chapter 5. formation of contract of sale

SALES REVIEWER (2013-‐2014) ATTY. RAY PAOLO SANTIAGO

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED: MAY 21, 2014)

CHAPTER 5: FORMATION OF CONTRACT OF SALE

I. Stages In The Life Of Sale

1. Policitacion – negotiation and bargaining. 2. Perfection – moment when there is meeting of the minds on

the subject matter and price 3. Consummation – parties perform their respective obligations

II. Policitacion Stage (Article 1479) Article 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable. An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promisor if the promise is supported by a consideration distinct from the price. (1451a)

• Scope: Negotiation covers the period from the time the prospective contracting parties indicate interest in the contract to the time the contract is concluded/perfected.

• General Rule: Before the negotiation is concluded by acceptance, there is “freedom to contract.” An owner of property is free to offer the subject property for sale to any interested person. There is still no obligation between the potential buyer and potential seller.

o Exception: option contract. o Policitation stage covers the doctrine of “freedom of

contract” which signifies or implies the right to choose with whom to contract. A property owner is free to offer his property for sale to any interested person, and is not duty bound to sell the same to the occupant thereof, absent any prior agreement vesting the occupants the right of first priority to buy. xGabelo v. Court of Appeals, 316 SCRA 386 (1999).

• A negotiation is formally initiated by an offer, which, however, must be certain. At any time prior to the perfection of the contract, either negotiating party may stop the negotiation. At this stage, the offer may be withdrawn; the withdrawal is effective immediately after its manifestation. To convert the offer into a contract, the acceptance must be absolute and must not qualify the terms of the offer; it must be plain, unequivocal, unconditional and without variance of any sort from the proposal. Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).1 Manila Metal Container Corp. v. Philippine National Bank

Facts: PNB foreclosed the mortgage MMCC constituted in its favor. PNB won the public auction. MMCC requested for an extension of the 1-‐year redemption period, which PNB rejected. A special assets department of PNB issued to petitioner a statement of account indicating bid price and interest (about Php 1.5 million); MMCC then remitted Php 725,000 as

1 Navarra v. Planters Dev. Bank, 527 SCRA 562 (2007).



“deposit for repurchase”. PNB offered to MMCC to buy back the property for Php 2.66 million. MMCC insists that it had already accepted the offer of the PNB department of Php 1.5 million, and it had deposited the money as earnest money (down payment). The amount of Php 2.6 million is a unilateral increase by PNB of the purchase price. Issue: Whether or not there was already a perfected contract of sale when MMCC gave deposit after the department issued statement of account. Held: NO. The exchanges were counter offers and so the contract never moved beyond the negotiation stage. It was stipulated by the parties that PNB will accept the deposit “on the condition that the purchase price is still subject to the approval of the PNB board.” Thus, there was no definite price. Doctrine:

o An unaccepted unilateral promise (offer to buy or to sell) prior to acceptance, does not give rise to any obligation or right. xRaroque v. Marquez, 37 O.G. 1911.

• Where the offer is given with a stated time for its acceptance, the offer is terminated at the expiration of that time. xVillegas v. Court of Appeals, 499 SCRA 276 (2006).

• The Letter of Intent to Buy and Sell is just that — a manifestation of Sea Foods Corporation’s (SFC) intention to sell the property and United Muslim and Christian Urban Poor Association, Inc. (UMCUPAI) intention to acquire the same —

which is neither a contract to sell nor a conditional contract of sale. Muslim and Christian Urban Poor Association, Inc. v. BRYC-‐V Development Corp., 594 SCRA 724 (2009).

Muslim and Christian Urban Poor Association, Inc. v. BRYC-‐V

Development Corp. Facts: MCUPAI entered into negotiation with Seafood Corporation (SFC) for the purchase of latter’s land. MCUPAI executed a Letter of Intent to Buy and SFC a Letter of Intent to Sell to facilitate the former’s loan application. The sale didn’t happen because herein buyer wasn’t able to obtain a loan, even when it was given an extension of 3 months to procure it. Eventually, SFC sold the lot to BRYC-‐V. MCUPAI alleged that the sale violated its subsisting agreement with SFC which gave it a preferred right to purchase the lot. Issue: Whether or not the letters of intent created a bilateral contract within the meaning of Article 1479 Held: NO. A mere intention or plan to do something does not give rise to an obligation, nor bind a party to do or give. It was not an offer, but merely an expression of the intention to enter in to the contract. It does not contain a commitment to enter into the contract. In fact, SFC’s entering into a contract was conditioned upon MCUPAI’s ability to raise the funds. Doctrine: A. Option Contract



1. Definition And Essence Of Option Contract • 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 of sale which the parties may enter into upon the consummation of the option. Carceller v. Court of Appeals, 302 SCRA 718 (1999).1

Carcellar v. Court of Appeals

Facts: SIHI (landowner) entered into lease contract with Carcellar with option to purchase within a certain period, exercised by a written notice to SIHI. Nearing termination, Carceller wrote expressing his intent to exercise the option, but requested for an extension to raise funds, which SIHI rejected. Carceller still later expressed intention to exercise option to purchase after the period expired, which SIHI denied because period had lapsed. Carceller files action for specific performance.

Issue: Whether or not Carceller should be allowed to exercise option given the delay in giving the required notice

1 Laforteza v. Machuca, 333 SCRA 643 (2000); Buot v. CA, 357 SCRA 846 (2001); Abalos v. Macatangay, Jr., 439 SCRA 649 (2004); Vasquez v. Ayala Corp., 443 SCRA 231 (2004); Eulogio v. Apeles, 576 SCRA 561 (2009).

Held: YES. Carceller’s letter to SIHI showed intent to exercise option to purchase despite the request for the extension. Granting the option is consistent with the intention of the parties. The delay was not substantial or fundamental as to amount to a breach that would defeat the intention of the parties when they entered into the contract. His first letter and his formal exercise were within reasonable time frame Doctrine:

• An option imposes no binding obligation on the person holding the option aside from the consideration for the offer. Until accepted, it is not treated as a sale. Tayag v. Lacson, 426 SCRA 282 (2004).2

Tayag v. Court of Appeals

Facts: Lacsons are owners of a land, tenanted by farmer tillers who had landholdings thereon. The farmers executed a deed of assignment in favor of Tayag stating that they would assign their landholdings for Php50/sq. meter payable when legal impediments to the sale of the property no longer existed and if the Lacsons decide to sell the property. When Tayag called for a meeting to discuss their agreement, the farmers expressed they would not attend and that they were going to sell their landholdings to the Lacsons. Tayag claims that they had no right to deal directly with the Lacsons, while their contracts with him

2 Adelfa Properties, Inc. v. CA, 240 SCRA 565 (1995); Kilosbayan, Inc. v. Morato, 246 SCRA 540 (1995); San Miguel Properties Philippines, Inc. v. Huang, 336 SCRA 737 (2000); Limson v. CA, 357 SCRA 209 (2001).



were valid and existing.

Issue: Whether or not the deeds of assignment were option contracts.

Held: NO. The payment of the purchase price was conditioned on the disappearance of any legal impediments in sale of the property and on the Lacsons actually selling it—there was no showing that they ever agreed to sell their property. There was no option contract here because in an option contract, the one giving is only bound to hold the land in case the optionee decides the receive the lands at his election. Here, the farmers did not just give Tayag an option; they gave him an exclusive right to buy the property. They cannot legally do this because they are not the registered owners of the land. They had no right to enter into those contracts with Tayag without the knowledge of the Lacsons. Doctrine:

• An option is a continuing offer or an unaccepted offer which

must be certain. It is distinct from the contract of sale, but as soon as the offer is accepted, the contract of sale is perfected. Adelfa Properties, Inc. v. Court of Appeals, 240 SCRA 565 (1995).

o The individual giving the option does not sell his land, but rather the right to privilege to buy at the election or option of the other party.

• Tenants, not being the registered owners, cannot grant an option on the land, much less any “exclusive right” to buy the

property under the Latin saying “nem dat quod non habet.” xTayag v. Lacson, 426 SCRA 282 (2004).

2. Elements Of A Valid Option Contract a. Consent b. Subject Matter – the right to choose whether or not to

buy a determinate/determinable object for a price certain (including manner of payment).

c. Consideration which is anything of value and is separate and distinct from the purchase price

• Just like in a sale, the option contract will only be perfected if the parties agree on the specific object (i.e. the right itself, and the conditions) and the price and manner of payment of the consideration

3. Contract Of Sale v. Option Contract

CONTRACT OF SALE OPTION CONTRACT Onerous; requires a separate consideration. Lack of consideration

makes the contract void. Consideration must be money or its equivalent, or essentially a

valuable consideration.

Consideration may be anything of value, even if it’s not money.

Consensual Contract Bilateral Contract Unilateral Contract

Subject matter is a thing to be given

Subject matter is the right to choose to purchase or not

Prestation: To Give Prestation: To Do or Not Do



Covered by Statute of Frauds Not Covered by Statute of Frauds

• It is a unilateral promise to sell a determinate thing. It only binds the optioner – even when the optionee has not paid a separate consideration – with the following obligations:

1. Not to offer to any third party the sale of the object 2. Not to withdraw the offer during the agreed period 3. To enter into a contract of sale when the option holder,

if he uses the option (i.e. accepts the offer) within the specified period.

• The three obligations are obligations to do. Therefore, a breach of the option contract will only be actionable for damages, not specific performance.

o When the offer is accepted, the obligations become obligations to give, since the contract of sale is already perfected.

• The subject matter of an option contract is the option to purchase a determinate thing. In other words, it is the subject matter is the right to choose to buy or not.

o Just like in a sale, the option contract will only be perfected if the parties agree on the specific object (i.e. the right itself, and the conditions) and the price and manner of payment of the consideration.

