
- It takes place when the vendor continues in possession of the property
sold not as owner but in some other capacity, as for example, when the
vendor stays as a tenant of the vendee. In this case, instead of the
vendor delivering the thing to the vendee so that the latter may, in turn,
deliver it back to the vendor, the law considers that all these have taken
place by mere consent or agreement of the parties.
- The owner of the property sells the property but after the sale the seller will
still have possession on the thing that was sold and yet even if with the
previous owner or the seller, the ownership is still transferred to the buyer.
- Mr. A owns a hacienda a 10 hectare hacienda in tarlac, and then mr. a sells
it to mr. B, but Mr. A tells Mr. B can I be the care taker or can I lease the
hacienda from you. Yung owner si Mr. B pero si A hindi siya owner pero
part pa rin siya as a lessee.

iv) Traditio brevi manu (Art. 1499): before the contract of sale, the would-be buyer was
already in possession of the thing sold, say as a lessee, and pursuant to sale, he would
now hold possession in the concept of an owner. It is the opposite of constitutum
possessorium.

- This mode of legal delivery happens when the vendee has already the
possession of the thing sold by virtue of another title as when the lessor
sells the thing leased to the lessee. Instead of turning over the thing to
the vendor so that the latter may, in turn, deliver it, all these are
considered done by action of law.

- Someone who used the possessed property not as owner after the sale will
now possessed it as owner.

- Ex: I am leasing a condo unit then, I have the right of first refusal under
contract of lease the owner of the condo unit offers sale to me, I accept so
I pay for the price and then once I pay the price and signed the deed of
sale, ako na owner, and I continue the possession in the condo.
 v) Traditio longa manu (Art. 1499): this is delivery of a thing merely by agreement, such
as when the seller points the property subject matter of the sale by way of delivery
without need of actually delivering physical possession.
- The first part of Article 1499 refers to traditio longa manu. This mode of
delivery takes place by the mere consent or agreement of the contracting
parties as when the vendor merely points to the thing sold which shall
thereafter be at the control and disposal of the vendee. It should be noted
that delivery “by the mere consent or agreement of the contracting parties”
is qualified by the phrase “if the thing sold cannot be transferred to the
possession of the vendee at the time of the sale.”

- You have a big parcel of land divided into 10 subdivisions, I buy one and
how does the seller delivers it to me turo niya, then the lot which is closed
to the river that is the lot that I am selling to you.

vi) Negotiable document of title (Art. 1513 & 1514): a document of title includes any bill
of lading, warehouse receipt, etc. used in the ordinary course of business in the sale
or transfer of goods as proof of the possession or control of the goods. A “negotiable”
document of title states that the goods referred to therein will be delivered to “bearer”
or “to order”.
A person to whom a negotiable document of title has been negotiated acquires title
to such goods as the person negotiating the document to him had.
• Someone is engaged in business of importation. Mr. A import 10 samsung TVs
from Korea. Upon arrival of the TV sets from the ports, the 10 tv sets are
transferred to a warehouse, there are businesses whose business is operation of
a warehouse so they basically store different items, and they charge the owners
of this items for the storage in the warehouse. These 10 tv sets are stored in a
warehouse. And upon storage, what is issued by the company that owns the
warehouse, a warehouse receipt so in the warehouse receipt it states the items
that are owned by Mr. A in the warehouse including its value. Then, there is an
endorsement. It is a negotiable document of title because with the warehouse
receipt the owner of the TV sets, Mr. A, can now go around and look for buyers of
TV sets without him carrying the items. Only showing the warehouse receipt. If he
finds a buyer, endorse niya lang sa likod na please accept this instructing the
owner of the warehouse company to release the TV sets dun sa buyer. Pagbigay
niya ng warehouse receipt nay un with his endorsement to the buyer, it is deemed
as delivered na yung TV sets to the buyer kahit na he did not physically transfer
the item to the buyer.
vii) Delivery of incorporeal property (Art. 1501): delivery of incorporeal property, which has
no physical existence:
 - when the sale is made through a public instrument, the execution thereof shall
be equivalent to delivery of thing
- by the placing of the titles of ownership in the possession of the buyer
- the use by the buyer of his rights, with the seller’s consent
• intangible assets
-patents, logo, and stocks
- how to transfer ownership: stock: stock certificate, patent: certificate of patent by
intellectual property office
viii) Delivery through carrier (Art. 1523): delivery of goods to a carrier for the purpose of
transmission to the buyer is deemed delivery to the buyer, unless the contrary appears
*incoterms - these are different arrangement particularly with respect to goods that
are shipped from one country to another. They specifically indicate who is going to
bear the risks, charges, shipping, damages, and insurance depending on the
specific.
- F.A.S. (Free Alongside) Sales: the seller pays all charges and is subject to risk
until the goods are placed alongside the vessel
- F.O.B. (Free on Board) Sales: the seller bears all expenses until the goods are
to be F.O.B. Accordingly, as to whether the goods are delivered F.O.B. at point
of shipment or point of destination determines where title to the property passes
to the buyer.
• F.O.B. manila, the transfer of the title over the thing that is being sold will
be in Manila, pagdating sa Manila, pagkadeliver sa consignee, there will
be transfer of title and ownership.
- C.I.F. (Costs, Insurance, and Freight) Sales: the price covers not only the costs
of the goods but also the expenses for freight and insurance to be paid by the
seller.
2 schools of thought re: transfer of title in C.I.F. sales:
- carrier acts as agent of buyer who pays the freight, hence, delivery to
carrier is delivery to buyer
- seller takes on responsibility of insuring the goods and providing shipment
to buyer, hence, seller must continue to bear the risk of loss during
shipment period
* Where goods are sent to the buyer under circumstances in which the seller knows that
it is usual to insure, the seller must give notice to the buyer so that buyer may insure
them during transit. If seller fails to do so, seller may be liable for goods during transit.

d. Completeness of delivery:
i) In case of movables:
In general (Art. 1522):
▪ if seller delivers quantity of goods less than he contracted to sell, buyer may
reject the goods; if buyer accepts or retains goods knowing seller will not deliver
the goods in full, buyer must pay for the goods at the contract rate;
▪ if buyer used or disposed of goods delivered before knowing that seller is not
going to deliver in full, buyer shall only be liable for fair value to him of goods
received;
▪ if seller delivers quantity of goods more than he contracted to sell, buyer may
accept goods included in contract and reject the excess; if buyer accepts the
whole of the goods delivered, he must pay for the goods at the contract rate; if
subject matter is indivisible, buyer may reject the whole of the goods
▪ if seller delivers goods mixed with goods not included in the contract,
buyer may accept the goods in accordance with the contract and reject
the rest; buyer may reject goods entirely if subject matter is indivisible.
Movables held by 3rd party (Art. 1521):
- if at the time of sale, the goods are in the possession of a 3rd person, seller has
not fulfilled his obligation to deliver to buyer unless such third person
acknowledges to buyer that he holds the goods in buyer’s behalf
Sale of specific mass of movables (Art. 1480):
- in sale of specific mass, the subject matter is the mass and not the actual number
of units or tons contained therein; hence, quantity delivered may be less than
parties’ estimate; distinguished from sale of movables

Sale by description and/or sample (Art. 1481):

- in sale by description and/or sample, the sale may be rescinded if the bulk of the goods
delivered do not correspond with the description or the sample.
- if the sale be by sample as well as by description, it is not sufficient that the bulk of
goods correspond with the sample if they do not also correspond with the description.

ii) In case of immovables

Sold per unit or number (Art. 1539 & 1540):
- if the sale of real estate is with a statement of area, at a rate of a certain price for a unit
of measure or number, seller is obliged to deliver to the buyer all that may have been
stated in contract. If the foregoing is not possible, buyer may choose between
 proportional reduction of price and rescission. For rescission, however, the lack of area
should not be less than 1/10 of that stated.
- if the sale of real estate is with a statement of area, at a rate of a certain price for a unit
of measure or number, and any part of the immovable is not of the quality specified in
the contract, buyer may choose between proportional reduction of price and
rescission. For rescission, however, the inferior value of the thing sold should not be
less than 1/10 of the price agreed upon.
- buyer may still rescind the sale, even if the smaller area or inferior quality is less than
1/10 of the area or price agreed upon, if buyer would not have bought the immovable
had he known of its smaller area or inferior quality.
- if there is a greater area in the immovable than that stated in contract, buyer may
accept the area stated in contract and reject the rest. Buyer may accept whole area
but must pay for the same at contract rate.

Sold for lump sum (Art. 1542):

- if the sale of real estate is for a lump sum and not at the rate of a certain sum for a unit
of measure or number, there shall be no increase or decrease of the price although
there be a greater or lesser area or number than that stated in contract.
* a specific agriculture lot P10 Million
- if 2 or more immovables are sold for a single price, but if, besides mentioning the
boundaries, its area should be designated in the contract, seller shall be bound to deliver
all that is included within the boundaries even if the area is greater than that stated in
contract
- where land is sold for lump sum, the boundaries of the land stated in the contract
determine the effects of sale
iii) Time and place of delivery (Art. 1521):
- whether it is for the buyer to take possession of the goods or for the seller to send
them depends on the terms of the contract
- if the time and place of delivery cannot be ascertained from contract or usage of
trade, place of delivery is seller’s place of business, if he has one, and if none, his
residence
- in sale of specific goods which were in some other place when contract was made,
such place is place of delivery
- if the seller is bound to send the goods to buyer but no time for sending the
goods is fixed, the seller shall send the goods within a reasonable time
- demand or tender of delivery may be treated as ineffectual unless made at
reasonable hour. What is reasonable is a question of fact
 iv) Effects of delivery (Art. 1477):
- ownership of thing sold shall be transferred to the buyer upon actual or constructive
delivery

v) When delivery does not transfer title:

- “On Sale or Return” (Art. 1502): when goods are delivered to the buyer “on sale or
return” to give the buyer the option to return the goods instead of paying the
price, the ownership passes to the buyer on delivery, but he may revest
ownership by returning the goods within the time fixed or if none is fixed, within a
reasonable time.
*may delivery na pero may given time sa buyer kung irereturn
- “Sale on Acceptance” (Art. 1502): when goods are delivered to the buyer on approval,
or on trial, or on satisfaction, the ownership passes to the buyer only when a) he
signifies his approval to the seller, b) buyer does not signify approval but retains the
goods without giving notice of rejection, then if a time has been fixed for the return of
the goods, upon expiration of such time, and if no time has been fixed, on the expiration
of a reasonable time
* sale on trial, trial period the seller retained his ownership
- Reservation of ownership (Art. 1503):
- where goods are shipped and by the bill of lading, goods are deliverable to seller
- where goods are shipped and by the bill of lading, the goods are deliverable to the
buyer but possession of the bill of lading is retained by the seller
- When sale is not valid: when contract of sale is void and inexistent, no title over the subject
matter of the sale can be conveyed

- When seller is not owner: based on the principle that nobody can dispose that which
does not belong to him
vi) When buyer refuses to accept: if buyer’s refusal is without just cause, title to the goods
passes to him from the moment they are placed at his disposal (Art. 1588)
3. Double Sales
a. Rules on Double Sales Under Art. 1544:
Requisites for double sales:
- the 2 or more sales transactions are valid
- the 2 or more sales transactions pertain exactly to the same subject matter
 - the 2 or more buyers claiming ownership of the subject matter represent conflicting
interests
- the 2 or more buyers claiming ownership of the subject matter have bought from
the very same seller

Movables: if the same movable is sold to different buyers, the ownership shall be
confirmed to the person who may have taken possession thereof in good faith
- a bag has been sold to 2 or more persons, movable, the possession is in the first
person who is in good faith not knowing that it has been sold to other. Immovable
the buyer who has it recorded in the register of deeds first. If di pa nagawa, the
valid buyer will be the first to possess

Immovables: if the same immovable is sold to different persons, the ownership shall
belong to the person who:
- in good faith first recorded it in the Registry of Property
- should there be no recording, the ownership shall pertain to the person who in
good faith was first in possession
- in the absence of the above, the person with oldest title

Purchaser in good faith – one who buys the property of another without notice that some
other person has a right to or interest in such property and pays a full and fair price for
the same at the time of such purchase and before he has notice of the claim or interest
of some other person in the property
- would-be purchaser has obligation to investigate known facts, including adverse
possession and lis pendens

*The rules on double sales provided under Art. 1544 do not overcome priority
rules under the Torrens System and auction rules under the Rules of Court.
Torrens System – registration is the operative act by which dealings on registered
land, whether they be voluntary or involuntary, shall be recognized as existing and
binding.
- when 2 certificates of title are issued to different persons covering the same land, the
earlier in date must prevail; in case of successive registrations, the person holding a
prior certificate is entitled to the land as against a person claiming right under a
subsequent certificate
4. Obligations of Buyer
a. Pay the price (Art. 1582):
The buyer is obliged to pay for the price of the thing sold at the time and place
stipulated in the contract.
b. Accept the delivery of thing sold (Art. 1582):
The buyer is bound to accept delivery of the thing sold at the time and place stipulated.
If the time and place has not been agreed upon, the acceptance must be made at the
time and place of the delivery of the thing sold.
In case of goods, the buyer is deemed to have accepted the goods when he intimates
to the seller that he has accepted them, or when the goods have been delivered to
him, and he does any act in relation to them which is inconsistent with the ownership of
seller, or when, after the lapse of a reasonable time, he retains the goods without
intimating to the seller that he has rejected them (Art. 1585).

