Concept of Sale

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What constitutes a contract of sale – In a contract of sale, “one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.”[1] A sales contract may either be absolute or conditional.[2]

Perfection of sales contract – The perfection of the sales contract happens when there is a meeting of minds upon the thing which is the object of the contract and upon the price.[3] The parties may reciprocally demand performance reckoned from such moment subject to the provisions of the law governing the form of contracts.[4]

Velasco v. Court of Appeals
G.R. No. L-31018, 29 June 1973

Lorenzo Velasco, through his sister-in-law entered into contract with Magdalena Estates. In the agreement, the 1st party will pay P100,000.00 for the property sold by the 2nd party. The payment was: P30,000.00 down payment, and P70,000.00 in 10 years. However, there was no indication as to when the P30,000.00 will be paid and how the P70,000 will be distributed in 10 yrs.

HELD: There was no perfected contract of sale. The buyers admit that they and the sellers had to meet and agree on when the down payment is to be paid and how the installment payments were to be made. Hence, there was no definite and firm sale agreement. “A definite agreement on the manner of payment of the purchase price is an essential element in the formation of a binding and enforceable contract of sale.”

Sales contract generally need not be formal – Subject to the Statute of Frauds and any other applicable law, a sales contract may be made: (a) in writing; (b) by word of mouth; (c) partly in writing and partly by word of mouth; or (d) may be inferred from the conduct of the parties.[5]

Best Legal Practices

  • Execute a sales contract – Although a sales contract is generally consensual in nature (i.e. parties may verbally agree), it is best for the parties to document the same by executing a written agreement. In case of controversy, the parties may simply refer to the written sales contract for reference.

Object of sale; Must be licit – The object (subject matter) of the sale must be licit or legal.[6] Parenthetically, the seller must have a right to transfer ownership at the time it is delivered.[7]

Martinez v. Court of Appeals
G.R. No. L-31271, 29 April 1974

Spouses Martinez were enjoined from constructing a dike on their property by the city government. As a defense, the spouses claimed that they have bought the property in good faith as the title to the property did not indicate any lien or encumbrance. The local government unit responded saying that the spouses could not have bought the said property as it was a river, which is public dominion.

HELD: Spouses Martinez cannot claim ownership over the property. As a river, it belongs in the public domain and is outside the commerce of men. The property is bounded on all sides with rivers. By all indications, it is in fact a river. Public domain is outside the commerce of men.

“The ruling that a purchaser of a registered property cannot go beyond the record to make inquiries as to the legality of the title of the registered owner, but may rely on the registry to determine if there is no lien or encumbrances over the same, cannot be availed of as against the law and the accepted principle that rivers are parts of the public domain for public use and not capable of private appropriation or acquisition by prescription.”

Same; Determinate thing – The object is determinate “when it is particularly designated or physically segregated from all others of the same class.”[8] The requisite to constitute a thing as determinate is met “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.”[9]

Melliza v. City of Iloilo
G.R. No. L-24732, 30 April 1968

Juliana Melliza sold properties to the Municipality of Iloilo. The contract of sale enumerated the lots and then adds on to say “such other portions or lots were necessary for the municipal hall site according to the Arellano plant.” Juliana sold her remaining interest to another, who, in turn sold such to petitioner Pio Sian Melliza. The city government donated the city-hall site to the University of the Philippines (Iloilo campus). In response, Pio Sian contested the first sale claiming that it was invalid as the thing was not determinate.

HELD: The contract of sale in favor of the city government was valid. Since the property was capable of being made determinate without the necessity of a new or further agreement between the parties.

Atilano v. Atilano
G.R. No. L-22487, 21 May 1969

Eulogio Atilano I sold an unoccupied lot to Eulogio Atilano II. When Eulogio II had the property resurveyed, it was found out that the land actually sold to him was the one occupied by Eulogio I.

HELD: The sale was valid. “When one sells or buys real property, one sells or buys the property as he sees it, in its actual setting and by its physical metes and bounds and not by the mere lot number assigned to it in the certificate of title.” Moreover, at the time of the perfection of the contract, it was the intention of the parties to buy and sell such land.