• An option contract is not covered by the Statute of Frauds. Therefore, it can be proved by parol evidence and is enforceable even if not written.

4. Meaning Of “Separate Consideration” (Articles 1479 and 1324)

Article 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised. (n)

• An option contract is an offer and a preparatory contract to that of sale. This presupposes that there is already a purchase price on the subject matter of the sale which was agreed upon by the parties. As long as the consideration for the option contract is distinct and not included in the purchase price, it is considered “separate consideration”.

• General Rule: An option without separate consideration is void as a contract. Consideration in an option contract may be anything of value, not necessarily money or its equivalent. As long as the consideration for the option contract is distinct and not included in the purchase price, it is considered “separate consideration”.

o Exception: An option may be included within another valid contract, such as a lease or mortgage. It will be binding even if it does not have a separate consideration. It is a stipulation within the contract which acts like an option contract.

• A unilateral promise to sell, in order to be binding upon the promissor, must be for a price certain and supported by a consideration separate from such price. xSalame v. Court of Appeals, 239 SCRA 356 (1995).1

1 JMA House, Inc. v. Sta. Monica Industrial and Dev. Corp., 500 SCRA 526 (2006).



• The “separate consideration” in an option may be anything of value, unlike in sale where it must be the price certain in money or its equivalent. Villamor v. Court of Appeals, 202 SCRA 607 (1991).1

Villamor v. Court of Appeals

Facts: Villamor purchased from Reyes one half of a piece of land for more than the market value. They then executed a Deed of Option stating that the reason only why Villamor bought the half in the first place is because Reyes granted him exclusive right to buy the other half whenever the need would arise for either party. Reyes sought to repurchase the half already bought by Villamor but the latter refused. Issue: Whether or not the Deed of Option was valid Held: YES. The consideration for the Option was the difference in the higher purchase price of the land compared to its actual market value. Consideration maybe anything of value. The option here was the consideration for the Villamors buying the first half of the land. Since they expressed their intention to exercise the option (which is an offer), a valid contract was perfected. Doctrine: The Court ruled that the separate consideration for the option to buy the other half was the difference between the market value and the P70 price paid.

1 De la Cavada v. Diaz, 37 Phil. 982 (1918); San Miguel Properties Philippines, Inc. v. Huang, 336 SCRA 737 (2000)

o In reciprocal contracts like lease, the obligation or

promise of each party is the consideration for that of the other. (Article 1350) Vda. De Quirino v. Palarca, 29 SCRA 1 (1969)

o The monthly interest paid by the spouses on the foreclosed property during the one-‐year period granted to them by the bank was considered as the separate consideration to hold the option contract valid. Dijamco v. Court of Appeals, 440 SCRA 190 (2004)

o The option to buy included in a mortgage was deemed a valid stipulation since it is supported by the same consideration of the mortgage, which is itself distinct from that of the sale. xSoriano v. Bautista, 6 SCRA 946 (1962).

• Although no consideration is expressly mentioned in an option contract, it is presumed that it exists and may be proved, and once proven, the option is binding. xMontinola v. Cojuangco, 78 Phil. 481 (1947).

5. No Separate Consideration: Void As Option, Valid As A Certain Offer. Sanchez v. Rigos, 45 SCRA 368 (1972).2

Sanchez v. Rigos

Facts: An Option to Purchase was executed where Rigos would sell a

2 Affirming Atkins, Kroll & Co., Inc. v. Cua, 102 Phil. 948 (1958); Overturning Southwestern Sugar Molasses Co. v. Atlantic Gulf & Pacific Co., 97 Phil. 249 (1955).



piece of land to Sanchez upon the exercise of the option within 2 years. Sanchez made several tenders of payment to Rigos, which latter rejected. Sanchez then deposited the amount with the CFI and commenced suit for specific performance against Rigos. Latter asserts that it was not a valid contract for absence of consideration. Issue: Whether or not there is a valid option contract Held: NO. Seller cannot revoke an offer if the option to buy had a separate consideration. If the option is given without a consideration, it is a mere offer of a contract of sale, which is not binding until accepted. If, however, acceptance is made before a withdrawal, it constitutes a binding contract of sale, even though the option was not supported by a sufficient consideration. Accordingly, the promisee cannot compel the promisor to comply with the promise, unless the former establishes the existence of said distinct consideration. In other words, the promisee has the burden of proving such consideration. Plaintiff herein has not even alleged the existence thereof in his complaint.

• CONTROLLING DOCTRINE: Sanchez v. Rigos, 45 SCRA 368 (1972). Without separate consideration, an option contract is void as a contract but would still be a valid offer. If the option is exercised before it is withdrawn, it is equivalent to an offer being accepted. Thus, a valid and binding sale would be perfected.

o The burden of proof to show that the option contract has a separate consideration is with the party seeking to show it. Article 1354, which presumes that consideration exists, cannot apply since Article 1479,

the more specific provision, requires such separate consideration for an option to be valid.

• BUT LATELY: There have been rulings by the SC which tend to diverge from the Sanchez doctrine. However, Sanchez is still the controlling doctrine since it has yet to be expressly abandoned by the Court. Montilla v. Court of Appeals, 161 SRA 167, 173 (1988); Natino v. IAC, 197 SCRA 323 (1991); Yai Ka Sin Trading v. Court of Appeals, 209 SCRA 763 (1991); Diamante v. Court of Appeals, 206 SCRA 52 (1992)

6. There Must Be Acceptance Of Option Offer. Vazquez v. CA, 199 SCRA 102 (1991).

Vasquez v. Court of Appeals

Facts: Vallejera sold land to Vasquez who then secured Transfer Certificate of Title. A separate instrument together with the deed of sale, a Right to Repurchase was executed by them in favor of Vallejera. Later, Vasquez resisted this action for redemption on the premise that Right to Repurchase is just an option to buy since it is not embodied in the same document of sale but in a separate document, and such option is not supported by a consideration distinct from the price, the deed for right to repurchase is not binding upon them. Issue: Whether or not the right of repurchase gave rise to a valid contract of sale. Held: NO. The right to repurchase was not supported by a separate consideration. Thus, for it to be binding on Vasquez, it must have been



shown that Vallejera accepted the offer therein before it was withdrawn by Vasquez. None was made; the vendor a retro must make actual and simultaneous tender of payment and consignation. Mere expressions of readiness or willingness to repurchase are insufficient. The right of repurchase is not a right granted the vendor by the vendee in a subsequent instrument, but is a right reserved by the vendor in the same instrument of sale as one of the stipulations of the contract. Doctrine: It was held in Vazquez v. Court of Appeals, 199 SCRA 102 (1991) that for the Sanchez doctrine to apply the option must be accepted and the acceptance must be communicated to the offeror. This emphasizes the point that an option contract is a distinct contract.

• Classroom example: S is selling B a condominium unit. He tells B that he can pay P50,000 as reservation fee which will entitle him to a period of 1 month to think about the purchase. If he accepts, the P50,000 will be deducted from the purchase price. This is not an option contract because the 50,000 is not a separate consideration but is actually part of the purchase price. What we have is an innominate contract (do ut facias). Breach of the contract will entitle B to damages only. The innominate contract involves a prestation to do, thus, specific performance is not available.

7. Proper Exercise Of Option Contract. • The optionee may exercise his right by merely advising the

offeror of the decision to buy and expressing his readiness to pay, provided that he is actually able to pay. Actual payment is

not necessary to exercise the option. Nietes v. CA, 46 SCRA 654 (1972).

Nietes v. Court of Appeals

Facts: Garcia (owner and lessor) entered into a Contract of Lease with Option to Buy a school with Nietes (lessee). Lessee is granted an option to buy the land within the period of the contract of lease. Later, Garcia expressed his intention to rescind the contract due to poor maintenance of the building. In his reply, Nietes expressed inention to exercise the option to buy. In the specific performance case filed against Garcia, he asserts that the full purchase price must first be paid before the option could be exercised. Issue: Whether or not Garcia’s assertion is correct. Held: NO. In the case of an option to buy, the creditor may validly and effectively exercise his right by merely advising the debtor of the former’s (1) decision to buy and (2) his readiness to pay the stipulated price, provided that the same is available and actually delivered to the debtor upon execution and delivery by him of the corresponding deed of sale. In other words, notice of the creditor’s decision to exercise his option to buy need not be coupled with actual payment of the price, so long as this is delivered to the owner of the property upon performance of his part of the agreement. Doctrine:



• Proper exercise of an option gives rise to the reciprocal obligations of sale xHeirs of Luis Bacus v. Court of Appeals, 371 SCRA 295 (2001),1 which must be enforced with ten (10) years as provided under Article 1144. xDizon v. Court of Appeals, 302 SCRA 288 (1999).

o The refusal by the offeror to comply with the demand by the offeree with the exercise of his option may be enforced by specific performance.

o Exercise of the option is acceptance of the offer which perfects the contract of sale. Thus, the obligations to do become obligations to give.

• Repeated tenders of payment, which were refused by the optioner for no reason, constitute evidence of a valid exercise of the option. Sanchez v. Rigos, 45 SCRA 368 (1972).

8. Option Not Deemed Part Of Renewal of Lease. An option

attached to a lease when not exercised within the option period is extinguished and cannot be deemed to have been included in the implied renewal (tacita reconduccion) of the lease. xDizon v. CA, 302 SCRA 288 (1999).

