The Nature of Sale

CHAPTER 1
NATURE OF SALE

DEFINITION:

                A contract whereby one of the contracting parties (seller) obligates himself to transfer the ownership, and to deliver the possession, of a determinate thing; and the other party (buyer) obligates himself to pay therefor a price certain in money or its equivalent. (Art.1458)

 

1.       NATURE OF OBLIGATIONS CREATED IN A SALE

a.       Two obligations of the seller:

i.                     Transfer the ownership

ii.                   Deliver the possession , of the subject matter

b.      Obligation for the buyer:

i.                     Pay the price

·         Both sets of obligations are real obligations or obligations to give and can be the proper subject of actions for specific performance

2.       SUBJECT MATTER OF SALE

·         Includes generic objects which are at least determinable

·         A thing is determinate when it is particularly designated or physically segregated from all others of the same class. The requisite that the thing be determinate is satisfied 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 (Art. 1460)

·         Even if the subject matter of the sale was generic (determinable), the performance of the seller’s obligation would require necessarily its physical segregation or particular designation, making the subject matter determinate at the point of performance

3.       ELEMENTS OF CONTRACT OF SALE

(Coronel v. CA)

a.       Consent, or meeting of the minds to transfer ownership in exchange for the price;

b.      Subject matter

c.       Price, certain in money or its equivalent

·         When all 3 elements are present, there being a meeting of the minds, then a perfected contract of sale arises, and its validity is not affected by the fact that previously a fictitious deed of sale was executed by the parties, or by the fact of non-performance of the obligations thereafter.

·         When some of the essential requisites are not present, the SC considers the resulting sale is void

·         When all 3 elements are present, but there is defect or illegality constituting any of such elements, the resulting contract is either voidable when the defect constitutes a vitiation of consent, or void as mandated under Art. 1409 of the Civil Code.

4.       STAGES IN THE LIFE OF SALE

(a)    Politacion, negotiation, or preparation stage

-          Covers the period from the time the prospective contracting parties indicate their interests in the contract to the time the contract is perfected

(b)   Perfection, conception or “birth”

-          Takes place upon the concurrence of the essential elements of the sale which are the meeting of the minds of the parties as to the object of the contract and upon the price

(c)    Consummation or “death”

-          Begins when the parties perform their respective undertaking under the contract of sale, culminating in the extinguishment therereof

·         It is only at perfection that sale as a contract begins to exist in the legal world. Until sale is perfected, it cannot serve as an independent source of obligation, nor as a binding juridical relation between the parties.

ESSENTIAL CHARACTERISTICS OF SALE

1.       NOMINATE AND PRINCIPAL

-          Sale is a nominate contract since it has been given a particular name by law; more importantly, its nature and consequences are governed by a set of rules in the Civil Code – the Law on Sales

-          Sales is a principal contract because it can stand on its own, and does not depend on another contract for its validity or existence; more importantly, that parties enter into sale to achieve within its essence the objectives of the transaction, and simply not in preparation for another contract

-          The “nominate and principal” characteristics of sale leads to the doctrine held by the SC that in determining the real character of the contract, the title given to it by the parties is not as significant as its substance

-          The other doctrinal significance of the “nominate and principal characteristics of sale is that all other contracts which have for their objective the transfer of ownership and delivery of possession of a determinate subject matter for a valuable consideration, are governed necessarily by the Law on Sales.

2.       CONSENSUAL

-          Sale is consensual since it is perfected by mere consent, at the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the price

-          Once there is a meeting of the minds as to the price, the sale is valid, despite the manner of its actual payment, or even when there has been breach thereof. If the real price is not stated in the contract, then the sale is valid but subject to reformation; if there is no meeting of the minds as to the price, because the price stipulated is simulated, then the contract is void. (Buenaventura v. CA)

-          Under Art. 1475 of the CC, from the moment of perfection of the sale, the parties may reciprocally demand performance, even when the parties have not affixed their signatures to the written form of such sale, but subject to the provisions of the law governing the form of contracts

-          Actual delivery of the subject matter or payment of the price agreed upon are not necessary components to establish the existence of a valid sale; and their nonperformance do not also invalidate or render “void” a sale that has began to exist as a valid contract at perfection; non-performance merely becomes the legal basis for the remedies of either specific performance or rescission, with damages in either case.

-          The binding effect of a deed of sale on the parties is based on the principle that the obligations arising therefrom have the force of law between them.

-          Since sale is a consensual contract, the party who alleges it must show its existence by competent proof, as well as of the essential elements thereof. However, when all 3 elements of a sale are present, there being a meeting of the minds, then a perfected contract of sale arises, and its validity is not affected by the fact that previously a fictitious deed of sale was executed by the parties; and at that point the burden is on the other party to prove the contrary.

-          Despite the consensual character of a sale, under Art. 1332, when one of the parties is unable to read or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former.

a.       MODALITIES THAT AFFECT THE CHARACTERISTIC OF CONSENSUALITY

§  The consensual characteristic of sale can be affected by modalities that by stipulation may be added into the contractual relationship, such as suspensive term or condition.