Same; Object with potential existence – An object may have a potential existence.[10] The effectivity of a sale of a mere hope or expectancy is deemed subject to the suspensive condition that the thing will come into existence.[11] However, the sale of a vain hope or expectancy is void.[12]

Same; Existing and future goods – Existing goods or those owned or possessed by the seller are valid objects for a sales contract.[13] Future goods or those to be manufactured, raised, or acquired by the seller after the perfection of the sales contract may likewise be the object in a sales contract.[14]

Same; Goods subject to conditions – There may be a sales contract of goods whose acquisition by the seller depends upon a contingency which may or may not happen.[15] Thus, things which are subject to a resolutory condition may be the object of a sale.[16]

Best Legal Practices

  • Clearly specify suspensive or resolution condition – As objects subject to suspensive or resolutory condition may be sold, it is important to clearly specify the requirements to meet such condition as well as to categorically agree on the consequences once such conditions are met.

Fungible goods – The sole owner of a thing may sell an undivided interest in the object.[17] For fungible goods, the owner may sell his undivided share of a specific mass even if the seller purports to sell and the buyer to purchase a definite number, weight or measure of the goods in the mass, and though the number, weight or measure of the goods in the mass, and though the number, weight or measure of the goods in the mass, is undetermined.[18]

Same; Buyer becomes co-owner – In such a sale mentioned above, the buyer becomes a co-owner of such a share of the mass as the number, weight or measure bought in relation to the number, weight or measure of the mass.[19]

Same; Same; Buyer becomes owner of whole mass if insufficient – Unless a contrary intent appears, if the mass contains less than the number, weight or measure bought, the buyer becomes the owner of the whole mass and the seller is bound to make good the deficiency from goods of the same kind and quality.[20]

Sale distinguished from agency to sell – In the interpretation of a contract containing stipulations characteristic of both the sales contract and the contract of agency to sell, the agreement’s “essential clauses” will be considered.[21]

Quiroga v. Parsons Hardware Co.
G.R. No. L-11491, 23 August 1918

Andres Quiroga executed a contract of exclusive right to sell “Quiroga beds” in the Visayas in favor of Parsons Hardware Co. For failure to meet the conditions in the contract by Parsons, Quiroga filed a complaint for the rescission of the contract claiming that Parsons was an agent who failed to comply with his obligations.

HELD: Parsons is a purchaser and not an agent. Parsons bought the bed. He did not act as agent. He bought the “Quiroga beds” and resold the same.

“In order to classify a contract, due regard must be given to its essential clauses. In the contract in question, what was essential, as constituting its cause and subject matter, is that the plaintiff was to furnish the defendant with the beds which the latter might order, at the price stipulated, and that the defendant was to pay the price in the manner stipulated. The price agreed upon was the one determined by the plaintiff for the sale of these beds in Manila, with a discount of from 20 to 25 per cent, according to their class. Payment was to be made at the end of sixty days, or before, at the plaintiff’s request, or in cash, if the defendant so preferred, and in these last two cases an additional discount was to be allowed for prompt payment. These are precisely the essential features of a contract of purchase and sale. There was the obligation on the part of the plaintiff to supply the beds, and, on the part of the defendant, to pay their price. These features exclude the legal conception of an agency or order to sell whereby the mandatory or agent received the thing to sell it, and does not pay its price, but delivers to the principal the price he obtains from the sale of the thing to a third person, and if he does not succeed in selling it, he returns it. By virtue of the contract between the plaintiff and the defendant, the latter, on receiving the beds, was necessarily obliged to pay their price within the term fixed, without any other consideration and regardless as to whether he had or had not sold the beds.” (Emphasis supplied.)

Gonzalo Puyat & Sons, Inc. v. Arco Amusement Company
G.R. No. L-47538, 20 June 1941

Arco Amusement Company (formerly Teatro Arco) contracted the services of Puyat in order to purchase equipment and machinery for a theater sound system from US-based company Starr Piano. Puyat used the list price in charging Arco. When Arco knew of this, it filed a complaint alleging that Puyat should have used the net price since the latter acted as its agent.