Sale by installments: unless agreed upon, the buyer of goods is not bound to accept
delivery by installments
- in case of sale of goods to be delivered by installments, which are to be separately paid
for, and seller makes defective deliveries or the buyer refuses without just cause to take
delivery or pay for one or more installments, it depends in each case on the terms of the
contract whether the breach is so material as to allow rescission and damages to the
injured party or whether the breach is severable (Art. 1583)
Goods as subject matter: the buyer who has not previously examined the goods sold is
not deemed to have accepted the goods unless he has had a reasonable opportunity to
examine the goods (Art. 1584)
C.O.D sales: where goods are delivered to carrier by the seller, upon the terms that the
goods shall not be delivered by the carrier to the buyer until he has paid the price, the
buyer is not entitled to examine the goods before payment of the price (Art. 1584)
Effect of acceptance of goods: absent a contrary agreement, acceptance of the goods
by the buyer shall not discharge the seller from liability in damages for breach of
warranty. But, if, after acceptance of goods, the buyer fails to notify the seller of breach
of warranty within a reasonable time after the buyer knows of the breach, the seller shall
not be liable therefore (Art.1586)
Refusal of acceptance of goods: if goods are delivered to the buyer who refuses to accept
them, having the right to do so, he is not bound to return it to the seller, but it is
sufficient if he notifies the seller that he refuses to accept them. If he voluntarily
constitutes himself as a depositary thereof, he shall be liable as such (Art. 1587)
I. DOCUMENTS OF TITLE (ARTS. 1507 TO 1520)
1. Definition of Documents of Title (Art. 1636)
A “document of title of goods” includes any bill of lading, dock warrant, quedan,
or warehouse receipt or order for delivery of goods used in business in the sale or
transfer of goods, as proof of the possession or control of the goods, or authorizing
or purporting to authorize the possessor of the document to transfer or receive, either
by endorsement or by delivery, goods represented by such document.
Functions of documents of title: a) evidence of possession or control of goods
described therein, b) medium of transferring title and possession of the goods without
having to effect actual delivery of such goods
Rationale for documents of title: the seller is allowed to deal with the goods described
therein as though he had physically delivered them to the buyer; and the buyer may
take the document of title as though he had actually taken possession and control of
the goods. Dealings through documents of title represent a species of constructive
delivery.
The provisions on documents of title are geared towards assuring the public to take,
accept, and deal with transactions over goods and merchandise by means of the
documents of title issued in representation thereof.
2. Negotiable Documents of Title
a. Definition: negotiable documents of title contain statements that the goods referred
to therein will be delivered to “bearer” or “to order” of any person named in such
document (Art. 1507).
- negotiability – trading through a piece of paper
b. Negotiation of documents of title:
A document of title may nevertheless be negotiated by the holder even if it contains
words like “non-negotiable” provided it contains an undertaking by a carrier,
warehouseman, or other bailee to deliver the goods to bearer or to the order of a
specified person (Art. 1510).
Ex: checks, money orders, and promissory notes
i) By delivery alone: a negotiable document of title may be negotiated by delivery
where by the terms of the document, the carrier, warehouseman, or other bailee
issuing the same undertakes to deliver the goods to “bearer” (Art. 1508, 1 st par.).
A document of title issued “to the order” of a specified person who endorses it in blank
or to bearer may then be negotiated by delivery (Art. 1508, 2 nd par.)
 i) By endorsement and delivery: a negotiable document of title issued to the order
of a specified person may be negotiated by endorsement of the person to whose
order goods are deliverable, coupled with delivery. Endorsement may be in blank,
to bearer or to a specified person (Art. 1509).

If a holder of a document of title endorsed in blank or to bearer endorses it to himself

or to a specified person, it may be negotiated by endorsement of the endorsee (Art.
1508).

c. Who can negotiate:

a. By the owner (Art. 1509);
b. By any person to whom possession or custody of the document has been
entrusted by owner, if, by the terms of the document, the bailee issuing the
document undertakes to deliver the goods to the order of the person to whom
possession or custody of the document has been entrusted, or if at the time of
such entrusting the document, it is in such form that it may be negotiated by
delivery (Art. 1512).

d. Effects of negotiation:
The person to whom a negotiable document of title has been negotiated acquires:
I. title to the goods as the person negotiating the document to him had or had
ability to convey to a purchaser in good faith for value;
II. title to the goods as the person to whose order the goods were to be delivered
had or had ability to convey;
III. the direct obligation of the bailee issuing the document to hold possession for
him as if such bailee contracted directly with him (Art. 1513

3. Non-negotiable Documents of Title

a. How assignment is made:
A non-negotiable document cannot be negotiated (Art. 1515).
A non-negotiable document of title may be transferred by holder by delivery to a
purchaser or donee (Art. 1511).
Sale of a non-negotiable document of title is perfected by mere consent but would
have to appear in a public instrument as sale of a non-negotiable document of
title constitutes incorporeal right (Art. 1624 & 1625).
 - audit and business records, medical records, transcripts
b. Effect of transfer or assignment:
The assignee of a non-negotiable document acquires the following rights as against
the transferor:
a. title to the goods, subject to the terms of agreement with the transferor;
b. the right to notify the bailee who issued the document of the transfer thereof and
thereby, acquire the direct obligation of such bailee to hold possession of the
goods for him (Art. 1514).
4. Warranties on Negotiation or Assignment
A person who negotiates or transfers a negotiable or non-negotiable document of title by
endorsement or delivery warrants that:
a. The document is genuine
b. He has legal right to negotiate or transfer it
c. He has no knowledge of fact which would impair the validity or worth of the
document
d. He has a right to transfer the title to the gods
e. The goods are merchantable or fit for a particular purpose, whenever such
warranties would have been implied even without the document of title (Art.
1516).

5. Levy/Garnishment of Goods Covered by Document of Title

a. Non-negotiable document of title: a person to whom a non-negotiable document of title
has been transferred must notify the bailee who issued the document of the transfer
thereof. Prior to the notification to the bailee, the title of the transferee to the goods
may be defeated by the levy or execution upon the goods by a creditor of the
transferor, or by a notification to the bailee by the transferor or subsequent purchaser
from the transferor of a subsequent sale of the goods by the transferor (Art. 1514).
b. Negotiable document of title
Goods covered by a negotiable document of title and while in the possession of the
bailee cannot be attached by garnishment or levied upon unless the document be first
surrendered to the bailee or its negotiation enjoined (Art. 1519). The bailee shall be
not compelled to deliver the actual possession of the goods until the document is
surrendered to him or impounded by the court (Art. 1519).

J. SALE BY NON-OWNER OR ONE WITH VOIDABLE TITLE (ARTS. 559, 1505, 1506)
1. When Seller is not Owner at Perfection
A contract of sale is valid even if at the time of its creation, the subject matter does not
exist, or that the seller is not the owner thereof.
Although a contract of sale ordinarily covers existing things, a valid contract of sale can
cover a subject matter that is not existing or having only a potential existence at the time
of perfection, or even a thing subject to a resolutory condition and ownership of the subject
matter by the seller at the time of perfection is not essential (Art. 1461, Art. 1465, Art.
1459, Art. 1475).

2. When Seller is not Owner at Consummation

Art. 1505: where goods are sold by a person who is not the owner thereof, and who does
not sell them under authority or with the consent of the owner, the buyer acquires no
better title to the goods than the seller had.
Art. 1505 is based on the principle that no one can give what one does not have.
However, this provision is relevant in the “consummation” stage of a contract of sale.
Hence, at the time of delivery of the thing sold, seller should be the owner of thing
sold. Otherwise, seller will not be able to comply with his obligation to transfer
ownership of the goods to the buyer.

a. Sales by co-owner of whole property or definite portion:

Rule in co-ownership – none of the co-owners may claim any right to a particular
portion of co-owned property, hence, a co-owner cannot divide the property in parts
and convey the whole of one part. However, a co-owner has the right to sell his
undivided part of the property.
When, prior to partition, a co-owner sells the entire property, the sale is valid as to
his spiritual share only.
The remedy of the other co-owners would be to ask for partition of the property.
If a co-owner, prior to partition, sells a definite portion of the property owned in
common, the sale as to that portion is not valid as to the other co-owners but valid
as to the selling co-owner’s spiritual share.
b. Exceptions to rule on effect of sale of a definite portion:
i) subject matter is indivisible in nature or by intent, then the sale could not even be
binding as to spiritual sale of the seller
 ii) the other co-owners consent to the sale of a particular portion of the co-owned
property, then there is already a partial partition and the other co-owners cannot
object to the sale

3. Exceptions to Rules on Sale by Non-owner

a. When owner is, by his conduct, precluded from denying the seller’s authority to sell
(estoppel) (Art. 1505)
b. When the contrary is provided for in recording laws – for instance, an innocent
purchaser for value of a property recorded under the Torrens System and evidenced
by a transfer certificate of title may rely on the correctness of such certificate, even
if the current registered owner acquired the property through a fictitious transfer from
a previous seller (Art. 1505)
c. When sale is made under statutory power of sale or under court order (Art. 1505)
d. When the sale is made at a merchant’s store, or a place where goods are kept for
sale (Art. 1505) – the rationale for this rule is to protect innocent 3rd parties who
purchase at merchants’ stores in good faith in order to facilitate commercial sales
on movables and to give stability to business transactions.
e. The sale by seller who at the time of delivery had voidable title to thing delivered
(Art. 1506)
f. Possession in good faith at public sale of movables lost by owner or of which owner
was unlawfully deprived of – the possessor is rightful owner with right to be paid price
(Art. 559)
g. Special rights of an unpaid seller of goods to resell under Arts. 1526 and 1533.

4. Sale by Seller Who Has Voidable Title (Art. 1506)

Art. 1506: “Where the seller of goods has a voidable title thereto, but his title has not
been avoided at the time of sale, the buyer acquires a good title to the goods, provided
he buys them in good faith, for value, and without notice of the seller’s defect of title.”
The stage of the contract of sale referred to as cut-off point is the consummation
stage. Hence, if the seller’s voidable title is avoided after the perfection but
before delivery, the buyer does not obtain good title to the goods.

5. “Title” as to Movable Properties

 Art. 559: possession of movable property acquired in good faith is equivalent to
title. One who has lost movable or has been unlawfully deprived thereof may recover
it from the person in possession of the same. If the possessor of a movable lost or
of which owner has been unlawfully deprived has acquired it in good faith at a public
sale, the owner cannot obtain its return without reimbursing the price therefor.
In relation to Art. 1505, an owner of a lost thing or thing unlawfully deprived from him
cannot recover the movable from the buyer at a merchant store, even if he offers to
reimburse.

K. LOSS AND DETERIORATION, FRUITS AND OTHER BENEFITS

1. Subject Matter is Determinate or Certain
Discussions on loss, deterioration, fruits, and improvements pertain only to sale
where the subject matter is determinate or certain, since the principles have no
application to subject matter which is determinable generic because a genus is not
subject to loss or deterioration (Art. 1263)
Art. 1263: “In an obligation to deliver a generic thing, the loss or destruction of
anything of the same kind does not extinguish the obligation.”

2. Loss or Deterioration of Thing Before Perfection

Before perfection of a contract of sale, the loss, deterioration, fruits and improvements
shall pertain to the would-be seller, since he owns the thing. The would-be seller
cannot look at another party (except one at fault) to answer for the loss or
deterioration of the property and neither can the would-be buyer claim any benefit
from the thing.

a. If the subject matter is entirely lost at time of perfection of contract, contract shall be
without any effect (Art. 1493)
b. If the subject matter is lost in part only at time of perfection of contract, buyer may
choose between:
- withdrawing from the contract; or
- demanding the remaining part and paying the price in proportion to the total sum
agreed upon (Art. 1493)
c. In case of sale of specific goods, and without the knowledge of the seller, the goods
have perished or have materially deteriorated in quality, the buyer may treat the sale
as either:
- avoided; or
- if the sale is divisible, valid in all of the existing goods and as binding the buyer to pay
the agreed price for such existing goods (Art. 1494)

3. Loss or Deterioration of Thing After Perfection But Before Delivery

a. Loss of Subject Matter: the goods remain at seller’s risk until the ownership is
transferred to the buyer, but when the ownership therein is transferred to the buyer,
the goods are at the buyer’s risk whether actual deliver of the goods has been made
or not (Art. 1504). This provision embodies the principle of res perit domino – when
a thing is lost or destroyed, it is lost to the owner of it at the time.
b. Deterioration, Fruits, and Improvements: Any injury to or benefit from the thing sold,
after the contract has been perfected, from the moment of perfection to the time of
delivery shall be borne by the buyer (Art. 1480, in relation to Arts. 1163 to 1165).
Hence, after the perfection of an unconditional contract of sale over goods, the risk of
deterioration and the benefit from fruits and improvements over the subject matter are
for the benefit of the buyer who becomes owner not because of delivery but by mere
fact of perfection of the contract.

L. REMEDIES OF PARTIES FOR BREACH OF CONTRACT OF SALE (ARTS. 1593 TO

1599)

1. Remedies of Seller
a. In Case of Movables:
i) Action for Rescission – in case of movables, if buyer should not have received the
thing sold upon expiration of period fixed for delivery of the thing or having
appeared to receive the thing sold fails to tender the price at the same time (Art.
1593).
ii) Action for Price of Goods (or specific performance) – in case ownership of the
goods passed to the buyer who wrongfully neglects or refuses to pay for the goods
according to terms of the contract (Art. 1595)
b. In Case of Immovables:
 i) Action for Rescission – if seller has reasonable grounds to fear loss of the
immovable property sold and its price, he may sue for rescission (Art. 1591); if
there is substantial breach by the buyer for failure to pay the price when due, the
seller may sue for rescission (Art. 1591, in relation to Art. 1191).
Buyer may still pay the price, even after the expiration of the period to pay, provided
no demand for rescission of the contract has been made (Art. 1592).
c. Unpaid Seller of Goods:
Unpaid Seller, defined – the seller of goods either: i) when the whole of the price
has not been paid or tendered, or ii) when a bill of exchange or a negotiable
instrument is received as conditional payment and the condition is broken due to
dishonor of the instrument or insolvency of the buyer (Art. 1525)
*ex: the buyer has not fully paid yet
Hierarchical Remedies of Unpaid Seller:
i) Possessory Lien: the general rule is when it comes to movables, the seller is not
bound to deliver the thing sold if the buyer has not paid him the price, or if no period
has not been fixed in the contract (Art. 1524). Whether or not ownership in the
goods may have passed to the buyer, the unpaid seller may retain the goods for
the price while he is in possession of them (Art. 1526).
the possessory lien of the unpaid seller is exercisable only in the following instances:
- where the goods have been sold without stipulation as to credit;
- where the goods have been sold on credit but the term of the credit has expired;
- where the buyer becomes insolvent (Art. 1527).
if a negotiable document has been issued for goods, no seller’s lien shall defeat the
right of any purchaser for value and in good faith (Art. 1535).
Where the unpaid seller made part delivery of the goods, he may exercise his right of
possessory lien on the remainder (Art. 1528).
the unpaid seller loses his possessory lien in the following instances:
- seller delivers the goods to a carrier or other bailee for the purpose of transmission
to buyer without reserving ownership in the goods;
- buyer or his agent lawfully obtains possession of the goods;
- by waiver thereof (Art. 1529).

ii) Stoppage in Transitu: when the buyer of goods becomes insolvent, the unpaid
seller who parted with the possession of the goods has a right to stop them in
 transit, that is to say, he may resume possession of the goods at any time while
they are in transit (Art. 1535).
If a negotiable document has been issued for goods, no seller’s right to stoppage
in transit shall defeat the right of any purchaser for value and in good faith (Art.
1535).
when goods are deemed in transit:

- from the time they are delivered to a carrier by land, water, or air for the purpose
of transmission to the buyer, until the buyer takes delivery from such carrier;
- if the goods are rejected by buyer and carrier continues in possession of them
(Art. 1531).
the unpaid seller may exercise his right to stoppage in transit by:
- obtaining actual possession of the goods;
- giving notice of his claim to the carrier or other bailee in whose possession the
goods are, in which case the bailee must redeliver the goods to the seller and the
expenses for such redelivery shall be borne by seller (Art. 1532).
if a negotiable document representing the goods has been issued by the carrier or other
bailee, he shall not be obliged to redeliver the goods to the unpaid seller unless such
document is first surrendered for cancellation (Art. 1532).