• Under the principle of tacita reconduccion, a lease is impliedly renewed if the term of the original contract of lease has expired, the lessor has not ordered the lessee to vacate, and 15 days has passed without the acquiescence of the lessor.2

1 Limson v. Court of Appeals, 357 SCRA 209 (2001). 2 Samelo v. Manotok Services, Inc., G.R. No. 170509 (not in the book)

• Only the essential stipulations in the lease are deemed renewed. An option to purchase which is stipulated in a lease is not essential to the lease. Thus, they it is not renewed.

9. Period Of Exercise Of Option. If the option contract does not

specify the period in which the option can be exercised, it cannot be presumed that it can be exercised indefinitely.

• Actions upon written contracts must be brought within 10 years. Afterwards, it prescribes.

• There must be “virtual” exercise of option with the option period. Notice within the option period of clear intention to purchase the property, even with a request for leeway or extension of the period in order to raise money to buy the property, is a valid and substantial exercise of the option. Carceller v. Court of Appeals, 302 SCRA 718 (1999).

Summary Of Rules When Period is Granted to Promisee Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994) summarized the applicable rules:

1. If the period is not supported by a separate consideration, the offeror can still withdraw the offer before it is accepted, or before he learns of an acceptance made by the offeree.

2. The right to withdraw must not be done whimsically or arbitrarily, otherwise, the other party may sue for damages under Article 19. If there is a separate consideration, an option contract is perfected, and withdrawal of the option within the period is a breach of the contract.

3. The option contract is an independent contract by itself. If it is withdrawn, there is a breach which can be the basis of an action



for damages. Specific performance is not available. 4. The nature of the consideration must be taken into account. If

the consideration was in fact part of the purchase price, then there is no option contract, but a perfected contract of sale.

Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994) ruled that the separate consideration merely guarantees that within the option period, before the optioner withdraws the offer, an acceptance by the optionee would give rise to a valid sale. This, in effect, is similar to the doctrine in Sanchez v. Rigos which considered an option which did not have separate consideration.

• The effect is that as far as the optionee is concerned, whether or not he gives a separate consideration, his right can be defeated simply by the optioner’s withdrawal. He is therefore not assured that a sale will be perfected.

• Att. Santiago: the more logical action in case of a breach of an option contract is specific performance. But, the reasoning in Ang Yu (i.e you can’t compel specific performance for prestations to do) is also logical.

• CLV: says this does not provide for a commercially sound doctrine because it emasculates the effectiveness of an option supported by a separate consideration. There is no incentive or motivation for the optionee to give, and the optioner to demand a separate consideration.

B. Right Of First Refusal

1. Definition: A promise on the part of the owner that if he decides to sell the property in the future, he would first negotiate its sale to the promisee.

• A right of first refusal cannot be the subject of specific performance, but breach would allow a recovery of damages. xGuerrero v. Yñigo, 96 Phil. 37 (1954).

2. Basic Concepts In The Right Of First Refusal • Rights of first refusal only constitute “innovative juridical

relations”, but do not rise to the level of contractual commitment since with the absence of agreement on price certain, they are not subject to contractual enforcement. Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994).

Ang Yu Asuncion v. Court of Appeals

Facts: Ang Yu and others were tenants and lessees of commercial spaces owned by Ongpin. On several occasions, Ongpin informed Ang Yu that he is offering to sell the premises and is giving them priority to acquire the same. Negotiations were had and counter offers were given by both parties. Ang Yu filed for specific performance to compel Ongpin to sell the property when he found out that the latter was about to sell the property. Pending resolution of the case, Ongpin sold the property to another. Issue: Whether or not there was a perfected sale. Held: NO. In a right of first refusal, while the object might be made determinate, the exercise of the right, would depend not only on the vendor’s intention to sell but also on terms, including the price, that are yet to be firmed up. Its breach cannot justify an issuance of a writ of execution under a judgment or sanction an action for specific



performance without negating consensuality in the perfection of contracts. The proper remedy is an action for damages. Doctrine:

• In a right of first refusal, while the object might be made determinate, the exercise of the right would be dependent not only on the grantor’s eventual intention to enter into a binding juridical relation with another but also on terms, including the price, that are yet to be firmed up. . . the “offer” may be withdrawn anytime by communicating the withdrawal to the other party. Vasquez v. Ayala Corp., 443 SCRA 231 (2004).

Vasquez v. Ayala Corp.

Facts: Vasquez spouses own shares of stocks with Conduit Corporation. Conduit's main asset was a 49.9 hectare land in Ayala Alabang, Muntinlupa. Spouses enter into a MOA with Ayala where the latter committed to develop said lands including the 4 parcels of land to be sold to petitioner spouses. Par. 5.15 of MOA states that Ayala agrees to grant the spouses "a first option to purchase four developed lots next to the “Retained Area” at the prevailing market price at the time of the purchase.” Issue: Whether or not the stipulation is a right of first refusal or an option contract. ! It was a right of first refusal. Held: While the object may be determinate, the exercise of the right would depend not only on the grantor's eventual intention to sell but

also on terms, including price, that are yet to be firmed up. It was not an option contract because there was no separate consideration. Applied to the instant case, paragraph 5.15 is obviously a mere right of first refusal and not an option contract. Although the paragraph has a definite object, i.e., the sale of subject lots, the period within which they will be offered for sale to petitioners and, necessarily, the price for which the subject lots will be sold are not specified. Doctrine:

o A right of first refusal is not a contract. It is not a sale, nor an option contract. While it has a definite subject matter, there is no agreement as to the price or the manner of payment. Furthermore, the exercise of the right would be dependent upon the grantor’s eventual intention to sell the land.

• A right of first refusal clause simply means that should the lessor decide to sell the leased property during the term of the lease, such sale should first be offered to the lessee; and the series of negotiations that transpire between the lessor and the lessee on the basis of such preference is deemed a compliance of such clause even when no final purchase agreement is perfected between the parties. The lessor was then at liberty to offer the sale to a third party who paid a higher price, and there is no



violation of the right of the lessee. Riviera Filipina, Inv. v. Court of Appeals, 380 SCRA 245 (2002).1

Riviera Filipina v. Court of Appeals

Facts: Juan L. Reyes leased his land along EDSA, QC to Riviera Filipina Inc. The contract of lease was for 10 years renewable. Par. 11 in the lease contained that the lessee shall have the right of first refusal should the lessee decided to sell the property during the term of the lease. The said lot was also subject to a REAL ESTATE MORTGAGE with Prudential Bank. Reyes was not able to pay for the installment and Prudential Bank foreclosed the property with a 1 year redemption period. Reyes decided to sell the property. Reyes offered to sell for P5,000 per square meter but Riviera through its president only offered P3,500. 7 months later Riviera offered P4000 and Reyes now wants P6000. Riviera then offers P5000 pesos saying it would be paid fully in 60 days, that the “offer is what we feel should be the market price of your property” and they Reyes should decide in 15 days. Reyes replied that “you have unfortunately failed to take advantage of your right of first refusal. Reyes then offered to sell the property to Cypress Construction Company who paid P5300. Reyes did not inform Riviera of the P5,300 offer. Riviera filed a suit to have the title transferred in his name after it has paid the P5300 paid by Cypress. RTC and Court of Appeals ruled that Riviera lost its right of first refusal. Issue: Whether or not Riviera’s right of first refusal was violated by Reyes’ sale of the property to Cypress.

1 Polytechnic University v. CA, 368 SCRA 691 (2001); Villegas v. CA, 499 SCRA 276 (2006).

Held: NO. Riviera strongly exhibited a "take-‐it or leave-‐it" attitude in its negotiations with Reyes. It quoted its "fixed and final" price as P5,000 and not any peso more. Riviera cannot now be heard that had it been informed of the offer of P5,300 of Cypress, it would have matched said price. Its stubborn approach in its negotiations with Reyes showed crystal-‐clear that there was never any need to disclose such information and doing so would be just a futile effort on the part of Reyes. Reyes was under no obligation to disclose the same. Doctrine:

3. How To Comply With The Right Of First Refusal When The Seller Decides To Sell

a. The seller must first offer to sell the property to the grantee of the option.

b. The negotiations about the sale between the seller and the grantee would be deemed compliance with the right, even if there is no final price agreed upon.

c. If no price is agreed upon, the seller can then offer to sell to other parties with the same terms as those offered to the grantee.

d. If the seller and the third party negotiate and agree upon different terms, the seller must first offer these new terms again to the grantee.

e. If the grantee again rejects the new terms, the seller can proceed with the sale of the property to the third party

4. Action If The Right To First Refusal Is Breached



• CONTROLLING DOCTRINE: Right of first refusal contained in a lease, when breached by promissor allows enforcement by the promisee by way of rescission of the sale entered into with the third party, pursuant to Articles 1381(3) and 1385 of Civil Code. xGuzman, Bocaling & Co. v. Bonnevie, 206 SCRA 668 (1992); Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 264 SCRA 483 (1996);1 Paranaque Kings Enterprises, Inc. v. CA, 268 SCRA 727, 741 (1997).

Equatorial Realty Dev. Inc. v. Mayfair Theater Inc.

Facts: Two contracts of lease between Carmelo and Mayfair provided “that if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30 days exclusive option to purchase the same.” Carmelo initially offered to sell the leased property to Mayfair for six to seven million pesos. Mayfair indicated interest in purchasing the property though it invoked the 30-‐day period. Nothing was heard thereafter from Carmelo. Four years later, the latter sold its entire Recto Avenue property, including the leased premises, to Equatorial for P11,300,000 without informing Mayfair. Mayfair filed an action for specific performance to have the property sold to it and to annul the sale to Equatorial.