HELD: Puyat was the agent of Starr Piano Company and not of Teatro Arco. It is not possible to be the agent of both Starr Piano and Teatro Arco. As observed by the trial court, “whatever unforseen events might have taken place unfavorable to the defendant [Gonzalo Puyat & Sons], such as change in prices, mistake in their quotation, loss of the goods not covered by insurance or failure of the Starr Piano Company to properly fill the orders as per specifications, the plaintiff [Arco Amusement Company] might still legally hold the defendant [Gonzalo Puyat & Sons] to the prices fixed of $1,700 and $1,600. This is incompatible with the pretended relation of agency between the petitioner and the respondent, because in agency, the agent is exempted from all liability in the discharge of his commission provided he acts in accordance with the instructions received from his principal… and the principal must indemnify the agent for all damages which the latter may incur in carrying out the agency without fault or imprudence on his part…”

Sale distinguished from piece of work – In a sales contract, the seller is obligated to deliver the object for a certain price “which the vendor in the ordinary course of his business manufactures or procures for the general market, whether the same is on hand at the time or not.”[22] On the other hand, in a contract for a piece of work, the contractor is obligated to deliver goods which are “to be manufactured specially for the customer and upon his special order, and not for the general market.”[23]

Celestino Co. & Company v. Collector of Internal Revenue
G.R. No. L-8506, 31 August 1956

Celestino Co. and Company operated an “oriental sash factory.” To reduce tax from 7% to 3%, it claimed that it was a contractor and not a seller.

HELD: Celestino Co. was a seller. It sold bulks of ready-made door and windows of standard sizes for the average home, contrary to what a contract for piece of work does. Moreover, it called itself a factory and registered as such. “The important thing to remember is that Celestino Co & Company habitually makes sash, windows and doors, as it has represented in its stationery and advertisements to the public. That it ‘manufactures’ the same is practically admitted by [the Company] itself. The fact that windows and doors are made by it only when customers place their orders, does not alter the nature of the establishment, for it is obvious that it only accepted such orders as called for the employment of such material-moulding, frames, panels as it ordinarily manufactured or was in a position habitually to manufacture.”

Commissioner of Internal Revenue v. Engineering Equipment
and Supply Company

G.R. No. L-27044, 30 June 1975

Engineering Equipment and Supply Company is engaged in setting up air conditioning in buildings. It claims that it was a contractor in order to lessen tax imposition by the Commissioner of Internal Revenue. The latter opined otherwise.

HELD: Engineering is a contractor. The services for installation of a central system offered by Engineering were tailored to the building. Hence, no two buildings have the same set-up. Consequently, their services depend on the contract.

“The point, therefore, is this — Engineering definitely did not and was not engaged in the manufacture of air conditioning units but had its services contracted for the installation of a central system… Engineering advertised itself as Engineering Equipment and Supply Company, Machinery Mechanical Supplies, Engineers, Contractors, 174 Marques de Comillas, Manila… and not as manufacturers. It likewise paid the contractors tax on all the contracts for the design and construction of central system as testified to by Mr. Rey Parker, its President and General Manager… Similarly, Engineering did not have ready-made air conditioning units for sale but as per testimony of Mr. Parker upon inquiry of Judge Luciano of the CTA…”

Sale distinguished from barter – If the consideration of a contract is partly in money and in another thing, then transaction is to be characterized by the manifest intention of the parties.[24] If the intention do not clearly appear, it is considered a barter if the value of the thing given as a part of the consideration exceeds the amount of the money or its equivalent; otherwise, it is a sale.[25]

Fule v. Court of Appeals
G.R. No. 112212, 02 March 1998

Gregorio Fule sold his Tanay property in consideration of an emerald-cut diamond earring owned by Dr. Ninevetch Cruz. Claiming that the earrings were fake, Fule filed a complaint for the invalidation of the sale alleging, inter alia, that such was not a sale but a barter.

HELD: The parties appeared to have entered into barter even if they executed a deed of sale. If the consideration of the contract consists partly in money, and partly in another thing, the transaction shall be characterized by the manifest intention of the parties. If such intention does not clearly appear, it shall be considered a barter if the value of the thing given as a part of the consideration exceeds the amount of the money or its equivalent; otherwise, it is a sale.