*It is only when unpaid seller exercised either his right of possessory lien or
stoppage in transitu that he can proceed with his special rights of resale or to
rescind.
iii) Special Right to Resell Goods: this right shall be exercised under the following
conditions:
- the goods are of perishable nature;
- where the seller expressly reserves the right of resale in case the buyer should
make default; or
- where the buyer has been in default in the payment of price for an unreasonable
time (Art. 1533).

upon the unpaid seller’s exercise of the right of resale, he shall not be liable
to the original buyer upon the contract of sale or for any profit made by such
resale; however, the unpaid seller may recover from the buyer damages for any
loss occasioned by the breach of the contract of sale (Art. 1533).
iv) Special Right to Rescind: notwithstanding that the ownership in the goods may
have passed to the buyer, the unpaid seller has a special right to rescind the sale,
 subject to prior exercise of either right of possessory lien or stoppage in transitu
(Art. 1526).
The right to rescind may be exercised where the unpaid seller expressly reserved
the right to do so in case of default of the buyer, or where the buyer has been in
default of payment of price for an unreasonable time (Art. 1534).
the unpaid seller is required to manifest to the buyer by some overt or implied act
an intention to rescind (Art. 1534).
Upon the proper exercise by unpaid seller of the right to rescind, the unpaid seller
shall not be held liable to the buyer upon the contract of sale, but may recover from
the buyer damages for any loss occasioned by the breach of the contract (Art.
1534).
d. Recto Law (Art. 1484): Art. 1484 provides for the remedies of a seller in contracts of
sale of personal property by installments.
The rationale for the Recto Law is to remedy the abuses committed in connection
with the foreclosure of chattel mortgage and was meant to prevent mortgagees
from seizing the mortgaged property, buying it at foreclosure sale for a low price
and then bringing suit against the mortgagor for deficiency judgment. The result
of such procedure is the mortgagor found himself minus the property and still owing
the full amount of his debt.
remedies of the seller are either:
- Specific performance: exact fulfillment of the obligation should the buyer fail to pay any
installment;
- Rescission: cancel the sale should the buyer’s failure to pay cover two or more
installments;
- Foreclosure of chattel mortgage on the thing sold: if one has been constituted, should
the buyer’s failure to pay cover two or more installments.
*If the seller should foreclose on the mortgage constituted on the thing sold, he shall have
no further action against the buyer to recover the unpaid balance of the price.

2. Remedies of Buyer
a. In Case of Movables
i) Specific Performance for Delivery of Goods: where the seller has broken a contract to
deliver specific goods, the buyer may file an action for specific performance to direct that
the contract be performed specifically, without giving the seller the option of retaining the
goods on payment of damages (Art. 1598).
ii) Remedies for Breach of Seller’s Warranty: where there is breach of warranty by seller,
the buyer may avail of the following remedies:
- accept or keep the goods and set up against the seller the breach of warranty by way
of recoupment in diminution or extinction of price;
- accept or keep the goods and maintain an action against the seller for damages for the
breach of warranty (Art. 1599).
- refuse to accept the goods, and maintain an action against the seller for damages for
breach of warranty;
- rescind the contract of sale and refuse to receive the goods or if the goods have already
been received, return them or offer to return them to the seller and recover the price or
any part thereof which has been paid.
Where buyer has claimed and been granted remedy in any of these ways, no other
remedy can thereafter be granted (Art. 1599).
b. In Case of Immovables
i). Suspension of Payments in Anticipation of Breach: if the buyer is disturbed in the
possession or ownership of thing acquired or should he have reasonable grounds to
fear such disturbance, by a vindicatory action or a foreclosure of mortgage, he may
suspend the payment of the price until the seller has caused the disturbance or
danger to cease, unless the latter gives security for the return of the price in a proper
case or it has been agreed that despite such contingency, the buyer shall be bound
to make the payment (Art. 1590).
ii). Subdivision or Condominium Projects: no installment payments made by a buyer in
a subdivision or condominium project 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 unit according to the approved plans and within the time limit. The
buyer has the option to be reimbursed the total amount paid. (Sections 23 and 24,
Presidential Decree No. 957.)
iii). Maceda Law (“Realty Installment Buyer Protection Act”, Republic Act 6552): the
Maceda Law provides for certain protection to particular buyers of real estate payable
on installments.
- Coverage: the Maceda Law covers sale or financing of real estate (primarily
residential real estate) on installment payments; the Maceda Law also includes both
contracts of sale and contracts to sell
- “Sale by installments” – involves at least two (2) installments to be paid in the future
at perfection of contract
 - Rights granted:
With at least two (2) years installment payments:
- the buyer has the right to pay, without additional interest, the unpaid
installments due within the total grace period earned; grace period shall be at
the rate of one month for every one year of installment payments
With less than two (2) years installment payments:
- the buyer shall be entitled to grace period of sixty (60) days from the date the
installment became due. If the buyer fails to pay the installments due at the
expiration of grace period, the seller may cancel the contract after thirty
(30) days of notice to the buyer of cancellation of contract by notarial act

Other rights granted to buyer:

- the buyer shall be entitled to sell his rights or assign the same to another
person or to reinstate the contract by updating the account during the grace
period and before actual cancellation of the contract.
- the buyer shall be entitled to pay in advance any installment or the full
unpaid balance of the purchase price any time without interest and to have such
full payment annotated in the certificate of title
M. RESCISSION IN SALES CONTRACTS COVERING IMMOVABLES: CONTRACT
OF SALE VS. CONTRACT TO SELL

1. Nature of Remedy of Rescission

Art. 1592, provision on rescission of sale of immovable: even though the sale contract
provides that failure to pay the price at the time agreed upon will result in rescission of
the contract, the buyer may still pay the price even after the expiration of the period as
long as no demand for rescission of the contract has been made by the seller judicially or
by a notarial act.
Rescission can be carried out only when the one who demands rescission can return
whatever he may be obliged to restore, like the object of the contract, with its fruits or the
price, with its interests (Art. 1385).
Rescission shall not take place when the object of the contract are in the possession of
third persons who did not act in bad faith (Art. 1385).
2. Contracts of Sale vs. Contracts to Sell
A contract of sell may either be absolute or conditional. One form of conditional sales is
what is termed as a contract to sell where ownership of title is retained until the fulfillment
of a positive suspensive condition, normally the payment of the purchase price.
The rationale for a contract to sell is to protect the seller against a buyer, who intends to
buy the property in installments, by withholding ownership over the property until full
payment by the buyer of the purchase price.
Divergent Remedies in Case of Non-fulfillment of Condition:
a. Contract to Sell: when the suspensive condition has not been fulfilled, no further
remedy is necessary since the contract is extinguished by non-happening of the condition;
if there has been previous delivery to the buyer of the subject matter, the seller may file
a court action for recovery of possession if the buyer refuses to voluntarily return the
subject matter.
b. Contract of Sale: the non-fulfillment of the condition would authorize the seller to
rescind the contract or to waive the condition and seek enforcement of the contract.

2. Contracts of Sale vs. Contracts to Sell

Summary of distinctions between contracts of sale and contract to sell:
a. Resulting obligations upon perfection: in a contract of sale, the perfection thereof gives
rise to reciprocal demandable obligations; in a contract to sell, the perfection thereof gives
rise to a reciprocal suspensive conditional obligation (i.e., non-demandable obligations
until the condition happens) on the part of the seller to transfer ownership upon full
payment of price

b. Effect of Delivery of Subject Matter on Transfer of Ownership: in a contract of sale, the

delivery of the subject matter to the buyer would transfer ownership thereof to the buyer;
in a contract to sell, delivery of the subject matter to the buyer does not transfer ownership
to the buyer

c. Remedy Upon Failure to Pay the Price: in a contract of sale, if the buyer fails to comply
with his obligation to fully pay the price, the ownership transferred to the buyer can be
revoked only upon the proper exercise of the remedy of rescission; in a contract to sell,
failure of the buyer to comply with his obligation to pay the price would amount to non-
happening of suspensive condition and no legal action need not be taken other than to
recover possession.
N. CONDITIONS AND WARRANTIES
1. Conditions vs. Warranties
Differences between conditions and warranties:
a. Non-fulfillment of warranty constitutes breach of contract; non-happening of a
condition, although it may extinguish the obligation upon which it is based, generally does
not amount to breach of a contract of sale. In case a condition does not happen, the
concerned party may waive performance of the condition or refuse to proceed with the
contract (Art. 1545).
b. Buyer may treat fulfillment by the seller of his obligation to deliver as condition of
buyer’s acceptance and payment for the thing. On the other hand, if a party promised
that a condition shall happen, the other party may treat non-performance of condition as
breach of warranty (Art. 1545)
c. Condition generally goes into the root of the existence of the obligation; warranty goes
into the performance of the obligation and may constitute an obligation in itself.
d. Condition must be stipulated by the parties in order to form part of an obligation;
warranty may form part of the obligation or contract by provision of law, without the parties
having agreed thereto.
e. Condition may attach itself either to the obligations of the seller to deliver possession
and transfer ownership over the subject matter; warranty relates to the subject matter
itself or obligations of seller as to the subject matter.

Validity and Effectivity of Contracts: where there is consent of the contracting parties over
the subject matter of the contract and the price, the result is a valid contract. However,
some parties introduce restrictions and modalities, the lack of which will not affect the
validity of the contract. For instance, if a contract contains a stipulation that the sale will
be effective only upon the approval by the court, only the effectivity of the contract is
affected. The validity of the contract is not affected.
2. Express Warranties
Requisites for express warranty to exist:
a. There is an affirmation of fact or any promise by the seller relating to the subject matter
of the sale;
b. The natural tendency of the affirmation or promise is to induce the buyer to purchase
the thing;
c. The buyer purchases the thing relying on such affirmation or promise thereon.
An affirmation of the value of the thing or a statement of seller’s opinion is not a warranty,
unless the seller is an expert and buyer relied on such affirmation (Art. 1546).

3. Implied Warranties
Implied warranties are warranties that constitute part of every contract of sale,
whether the parties were aware of them or not, or whether the parties intended them or
not.
a. Warranty That Seller Has Right to Sell: there is implied warranty on the part of the
seller that he has the right to transfer ownership of the subject matter at the point of
consummation, i.e., delivery of the subject matter to buyer (Art. 1547).
b. Warranty Against Eviction: there is an implied warranty on the part of the seller that
when the ownership is to pass, the buyer shall from that time have and enjoy the legal
and peaceful possession of the thing (Art. 1547).
the warranty or promise of the lessor that the lessee can enter into possession and enjoy
the use of the thing being leased freely and without the fear that someone will come and
say I own this property, so you have to leave — eviction

Elements for breach of warranty against eviction:

i) The purchaser has been deprived of or evicted from the whole or part of the thing sold;
ii) The eviction is by final judgment;
iii) The basis thereof is by virtue of a right prior to the sale made by the seller;
iv) The seller has been summoned and made co-defendant in the suit for eviction at the
instance of buyer (Art. 1548)
Amounts for which seller is liable in case of eviction:
i) The return of the value which the thing sold had at the time of eviction, be it
greater or lesser than the price of the sale;
ii) The income or fruits, if he has been ordered to deliver them to the party who
won the suit;
iii) The costs of the suit which caused the eviction;
iv) Expenses of contract, if buyer paid for them;
v) Damages and interests and ornamental expenses, if sale was made in bad
faith (Art. 1555).
c. Warranty Against Non-Apparent Servitudes:
Instances when the warranty applies:
i) The immovable sold is encumbered with any non-apparent burden or servitude, not
mentioned in the agreement; AND
ii) The nature of such non-apparent burden or servitude is such that it must be presumed
that the buyer would not have acquired it had he been aware thereof (ART. 1560).
Buyer may either bring an action for rescission or sue for damages within one (1) year
from execution of deed. If one (1) year lapsed, buyer may only bring action for damages,
within one (1) year from discovery of burden (Art. 1560).
Ex: condo building unit behind the statue of Rizal park. Some government sectors and
other patriotic sectors are claiming that it impinges on the servitude of view which is that
this is a park. Rizal park was built that monument of Rizal was built there for relaxation
and aesthetic purposes which means we go to the park to enjoy the fresh air as well as
the view. Now, as alleged, because of the presence of this government park, there is a
servitude (obligation) on the part of the surrounding buildings to ensure that the view
around Rizal park will not be impinged.
Right of way is the right of property owners located behind a property that usually is in
front of a major road. This property owner because of the presence of other lots behind
this property, meron siyang servitude or obligation to allow right of way. Karapatan ng
may ari ng property sa likod to demand na padaanin mo kami. Right of way, you have the
right to demand to make way in your property for us to pass through.
If you are leasing a property, one of the obligations of the lessor is to inform you kung
merong right of way or servitude that you have to know of with respect to the property.
Otherwise, the lessor will now be deemed that he violated such warranty.
d. Warranty Against Hidden Defects:
Instances when the warranty applies:
i) The nature of the hidden defect is such that it should render the subject matter unfit for
the use for which it is intended; OR
ii) The hidden defect diminishes the fitness of the subject matter for such use to such an
extent that, had the buyer been aware thereof, he would not have acquired it or would
have given a lower price for it (Art. 1561).
Seller is not answerable if buyer is an expert, who by reason of his trade, should have
known the defect (Art. 1561).
In case of breach of warranty against hidden defect, the buyer may elect between
withdrawing from the contract and demanding a proportionate reduction of the price, with
damages in either case (Art. 1567).
Actions on warranties against hidden defects shall be barred after six (6) months from the
delivery of the thing sold (Art. 1571).
e. Redhibitory Defects on Animals:
Even when professional inspection has been made, if the hidden defect of
animals should be of such a nature that expert knowledge is not sufficient to discover it,
the defect shall be considered as redhibitory (Art. 1576).
In sale of animals with redhibitory defects, the buyer may elect between
withdrawing from the contract and demanding a proportionate reduction of the price, with
damages in either case (Art. 1580). The action must be brought within forty (40) days
from the date of delivery to the buyer (Art. 1577).