§  In sales with assumption of mortgage, the assumption of mortgage is a condition precedent to the seller’s consent and therefor, without approval of the mortgagee, the sale is not perfected.

§  Even the delivery and taking possession of the subject matter by the buyer with the knowledge or consent of the seller, would not bring about the perfection and binding effect of the sale, when the meeting of the minds is incomplete, there being no agreement yet on the final price.

3.       BILATERAL AND RECIPROCAL

-          Imposes obligations on both parties to the relationship, and whereby the obligation or promise of each party is the cause or consideration for the obligation or promise of the other

-          Reciprocal obligations – those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other; they are to be performed simultaneously such that the performance of one is conditioned upon the simultaneous fulfillment of the other

-          Legal effects and consequences of sale being bilateral and reciprocal:

(a)    Power to rescind is implied

(b)   Neither party incurs delay if the other party does not comply, or is not ready to comply in a manner, with what is incumbent upon him

(c)    From the moment one of the parties fulfills his obligation, the default by the other begins, without the need of prior demand

-          Since both parties in a sale are bound by their respective obligations which are reciprocal in nature, then a party cannot simply choose not to proceed with the sale by offering also the other party not to be bound by his own obligation; that each party has the remedy of specific performance; and that rescission or resolution cannot be enforced by defaulting party upon the other party who is willing to proceed with the fulfillment of his obligation

-          It is therefore a general requisite for the existence of a valid and enforceable contract of sale that it be mutually obligatory, i.e., there should be a concurrence of the promise of the vendor to sell a determinate thing and the promise of the vendee to receive  and pay for the property so delivered and transferred. (PUP v. CA)

4.       ONEROUS

-          Imposes a valuable consideration as a prestation, which ideally is a price certain in money or its equivalent.

-          Since sale is essentially an onerous contract, the rules of interpretation would incline the scales in favor of the greater reciprocity of interest

-          The stipulation in a contract of sale on the payment of the balance of the purchase price must be deemed to cover a suspensive period rather than a condition since greater reciprocity is obtained if the buyer’s obligation is deemed to be actually existing, with only its maturity postponed or deferred, than if such obligation were viewed as non-existing or not binding until sold.

5.       COMMUTATIVE

-          Sale is a commutative because a thing of value is exchanged for equal value

-          Nevertheless, there is no requirement that the price be equal to the exact value of the subject matter; all that is required is for the seller to believe that what was received was of the commutative value of what he gave

-          The subjective test of the commutative nature of sale is further bolstered by the principle that inadequacy of price does not affect ordinary sale. Inadequacy of price may be a ground for setting aside an execution sale but is not a sufficient ground for the cancellation of a voluntary contract of sale otherwise free from invalidating effects. Inadequacy of price may show vice in consent, in which case the sale may be annulled, but such annulment is not for inadequacy of price, but rather for vitiation in consent.

6.       SALE IS TITLE AND NOT MODE

-          in one case the Court defined a “sale” as a “contract transferring dominion and other real rights in the thing sold,” sale is merely title that creates the obligation on the part of the seller to transfer ownership and deliver possession, but on its own sale is not a mode that transfers ownership.

-          Upon the perfection of the sale, the seller assumes the obligation to transfer ownership and to deliver the thing sold, but the real right of ownership is transferred only “by tradition” or delivery thereof to the buyer.

-          Mode is the legal means by which dominion or ownership is created, transferred or destroyed; title only constitutes the legal basis by which to affect dominion or ownership. Therefore, sale by itself does not transfer or affect ownership; the most that sale does is to create the obligation to transfer ownership; it is tradition or delivery, as a consequence of sale, that actually transfers ownership.

SALES DISTINGUISHED FROM OTHER SIMILAR CONTRACTS

·         “A contract is what the law defines it to be, taking into consideration its essential elements, and not what the contracting parties call it. The transfer of ownership in exchange for a price paid or promised is the very essence of a contract of sale.

1.       SALES V. DONATION

SALE	DONATION
Onerous	Gratuitous/onerous
Consensual	Formal Contract
Law on Sales	Law on Donation

DEFINITION OF DONATION:

Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. (Art. 725)

·         Under Article 726 of the Civil Code, even when the donor imposes upon the donee a burden, but which is less than the value of the thing given, there is still a donation. The legal implication under said article is clear: when the value of the burden placed upon the donee is more than the value of the thing given, it becomes an “onerous” donation, as either a barter or sale, which are both governed by the Law on Sales.