“There is fraud when, through the insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. The records, however, are bare of any evidence manifesting that private respondents employed such insidious words or machinations to entice petitioner into entering the contract of barter.  Neither is there any evidence showing that Dr. Cruz induced petitioner to sell his Tanay property or that she cajoled him to take the earrings in exchange for said property.  On the contrary, Dr. Cruz did not initially accede to petitioner’s proposal to buy the said jewelry. Rather, it appears that it was petitioner, through his agents, who led Dr. Cruz to believe that the Tanay property was worth exchanging for her jewelry as he represented that its value was P400,000.00 or more than double that of the jewelry which was valued only at P160,000.00. If indeed petitioner’s property was truly worth that much, it was certainly contrary to the nature of a businessman-banker like him to have parted with his real estate for half its price.  In short, it was in fact petitioner who resorted to machinations to convince Dr. Cruz to exchange her jewelry for the Tanay property.”

When a price is certain – To consider a price to be certain, it is sufficient that it be so with reference to another thing certain, or that the determination thereof be left to the judgment of a special person or persons.[26]

Third person unable or unwilling to fix price – If the said person mentioned above is unable or unwilling to fix the price, the contract will become inefficacious unless the seller and the buyer subsequently agree on a price.[27] Should the third person acted in bad faith or by mistake, the courts will be the one to fix the price.[28]

Best Legal Practices

  • Stipulate on a contingency plan – While the parties may enter into an agreement on having a third person fix the price, they should likewise specify a contingency plan in the event that the said person refuses or fails to fix the price. Otherwise, the contract becomes inefficacious.

Same; Prevented from fixing price or terms – If the third person is prevented from fixing the price or the terms due to the fault of the seller or the buyer, the innocent party may have such remedies against the party in fault as are allowed the seller or the buyer, as the case may be.[29]

Gross inadequacy of price – The gross inadequacy of the price does not affect the sales contract.[30] However, it may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract.[31]

Simulated price – If the price is simulated, the sales contract is void.[32] The act may be shown to have been in reality a donation or some other act or contract.[33]

Same; Price for securities, grain, liquids – The price of securities, grain, liquids, and other things are considered certain when the price fixed is “that which the thing sold 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 be certain.”[34]

Price fixing not left to sole will or discretion of a party – The fixing of the price cannot be left to the sole will or discretion of one of the contracting parties.[35] Notwithstanding, should the price be fixed by one of the party and is subsequently accepted by the other, then the sales contract is perfected.[36] If the price cannot be determined based on the earlier rules, the contract is inefficacious.[37] However, the buyer is required to pay a reasonable price if he has appropriated the thing or any part thereof after it has been delivered to him.[38]

Transfer of ownership after full payment – The parties may enter into a contractual stipulation that ownership in the thing is not to pass to the purchaser until he has fully paid the price.[39]

Earnest money – In a sales contract involving an earnest money paid (downpayment), it is considered as part of the price and as proof of the perfection of the contract.[40]

Option money – An option is “a preparatory contract in which one party grants to the other, for a fixed period and under specified conditions, the power to decide, whether or not to enter into a principal contract.”[41]

Carcellar v. Court of Appeals
G.R. No. 124791, 10 February 1999

State Investment Houses, Inc. (SIHI) executed a contract of lease with option to buy in favor of Carcellar. Days before the lease contract would expire, Carcellar wrote to SIHI asking for an extension of 6 months since it wanted time to raise the amount needed to buy the property. SIHI denied the extension. After 18 days from the expiration of the lease, Carcellar tendered the deposit, which SIHI didn’t accept.

HELD: The option contract of sale was binding. 18 days is not substantial delay. “An option is a preparatory contract in which one party grants to the other, for a fixed period and under specified conditions, the power to decide, whether or not to enter into a principal contract. It binds the party who has given the option, not to enter into the principal contract with any other person during the period designated, and, within that period, to enter into such contract with the one to whom the option was granted, if the latter should decide to use the option. It is a separate agreement distinct from the contract which the parties may enter into upon the consummation of the option.”