f. Implied Warranties in Sale of Goods:

In sale of goods, there is implied warranty as to fitness of the goods, as follows:
i) Where the buyer makes known to seller the particular purpose for which the
goods are acquired, there is implied warranty that the goods shall be reasonably fit for
such purpose;
ii) Where by goods are bought by description from a seller who deals in goods
of that description, there is implied warranty that the goods shall be of merchantable
quality (Art. 1563)

Buyer’s options in case of breach of warranty:

i) Accept of keep the goods and set up against the seller, the breach of
warranty by way of recoupment in diminution or extinction of the price;
ii) Accept or keep the goods and maintain an action against the seller for
damages for the breach of warranty;
iii) Refuse to accept the goods, and maintain an action against the seller for
damages for breach of warranty;
iv) Rescind the contract and refuse to receive the goods (Art. 1599)

4. Additional Terms of Warranties for Consumer Goods (RA 7394):

“Consumer goods” are those which are primarily for personal, family,
household or agricultural purposes, which shall include but not limited to, food, drugs,
cosmetics, and devices (Republic Act 7394).
 Warranty rights can be enforced by presentment to the immediate seller either
the warranty card or the official receipt.
Seller and buyer may stipulate the period within which the express warranty
shall be enforced.

In case of breach of express warranty, the consumer may elect to have the goods
repaired or its purchase price refunded by warrantor.
Retailer shall be subsidiarily liable under the warranty in case of failure of both
manufacturer and distributor to honor the warranty; in such case, retailer shall shoulder
the expenses and costs to honor the waranty. The remedy of the retailer shall be to
proceed against the distributor or manufacturer.
O. Extinguishment of Sale
1. In General
Obligations arising from the contract of sale are extinguished on the same
grounds by which obligations in general are extinguished:
a. Payment or performance;
b. Loss of subject matter;
c. Condonation or remission;
d. Confusion or merger of rights of creditor and debtor;
e. Compensation;
f. Novation;
g. Annulment;
h. Rescission
i. Fulfillment of resolutory condition;
j. Prescription (Art. 1231).
1. Payment or performance – once na makapagbayad na or naperform mo na
obligations mo resolved na

2. Loss of the thing debt – seller ka eh kaso nawala mo yung item, the remedy of the
buyer would be the buyer can ask for reimbursement sa loss

3. Condonation or remission of debt

 c. Condonation – similar to waiver kapag may pinatawad ka. Kapos yung
pinagutangan mo edi binabaan mo yung price.
d. Remission – nagbayad na sayo yung kulang niya di mo na pinabayaran

4. Confusion or merger of the rights of the debtor and debtor - Nagmerge si creditor
at debtor
Ex: Ms. Ana beautiful young lady, borrows money to her matandang dalaga na tita,
tita lends her 1M the debtor is ana creditor is auntie, yung auntie namatay, nung
namatay napapamana na kay ms. Ana kasi nakalagay sa kasulatan siya yung heir,
yung heir, being the heir who inherits, siya yung nagkautang sa sarili niya kasi
napasa sa kanya yung property.

5. By compensation – in accounting, parang in exchange for property yan. Ms. A

loans 1M to Ms. B. Ms. B does not have money to compensate, Ms. A said that
she wants Ms. B’s car worth one million.

6. By novation - there is a change in element of obligation.

Papaltan ka , in your place sino magbabayad in your place

7. Others: annulment, rescission, fulfillment of resolutory condition, prescription

Prescription- if there is an obligation there is a corresponding right on the part of
the party who our rights are not forever there are given period for us to enforce our
right. There is a promissory note, si ms b di siya nangolekta for 10 years. What
does ms a do now, may right na di na sa kanya mangolekta yung creditor. Know
that there is a period of time for our exercise of obligation

In addition, sales are also extinguished by:

a. Conventional redemption;
b. Legal redemption

2. Conventional Redemption (Sale a Retro)

Conventional redemption takes place when the seller reserved for himself the
right to repurchase the thing sold, with the obligation to return the price of the sale, the
expenses of the contract, any other legitimate payments made by reason of the sale, and
the necessary and useful expenses made on the thing sold (Art. 1601 and 1616).
The right to repurchase must be reserved by the vendor by stipulation to that
effect in the contract of sale (Art. 1601).
 The parties may agree to a period of redemption of not exceeding ten (10)
years from date of contract (Art. 1606).
If the parties agreed on a right of repurchase but did not agree on the period when it can
be exercised, it shall last four (4) years from the date of the contract (Art. 1606).
How redemption is effected:
The seller should return to the buyer the following:
a. The price of the sale;
b. The expenses of the contract, and any other legitimate payments made by
reason of the sale;
c. The necessary and useful expenses made on the thing sold (Art. 1616).
Equitable Mortgage- has the following essential requisites:
a. That the parties entered into a contract denominated as a contract of sale;
b. That their intention was to secure existing debt by way of mortgage.
If the foregoing requisites are present in a contract of sale with right of
repurchase, such contract may be construed as an equitable mortgage. The rationale for
the foregoing is to prevent circumvention of laws on usury and prohibition against creditor
appropriating the mortgaged property.
3. Legal Redemption
Legal Redemption, Defined – it is the right to be subrogated upon the same
terms and conditions in the contract, in the place of one who acquires a thing by purchase
or dation in payment or by any other transaction in which ownership is transmitted (Art.
1619).
Types of Legal Redemption:
a. Among co-heirs- should any of the heirs sell his hereditary rights to a
stranger before partition, any or all of the co-heirs may by subrogated to the rights of the
purchaser by reimbursing him for the price of the sale, within one (1) month from their
being notified in writing of the sale (Art. 1088).
b. Among co-owners- a co-owner of a thing may exercise the right of redemption in case
the shares of all the other co-owners or of any of them are sold to a third person (Art.
1620).
c. Among adjoining owners of rural land – the owners of adjoining lands shall
have the right of redemption when a piece of rural land, the area of which does not exceed
one (1) hectare, is alienated (Art. 1621).
 d. Among adjoining owners of urban land which is so small and so situated
that a major portion thereof cannot used for a practical purpose (Art. 1622).
P. ASSIGNMENT
1. Definition
“Assignment” is the sale of credits and other incorporeal rights (Art. 1624).
In an assignment of credit, the consent of the debtor is not essential for its
perfection, his knowledge thereof of lack of its affecting only the efficaciousness of any
payment he might make.
Transfer of title over the subject matter of assignment is effected by
constructive delivery (Art. 1498).

Q. BULK SALES LAW (RA 3952, AS AMENDED)

1. Rationale
The Bulk Sales Law is intended as a species of bankruptcy law meant to
protect supply creditors or businessmen against preferential or fraudulent transfers done
by merchants. It was meant to prevent a situation where merchants would cheat their
creditors by hurriedly selling their businesses and vanishing into thin air.
Primary objective of the law is to compel the seller in bulk to execute and
deliver verified lists of his creditors to his buyer, and notice of intended sale to be sent in
advance to said creditors, and to use the proceeds of the sale to cover payment of
outstanding liabilities.
2. Transactions Covered
The following are considered “bulk sales”:
a. Any sale, transfer, mortgage, or assignment of stock of goods, wares,
merchandise, or materials otherwise than in the ordinary course of trade and the regular
prosecution of the business of the seller, mortgagor, transferor, or assignor;
b. Any sale, transfer, mortgage, or assignment of all, or substantially all, of the
business or trade therefore conducted by the seller, mortgagor, transferor, or assignor;
and
c. . Any sale, transfer, mortgage, or assignment of all, or substantially all, of
the fixtures and equipment used in and about the business or the seller, mortgagor,
transferor.

2. Transactions Covered
 The following are considered “bulk sales”:
a. Any sale, transfer, mortgage, or assignment of stock of goods, wares,
merchandise, or materials otherwise than in the ordinary course of trade and the regular
prosecution of the business of the seller, mortgagor, transferor, or assignor;
b. Any sale, transfer, mortgage, or assignment of all, or substantially all, of the
business or trade therefore conducted by the seller, mortgagor, transferor, or assignor;
and
c. . Any sale, transfer, mortgage, or assignment of all, or substantially all, of
the fixtures and equipment used in and about the business or the seller, mortgagor,
transferor.

3. Obligations of Seller in “Bulk Sales”:

a. Before receiving from buyer, mortgagee, or agent any part of the purchase
price, to deliver to such buyer or mortgagee a written statement of the names of the
creditors of the seller, with amounts of indebtedness;
b. Apply the purchase or mortgage money to the pro rata payment of the claims
of the creditors of the seller;
c. Make an inventory of all goods, wares, etc. and to notify the creditors of the
price, terms, and conditions of the bulk sale, at least ten (10) days prior to transfer of
possession of things sold; and
d. Not to sell in bulk without consideration or for a nominal consideration only.

4. Consequences of Violation of the Law:

a. If the list of creditors is not prepared and delivered, any sale, transfer, or
mortgage shall be void; and
b. The seller, mortgagor, or assignor who fails to prepare and deliver the sworn
statement of creditors and who fails to apply proceeds of the sale to the creditors pro rata
shall be criminally liable.
LEASE

Lease, general definition:

Lease is a consensual, bilateral, onerous, and commutative contract by virtue of

which one person binds himself to grant temporarily the use of a thing or to render some
service to another who undertakes to pay some rent, compensation or price.

- Someone obligates himself to temporarily allow the use of a thing if it is lease of

things.

2 general types of lease (Art. 1642):

1. lease of things

2. lease of service – rendition of service with compensation, contractual service

Consensual – contracts perfected by mere meeting of minds

Bilateral – gives rise to reciprocal obligation

Commutative contract - when undertaking of one of the party is considered the

equivalent of that of the other – give and take

A. Definitions

Lease of things, defined (Art. 1643):

One of the parties binds himself to give to another the enjoyment or use of a thing
for a price certain, and for a period which may be definite or indefinite. However, no lease
for more than 99 years shall be valid.

What can be leased? Real property, clothes, land, and vehicles (movable).

Attributes or elements of ownership of property:

1. the right to enjoy – to use, enjoy the fruits, consume (transferred to lessee)

2. the right to dispose or alienate or even destroy (remains with the owner or
lessor)
 3. the right to vindicate or action to recover property (remains with the owner or
lessor)

Lease of work or service, defined (Art. 1644):

One of the parties binds himself to execute a piece of work or to render to the
other some service for a price certain but the relation of principal and agent does not
exist between them.

Ex: you become accountants and your firm is going to be hired by a company to audit
their books of accounts. — lease of service

Lease of things and lease of work, distinguished:

1. as to object

2. as to obligation of lessor

3. remedies in case of breach

B. LEASE OF THINGS

Time and Place of Payment for Lease (Arts. 1521 & 1679):

1. Time and place of payment for lease shall be as stipulated by the parties.
2. If no place of payment has been agreed upon, it shall be the domicile, the place of
residence, of the debtor (lessee).
3. If no time of payment has been agreed upon, the custom (ex: monthly basis) of the
place shall be applied.

Duration of Lease (Arts. 1669, 1675, 1682, 1687):

1. If lease is with determinate period – the lease ceases upon day fixed, without need of
demand (Art. 1669)
2. For urban lands, if period of lease has not been fixed:
- if rent is annual: lease is from year to year
- if rent is monthly: lease is from month to month
 - if rent is weekly: lease is from week to week
- if rent is daily: lease is from day to day
3. For rural lands, if period of lease has not been fixed, it is understood to be made for
all the time necessary for the gathering of the fruits which the estate may yield in one
year
Who Are Disqualified to Lease Things (Art. 1646):
1. Husband and wife, with regard to conjugal property
2. Guardian, with regard to property of ward
3. Agent, with regard to property under administration or sale, unless with consent
of principal
4. Executors and administrators, with regard to property of estate under
administration
5. Public officers and employees, with regard to property of the state the
administration of which is entrusted to them
6. Justices, judges, prosecuting attorneys, clerks of court, with regard to property
subject of litigation in which they took part

Recording of Lease of Real Estate (Arts. 1648 and 1647)

1. Every lease of real property may be recorded in the Register of Deeds. Unless a
lease is recorded, it shall not be binding upon third persons.
TCT
2. The following cannot constitute recording of lease in the Register of Deeds without
proper authority:
- the husband, with respect to wife’s paraphernal property
- the father or guardian, with respect to property of minor or ward
- the manager without special power

Assignment of Lease (Art. 1649):

The lessee cannot assign the lease without the consent of the lessor, unless there is a
contrary stipulation. Someone else takes over as lessee
I am leasing condo unit and I have a one-year lease contract to be the lessee of the
condo unit and in the middle of the term of the lease, I migrate to Canada and then,
because I’m already bound by the one-year lease I assign my right as lessee which
means I now have someone else in my behalf. That as a rule cannot be done without
the consent of the lessor. I cannot just assign my right as lessee without getting the
consent of lessor first.
Sublease (Arts. 1650, 1651, 1652):
1. The lessee may sublease the thing leased, in whole or in part, unless there is an
express prohibition in the contract.
2. The sublessee is bound to the lessor for all acts which refer to the use and
preservation of the thing leased, in manner agreed upon between lessor and lessee.
3. The sublessee is subsidiarily liable to the lessor for any rent due from the lessee, but
only up to the amount of rent due from him.
Sublease- you have another person that is enjoying the use of the thing that is being
leased pursuant to an agreement with the initial lessee.
Ex: I am leasing a condo unit but the condo unit is too big, I decided that I divide it into
two and then, I lease in turn, I sub lease the other half. For instance, my rental for the
entire condo unit is 50,000. I sub-;ese half of the unit to another person and charge that
person 25,000. What happens there is the main lease agreement is between me and the
owner of the condo unit and then there is another smaller sublease between me and my
own lessee.
Sublessee enters into sublease under the rights of the main lessee. But in the
assignment of lease, the new lessee takes over.