1 Rosencor Dev. Corp. v. Inquing, 354 SCRA 119 (2001); Conculada v. CA, 367 SCRA 164 (2001); Polytechnic University v. CA, 368 SCRA 691 (2001); Riviera Filipina, Inv. v. Court of Appeals, 380 SCRA 245 (2002); Lucrative Realty and Dev. Corp. v. Bernabe, Jr., 392 SCRA 679 (2002); Villegas v. Court of Appeals, 499 SCRA 276 (2006); Polytechnic University of the Philippines v. Golden Horizon Realty Corp., 615 SCRA 478 (2010).

Issues: 1. Whether or not there was a right of first refusal. ! YES 2. Whether or not the sale to Equatorial was valid. ! YES, but

such contract of sale is rescissible. Held: Carmelo violated the right of first refusal when without affording its negotiations with Mayfair the full process to ripen to a definite offer and a possible acceptance within the "30-‐day exclusive option" time. Equatorial is a buyer in bad faith because it had notice and full knowledge of Mayfair’s rights. Hence, the sale to Equatorial is rescissible. Doctrine:

Paranaque Kings v. Court of Appeals �Facts: Catalina owned eight parcels of land which were leased to Chua, who then assigned his rights to Lee Ching Bing. Lee Ching Bing then assigned the rights to Parañaque King, which introduced significant improvements on the premises. It was stipulated in the lease agreement that, “in case of sale, the lessor shall have the option or priority to buy the said properties.” Catalina, in violation of the said stipulation, sold the lot to Raymundo for five million. Parañaque King then notified her of the breach. She immediately had the lots reconveyed. She then offered the lot to Parañaque King for fifteen million; the latter refused claiming that the offer was “ridiculous.” Catalina thereafter sold it again to Raymundo for nine million. The lower courts dismissed the Complaint of Parañaque King claiming that Catalina had substantially complied with her obligation to offer the said lot to the former.



Issues:

1. Whether the complaint alleging breach of the contractual right of “first option or priority to buy” states a valid cause of action. ! YES.

2. Whether or not the grantee of such right is entitled to be offered the same terms and conditions as those given to a third party who eventually bought such properties ! YES.

Held: The Supreme Court held that in order to have full compliance with the contractual right granting petitioner the first option to purchase, the sale of the properties for the amount of P9 million, the price for which they were finally sold to respondent Raymundo, should have likewise been first offered to petitioner. Only if the petitioner failed to exercise their right of first priority could Santos thereafter lawfully sell the subject property to others, and only under the same terms and conditions previously offered to the petitioner. The basis of the right of the first refusal must be the current offer to sell of the seller or offer to purchase of any prospective buyer Doctrine:

• The buyer of a real property who knew that such property was subject to the right of first refusal cannot claim good faith.

o Where the right of first refusal clause found in a valid lease contract was violated and the property was sold to a buyer who was aware of the existence of such right, the resulting contract is rescissible by the person in whose favor the right of first refusal was given.

• If the promise is breached, an action for specific performance is not allowed, but action for damages is allowed. Guerrero v. Yñigo, 96 Phil. 37 (1954)

5. Right Of First Refusal Embodied In A Lease Agreement • If the right of first refusal is included in a lease, there need not

be a separate consideration for the right since it is already part and parcel of the entire contract of lease. The consideration for the lease is the consideration for the right of first refusal. Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 264 SCRA 483 (1996)

o The enforceability of the right of first refusal is based on the obligatory force of the lease contract.

o If the right is violated by the grantor who sold the property to another, the resulting contract is rescissible by the grantee of the right.

• The Equatorial Realty Dev., Inc. v. Mayfair Theater, Inc., 264 SCRA 483 (1996) ruling would only apply to rights of first refusal attached to a valid principal contract. If they are constituted as separate contracts, the ruling in Ang Yu Asuncion v. Court of Appeals, 238 SCRA 602 (1994) would apply.

o Verbal grants of the right of first refusal are unenforceable since such right must be embodied in a written contract. Sen Po Ek Marketing Corp. v. Martinez, 325 SCRA 210 (2000)

• When a lease contract contains a right of first refusal, the lessor has the legal duty to the lessee not to sell the leased property to anyone at any price until after the lessor made an offer to sell the property to the lessee and the lessee has failed to accept it.



Only after the lessee has failed to exercise his right of first priority could the lessor sell the property to other buyers under the same terms and conditions offered to the lessee, or under terms and conditions more favorable to the lessor. Polytechnic University of the Philippines v. Golden Horizon Realty Corp., 615 SCRA 478 (2010).

• A right of first refusal in a lease in favor of the lessee cannot be availed of by the sublessee. xSadhwani v. Court of Appeals, 281 SCRA 75 (1997).

6. Right Of First Refusal v. Option Contract • A right of first refusal is a contractual grant, not of the sale of a

property, but of the first priority to buy the property in the event the owner sells the same. As distinguished from an option contract, in a right of first refusal, whole the object might be made determinate, the exercise of the right of first refusal would be dependent not only on the owner’s eventual intention to enter into a binding juridical relation with another but also on terms, including the price, that are yet to be firmed up. Polytechnic University of the Philippines v. Golden Horizon Realty Corp., 615 SCRA 478 (2010).

• Similar to an option contract, the right of first refusal included in a lease is not renewed even in tacita reconduccion. Dizon v. Court of Appeals, 396 SCRA 152 (2003)

Proposed Doctrine on Option Contracts vis-‐à-‐vis Right of First Refusal A. Alternative Doctrine of Enforceability of Rights of First Refusal

• Justice Vitug, in his decision in Ang Yu Asuncion and in his

dissent in Equatorial Realty said that a right of first refusal is not a contract.

o In his view, breach would result in damages pursuant to Article 19.

• CLV posits that a right of first refusal over a determinate subject matter and supported by a separate consideration would give rise to an innominate contract (do ut facias).

o This would allow the remedy of recission which would then give rise to damages if it is breached. (Note: Article 19 would not be the basis for damages.)

B. Enforceability of Option Rights Should be at Par with, if not at a Higher Level Than, Rights of First Refusal

• In light of the rulings in Equatorial Realty and Parañaque Kings, it seems that rights of first refusal attached to principal contracts have greater legal enforceability than option contracts which are supported by separate consideration.

• CLV’s proposed better rule: o If the option is supported by a separate consideration,

the optionee shall have the right to exercise the option anytime during the period, and that would give rise to a valid sale.

o The optioner, on the other hand, cannot withdraw the offer during the option period, and any attempt to withdraw will be void.

o If a third party bought the property in bad faith (i.e. he knew the existence of the option in favor of the optionee), the optionee can go after the optioner and the third-‐party buyer in an action for specific



performance. o If a third party bought the property in good faith and for

value, the optionee may sue the optioner for recovery of damages for breach of contract of sale.

C. Mutual Promises to Buy and Sell (Article 1479): “True Contract to Sell”

• Mutual promises to buy and sell a certain thing for a certain price gives each of the contracting parties a right to demand from the other the fulfillment of the obligation. xBorromeo v. Franco, 5 Phil. 49 (1905).

• Even in this case the certainty of the price must also exist, otherwise, there is no valid and enforceable contract to sell. xTan Tiah v. Yu Jose, 67 Phil. 739 (1939).

• An accepted bilateral promise to buy and sell is in a sense similar to, but not exactly the same, as a perfected contract of sale because there is already a meeting of minds upon the thing which is the object of the contract and upon the price.1 But a contract of sale is consummated only upon delivery and payment, whereas in a bilateral promise to buy and sell gives the contracting parties rights in personam, such that each has the right to demand from the other the fulfillment of their respective undertakings. Macion v. Guiani, 225 SCRA 102 (1993).2

1 El Banco Nacional Filipino v. Ah Sing, 69 Phil. 611 (1940); Manuel v. Rodriguez, 109 Phil. 1 (1960). 2 Borromeo v. Franco, 5 Phil. 49 (1905); Villamor v. CA, 202 SCRA 607 (1991); Coronel v. CA, 263 SCRA 15 (1996).

Macion v. Judge Guiani Facts: Petitioners and private respondent entered into a contract to sell where petitioners was to sell two lots to private respondents for P1,750,000. Petitioners surrendered the physical possession of the 2 lots to private respondent who promptly built an edifice worth P800,000. However, the sale failed to materialize. Petitioners filed a complaint for unlawful detainer against private respondent while private respondent filed a complaint for reformation of the contract to sell. The parties entered into a compromise agreement where private respondents were given 5 months to raise P2,060,000 and upon securing the amount, petitioners were to execute a deed of sale for the 2 lots. The trial court approved this compromise. After private respondent secured a loan from BPI, it wrote letters to petitioner for the latter to execute a contract to sell. On the other hand, petitioners filed a motion for execution of judgment alleging that after a lapse of 5 months, private respondent have failed to settle their obligations with petitioners. Respondent judge ruled in favor of respondents. Hence, the present petition. Issue: Whether or not respondent Judge may compel Macion to execute a contract to sell in favor of Dela Vida Institute. Held: YES. The court looked into the contemporaneous and subsequent acts of the parties and determined their real intentions. A review of the facts reveal that even prior to the signing of the compromise agreement and the filing of Civil Case No. 592 before the trial court, the parties had



already entered into a contract to sell. In contracts to sell, payment is a positive suspensive condition, failure of which does not constitute a breach but an event that prevents the obligation of the vendor to convey title from materializing, in accordance with Article 1184 of the Civil Code. Doctrine:

• The cause of action under a mutual promise to buy and sell is 10 years. xVillamor v. Court of Appeals, 202 SCRA 607 (1991).

Contract of Sale Mutual Promise to Buy and Sell An accepted bilateral promise to buy and sell is in a sense similar to, but not exactly the same, as a perfected contract of sale because there is already a meeting of minds upon the thing which is the object of the contract and upon the price. Consummated only upon delivery and payment

Gives the contracting parties rights in personam, such that each has the right to demand from the other the fulfillment of their respective undertakings.