Capacity to buy or sell

Capacitated persons – Unless otherwise provided by law, all capacitated person are allowed to enter into a sales contract.[42] However, minors or other incapacitated persons are permitted to buy and accept delivery of necessaries provided they pay reasonable price.[43]

When Thing Sold is Lost

When object entirely lost at time of perfection of sale – The sales contract will be without any effect if the object of the contract has been entirely lost at the time of the perfection of sale.[44] If there is only partial loss, the buyer has the option between: (a) withdrawing from the contract, or (b) demanding the remaining part and paying its price in proportion o the total sum agreed upon.[45]

Buyer’s options in case of loss of specific goods without knowledge of seller – The buyer has the following options in case of the sale of specific goods and, without the knowledge of the seller, the same perish in part or have wholly or in material part so deteriorated in quality as to be substantially changed in character: (a) as avoided, [46] or (b) as valid in all of the existing goods or in so much thereof as have not deteriorated, and as binding the buyer to pay the agreed price for the goods in which the ownership will pass, if the sale was divisible.[47]

[1] CIVIL CODE. Paragraph 1, Article 1458.

[2] Ibid. Paragraph 2, Article 1458.

[3] Ibid. Paragraph 1, Article 1475.

[4] Ibid. Paragraph 2, Article 1475.

[5] Ibid. Article 1483.

[6] Ibid. Article 1459.

[7] Ibid. Article 1459.

[8] Ibid. Paragraph 1, Article 1460.

[9] Ibid. Paragraph 2, Article 1460.

[10] Ibid. Paragraph 1, Article 1461.

[11] Ibid. Paragraph 2, Article 1461.

[12]Ibid. Paragraph 3, Article 1461.

[13] Ibid. Paragraph 1, Article 1462.

[14] Ibid.

[15] CIVIL CODE. Paragraph 2, Article 1462.

[16] Ibid. Article 1465.

[17] Ibid. Paragraph 2, Article 1463.

[18] Ibid. Article 1464.

[19] Ibid.

[20] Ibid.

[21] CIVIL CODE. Article 1466.

[22] Ibid. Article 1467.

[23] Ibid.

[24] Ibid. Article 1468.

[25] Ibid.

[26] CIVIL CODE. Paragraph 1, Article 1469.

[27] Ibid. Paragraph 2, Article 1469.

[28] Ibid. Paragraph 3, Article 1469.

[29] Ibid. Paragraph 4, Article 1469.

[30] Ibid. Article 1469.

[31] Ibid.

[32] CIVIL CODE. Article 1471.

[33] Ibid.

[34] CIVIL CODE. Article 1472.

[35] Ibid. Article 1473.

[36] Ibid.

[37] CIVIL CODE. Article 1474.

[38] Ibid. The issue on what will constitute “a reasonable price” is a question of fact that will depend on the circumstance of each case (Article 1474, Civil Code).

[39] CIVIL CODE. Article 1478. The seller is reminded of the doctrine of res perit domino (the owner bears the loss).

[40] CIVIL CODE. Article 1482.

[41] Carceller v. Court of Appeals, G.R. No. 124791, 10 February 1999.

[42] CIVIL CODE. Paragraph 1, Article 1489. The husband and the wife cannot sell property to each other, except… (1) When a separation of property was agreed upon in the marriage settlements; or… (2) When there has been a judicial separation of property under article 191” (Article 1490, Civil Code). The following persons cannot acquire by purchase, even at a public or judicial auction, either in person or through the mediation of another… (1) The guardian, the property of the person or persons who may be under his guardianship… (2) Agents, the property whose administration or sale may have been entrusted to them, unless the consent of the principal has been given… (3) Executors and administrators, the property of the estate under administration… (4) Public officers and employees, the property of the State or of any subdivision thereof, or of any government-owned or controlled corporation, or institution, the administration of which has been intrusted to them; this provision shall apply to judges and government experts who, in any manner whatsoever, take part in the sale… (5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice, the property and rights in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring by assignment and shall apply to 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… (6) Any others specially disqualified by law” (Article 1491, Civil Code) The prohibitions in the two preceding articles are applicable to sales in legal redemption, compromises and renunciations” (Article 1492, Civil Code).

[43] Ibid. Paragraph 2, Article 1489.

[44] Ibid. Paragraph 1, Article 1493.

[45] Ibid. Paragraph 2, Article 1493.

[46] Ibid. Article 1494 (1).

[47] Ibid. Article 1494.

©2020 BUSINESSLAW.PH. All rights reserved. Statements and opinions of the author are of his own, and does not reflect any organization he may be connected or affiliated. All information herein are for educational and general information only. The content should not be considered as a legal advice or opinion. Please consult a lawyer to address your specific concerns.
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