Warranty of Lessor (Art. 1653):

Provisions governing warranty in sales shall be applicable to the contract of lease.
- Warranties pertains to the right of the seller, the commitment or the promise of
the lessor that the buyer will not be dispossess of what is being bought.
Hence, the following implied warranties would be applicable in a contract of lease:
a) warranty of right to lease,
b) warranty against eviction – the warranty or promise of the lessor that the lessee can
enter into possession and enjoy the use of the thing being leased freely and without the
fear that someone will come and say I own this property, so you have to leave —
eviction
c) warranty against non-apparent servitudes –
servitudes –
Ex: condo building unit behind the statue of Rizal park. Some government sectors and
other patriotic sectors are claiming that it impinges on the servitude of view which is that
this is a park. Rizal park was built that monument of Rizal was built there for relaxation
and aesthetic purposes which means we go to the park to enjoy the fresh air as well as
the view. Now, as alleged, because of the presence of this government park, there is a
servitude (obligation) on the part of the surrounding buildings to ensure that the view
around Rizal park will not be impinged.
Right of way is the right of property owners located behind a property that usually is in
front of a major road. This property owner because of the presence of other lots behind
this property, meron siyang servitude or obligation to allow right of way. Karapatan ng
may ari ng property sa likod to demand na padaanin mo kami. Right of way, you have the
right to demand to make way in your property for us to pass through.
If you are leasing a property, one of the obligations of the lessor is to inform you kung
merong right of way or servitude that you have to know of with respect to the property.
Otherwise, the lessor will now be deemed that he violated such warranty.

d) warranty against hidden defects

Where the return of the price is required, reduction shall be made in proportion to the
time during which the lessee enjoyed the thing.

OBLIGATIONS OF THE LESSOR (ARTS. 1654, 1656, 1661, 1664):

1. To deliver the thing leased in such condition as to render it fit for the use intended;
2. To make on the same during the lease all necessary repairs in order to keep it
suitable for the use to which it has been devoted;
3. To maintain the lessee in the peaceful and adequate enjoyment of the lease for the
duration of the contract;
4. For a lessor of a business or industrial establishment, to continue engaging in same
business or industry to which the lessee devotes the thing leased;
Ex: the lessee is engaged in operation of business in the mall, it’s the lessors obligation
to continue operation of the mall so that the lessee would be able to use the leased
units.
5. Not to alter the form of the thing leased in such a way as to impair the use to which
the thing is devoted under the terms of the lease.
Lessor is not obliged to answer for a mere act of trespass of a 3rd person on the thing
leased. “Mere act of trespass” means the third person claims no right whatsoever.
Trespass - a third person enters without authority to the property being leased. Can the
lessee hold the lessor liable ex, the trespasser broke into units and stole the property of
the lessee? No, provided that the trespasser did not get in the unit because of
negligence of the lessor.

Obligations of the Lessee (Art. 1657, 1662, 1st par., 1663, 1665, 1666, 1667, 1668):
1. To pay the price of the lease according to the terms stipulated;
2. To use the thing leased as a diligent father of a family, devoting it to the use
stipulated;
3. To pay the expenses for the deed of lease (cost of notarization);
4. To tolerate the urgent repairs needed to be done on the thing leased, although it
may be annoying to him, and although during the same, he may be deprived of a
part of the premises;
Urgent repairs – kailangan agad kasi di magagamit ng lessee yung property;
Necessary – di kailangan agad
5. To immediately inform the lessor about any usurpation (attempt to get ownership
of property) or untoward act which a 3rd person may have committed or is openly
preparing to carry out upon the thing leased;
6. To immediately inform the lessor of necessary repairs on the thing leased;
7. To return the thing leased, upon end of the lease, just as he received it, except
what may have been lost or impaired by the lapse of time, or by ordinary wear
and tear, or from inevitable cause;
8. To answer for the deterioration or loss of the thing leased, except if lessee proves
absence of fault on his part; and except if it is not fault of lessee
9. To answer for deterioration caused by members of his household and by guests
and visitors.
If lessee fails to immediately inform lessor of threat to, or needed repairs on the
property, lessee shall be liable for damages that may be suffered by lessor.
The law presumes that lessee received the thing leased in good condition, unless there
is contrary proof.

OPTIONS AND REMEDIES OF LESSOR AND LESSEE

1. In General (Art. 1659): if lessor or lessee should not comply with their obligations
under Articles 1654 and 1657, the aggrieved party may ask for a) rescission, with
damages, or b) damages only, allowing the contract to remain in force.

2. In Case of Destruction of Leased Thing Due to Fortuitous Event (Art. 1655): if the
thing leased is totally destroyed, the lease is extinguished. If the destruction is
 partial, the lessee may choose between a) proportional reduction of rent – return of
payment and b) rescission of lease.

3. In Case of Failure of Lessor to Make Repairs (Art. 1658): lessee may suspend
payment if lessor fails to make the necessary repairs or to maintain the lessee in
peaceful and adequate enjoyment of the property leased.

4. If Leased Premises is Unfit for Habitation (Art. 1660): if a dwelling place intended
for human habitation is in such a condition that its use brings imminent and serious
danger to life or health, the lessee may terminate the lease at once, even if at the
time the contract was perfected, the former knew of the dangerous condition or
waived the right to rescind the lease due to this condition.
-yung toxic na nagleak dun sa condo, pinaevacuate agad

5. In Case of Urgent Repairs on Leased Premises (Art. 1662, 2 nd and 3rd par., Art.
1663, 4th par.): a) if repairs last for more than 40 days, rent may be reduced in
proportion to the time the lessee has been deprived of use of property, b) if the
work is such that a portion of the property used for dwelling becomes
uninhabitable, lessee may rescind the contract if the main purpose of the lease
is to provide a dwelling place for the lessee, c) if lessor fails to make urgent
repairs, lessee may order the repairs at lessor’s cost, in order to avoid an
imminent danger

6. In Case of Trespass (Art. 1664): lessee may have direct action against an intruder

7. In Case of Deterioration (Arts. 1667 and 1668): lessee is presumed liable for
deterioration or loss of thing leased, except if the deterioration or loss is due to
earthquake, flood, storm or other natural calamity

8. Judicial Ejectment of Lessee (Arts. 1673, 1674, 1677): the lessor may judicially
eject a lessee if: a) the lease period has expired, b) lessee does not pay the price
for the lease, c) lessee violates any of the conditions in the contract, d) lessee
devotes the thing leased to other uses not stipulated on causing its deterioration

9. In Case of Improvement by Lessee (Art. 1678):

c. If lessee makes useful improvements which are suitable to the use for which
the lease is intended, without altering the form or substance of the property
leased, the lessor shall pay lessee ½ of the value of the improvements
made. If the lessor refuses to make the reimbursement, the lessee may
remove the improvements, even though the principal thing may suffer damage.
– essential for the use of the thing being leased
 d. If lessee incurs ornamental expenses, the lessee shall not be entitled to
reimbursement. Lessee may remove the ornaments, provided no damage is
caused to the thing leased and lessor does not choose to retain them by
paying their value at the time the lease is extinguished.

Implied New Lease (Arts. 1669, 1670, 1672):

There is an implied new lease if, at the end of the term of a contract of lease, the lessee
should continue enjoying the thing leased for 15 days, with acquiescence of the lessor.
The other terms of the original contract shall be revived. (13)
However, if the thing leased is a rural land, the period for the implied new lease shall be
the time necessary for the gathering of the fruits which the whole estate may yield.
If the thing leased is urban land, the period for the implied lease shall be from year to
year, if the rent is annual; from month to month, if the rent is monthly; from week to week,
if the rent is weekly; and from day to day, if the rent is daily.

Purchase of Land Under Lease (Art. 1676):

If the lease of land is not recorded in the Register of Deeds, the purchaser of the land
may terminate the lease, except: a) if there is a stipulation to the contrary in the contract
of sale, OR b) when the purchaser knows of the existence of the lease.
If the purchaser of the land terminates the lease, the lessee may: a) demand that he be
allowed to gather the fruits of the harvest which correspond to the current agricultural
year, AND b) the vendor indemnify him for damages suffered.
If the sale is merely fictitious, i.e., for the purpose of extinguishing the lease, the purchaser
cannot terminate the lease. The sale is fictitious if it is not recorded in the Register of
Deeds at the time purchaser asks for lease termination.

Special Provisions for Lease of Rural Lands (Arts. 1680 to 1685):

Lessee of rural land has no right for reduction of rent due to the following: a) sterility of
the land, b) loss due to ordinary fortuitous events, c) loss of fruits after separation from
stalk, root or trunk.
Lessee has right for reduction of rent due to extraordinary fortuitous events, such as fire,
war, pestilence, unusual flood, locusts, earthquake, or others which are uncommon and
which the parties could not have foreseen.
The outgoing lessee shall allow incoming lessee or lessor the use of the premises
necessary for preparatory labor for the following year.
The incoming lessee or the lessor shall allow the outgoing lessee to do whatever may be
necessary for the gathering or harvesting and utilization of the fruits.
Land tenancy on shares is governed by Comprehensive Agrarian Reform Program
extension with reform (CARPER) law (Republic Act 9700) and other laws.

C. LEASE OF WORK AND SERVICE (ARTS. 1689 TO 1766)

Household Service (Arts. 141 to 155, Labor Code):

“Domestic or household service” refers to services in the employer’s home which is
necessary or desirable for the maintenance thereof and includes ministering to the
personal comfort and convenience of the members of the employer’s household,
including services of family drivers.
- Employment contract
The original contract of domestic service shall not last for more than 2 years, but it may
be renewed from year to year.
Minimum wage for household service: a) Php2,500.00 per month in NCR, b) Php2,000.00
per month in chartered cities and first-class municipalities, c) PhP1,500.00 per month for
those employed in municipalities. (Kasambahay Act, RA 10361)
A househelper shall be covered by the SSS.

No househelper shall be assigned to work in a commercial, industrial, or agricultural

enterprise at a salary rate lower than that provided for agricultural or non-agricultural
worker.
If the househelper is under the age of 18 years, the employer shall give him an opportunity
for elementary education. The cost of such education shall be part of the house helper’s
compensation.
The employer shall treat the house helper in a just and humane manner. No physical
violence shall be used upon the house helper.

The employer shall furnish the househelper free of charge suitable and sanitary living
quarters as well as adequate food and medical attendance.
If the period of domestic service is fixed, neither the employer nor the househelper may
pre-terminate the contract, unless for a just cause. If the househelper is unjustly
dismissed, he or she shall be paid compensation already earned plus that for 15 days, as
indemnity. If the househelper leaves without justifiable reason, he or she shall forfeit any
unpaid salary due him or her not exceeding 15 days.
The employer shall bear funeral expenses, in case of death of househelper.

Contract of Labor (Labor Code):

1. All doubts in the implementation and interpretation of the Labor Code shall be
resolved in favor of labor.
2. The provisions on working conditions in the Labor Code apply to employees in all
establishment, whether for profit or not, but do not apply to government employees,
managerial employees, field personnel, members of the family of the employer
who are dependent on him for support, domestic helpers, persons in the personal
service of another, and workers who are paid by results.
3. The normal hours of any employee shall not exceed 8 hours.
 4. Wages shall be paid at least once every two (2) weeks or twice a month at intervals
not exceeding 16 days.
5. Payment of wages shall be made at or near the place of undertaking.
6. In the event the contractor or subcontractor fails to pay the wages of his employees
in accordance with the Labor Code, the employer shall be jointly and severally
liable with his contractor or subcontractor to such employees to the extent of the
work performed under the contract.
7. The usual test used to determine the existence of employer-employer relationship
is the so-called four-fold test. In applying this test, the following elements are
generally considered:
a. Right to hire or to the selection and engagement of the employee.
b. Payment of wages and salaries for services.
c. Power of dismissal or the power to impose disciplinary actions.
d. Power to control the employee with respect to the means and methods by
which the work is to be accomplished. This is known as the right-of-control
test

Of the above-mentioned elements, the right of control test is considered as the

most important element in determining the existence of employment
relation. Control test thus refers to the employer’s power to control the employee’s
conduct not only as to the result of the work to be done but also with respect to the
means and methods by which the work is to be accomplished.

To know if the employee is entitled to minimum wage

Contract for Piece of Work (Arts. 1713 to 1731)

In a “contract for piece of work”, the contractor binds himself to execute a piece of work
for the employer, in consideration of a certain price or compensation. The contractor may
either employ only his labor or skill, or also furnish the material.

Obligations of Contractor, in General:

1. The contractor shall execute work in such a manner that it has the qualities agreed
upon and no defects which destroy or lessen its value or fitness for its ordinary or
stipulated use (Art. 1715).
2. The contractor is responsible for the work done by persons employed by him (Art.
1727).
3. The contractor is liable for all the claims of laborer and others employed by him,
and of third persons for death or physical injuries during the construction (Art.
1728).