• An unconditional mutual promise to buy and sell is enforceable

by an action for specific performance. III. Perfection Stage (Articles 1475, 1319, 1325 and 1326) Article 1475. The contract of sale is perfected at the moment there is a meeting of

minds upon the thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts. (1450a) Article 1319. Consent is 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 the acceptance absolute. A qualified acceptance constitutes a counter-‐offer. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (1262a) Article 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. (n) Article 1326. Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears. (n) • Sale is perfected at the moment there is a meeting of minds

upon the thing which is the object of the contract and upon the



price. From that moment, the parties may reciprocally demand performance subject to the law governing the form of contracts. xMarnelego v. Banco Filipino Savings and Mortgage Bank, 480 SCRA 399 (2006).1

• Mutual consent being a state of mind, its existence may only be inferred from the confluence of two acts of the parties: an offer certain as to the object of the contract and its consideration, and an acceptance of the offer which is absolute in that it refers to the exact object and consideration embodied in said offer. xVillanueva v. PNB, 510 SCRA 275 (2006).2

A. Requisite For Perfection: Mutual Consent Evidenced By:

1. Offer Must Be Certain. An offer is certain when it contains: (1) A description of the subject matter which is a “possible thing,” licit and determinate or at least determinable, and (2) a price which is real, in money or its equivalent, certain or at least ascertainable. The terms of payment must also be included.

o If a material element of a contemplated contract is left for future negotiations, the same is too indefinite to be enforceable. For a contract to be enforceable, its terms must be certain and explicit, not vague or indefinite. xBoston Bank of the Phil. v. Manalo, 482 SCRA 108 (2006).

o So long as there is any uncertainty or indefiniteness, or future negotiations or consideration yet to be had

1 Valdez v. Court of Appeals, 439 SCRA 55 (2004); Blas v. Angeles-‐Hutalla, 439 SCRA 273 (2004); Ainza v. Padua, 462 SCRA 614 (2005); Cruz v. Fernando, 477 SCRA 173 (2005). 2 Moreno, Jr. v. Private Management Office, 507 SCRA 63 (2006).

between the parties, there is no contract at all. xMoreno, Jr. v. Private Management Office, 507 SCRA 63 (2006).

2. Absolute Acceptance Of A Certain Offer o The essence of consent is the conformity of the parties

on the terms of the contract, that is, the acceptance by one of the offer made by the other. However, the acceptance must be absolute; otherwise, the same constitutes a counter-‐offer and has the effect of rejecting the offer. XYST Corp. v. DMC Urban Properties Dev., Inc., 594 SCRA 598 (2009).

B. Absolute Acceptance Of A Certain Offer (Article 1475)

• Under Article 1319, the acceptance of an offer must therefore be unqualified and absolute. In other words, it must be identical in all respects with that of the offer so as to produce consent or meeting of the minds. This was not the case herein considering that petitioner’s acceptance of the offer was qualified, which amounts to a rejection of the original offer. Limketkai Sons Milling, Inc. v. Court of Appeals, 255 SCRA 626 (1996).

o The acceptance must be plain and unconditional, and it will not be so if it involves any new proposition. Zayco v. Serra, 44 Phil 326 (1923)

o Acceptance must be in the exact terms in which they are made. Any modification annuls the offer. Beumont v. Prieto, 41 Phil. 670 (1916)

• The moment a party accepts the offer unconditionally, the contract of sale is perfected. If the seller subsequently requests



for a higher price, but no agreement is reached, the first sale is still valid and is not novated. Uraca v. Court of Appeals, 278 SCRA 702

• A qualified acceptance or one that involves a new proposal constitutes a counter-‐offer and a rejection of the original offer. The acceptance must be identical in all respects with that of the offer so as to produce consent or meeting of minds. Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006).1

• No Absolute Acceptance in the following: o Placing the word “Noted” and signing such note at the

bottom of the written offer cannot be considered an acceptance that would give rise to a valid contract of sale. xDBP v. Ong, 460 SCRA 170 (2005).

o If the term “to negotiate” is included in the acceptance letter, there is still no absolute acceptance. Yuvienco v. Dacuycuy, 104 SCRA 668 (1981)

o If a party accepts but with a request that payment terms be modified, there is no absolute acceptance. Limketkai Sons Milling, Inc. v. Court of Appeals, 255 SCRA 626 (1996)

o A document cannot constitute a sale even when it provides for a downpayment since the provision on the downpayment made no specific reference to a sale of a vehicle. Definiteness as to the price is an essential element of a binding agreement to sell personal property. Toyota Shaw, Inc. v. Court of Appeals, 244 SCRA 320 (1995)

1 Beaumont v. Prieto, 41 Phil. 670 (1916); Zayco v. Serra, 44 Phil. 326 (1923).

1. Acceptance May Be Express Or Implied • Acceptance may be evidenced by some act or conduct,

communicated to the offeror, either in a formal or an informal manner, that clearly manifest the intention or determination to accept the offer to buy or sell.

• Acceptance on the part of the buyer was manifested through acts such as payment of the purchase price, declaration of the property for tax purposes, and payment of real estate taxes. Gomez v. Court of Appeals, 340 SCRA 720 (2000)

• By affixing their signatures as witnesses, the co-‐owners accepted the terms of the contract. Oesmer v. Paraiso Development Corp., 514 SCRA 228 (2007)

2. Acceptance By Letter Or Telegram • Does not bind the offeror except from the time it came to his

knowledge. Therefore, mere mailing or sending the acceptance is not enough. The offeror may still withdraw before he learns of the acceptance.

3. Acceptance Subject To A Suspensive Condition • If sale subject to suspensive condition: No perfected sale of a

lot where the award thereof was expressly made subject to approval by the higher authorities and there eventually was no acceptance manifested by the supposed awardee. xPeople's Homesite & Housing Corp. v. CA, 133 SCRA 777 (1984).

C. When “Deviation” Allowed:



• It is true that an acceptance may contain a request for certain changes in the terms of the offer and yet be a binding acceptance, so long as it is clear that the meaning of the acceptance is positively and unequivocally to accept the offer, whether such request is granted or not, a contract is formed. The vendor’s change in a phrase of the offer to purchase, which change does not essentially change the terms of the offer, does not amount to a rejection of the offer and the tender or a counter-‐offer. Villonco v. Bormaheco, 65 SCRA 352 (1975).1

Villonco v. Bormaheco

Facts: Cervantes (Bormaheco) owns a lot in Buendia. It offered to sell the lot to Villaconco who owns a lot adjacent to the lot of the latter with the following conditions; (a) 100k as earnest money which will become part of the payment if lot in Sta. Ana is purchased (b) If the said property is not purchased, the money will be returned and the sale will not be consummated, which will be known 45 days after negotiation. Villonco sent a counter-‐offer that the 100k will have an interest of 10% per annum. The check was delivered by de Tagle to Bromaheco, which was received by Cervantes. The voucher-‐receipt evidencing delivery had the phrase “subject to the terms and conditions embodied in Bormaheco’s letter”. Later, Cervantes returned the earnest money and reasoned that he acquired the property beyond the 45 days period. Issue: Whether or not there was a perfected sale.

1 Reiterated in Limketkai Sons Milling, Inc. v. Court of Appeals, 250 SCRA 523 (1995), but reversed in 255 SCRA

Held: YES. "Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract" (Article �1482, Civil Code). The contract was already consummated at the time respondent accepted the check. In fact, he accepted the earnest money, and furthermore returned the 100k with 10% interest which serves as proof of the acceptance. The alleged changes or qualifications in the revised counter-‐offer are not material or are mere clarifications of what the parties had previously agreed upon. Doctrine: D. Sale By Auction (Articles 1476, 1403(2)(d), 1326) Article 1476. In the case of a sale by auction: (1) Where goods are put up for sale by auction in lots, each lot is the subject of a separate contract of sale. (2) A sale by auction is perfected when the auctioneer announces its perfection by the fall of the hammer, or in other customary manner. Until such announcement is made, any bidder may retract his bid; and the auctioneer may withdraw the goods from the sale unless the auction has been announced to be without reserve. (3) A right to bid may be reserved expressly by or on behalf of the seller, unless otherwise provided by law or by stipulation.



(4) Where notice has not been given that a sale by auction is subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ or induce any person to bid at such sale on his behalf or for the auctioneer, to employ or induce any person to bid at such sale on behalf of the seller or knowingly to take any bid from the seller or any person employed by him. Any sale contravening this rule may be treated as fraudulent by the buyer. (n) Article 1403. The following contracts are unenforceable, unless they are ratified: (1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers; (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:

(a) An agreement that by its terms is not to be performed within a year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another;

(c) An agreement made in consideration of marriage, other than a mutual promise to marry; (d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum; (e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (f) A representation as to the credit of a third person.

(3) Those where both parties are incapable of giving consent to a contract.

• The terms and conditions provided by the owner of property to be sold at auction are binding upon all bidders, whether they knew of such conditions or not. xLeoquinco v. Postal Savings Bank, 47 Phil. 772 (1925).

• An auction sale is perfected by the fall of the hammer or in other customary manner and it does not matter that another



was allowed to match the bid of the highest bidder. xProvince of Cebu v. Heirs of Rufina Morales, 546 SCRA 315 (2008).

o Until such announcement is made, any bidder may retract his bid, and the auctioneer may withdraw the goods from the sale, unless the auction has been announced to be without reserve.

• General Rule: The seller and the auctioneer cannot bid either by themselves or by an agent.

o Exception: When the seller reserves such right. In such case, there must be notice.