2.       SALES V. BARTER

BASIS	SALE		BARTER
Nature	a thing is given in exchange of a price certain in money or its equivalent		a thing is given in exchange of another thing
Rules to determine whether contract is sale or barter	The transaction is characterized by the manifest intention of the parties
	If intention is not clear, Value of the thing =/< amount of money		If intention is not clear, Value of the thing > amount of money
Applicable Law	Law on Sales
Statute of Frauds	Apply to the sale of real property and personal property bought at P500 or more	Does not apply

·         The distinctions between sale and barter are merely academic, since aside from two separate rules applicable to barter, as to all matters not specifically provided for, Article 1641 provides that barter shall be governed by the Law on Sales.

·         Two rules specifically provided for barter contracts:

(a)    If one of the contracting parties, having received the thing promised in barter, should prove that it did not belong to the person who gave it, he cannot be compelled to deliver that which he offered in exchange, but he shall be entitled to damages

(b)   One who loses by eviction the thing received in barter may recover that which he gave in exchange with a right to damages, or he can only make use of the right to recover the thing which he has delivered while the same remains in the possession of the other party, but without prejudice to the rights acquired in good faith by a third person

3.       SALES V. CONTRACT FOR PIECE-OF-WORK

BASIS	SALE	CONTRACT FOR PIECE-OF-WORK
Existence	Manufacturing in the ordinary course of business	Manufacturing upon special order of a customer
To whom made	For the general market	Not for the general market; but especially for the customer
Applicability of Statute of Frauds	Governed by the Statute of Frauds	Not within the Statute of Frauds
Risk of loss	Borne by the buyer	Borne by the worker or contractor, not by the employer

·         By the contract for a 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. (Art. 1713)

·         Rules in determining if the contract is one of sale or a piece of work:

SALE	PIECE OF WORK
If ordered or manufactured in the ordinary course of business	If manufactured especially for the customer and upon his special order
Involves the sale of a thing or right	Involves lease of service
Obligation of seller is real obligation or an obligation to give	Obligation of seller is personal or obligation to do

·         The test of “special orders” under Article 1467 of the Civil Code is not one of timing, or habit, but actually must be drawn from the nature of the work to be performed and the products to be made: it must be of the nature that the products are not ordinary products of the manufacturer, and they would require the use of extraordinary skills or equipment, if to be performed by a manufacturer. (Celestino Co. v. Collector of Internal Revenue)

4.       SALES V. AGENCY TO SELL

·         A contract of agency is one that essentially establishes a representative capacity in the person of the agent on behalf of the principal, and one characterized as highly fiduciary.

BASIS	SALE	AGENCY TO SELL
Obligation as regards the price	Buyer pays for price of object	Agent not obliged to pay for price; must account for the proceeds of the sale
Transfer of ownership	Buyer becomes owner of thing	Principal remains the owner even if the object is delivered to the agent
Warranty	Seller warrants	Agent assumes no personal liability as long as within authority given
Revocability	Not unilaterally revocable	May be revoked unilaterally even w/out ground
As to profit	Seller receives profit	Agent not allowed to profit
As to Contract	Real contract	Personal contract

·         In construing a contract containing provisions characteristic of both the contract of sale and of the contract of agency to sell, the essential clauses of the whole instrument shall be considered. (Art. 1466)

·         Knowing whether the contract is one of sale or an agency to sell is also important in considering the applicability of the Statute of Frauds.

5.       SALES V. DACION EN PAGO

·         Dation in payment is one whereby property is alienated to the creditor in full satisfaction of a debt in money; it constitutes “the delivery and transmission of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation.

BASIS	SALE	DACION EN PAGO
Existence of credit	No pre-existing credit	Contract where property is alienated to extinguish pre-existing credit/debt
Relationship	Buyer-seller relationship	Novates creditor-debtor relationship into seller-buyer
Obligation	Obligations are created	Obligations are extinguished
Consideration	On the part of the seller: Price   On the part of the buyer: Acquisition of the object	On the part of the debtor: Extinguishment of the debt   On the part of the creditor: The acquisition of the object offered in lieu of the original credit
Determination of the Price	Greater freedom	Limited freedom
Payment of Price	Buyer still has to pay the price	The debtor receives the payment before the contract is perfected

·         Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. (Art. 1245)

·         What actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale while the debt is considered as the purchase price; that is why the elements of sale must be present, including a clear agreement that the things offered is accepted for the extinguishment of the debt. (Vda. De Jayme v. CA)

·         In order that there be a valid dation in payment, there must be (Lo v. KJS Eco-Formwork System Phil., Inc.):

(a)    Performance of the prestation in lieu of payment (animo solvendi) which may consist in the delivery of a corporeal thing or a real right or a credit against the third person;

(b)   Some difference between the prestation due and that which is given in substitution (aliud pro alio); and

(c)    An agreement between the creditor and debtor that the obligation is immediately extinguished by reason of the performance of a presentation different from that due.

6.       SALE V. LEASE

SALE	LEASE
Obligation to absolutely transfer ownership of thing	Use of thing is for specified period only with obligation to return
Consideration is the price	Consideration is the rental
Seller needs to be owner of thing to transfer ownership	Lessor need not be the owner

·         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.