Obligations of Employer, in General:

1. To accept the work. Acceptance of the work by the employer relieves the
contractor of liability for any defect in the work, except: a) hidden defects, which
 the employer is not, by his special knowledge, expected to recognize, OR b)
employer expressly reserves his rights against contractor (Art. 1719).
2. To pay the price or compensation at the time and place of delivery of work, unless
there is contrary agreement. If work is to be delivered partially, the price for each
part shall be paid at time and place of delivery (Art. 1720).

Remedies of Parties, in General:

1. If the work is not of the quality agreed upon, employer may require that the contractor
remove the defect or execute another work. If contractor refuses or fails to comply,
the employer may have the defect removed or another work executed, at the expense
of the contractor (Art. 1715).

2. If in the execution of the work, an act of employer is required and employer delays or
does not perform the act, the contractor is entitled to reasonable compensation (Art.
1721).

3. If the work cannot be completed due to defect in the material furnished by employer or
because of orders from employer, the contractor has the right to an equitable part of
the compensation proportionate to work done and expenses incurred (Art. 1722) .

4. The employer may withdraw at will from the construction of the work, provided the
contractor is indemnified for all his expenses and work (Art. 1725).

5. If the work is entrusted to a person due to his personal qualifications and he dies, the
contract shall be rescinded. The employer shall pay the heirs the value of the part of
the work done. The same rule applies if the contractor cannot finish the work due to
circumstances beyond his control (Art. 1726) .

6. He who has executed work upon a movable has a right to retain it by way of pledge
until he is paid (Art. 1731).

7. Those who put their labor upon or furnish materials for a piece of work have an action
against the employer (Art. 1729).

Work with Material Furnished by Contractor:

1. Contractor shall deliver the work done to the employer and transfer ownership over the
thing. Provisions on warranty of title and against hidden defects, as well as payment
of price, in a contract of sale shall apply (Art. 1714).
2. Contractor shall suffer the loss if the work should be destroyed before its delivery,
except when there’s delay in receiving it (Art. 1717).

Contractor Employs Only Skill or Labor:

1. Contractor cannot claim compensation if the work should be destroyed before its
delivery, except: a) there was delay by employer in receiving it, OR b) the destruction
is due to poor quality of the material which was communicated to the employer in due
time (Art. 1718).
2. If the material provided by employer is lost due to fortuitous event, the contract shall
be extinguished (Art. 1718).

Construction Work:
1. The engineer or architect who drew up the plans and specifications for a building is
liable for damages if the building collapses within 15 years from completion due to a
defect in the plans and specifications OR due to defects in the ground (Art. 1723).

2. The contractor of a building is liable for damages if the building collapses within 15
years from completion due to defects in the construction, OR the use of materials of
inferior quality, OR violation of the terms of the contract (Art. 1723).

3. The contractor who undertakes to build a structure for a stipulated price based on plans
and specifications agreed upon with employer can neither withdraw from the contract
nor demand an increase in the price due to higher cost of materials or labor. However,
an increase in price may be allowed if there is a change in the plans and specificatons
and such change has been authorized by the employer in writing and the additional
price is determined by the parties in writing (Art. 1724).

Common Carriers (Arts. 1732 to 1766)

“Common carriers” are persons, corporations, firms, or associations engaged in the
business of carrying or transporting passengers or goods or both, by land, water, or air,
for compensation, offering their services to the public (Art. 1732).

Extraordinary Diligence: this is the level of diligence required of common carriers in the
transport and safety of goods and passengers.

Extraordinary Diligence Over Goods:

1. Common carriers are responsible for the loss, destruction, or deterioration of the
goods, except if the loss is due to any of the following:
a) Flood, storm, earthquake, lightning, or other natural disaster or calamity;
b) Act of the public enemy in war, whether international or civil;
c) Act or omission of the shipper or owner of the goods;
 d) Character of the goods or defects in the packaging;
e) Order or act of competent public authority (Art. 1734).

In all cases other than those mentioned in Art. 1734, if the goods are lost, destroyed or
deteriorated, common carriers are presumed to have been at fault or to have acted
negligently, unless they prove that they observed extraordinary diligence.

2. The extraordinary responsibility of the common carriers lasts from the time the goods
are unconditionally placed in the possession of, and received by the carrier for
transportation until the same are delivered, actually or constructively, by the carrier to
the consignee, or to the person who has the right to receive them (Art. 1737).
3. The common carrier is exempted from liability for loss of goods if the natural disaster
is the proximate and only cause of the loss. However, the common carrier must
exercise due diligence to prevent or minimize the loss before, during, and after the
natural disaster to be free from liability (Art. 1739).

4. If the common carrier negligently delays in transporting the goods, it shall not be
exempt from liability arising from loss of the goods due to a natural disaster (Art. 1737).

5. If proximate cause of the loss or deterioration of the loss is the common carrier’s fault
but the shipper or owner of the goods is guilty of contributory negligence, the liability
of the common carrier for damages shall be equitably reduced (Art. 1741).

6. A stipulation limiting the liability of the common carrier for loss or deterioration of the
goods to a degree less than extraordinary diligence shall be valid provided: a) the
stipulation is in writing, b) supported by valuable consideration other than the service
rendered by the common carrier, and c) reasonable, just and not contrary to public
policy (Art. 1744).

7. The following shall be considered unreasonable, unjust, and contrary to public policy:
a. That the goods are transported at the risk of the owner or shipper;
b. That the common carrier will not be liable for any loss, destruction, or
deterioration of the goods;
c. That the common carrier need not observe any diligence in the custody of the
goods;
d. That the common carrier shall not be responsible for the acts or omissions of
his or its employees;
e. That the common carrier shall exercise a degree of diligence less than that of
a good father of a family, or of a man or ordinary prudence in the vigilance over
the movables transported;
f. That the common carrier’s liability for acts committed by thieves or of robbers
who do not act with grave or irresistible threat, violence, or force, is dispensed
with, or diminished;
 g. That the common carrier is not responsible for the loss, destruction, or
deterioration of goods on account of the defective condition of the car, vehicle,
ship, airplane or other equipment used in the contract of carriage (Art. 1745).
8. An agreement that limits the common carrier’s liability for delay due to strikes or riots
is valid (Art. 1748).

9. If the common carrier, without just cause, delays the transportation of the goods or
changes the stipulated or usual route, the contract limiting the common carrier’s liability
cannot be availed of in case of the loss or deterioration of the goods (Art. 1747).
10. A contract fixing the sum that may be recovered by owner or shipper for loss or
deterioration of the goods is valid, if it is reasonable and just and has been fairly agreed
on (Art. 1752).

11. The law of the country to which the goods are to be transported governs the liability
of the common carrier (Art. 1753).

Extraordinary Diligence in Safety of Passengers:

1. A common carrier is bound to carry the passengers safely as far as human care and
foresight can provide, using the outmost diligence of very cautious persons, with a due
regard for all circumstances (Art. 1755).

2. In case of death or injuries to passengers, common carriers are presumed to have

been at fault or to have acted negligently, unless they prove that they observed
extraordinary diligence (Art. 1756).

3. Extraordinary diligence of common carriers in safety of passengers can’t be dispensed

with or lessened by stipulation, posting of notices, statements on tickets, etc. (Art.
1757).

4. When a passenger is carried free of charge, a stipulation limiting the common carrier’s
liability for negligence is valid, but not for willful acts or gross negligence (Art. 1758).

5. Reduction of fare does not justify any limitation of the common carrier’s responsibility
(Art. 1758).

6. Common carriers are liable for the death of or injuries of passengers through the
negligence of their employees, even if such employees acted beyond the scope of their
authority or in violation of the common carrier’s orders. The liability of the common
carrier does not cease upon proof that they exercised diligence of a good father of a
family (Art. 1759).

7. The passenger must observe the diligence of a good father of a family to avoid injury
to himself (Art. 1761).
8. The contributory negligence of the passenger does not bar recovery of damages for
his death or injuries, if the proximate cause thereof is the negligence of the common
carrier, but the amount of damages shall be equitably reduced (Art. 1762).

9. A common carrier is responsible for injuries suffered by a passenger on account of the

willful acts or negligence of other passengers or of strangers, if the common carrier’s
employees, through exercise of diligence of a good father of a family, could have
prevented or stopped the act (Art. 1763).

AGENCY
A. Nature, Form, and Kinds of Agency
1. Agency, defined:
By the contract of agency, a person binds himself to render some service or to do
something in representation or on behalf of another, with the consent or authority of the
latter (Art. 1868).
- Refers to an arrangement where you have a person called the principal who has
something that needs to be done and asks an agent to do this thing for and on
behalf of the principal.
A contract of agency excludes the relationship of employer and employee
(dependent), of master and servant, and of employer and independent contractor.
The agent’s power to affect the principal’s contractual relations with 3rd persons
differentiates the agent from the employee, the servant, or the contractor.

Mr. Jacob owns a parcel of land on which he wants to construct a building.

Mr. Jacob Building Contractor
Mr. Jacob Laborers
Mr. Jacob Construction Manager

Agency is both a contract and a representative relation.

Employee & employer – the employee is engaged to work for the principal.
Agent & Principal – agent is engaged by the principal to act for and on behalf of the
principal.
However, without a contract or a consideration, there can be an agency or agency
powers, such as when one person acts for another without authority and the latter ratifies
it.
Representation constitutes the basis of agency. The acts of the agent on behalf
of the principal within the scope of his authority produce the same legal and binding
effects as if they were personally done by the principal.

Essential elements of agency:

a. There is consent, express or implied, of the parties;
b. The object is the execution of a juridical act in relation to third persons;
c. The agent acts as a representative and not for himself;
d. The agent acts within the scope of his authority.

KINDS OF AGENCY:
A. As to manner of creation:
a. express – one where the agent has been actually authorized by the
principal, either orally or in writing (Art. 1869) – agency contract

b. implied – one which is implied from the acts of the principal, from his
silence or lack of action (Art. 1869), or his failure to repudiate
the agency knowing that another person is acting on his behalf, without
authority (Art. 1869), or from the agent’s acts which carry out the
agency or the agent’s silence or inaction according to the
circumstances (Art. 1870)

C. As to character:
a) gratuitous – one where the agent receives no compensation for his services
(Art. 1875)

b) compensated or onerous – one where the agent receives compensation for his
services (Art. 1875)

C. As to extent of business covered:

a. general – one which comprises all the business of the principal (Art. 1876)
 (going abroad leaving the business to the agent)

b. special - one which comprises one or more specific transactions (Art. 1876)
(agent is only appointed to a specific task, ex: as a cooker in a restaurant but with
respect to deposits in the bank account it is not the agent’s function)
D. As to authority conferred:
i. couched in general terms – one which is created in general terms and is deemed to
comprise only acts of administration (Art. 1877)
ii. couched in specific terms – one authorizing only the performance of a specific act or
acts (Art. 1878)
E. As to nature and effects:
i. ostensible or representative – one where the agent acts in the name and
presentation of the principal (Art. 1868)
ii. simple or commission - one where the agent acts in his own name but for the
account of the principal

ACCEPTANCE OF AGENCY:
a. Form of acceptance:
Acceptance may be express or implied from the agent’s acts which carry out
the agency, or from his silence or inaction according to the circumstances (Art. 1870).

b. Acceptance between persons present: (not relevant)

There is implied acceptance of agency if the principal personally delivers his
power of attorney to the agent and the latter receives it without any objection (Art.
1871).
Power of attorney – an instrument in writing by which one person appoints
another as his agent

c. Acceptance between persons absent:

There is implied acceptance of agency if:
a. the principal transmits his power of attorney to the agent who receives it
without any objection; or
 b. the principal entrusts to him by letter or telegram a power of attorney with
respect to the business in which he is habitually engaged as an agent and
he did not reply to the letter or telegram (Art. 1872).

4. GIVING NOTICE OF AGENCY:

a. If notice of agency is given by way of special information (e.g., by letter), the person
appointed as agent is considered as such with respect to the person to whom it was
given.
b. If notice of agency is given by way of public advertisement, the agent is considered
as such with regard to any person.
In either case, agency is deemed to exist whether there is actually an agency or
not.
The power of attorney must be revoked in the same manner in which it was given
(Art. 1873).

COMPENSATION FOR AGENCY:

It is presumed that agency is with compensation, unless there is contrary proof
(Art. 1875).
The fact that an agent is acting without compensation has no effect upon his
rights and duties with reference to the principal and to third parties.
The principal must pay the agent the compensation agreed upon or the
reasonable value of the agent’s services if no compensation was specified.
The liability of the principal to pay commission presupposes that the agent has
complied with his obligation as such to the principal.

SCOPE OF AGENT’S AUTHORITY:

An agent must act within the scope of his authority. He may do such acts as may
be conducive to the accomplishment of the purpose of the agency (Art. 1881).
Kinds of authority of an agent:
a. actual – when it is actually granted
b. apparent or ostensible – authority by estoppel; there is no actual
authority
c. express – when it is directly conferred by words
d. implied – when it is incidental to the transaction or reasonably necessary
to accomplish the purpose of the agency
e. general – when it refers to all business of the principal
f. special – when it is limited to one or more specific transactions
 g. authority by necessity or by operation of law – when it is demanded by
virtue of the existence of an emergency; it terminates when the agency
has passed
The limits of the agent’s authority shall not be considered exceeded should it have
been performed in a manner more advantageous to the principal than that
specified by him (Art. 1882).

If an agent, being authorized to act on behalf of the principal, acts in his own name,
the agent shall be directly liable to the person with whom he had contracted as if
the transaction were his own. Therefore, the principal cannot have a right of action
against the third person nor the third person against him (Art. 1883).
An agent acts beyond his authority – ex: the agent accepts payment from buyer
upon selling the land. The owner of the proper can tell the buyer that in the
document where I appointed my agent, it does not state that he is authorized to
receive payment. I am not going to authorize your payment you have to pay me
again. In this case, the buyer can demand the agent to return the payment.
However, if in the above situation, the contract entered into by the agent involves
things belonging to the principal, the contract is considered entered into between
the principal and the third person (Art. 1883).