E. Earnest Money (Article 1482) Article 1482. Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract. (1454a)

1. Earnest Money In A Contract Of Sale • Article 1482 gives a presumption. This prevails only in the

absence of contrary or rebuttal evidence. PNB v. Court of Appeals, 262 SCRA 464 (1996)

• Earnest money given by the buyer shall be considered as part of the price and as proof of the perfection of the contract. It constitutes an advance payment to be deducted from the total price. xEscueta v. Lim, 512 SCRA 411 (2007).

• Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract. But when there is no contract of sale because

the parties never went pass the negotiation stage, or more accurately, have not reached the perfection stage with the present of the three essential elements of the contract of sale, the concept of earnest money is certainly inapplicable. The earnest money forms part of the consideration only if the sale is consummated upon full payment of the purchase price. Hence, there must first be a perfected contract of sale before we can speak of earnest money. xGSIS v. Lopez, 592 SCRA 456 (2009).1

• Absent proof of the concurrence of all the essential elements of a contract of sale, the giving of earnest money cannot establish the existence of a perfected contract of sale. The presumption is based on the fact that there is a valid sale. The giving of earnest money does not establish the existence of a perfected sale. It is still the concurrence of the essential elements of sale which perfects the contract. Manila Metal Container Corp. v. PNB, 511 SCRA 444 (2006). 2

• When there is no provision for forfeiture of earnest money in the event the sale fails to materialize, then with the rescission it becomes incumbent upon seller to return the earnest money as legal consequence of mutual restitution. xGoldenrod, Inc. v. Court of Appeals, 299 SCRA 141 (1998).

o Except if expressly stipulated, the seller cannot keep the earnest money to answer for damages sustained in the event that the sale fails due to the fault of the buyer.

1 XYST Corp. DMC Urban Properties Dev., Inc., 594 SCRA 598 (2009). 2 Limjoco v. CA, 37 SCRA 663 (1971); Villonco v. Bormaheco, 65 SCRA 352 (1975); Spouses Doromal, Sr. v. CA, 66 SCRA 575 (1975); PNB v. CA, 262 SCRA 464 (1996); San Miguel Properties Philippines, Inc. v. Huang, 336 SCRA 737 (2000); Platinum Plans Phil. Inc. v. Cucueco, 488 SCRA 156 (2006).



o If the sale is rescinded, the seller must return the earnest money. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits and interest.

2. Earnest Money In A Contract To Sell • Article 1482 does not apply when earnest money given in a

contract to sell xSerrano v. Caguiat, 517 SCRA 57 (2007), especially where by stipulation the buyer has the right to walk away from the transaction, with no obligation to pay the balance, although he will forfeit the earnest money. xChua v. Court of Appeals, 401 SCRA 54 (2003).1

o The money given in a contract to sell is not earnest money but as part of the consideration to the seller’s promise to reserve the subject property for the buyer. PNB v. Court of Appeals, 262 SCRA 464 (1996)

3. Earnest Money In A Conditional Contract Of Sale • In a conditional contract of sale, the acceptance of earnest

money would prove that the sale is conditionally consummated or party executed. Villonco v. Bormaheco, 65 SCRA 352 (1975).

4. Varying Treatments Of Earnest Money • The treatment of earnest money in Article 1482 is the preferred

concept under the law. • However, there is nothing which prevents the parties from

treating the earnest money differently.

1 San Miguel Properties Philippines, Inc. v. Huang, 336 SCRA 737 (2000).

o For example, the parties treated the earnest money as a guarantee that the buyer would not back out from the sale. This was the concept of earnest money in the old Civil Code. Spouses Doromal v. Court of Appeals, 66 SCRA 575 (1975)

F. Difference Between Earnest Money And Option Money. Oesmer v. Paraiso Dev. Corp., 514 SCRA 228 (2007).

Oesmer v. Paraiso Development Co.

Facts: Petitioners are siblings and co-‐owners of two parcels of land in Cavite. Ernesto, met with Respondent PDC and signed a Contract to Sell. A P100,000 check, payable to Ernesto, was given as option money. Sometime thereafter, 4 other also signed the Contract to Sell. Petitioners then wrote a letter to PDC to rescind the contract.

Issue: Whether or not the sale is valid on the petitioners who signed the contract

Held: YES. The other five petitioners (excluding Ernesto) personally affixed their signatures thereon. Therefore, a written authority is no longer necessary in order to sell their shares because, by affixing their signatures on the Contract to Sell, they were not selling their shares through an agent but, rather, they were selling directly and in their own right. 6/8 of the property is sold.

The court also had the occasion of distinguishing earnest money and option money; (a) earnest money is part of the purchase price, while



option money is the money given as a distinct consideration for an option contract; (b) earnest money is given only where there is already a sale, while option money applies to a sale not yet perfected; and (c) when earnest money is given, the buyer is bound to pay the balance, while when the would-‐be buyer gives option money, he is not required to buy, but may even forfeit it depending on the terms of the option Doctrine:

Earnest Money Option Money Part of the purchase price Distinct consideration for an

option contract Given only where there is already a sale

Applies to a sale not yet perfected

They buyer is bound to pay the balance

They buyer is not required to buy.

• Atty. Santiago: There is no option contract at all if there is no

distinct consideration for the contract. Rather, a situation where the money given is supposed to be credited to the purchase price if the sale pushes through OR forfeited if the sale does not push through, is a hybrid of Article 1842. As such, the article is not strictly applicable.

G. Sale Deemed Perfected Where Offer Was Made (Article 1319)

• The sale’s place of perfection is where the meeting of the minds as to the determinate subject matter and price occurs.

• In case of acceptance by telegram or letter, the presumption is that the contract was perfected in the place where the offer was made.

H. Effect Of Rescission On Earnest Money Received

• Except if expressly stipulated, the seller cannot keep the earnest money to answer for damages sustained in the event that the sale fails due to the fault of the buyer. Goldenrod, Inc v. Court of Appeals, 299 SCRA 141 (1998).

• If the sale is rescinded, the seller must return the earnest money. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits and interest.

I. Place Of Perfection

• The sale’s place of perfection is where the meeting of the minds as to the determinate subject matter and price occurs.

• In case of acceptance by telegram or letter, the presumption is that the contract was perfected in the place where the offer was made.

J. Expenses Of Execution And Registration

• The seller has to answer for the following expenses: 1. Execution and registration of the sale 2. Putting the goods into a deliverable state 3. Withholding taxes due on the sale

K. Performance Should Not Affect Perfection



• The ability of the parties to perform the contract (after perfection) does not affect the perfection of the contract.

• Example: o In Schuback v. Court of Appeals, 227 SCRA 719 (1993),

the Court ruled that there was already a perfected sale even when the required letter of credit (which was the means of payment agreed upon) had not been opened by the buyer.

• Non-‐payment of the price does not render void nor reverse the effects of the perfection of the contract of sale. It only creates a right to demand fulfillment of the obligation or to rescind the contract. Balatbat v. Court of Appeals, 261 SCRA 128 (1996)

• When the seller is not the owner both at the time of perfection and delivery, it is similar to an “impossible service” under Article 1409(5). Thus, the contract is void. Nool v. Court of Appeals, 276 SCRA 149 (1997)

o BUT CLV says that the comparison to an impossible service is erroneous because the obligations are “to give,” not “to do.”

IV. Formal Requirements Of Sales (Articles 1357, 1358, 1406 and 1483) Article 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract. (1279a)

Article 1358. The following must appear in a public document: (1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein are governed by articles 1403, No. 2, and 1405; (2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; (3) The power to 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; (4) The cession of actions or rights proceeding from an act appearing in a public document. All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by articles, 1403, No. 2 and 1405. (1280a) Article 1406. When a contract is enforceable under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1357.



Article 1483. Subject to the provisions of the Statute of Frauds and of any other applicable statute, a contract of sale may be made in writing, or by word of mouth, or partly in writing and partly by word of mouth, or may be inferred from the conduct of the parties. (n) A. Form Not Important for Validity of Sale

• General Rule: Sale, being a consensual contract, no particular form is required for its validity.

• Remember: Unenforceable contracts are still valid, so the fact that the sale over land was not registered does not affect the validity of the sale. Again, registration is only for the purpose of greater efficacy and binding third persons. Universal Sugar Milling Corp. v. Heirs of Angel Teves, 389 SCRA 216 (2002)

o The requirement in the Statute of Frauds that sale of real estate should be embodied in a public document is only for the purpose of binding third parties.

o Sale of land under private instrument is valid. Gallar v. Husain, 20 SCRA 186 (1967).1

o Articles 1357 and 1358, in relation to Article 1403(2), require that the sale of real property must be in writing for it to be enforceable, it need not be notarized for there is nothing in those provisions which require that it must be executed in a public document to be valid. xMartinez v. CA, 358 SCRA 38 (2001);2 but both its due execution and its authenticity must be proven, pursuant

1 F. Irureta Goyena v. Tambunting, 1 Phil. 490 (1902). 2 Heirs of Biona v. CA, 362 SCRA 29 (2001); The Estate of Pedro C. Gonzales v. The Heirs of Marcos Perez, 605 SCRA 47 (2009).

to Sec. 20, Rule 132 of the Rules of Court. xTigno v. Aquino, 444 SCRA 61 (2003).

o Although the conveyance of land is not made in a public document, it does not affect the validity of such conveyance. Article 1358 of the Civil Code does not require the accomplishment of the acts or contracts in a public instrument in order to validate the act or contract but only to insure its efficacy. The Estate of Pedro C. Gonzales v. Their Hiers of Marcos Perez, 605 SCRA 47 (2009).

1. Other Rulings on Deeds of Sale: • Seller may agree to a deed of absolute sale before full payment

of the purchase price. xPan Pacific Industrial Sales Co., Inc. v. CA, 482 SCRA 164 (2006).

• Assuming that the buyers failed to pay the full price stated in the Deed of Sale, such partial failure would not render the sale void. Bravo-‐Guerrero v. Bravo, 465 SCRA 244 (2005).

• That marital consent was executed prior to the Deed of Absolute Sale does not indicate that it is a phoney. Pan Pacific Industrial Sales Co., Inc. v. CA, 482 SCRA 164 (2006).

• A Deed of Sale when acknowledged before a notary public, enjoys the presumption of regularity and due execution. To overthrow that presumption, sufficient, clear and convincing evidence is required, otherwise the document should be upheld. xBravo-‐Guerrero v. Bravo, 465 SCRA 244 (2005).3

3 Yason v. Arciaga, 449 SCRA 458 (2005); Union Bank v. Ong, 491 SCRA 581 (2006); Tapuroc v. Loquellano Vda. De Mende, 512 SCRA 97 (2007); Alfaro v. Court of Appeals, 519 SCRA 270 (2007); Santos v. Lumbao, 519 SCRA 408



• Notarization of Deeds of Sale by one who was not a notary public does not affect the validity thereof; said documents were merely converted into private documents. xR.F. Navarro & Co. Inc. v. Vailoces, 361 SCRA 139 (2001).

• Notarization of a deed of sale does not guarantee its validity nor is it conclusive of the true agreement of the parties thereto, because it is not the function of the notary public to validate an instrument that was never intended by the parties to have any binding legal effect. xSalonga v. Concepcion, 470 SCRA 291 (2005).1

• Buyer’s immediate taking of possession of subject property corroborates the truthfulness and authenticity of the deed of sale. xAlcos v. IAC, 162 SCRA 823 (1988). Conversely, the seller’s continued possession of the property makes dubious the contract of sale between them. xSantos v. Santos, 366 SCRA 395 (2001).2

• Any substantial difference between the terms of the Contract to Sell and the concomitant Deed of Absolute Sale (such as difference in subject matter, and difference in price and/or the terms thereof), does not make the transaction between the seller and the buyer void, for it is truism that the execution of the Deed of Absolute Sale effectively rendered the previous Contract to Sell ineffective and cancelled [through the process of novation]. xLumbres v. Talbrad, Jr., 516 SCRA 575 (2007).

(2007); Pedrano v. Heirs of Benedicto Pedrano, 539 SCRA 401 (2007); Olivares v. Sarmiento, 554 SCRA 384 (2008). 1 Nazareno v. CA, 343 SCRA 637 (2000); Santos v. Heirs of Jose P. Mariano, 344 SCRA 284 (2000) 2 Domingo v. CA, 367 SCRA 368 (2001).

2. Value of Business Forms to Prove Sale • Business forms, e.g., order slip, delivery charge invoice and the

like, which are issued by the seller in the ordinary course of the business are not always fully accomplished to contain all the necessary information describing in detail the whole business transaction—more often than not they are accomplished perfunctorily without proper regard to any legal repercussion for such neglect such that despite their being often incomplete, said business forms are commonly recognized in ordinary commercial transactions as valid between the parties and at the very least they serve as an acknowledgment that a business transaction has in fact transpired. By themselves, they are inadequate to establish the case for the vendor. Their probative value must be evaluated in conjunction with other evidence. xDonato C. Cruz Trading Corp. v. CA, 347 SCRA 13 (2000).

• These documents are not mere scraps of paper bereft of probative value but vital pieces of evidence of commercial transactions. They are written memorials of the details of the consummation of contracts. xLagon v. Hooven Comalco Industries, Inc., 349 SCRA 363 (2001).

B. When Form Important in Sale

• General Rule: Form does not affect validity of sale. o Exceptions: 1. Power to sell a piece of land by an agent must be in

writing, otherwise, the sale will be void.



2. Sale of large cattle must be in writing, otherwise the sale would be void. It must also be registered with the municipal treasurer in order to be valid.

3. Sale of land by “non-‐Muslim hill tribe cultural minorities all throughout the Philippines” is void if not approved by the National Commission on Indigenous Peoples (NCIP).

1. To Bind Third Parties • Article 1358 which requires the embodiment of certain

contracts in a public instrument is only for convenience, and registration of the instrument only adversely affects third parties. Formal requirements are, therefore, for the benefit of third parties; and non-‐compliance therewith does not adversely affect the validity of the contract nor the contractual rights and obligations of the parties thereunder. Fule v. CA, 286 SCRA 698 (1998);1 Dalion v. CA, 182 SCRA 872 (1990).2

Fule v. Court of Appeals

Facts: A land owned by Fr. Jacobe was foreclosed and put up for public auction by Rural Bank. Fule, the bank’s corporate secretary, sought a buyer for the land. His 2 agents recommended Dra. Cruz. At that time Fule was interested in a pair of diamond earrings that Cruz had but the latter rejected all his monetary offers for it. When he offered the land to

1 Universal Robina Sugar Milling Corp. v. Heirs of Angel Teves, 389 SCRA 316 (2002). 2 Limketkai Sons Milling, Inc. v. CA, 250 SCRA 523 (1995); Agasen v. CA, 325 SCRA 504 (2000).

Dra. Cruz, she showed interest in trading so he redeemed the property in Fr. Jacobe’s name and executed a deed of sale to get it in his own name. Fule represented the land to be actually worth P200,000 so they agreed that it would be traded for the earrings, being worth P160,000, plus P40,000; this notwithstanding that the consideration in their deed of sale says the land is only worth P80,000. When Fule had signed the deed “delivering” the land to Dra. Cruz, they went to the bank to retrieve the earrings. Upon a quick glance, Cruz showed satisfaction at the earrings and left with them. 2 hours later however, he went back and claimed that the earrings were fake. A suit was brought to void their contract of sale. Bought the RTC and Court of Appeals upheld the sale and awarded damages in favor of respondents, hence this appeal. Issue: Whether or not there was a valid contract of sale or barter. Held: YES. The Supreme Court also ruled that their contract of barter, which took the form of a sale, was complete by mere meeting of the minds and so legally binding on them, especially since there was already delivery to both parties of their respective objects and both had accepted them – Fule especially, by his act in leaving the bank with the jewelry. Damages were also proper since Fule brought suit knowing himself to be guilty and negligent in not bothering to inspect the jewelry before leaving with it; he should have known better since he himself is a banker and a jeweler. Doctrine:

Dalion v. Court of Appeals Facts: Sabesaje sued to recover ownership of land that was sold to him



by Dalion. Dalion denies the sale, and claims that Sabesaje is only preempting Dalion’s threat to sue for unpaid commission on sales of copra and abaca that petitioner spouses earned when they were administering 5 parcels of land for Leonardo Sabesaje. Issue: Whether or not the sale was valid despite the failure to embody it in a public document Held: YES. Article 1358 states that “acts and contracts which have for their object the creation, transmission, modification or extinction of real rights over immovable property must appear in a public instrument” is only for convenience, not for validity or enforceability. It is not a requirement for the validity of a contract of sale of a parcel of land that this be embodied in a public instrument. A contract of sale is a consensual contract, which means that the sale is perfected by mere consent. No particular form is required for its validity. The Supreme Court ruled that the authenticity of the sale has been proved accordingly since witnesses positively testified to the authenticity of the sale, and the signature thereon was proved to be authentic. The Court also ruled that execution of the sale in a public document is not a fatal defect as a contract of sale is consensual. Doctrine:

• Article 1358 of the Civil Code which requires the embodiment of certain contracts in a public instrument, in only for convenience; and registration of the instrument only adversely affects third parties, and non-‐compliance therewith does not adversely

affect the validity of the contract or the contractual rights and obligations of the parties thereunder. xEstreller v. Ysmael, 581 SCRA 247 (2009).1

• While sale of land appearing in a private deed is binding between the parties, it cannot be considered binding on third persons, if it is not embodied in a public instrument and recorded in the Registry of Deeds. Secuya v. Vda. De Selma, 326 SCRA 244 (2000).2

Secuya v. Vda. De Selma

Facts: The parcel of land subject of this case is a portion of original Lot 5679. The property was originally registered under a patent issued to Maxima Caballero Vda. de Cariño. During her lifetime, she entered into an agreement of partition in 1938 with Paciencia Sabellona, whereby she bound herself to transfer one-‐third (1/3) of Lot 5679 in favor of Paciencia. An action for quieting of title was filed by petitioners against private respondent. Secuya alleged that Paciencia took possession and occupation of that one-‐third portion of Lot 5679 adjudicated to her. Later, she sold the three thousand square meter portion thereof to Dalmacio Secuya (predecessor-‐in-‐interest of petitioners) in 1953. Respondent claimed that she is the registered owner of Lot 5679, having bought the land sometime in February 1975 from Cesaria Caballero and has been in possession of the same since then.

1 Universal Robina Sugar Milling Corp. v. Heirs of Angel Teves, 389 SCRA 316 (2002). 2 Talusan v. Tayag, 356 SCRA 263 (2001); Santos v. Manalili, 476 SCRA 679 (2005).



Issue: Whether or not the sale to Dalmacio Secuya was valid. Held: NO. There was no evidence of the sale. Petitioners insist that Paciencia sold the disputed property to Dalmacio Secuya on October 20, 1953, and that the sale was embodied in a private document. However, such document, which would have been the best evidence of the transaction, was never presented in court, allegedly because it had been lost. While a sale of a piece of land appearing in a private deed is binding between the parties, it cannot be considered binding on third persons, if it is not embodied in a public instrument and recorded in the Registry of Property. While petitioners alleged that respondent was aware of petitioners’ possession of the disputed properties, thus, regarding her as not a purchaser in good faith who is entitled to the protection of the Torrens system, Cesaria Caballero, assured respondent that petitioners were just tenants on the said lot. Private respondent cannot be faulted for believing this representation, considering that petitioners' claim was not noted in the certificate of the title covering Lot No. 5679. Moreover, private respondent's title is amply supported by clear evidence, while petitioners' claim is barren of proof. Doctrine:

2. For Enforceability Between the Parties: Statute of Frauds (Articles 1403 and 1405)

Article 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of

article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit under them.