Instances When Special Powers of Attorney are Necessary (Art. 1878):

SPA – a document where you appoint someone for and on your behalf
a. To make payments which are not considered acts of administration (to pay
for property you are buying); acts of administration – (day-to-day activities)
b. To effect novation to put an end to obligations already in existence;
c. To compromise, to submit to arbitration, to renounce the right to appeal from
judgment, to waive objections to venue of an action, or to abandon a
prescription already acquired;
d. To gratuitously waive any obligation;
e. To enter into any contract by which ownership of an immovable is transmitted
or acquired;
f. To make gifts, except customary ones for charity or those made to employees in the
business managed by the agent;
g. To loan or borrow money, unless the need for money is urgent and
indispensable for preservation of the things which are under administration;
h. To lease real property to another person for more than 1 year;
i. To bind the principal to render some service without compensation;
j. To bind the principal in a contract of partnership;
 k. To obligate the principal as a guarantor or surety;
l. To create or convey rights over immovable property;
m. To accept or repudiate an inheritance;
n. To ratify or recognize obligations contracted before the agency; and
o. Any other act of strict dominion.
A special power to compromise does not authorize submission to arbitration (Art. 1880).
SALE OF LAND THROUGH AGENT:
When a 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 (Art. 1874).
A special power to sell excludes the power to mortgage; and a special power to
mortgage does not include the power to sell (Art. 1879).

B. OBLIGATIONS OF THE AGENT

1. OBLIGATIONS OF AGENT, IN GENERAL:
a. Loyalty to the principal – it is the duty of the agent to act with the outmost
good faith and loyalty for the furtherance and advancement of the interests
of the principal (Arts. 1868, 1884). Agent should not prioritize his interests
over the principal.

b. Obedience to principal’s instructions - an agent must obey all lawful

instructions of the principal within the scope of the agency (Art. 1887). If
he fails to do so, he becomes liable for any loss the principal incurs even
though he can show he acted in good faith or exercised reasonableness
(Art. 1884). In the absence of instructions of the principal, an agent is
bound to exercise diligence of a good father of a family as required by the
business (Art. 1887).

c. Exercise of reasonable care – the agent undertakes that he is reasonably

competent for the performance of the service, and that in performing his
undertaking, he will exercise reasonable care, skill and diligence. Hence,
an agent shall not carry out an agency if its execution would manifestly
result in loss or damage to the principal (Art. 1888).

2. SPECIFIC OBLIGATIONS OF AGENT:

a. To advance necessary funds – if the contract states that the agent shall
advance the necessary funds, the agent is bound to do so, except when the
principal is insolvent (Art. 1886). Ex: Agent is tasked to deliver a car, if the
 agent needs to advance the toll fee or expense to be able to bring the car,
then agent has to do that.

b. Not to prefer his own interests to those of principal – if there is a conflict of

interests between the agent and the principal and the agent prefers his own,
he shall be liable for damages (Art. 1889).

c. Not to loan to himself – if the agent has been authorized to lend money at
interest, he cannot be the borrower without the consent of the principal. If
the agent has been authorized to borrow money, he may himself be the
lender at the current rate of interest (Art. 1890). If the agent is authorized to
receive payment, this payment received by an agent in cash the agent
should not borrow this money.

d. To render accounts – the agent shall account for and deliver to the principal
all money and transactions which may have come into his hands by virtue
of the agency, even those not owing to the principal. A stipulation that the
agent is exempted from rendering an account shall be void (Art. 1891).
Agent should turn over proof of payment

e. Liability for interest – an agent who used the funds of the principal for his
own use is liable to pay interest as indemnity. If, after the expiration of the
agency, an agent fails to give an amount still due to the principal, the agent
shall also be liable for interest (Art. 1896).

f. Liability for Fraud and Negligence – the agent is responsible to the principal
for fraud and negligence in the performance of his obligation. The
circumstance that the agency is or is not for a compensation shall be
considered by the courts in fixing the liability of the agent for negligence (Art.
1909).

g. Obligations to Third Parties –

I. If an agent expressly binds himself to the party with whom he contracts
as an agent, he obligates himself personally (Art. 1897).
II. An agent who exceeds his authority is personally liable if he did not give
notice of his powers to the other party (Art. 1897).
III. An agent who exceeds his authority is personally liable if the principal
does not ratify the contract and the party with whom he enters into a
contract is not aware of the scope of his powers. If the other party is
aware of the agent’s powers, the contract is void (Art. 1898).
IV. An agent who exceeds his authority is personally liable if he promised
to secure the principal’s ratification of the contract (Art. 1898).
 V. An agent who exceeds the limits of his authority according to a secret
understanding with the principal is not personally liable if the act or
transaction is within the terms of a written power of attorney (Art.
1900).
VI. An agent may be required by a 3rd person to present the power of
attorney or the instructions regarding the agency (Art. 1902).

3. OBLIGATION OF PERSON WHO DECLINES AN AGENCY :

In case a person declines an agency, he is bound to observe the diligence of a

good father of a family in the custody and preservation of the goods forwarded to him
by the owner. However, the owner must appoint an agent or take charge of the goods
as soon as possible (Art. 1885).

4. SUBSTITUTE AGENT:
A substitute agent (or sub-agent) is a person to whom the agent delegates, as
his agent, the performance of an act for the principal which the agent has been
empowered to perform.

Ex: I am appointed by my auntie to negotiate or sell her property because she is going
to migrate in Canada. She signed SPA for and on her behalf. Because I am busy, I
appoint in turn an agent to look for a buyer. The one whom I called is the substitute
agent because he/she is appointed by me, the main or primary agent.
If the principal designates the sub-agent, the agent is not liable for the acts of the
sub-agent.
If the principal authorized the agent to appoint a sub-agent and the principal did
not designate the sub-agent to be appointed, the agent is not responsible for the acts of
the sub-agent, unless the person appointed is notoriously incompetent or insolvent (Art.
1892)
An agent shall be responsible for the acts of the sub-agent that he may appoint, if
the principal did not authorize the agent to appoint a sub-agent but did not prohibit the
agent from so appointing a sub-agent either (Art. 1892).
If the principal prohibited the agent from appointing a substitute, the acts of the
substitute shall be void (Art. 1892).
 If the principal did not prohibit the appointment of a sub-agent, the principal may
bring an action against the substitute with respect to the contracts undertaken by the
substitute (Art. 1893).

5. TWO OR MORE AGENTS:

If two or more agents are appointed by the principal, it is presumed that the
agents are jointly liable, unless solidary obligation of the agents is expressly stipulated
(Art. 1894).
If the agents are solidarily liable, each agent is responsible for the non-fulfillment
of the agency, and for the fault or negligence of his fellow agents (Art. 1885).
Even if the agents are solidarily liable, an agent is not liable for the fault or
negligence of a fellow agent who acted beyond the scope of his authority (Art. 1895).

6. COMMISSION AGENTS:
A factor or commission agent is one whose business is to receive and sell goods
for a commission and who is entrusted by the principal with the possession of goods
to be sold, and usually selling in his own name. He may act in his own name or in that
of the principal.
- It is sold to the commission agent, this commission agent receives goods from
manufacturer. Upon receipt, he now sells the goods under his own name and not
under the manufacturer’s name.
A commission agent is responsible for any damage or deterioration suffered by
goods consigned to him, unless he makes a written statement of the damage and
deterioration of the damage and deterioration, if the condition of the goods received by
him do not conform to the description in the consignment (Art. 1903).
A commission agent who handles goods of the same kind and mark, which belong
to the same owners, shall distinguish them by counter marks, and designate the
merchandise respectively belonging to the same principal (Art. 1904).
A commission agent can only sell on credit with the express or implied consent of
the principal. If the commission agent sells on credit without the consent of the principal,
the principal may demand from him payment in cash. However, the agent shall be entitled
to any interest or benefit from such sale on credit (Art. 1905).
If the commission on agent sells on credit, with authority of the principal, the agent
is required to inform the principal about the sale with a statement of the names of the
buyers. If the commission agent fails to so inform the principal, the sale shall be deemed
to have been on cash basis insofar as the principal is concerned (Art. 1906).
 A commission agent who receives a guaranty commission in addition to ordinary
commission shall bear the risk of collection and shall pay the principal the proceeds of
the sale on the same terms agreed upon with the principal (Art. 1907).
A guarantee commission is one where in consideration of an increased
commission, the commission agent guarantees to the principal the payment of debts
arising through his agency. A guarantee commission applies to both cash and credit
sales.
- You have someone who sells good on commission plus, he guarantees that the
goods will be sold in a week. Because there is a guarantee that it will be sold, the
payment for the sale of the goods will be higher but there is a bigger obligation.
A commission agent who made an authorized sale on credit must collect the
credits due the principal at the time they become due and demandable. If he fails to do
so, the agent shall be liable for damages unless he can show that the credit could not be
collected notwithstanding exercise of due diligence on his part (Art. 1908).

C. OBLIGATIONS OF THE PRINCIPAL

1. Obligations of the Principal, In General:
a. To comply with the obligations which the agent may have contracted within the
scope of his authority (Art. 1910).

b. To comply with the obligations contracted by the agent in excess of his power, if
the principal ratifies the act of the agent (Art. 1910). The principal is solidarily liable
with the agent for acts of the agent which exceed his authority if the principal
allowed the agent to act as though he had full powers.

2. Specific Obligations of the Principal:

a. Upon request of the agent, the principal shall advance to the agent the funds
necessary for the execution of the agency (Art. 1912).
b. If the agent advanced the funds necessary for execution of the agency, the
principal shall reimburse the agent, even if the undertaking was not successful,
provided the agent is free from fault. The reimbursement shall include interest
on the sums advanced, from the day on which the advance was made (Art.
1912).
c. The principal must indemnify the agent for all damages which the execution of
the agency may have caused the agent, without fault on the latter’s part (Art.
1913).

Broker vs. Agent

 Broker is a middle person who does not have an agreement with any of the parties.
Being a middle person, he is more independent compared to the agent. An agent
has a contract with a buyer, being an agent, he has authorities that he should follow
from the principal (obligation of loyalty). A broker has a freedom. In terms of
compensation, there is a similarity in a sense that usually the fee of broker and an
agent will depend on the purchase price of real property.
3. Liability of Principal Due to Estoppel :

Estoppel – is a bar which prevents a person from denying or asserting anything

contrary to that which has been established as truth by his own deed or representation,
either express or implied.

If the agent exceeded his authority and caused damage to a third party, said third party
may hold the principal solidarily liable with the agent if the principal was disclosed to
the third party and the third person was not aware of the limits of the authority of the
agent (Art. 1911).

4. Two or More Principals:

If two or more principals have appointed an agent for a common transaction or
undertaking, they shall be solidarily liable to the agent for the consequences of the
agency (Art. 1915). Hence, the agent may sue each of the principal for the entire
amount due, and not just for his proportionate share.

5. Two or More Persons Contract Separately With Principal and Agent:

If two persons contract separately with the agent and the principal with regard to the
same thing and the contracts are incompatible, the one of prior date shall be preferred.
However, in case of sale, the rule on double sales shall prevail, i.e., in case of
immovable, the ownership shall belong to the person who had it recorded in the
Register of Deeds in good faith, and in case of movables, the first to take possession
shall own the property (Art. 1916).

If the agent acted in good faith, the principal shall be liable in damages to the prejudiced
3rd person. If the agent acted in bad faith, he alone shall be liable (Art. 1917).

6. When Principal Not Liable for Expenses of Agent:

1. When agent acted in contravention of the instructions of the principal and the
principal does not want to avail of the benefits of the contract;
2. When the expenses were due to the fault of the agent;
3. When the agent incurred the expenses with knowledge that an unfavorable result
would ensue, and the principal was not aware thereof;
4. When it was agreed that the expenses would be borne by the agent, or that the
agent would be allowed only a certain sum (Art. 1918).
7. Ignorance of Agent Not a Defense:
If the duly authorized agent acts in accordance with the orders of the principal, the
latter cannot set up the ignorance of the agent as to circumstances whereof he himself
was, or ought to have been aware (Art. 1898).

D. Modes of Extinguishment of Agency

1. Modes of Extinguishment of Agency:

a. By its revocation;
b. By the withdrawal of the agent;
c. By the death, civil interdiction, insanity or insolvency of the principal or of the agent;
d. By the dissolution of the firm or corporation which entrusted or accepted the agency;
e. By the accomplishment of the object or purpose of the agency;
f. By the expiration of the period for which the agency was constituted (Art. 1919).

2. Revocation of Agency:
The principal may revoke the agency at will, i.e., at any time, at his mere option, with
or without reason, and compel the agent to return the document evidencing the agency.

The revocation may be express or implied (Art. 1920).

Revocation at will may be done whether the agency is gratuitous or with compensation.

Instances of implied revocation of agency:

a. If the principal appoints a new agent for the same business or transaction – the
previous agency is revoked from the day notice was given to the former agent
(Art. 1923).
b. If the principal directly manages the business and deals directly with 3 rd persons
(Art. 1924).

If the agency is created for the purpose of contracting with specific persons, the
revocation will not prejudice said specific persons until notice of the revocation is given
to them (Art. 1921).

In case the agent had general powers (as when the agent has been appointed to
manage a business), persons acting in good faith will not be prejudiced by the
revocation if they had no knowledge of the revocation. However, notice of the
revocation in a newspaper of general circulation is sufficient notice to third persons
(Art. 1922).

When two or more principals have granted a power of attorney for a common
transaction, any one of them may revoke the same without the consent of the others
(Art. 1925).
 A general power of attorney granted to an agent is impliedly revoked as to matters
covered by a special power of attorney granted to another agent (Art. 1926).

Instances when agency cannot be revoked:

a. When a bilateral contract depends upon it; or
b. If it is the means to fulfilling an obligation already contracted; or
c. If a partner is appointed manager of a partnership in the contract of
partnership and his removal from the management is unjustifiable (Art.
1927).

3. Withdrawal by the Agent:

The agent may withdraw from the agency at any time by giving notice to the principal,
and without the consent of the principal. However, if the principal’s contractual rights
are violated, the agent shall indemnify the principal (Art. 1928).
If the agent withdraws for a valid reason, like when the withdrawal is based on the
impossibility of continuing with the agency without grave detriment to himself or is due
to fortuitous event, the agent cannot be held liable (Art. 1928).
The withdrawing agent must continue to act pursuant to the agency until the principal
takes the necessary steps to meet the situation (Art. 1929).

4. Death of the Principal:

Agency is terminated instantly by the death of the principal (Art. 1919). However, the
agency remains in full force and effect in the following instances:
a. If the agency has been constituted in the common interest of the principal and
the agent (Art. 1927); or
b. If the agency has been constituted in the interest of a third person who
accepted the stipulation in his favor (Art. 1927, in relation to Art. 1311).
Anything done by the agent, without knowledge of the death of the principal, is valid
and effective with respect to third persons who acted in good faith (Art. 1931).

5. Death of the Agent:

If the agent dies, the agency is also extinguished. The heirs of the agent are obligated
to notify the principal and to take such steps necessary to meet the situation (Art. 1932).

LOAN
 4. Loan, defined:
Commodatum: (gratuitous loan of a movable property) one of the parties delivers
to another, either something not consumable so that the latter may use the same for a
certain time and return it. Commodatum is essentially gratuitous. The bailor retains
ownership of thing loaned. (Art. 1868)
Terms:
Bailee - a person or party to whom goods are delivered for a purpose, such as custody or repair,
without transfer of ownership.
Bailor - a person or party that entrusts goods to a bailee.
Ex: L lends to B an oversized bottle of wine to be used as a sample or for advertisement
An example of commodatum involving real property is when a person allowed another to build
a warehouse on the former’s land so that the latter may use the property for a certain period without
any payment of rentals. If no time for use of the land is specified, the contract would be that specie of
commodatum called “precarium” expressly recognized in Article 1947. If rental is paid, the contract
would be one of lease.

Loan or mutuum: one of the parties delivers to another money or other

consumable thing, upon the condition that the same amount of the same kind and quality
shall be paid. Simple loan or mutuum may be gratuitous or with stipulation to pay interest.
Ownership of thing loaned passes to the borrower. (Art. 1868)
Ex: if A borrows money in the amount of P1,000.00 from B and B agrees, then the
contract of loan is perfected. But it is only when B gives P1,000.00 to A that the contract
of loan is consummated. So once it is consummated, B becomes obliged to deliver the
amount to A. a, on the other hand, is obliged to return the same amount of money to
John on the date agreed upon.
2. Commodatum:
a. Nature of commodatum: the bailee acquires use of the thing loaned, but not its fruits
(Art. 1935).
Consumable goods may be the object of commodatum, if the purpose of the
contract is not the consumption of the object, as when it is merely for exhibition.
Movable or immovable property may be the object of commodatum (Art. 1937).

b. Obligations of the bailee:

 a. To pay for the ordinary expenses for the use and preservation of the thing loaned
(Art. 1941).
b. To be liable for the loss of the thing loaned, even if it should be through a fortuitous
event, if:
- he uses it for a purpose other than for which it has been loaned
- he keeps it longer than period stipulated
- there is appraisal of the value of the thing loaned
- he lends the thing loaned to others
- he chooses to save his own property (Art. 1942).

c. Obligations of the bailor:

a. The bailor cannot demand return of the thing prior to expiration of period stipulated
or the accomplishment of the use for which commodatum was constituted, except
if he should have urgent need of the thing (Art. 1946) or the bailee commits acts of
ingratitude (Art. 1948).
b. The bailor may demand the return of the thing if (precarium):
- there is no stipulation on the period or the use for which the thing loaned should
be devoted
- the use of the thing is merely tolerated by owner (Art. 1947).
Precarium - one whereby the bailor may demand the thing loaned at will Art. 1936

ILLUSTRATIVE CASE:
Loan of a bull for breeding purposes was subject to payment of breeding fee by borrower
who used the bull after the period stipulated until its death due to force majeure.

Facts: B borrowed from L (Bureau of Animal Industry) three bulls for breeding purposes
for a period of one year, later on renewed for another year as regards one bull. The loan
was subject to the payment by the borrower of breeding fee of 10% of the book value of
the bulls. B kept and used the bull (the loan of which was renewed) for four years after
the period stipulated in the contract until it was killed during a Huk raid by stray bullets. B
contends that the contract was commodatum, and that, for that reason, as L retained
ownership or title to the bull, it should suffer the loss.
Issue: As the death of the bull was due to force majeure, is B relieved from the duty of
paying its value?
Held: No. A contract of commodatum is essentially gratuitous. If the breeding fee be
considered compensation, then the contract would be a lease of the bull. Under Article
1671 of the Civil Code, the lessee would be subject to the responsibilities of a possessor
in bad faith because she had continued possession of the bull after the expiration of the
contract. And even if the contract be commodatum, still B is liable under Article 1942
3. Simple Loan or Mutuum:
A person who receives a loan of money or other fungible thing acquires the
ownership thereof and is bound to pay the creditor an equal amount of the same
kind a quality (Art. 1953).
No interest shall be due unless it has been expressly stipulated in writing (Art.
1956).
Interest due and unpaid shall not earn interest (except legal interest). The
contracting parties may, however, capitalize the unpaid interest. (Art. 1959).
Example:
Commodatum – I own a house in Tagaytay and I tell my friend you can stay for 1 month
for you to unwind or relax. Only for a month because my sister will use that house when
she goes home. My friend upon staying, has the obligation to pay for the utility bills. If
there’s a vase that is broken by her, she will be liable for damages. Now, for ex, my
sister goes home ahead of time I have to right to demand my friend to leave the house
ahead of time because it is urgent.

DEPOSIT

1. Deposit, in general:
There is deposit if a person receives something belonging to another, with the
obligation of safely keeping it and of returning the same (Art. 1962).
A deposit is a gratuitous contract, except if there is agreement to the contrary or
if the depositary is engaged in the business of storing goods (Art. 1965).
Only movable things may be the object of a deposit (Art. 1967).
2. Voluntary deposit:
a. General provisions:
There is voluntary deposit if delivery is made by the will of the depositor (Art.
1968).
A contract of deposit may be entered into orally or in writing (Art. 1969).
a. Obligations of depositary:
The depositary is obliged to keep the thing safely and to return it, when required
to the depositor, or his heirs or successors, or to the person who may have been
designated in the contract (Art. 1972).
The depositary cannot deposit the thing with a third person (Art. 1973).
The depositary cannot use the thing deposited without the express permission of
the depositor (Art. 1977).
Fixed, savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions on loan (Art. 1980).
The depositary cannot demand that the depositor prove ownership of the thing
deposited (Art. 1984).
If depository discovers that the thing deposited has been stolen and who its true
owner is, he must advise the latter of the deposit. If the latter does not claim the
thing deposited within 1 month, the depositary may return the thing to the
depositor (Art. 1984).
If the depositary has reasonable grounds to believe that the thing has not been
lawfully acquired by depositor, the depositary may return the same to the depositor
(Art. 1984).

- arises without any such calamity, from the mere consent or agreement of the
parties.

b. Obligations of depositor:
If deposit is gratuitous, depositor is to reimburse the depositary for expenses
incurred to preserve the thing deposited (Art. 1992) or for any loss incurred due to the
nature of the thing deposited (Art. 1993).
The depositary may retain the thing in pledge until the full payment of what may
be due him by reason of the deposit (Art. 1994).
3. Necessary deposit:
 Instances of necessary deposit (Art. 1996):
a. When it is made in compliance with a legal obligation;
b. When it takes place on the occasion of any calamity.
Deposit of things of travelers in hotels or inns shall be considered necessary
deposit and keepers of inns and hotels are responsible for the things of the travelers
as depositaries (Art. 1998).
The hotel is liable for the vehicles, animals, and articles placed in the annexes of
the hotel (Art. 1999).
- such as arises from pressing necessity; for instance, in case of a fire, a
shipwreck, or other overwhelming calamity
Voluntary and necessary deposits distinguished.
The chief difference between a voluntary deposit and a necessary deposit is that in the
former, the depositor has complete freedom in choosing the depositary, whereas in the
latter, there is lack of free choice in the depositor. (see 11 Manresa 674.)
4. Judicial deposit or sequestration:
There is judicial deposit or sequestration when an attachment or seizure of
property in litigation is ordered.

Deposit distinguished from mutuum.

The distinctions are as follows:
(1) In deposit, the principal purpose is safekeeping or mere custody, while in mutuum,
the consumption of the subject matter;
(2) In deposit, the depositor can demand the return of the subject matter at will, while in
mutuum, the lender must wait until the expiration of the period granted to the debtor;
and
(3) In deposit, both movable and immovable property may be the object, while in
mutuum, only money and any other fungible thing.
Deposit distinguished from commodatum.
The following are the distinctions:
(1) In deposit, the principal purpose is safekeeping, while in commodatum, the transfer
of the use;
(2) Deposit may be gratuitous, while commodatum is essentially and always gratuitous;
and
(3) In (extrajudicial) deposit, only movable (corporeal) things may be the object, while in
commodatum, both movable and immovable property may be the object.

GUARANTY

1. Nature and extent of guaranty:

By guaranty, a person, called the guarantor, binds himself to the creditor to fulfill
the obligation of the principal debtor in case the latter should fail to do so. If the person
binds himself solidarily with the principal debtor, the contract is called a suretyship (Art.
2047).
A guarantee is gratuitous, except if there is contrary stipulation (Art. 2048).
A guarantor may bind himself for less, but not for more than the principal debtor
(Art. 2054).
A guaranty must be express (Art. 2055).
Suretyship may be defined as a relation which exists where one person (principal or
obligor) has undertaken an obligation and another person (surety) is also under a direct
and primary obligation or other duty to a third person (obligee), who is entitled to but
one performance, and as between the two who are bound, the one rather than the other
should perform
2. Effects of guaranty:
a) Between guarantor and creditor: the guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the properties of the debtor and has
resorted to all legal remedies against the debtor (Art. 2058).
b) Between debtor and guarantor: the guarantor who pays for a debtor must be
indemnified by the debtor with the total amount of the debt, the legal interest,
expenses incurred by guarantor, and damages, if any (Art. 2066).
The guarantor is subrogated to all the rights of the creditor against the debtor
(Art. 2067).
c) Between co-guarantors: when there are two or more guarantors of the same
debtor and for the same debt, the one among them who has paid may demand of
each of the others the share which is proportionally owing from him (Art. 2073).
Sub-guarantor: is responsible to the co-guarantors if the guarantor for whom he
bound himself is insolvent (Art. 2075).

3. Extinguishment of guaranty:
 The obligation of the guarantor is extinguished at the same time the debtor’s
obligation is extinguished and for the same cases as all other obligations (Art.
2076).
If creditor accepts immovable or other property in payment of debt, the guarantor
is released (Art. 2077).
An extension granted to the debtor by the creditor, without the consent of the
guarantor, extinguishes the guaranty (Art. 2079).

PLEDGE, MORTGAGE, ANTICHRESIS

1. Provisions Common to Pledge and Mortgage:
Essential requisites in contracts of pledge and mortgage:
a. The pledge and mortgage are constituted to secure the fulfillment of a principal
obligation;
b. The pledgor or mortgagor is the absolute owner of the thing pledged or
mortgaged;
c. The persons constituting the pledge or mortgage have the free disposal of
their property (Art. 2085).
In pledge and mortgage, when the principal obligation becomes due, the things
pledged or mortgaged may be alienated for payment of creditor (Art. 2087).

2. Pledge:
In a contract of pledge, a movable is delivered to the creditor who has the right to
retain the thing in his possession until the debt has been paid (Art. 2098).
All movables, as well as incorporeal rights, which are within commerce may be
pledged (Art. 2094).
The thing pledged should be placed in the possession of the creditor or a third
person by common agreement (Art. 2093).
Pledge is a contract by virtue of which the debtor delivers to the creditor or to a
third person a movable (Art. 2094.) or document evidencing incorporeal rights for the
purpose of securing the fulfillment of a principal obligation with the understanding that
when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and
accessions
3. Mortgage:
Only the following property may be the object of a contract of pledge:
a. immovables;
b. alienable real rights imposed upon movables.
 Movables may be the object of a chattel mortgage (Art. 2124).
In order that a mortgage may be constituted, the document in which it appears
must be recorded in the Registry of Property (Art. 2125).
The mortgage directly and immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the fulfillment of the obligation for whose
security is was constituted (Art. 2126).
Mortgage (otherwise known as “real estate mortgage” or “real mortgage’’) is a contract
whereby the debtor secures to the creditor the fulfillment of a principal obligation,
specially subjecting to such security immovable property or real rights over immovable
property which obligation shall be satisfi ed with the proceeds of the sale of said
property or rights in case the said obligation is not complied with at the time stipulated.

Pledge and real mortgage distinguished. The following are the distinctions.
(1) Pledge is constituted on movables (Art. 2094.), while mortgage, on immovables.
(2) In pledge, the property is delivered to the pledgee, or by common consent to a third
person (Art. 2093.), while in mortgage, delivery is not necessary (Legaspi & Salcedo vs.
Celestial, 66 Phil. 372 [1938].); and
(3) Pledge is not valid against third persons unless a description of the thing pledged
and the date of the pledge appear in a public instrument (Art. 2096.), while mortgage is
not valid against third persons if not registered. (Art. 2125.
5. Antichresis:
- by the contract of antichresis, the creditor acquires the right to receive the fruits
of an immovable of his debtor, with the obligation to apply them to the payment of
the interest, if owing, and thereafter, to the principal of his credit.

Antichresis and pledge compared.

The distinctions are as follows:

(1) Antichresis refers to real property, while pledge, to personal property; and

(2) Antichresis is perfected by mere consent, while pledge is perfected by the delivery of
the thing pledged; and

(3) Antichresis is a consensual contract, while pledge is a real contract. Both are similar
in that the debtor loses control of the subject matter of the contract.

Antichresis and real mortgage compared.

The following are the distinctions:

(1) In antichresis, the property is delivered to the creditor, while in mortgage, the debtor
usually retains possession of the property;

(2) In antichresis, the creditor acquires only the right to receive the fruits of the property;
hence, it does not produce a real right, while in mortgage, the creditor does not have
any right to receive the fruits, but mortgage creates a real right over the property which
is enforceable against the whole world;

(3) In antichresis, the creditor, unless there is a stipulation to the contrary, is obliged to
pay the taxes and charges upon the