• The term “Statute of Frauds” is descriptive of the statutes which require certain classes of contracts, such as agreements for the sale of real property, to be in writing, the purpose being to prevent fraud and perjury in the enforcement of obligations depending for their evidence on the unassisted memory of witnesses by requiring certain enumerated contracts and transactions to be evidenced by a writing signed by the party to be charged. Shoemaker v. La Tondeña, 68 Phil. 24 (1939).

o Atty. Santiago: The parties cannot and should not merely rely on their memory for certain transactions.

• Nature And Purpose Of Statute Of Frauds – To prevent fraud and perjury in the enforcement of obligations. The written note must emobody the essentials of the contract. Torcuator v. Bernabe, 459 SCRA 439 (2005).

• Presupposes Valid Contract Of Sale – “The application of the Statute of Frauds presupposes the existence of a perfected contract.” When the records show that there was no perfected contract of sale, there is no basis for the application of the Statute of Frauds. xFirme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003).1

• Coverage a. Sale of Real Property – A sale of realty cannot be

proven by means of witnesses, but must necessarily be

1 Rosencor Development Corp. v. Inquing, 354 SCRA 119 (2001).



evidenced by a written instrument, duly subscribed by the party charged, or by secondary evidence of the contents of such document. No other evidence can be received except the documentary evidence referred to. xGorospe v. Ilayat, 29 Phil. 21 (1914).1

Sales Coverage in Statute of Frauds

• The following kinds of sale are unenforceable if not embodied in a written document: (1-‐500-‐R)

1. A sale which is not to be performed within one year. 2. Agreement for the sale of goods, chattel or things in

action not less than P500. 3. Sale of real property.

• Evidence of the agreement must be in writing.

Exceptions to Coverage of Statue of Frauds in Sales Contracts • The following are exempted from the Statute of Frauds and are

thus enforceable: (M-‐POE) 1. There is a note or memorandum in writing and

subscribed by the party charged or his agent 2. When there has been partial consummation/partial

performance 3. Failure to object to the presentation of evidence aliunde

(meaning: from another place) as to the existence of a contract

4. Sales effected through electronic commerce.

1 Alba Vda. De Ray v. Court of Appeals, 314 SCRA 36 (1999).

b. Agency to Sell or to Buy – As contrasted from sale, an agency to sell does not belong to any of the three categories of contracts covered by Articles 1357 and 1358 and not one enumerated under the Statutes of Frauds in Article 1403. xLim v. Court of Appeals, 254 SCRA 170 (1996).2

c. Rights of First Refusal – A “right of first refusal” is not covered by the statute of frauds. Furthermore, Article 1403(2)(e) of Civil Code presupposes the existence of a perfected, albeit unwritten, contract of sale; a right of first refusal, such as the one involved in the instant case, is not by any means a perfected contract of sale of real property. xRosencor Dev. Corp. v. Inquing, 354 SCRA 119 (2001).

d. Equitable Mortgage – Statute does not stand in the way of treating an absolute deed as a mortgage, when such was the parties’ intention, although the agreement for redemption or defeasance is proved by parol evidence. xCuyugan v. Santos, 34 Phil. 100 (1916).3

e. Right to Repurchase – The deed of sale and the verbal agreement allowing the right of repurchase should be considered as an integral whole; the deed of sale is itself the note or memorandum evidencing the contract. xMactan Cebu International Airport Authority v. Court of Appeals, 263 SCRA 736 (1996).

• Memorandum. Yuviengco v. Dacuycuy, 104 SCRA 668 (1981)

2 Torcuator v. Bernabe, 459 SCRA 439 (2005). 3 Rosales v. Suba, 408 SCRA 664 (2003); Ayson, Jr. v. Paragas, 557 SCRA 50 (2008).



Yuviengco v. Dacuycuy

Facts: Petitioners own a property in Tacloban City which they intend to sell for 6.5M. They gave the respondents the right to purchase the property within July 31, 1978. Respondents replied that they agree to buy the property and they will negotiate for details, as soon as petitioners send their representative in Tacloban. Petitioner sent another telegram informing respondents that their proposal is accepted and a contract will be prepared. Petitioners’ lawyer, Mr. Gamboa, arrived bringing a contact changing the mode of payment. It now stated that the balance payment should be paid within 30 days instead of the former 90 days originally agreed upon. (The original terms was 2M payment upon execution of contract, and then 4.5M after 90 days) Issue: Whether or not there was a perfected contract of sale. Held: NO. The Supreme Court considered the correct juridical significance of the telegram of respondents instructing Atty. Gamboa to "proceed to Tacloban tonegotiate details." It emphasizes the word "negotiate" advisedly because to Court’s mind it is the keyword that negates and makes it legally impossible to hold that respondents' acceptance of petitioners' offer, assuming that it was a "certain" offer indeed, was the "absolute" one that Article 1319. Payment on installments is entirely different from cash payment. The manner of payment is an essential requisite in a contract of sale. The alteration in the terms of payment clearly showed there was no meeting of the

minds yet to perfect a contract of sale. In any sale of real property on installments, the Statute of Frauds read together with the perfection requirements of Article 1475 of the Civil Code must be understood and applied in the sense that the idea of payment on installments must be in the requisite of a note or memorandum therein contemplated. Under the Statute of Frauds, the contents of the note or memorandum, whether in one writing or in separate ones merely indicative for an adequate understanding of all the essential elements of the entire agreement, may be said to be the contract itself, except as to the form. Doctrine:

o Under Article 1403, an exception to the unenforceability of contracts pursuant to the Statute of Frauds is the existence of a written note or memorandum evidencing the contract. The memorandum may be found in several writings, not necessarily in one document. The memorandum or memoranda is/are written evidence that such a contract was entered into. The existence of a written contract of the sale is not necessary so long as the agreement to sell real property is evidenced by a written note or memorandum, embodying the essentials of the contract and signed by the party charged or his agent. Limketkai Sons Milling, Inc. v. CA, 250 SCRA 523 (1995).

o BUT: The memoranda must be signed by the party sought to be charged, and must clearly provide a deed



of sale categorically conveying the subject property. Limketkai Sons Milling, Inc. v. CA, 255 SCRA 6 (1996); 261 SCRA 464 (1996).

Limketkai v. Court of Appeals

Facts: BPI as trustee of PRC, authorized Pedro Revilla to sell a lot in Barrio Bagong Hog, Pasig. BPI VP Albano, Asst. VP Aromin and Limketkai had negotiations and eventually settled on Php 1000/sq meter. Lim asked if they could pay on terms and so VP Albano dictated the terms of payment. About 3 days later, Limketkai learned that its offer to pay on terms has been frozen. Lim went to BPI to tender full payment of Php 33, 056, 000.00 to VP Albano but the latter refused payment and said his authority to sell the land had been withdrawn. Limketkai filed a case to against BPI for specific performance. Issues

1. Whether or not there was a perfected contract of sale between Limketkai and BPI ! YES

2. Whether or not the evidence admitted by the trial court in ruling for the perfection of the sale is admissible, given that in a sale of real property, the Statute of Frauds is applicable? !YES

3. Whether or not the sale to NBS during the pendency of the trial in the RTC was effected in good faith ! NO

Held 1. Contract of sale perfected. VP and Asst. VP have authority to

sell since their primary responsibilities were to manage and administer real estate property. Asst. VP Aromin testified that there was already a perfected contract of sale. When they met,

talked and agreed that the lot would be sold to Limketkai at Php 1000/sq. meter and on terms dictated by Albano, the sale was perfected.

2. Statute of Frauds. Transaction was outside the ambit of the SoF, there is the existence of a written note or memorandum, the Authorization Letters and letter from Limketkai confirming the sale. Respondents cross-‐examined the witnesses at length regarding the contract, price, tender of payment, etc.

3. NBS not a purchaser in good faith. They ignored the lis pendens annotated on the title.

Limketkai v. Court of Appeals (MR)

1. No contract of sale perfected. Petitioners fail to establish any

definite agreement or meeting of the mind as regards the price or term of payment. Petitioner’s acceptance of the offer was qualified, which amounts to a rejection of the original offer.

2. Statute of Frauds. Petitioner claims as proof of perfected

contract of sale between it and respondent BPI were not subscribed by the party charged, i.e. BPI, thus did not constitute the memoranda or notes that the law speaks of.

o For the memorandum to take the sale out of the

coverage of the Statute of Frauds, it must contain “all the essential terms of the contract” of sale. xTorcuator v. Bernabe, 459 SCRA 439 (2005),1 even when scattered

1 Paredes v. Espino, 22 SCRA 1000 (1968).



into various correspondences which can be brought together xCity of Cebu v. Heirs of Candido Rubi, 306 SCRA 408 (1999).1

" The manner of payment must also be included in the memorandum. Yuvienco v. Dacuycuy, 104 SCRA 668 (1981)

" But the Court has held that in sales of real property, the statute of frauds will not apply if there has already been partial payment even if the memorandum evidencing the sale did not mention payment by installment. David v. Tiongson, 313 SCRA 63 (1999).

o Exception: Electronic Documents under the E-‐Commerce Act (R.A. 8792)

" The main point of this entire section in the book is this: electronic documents are given the same legal recognition as paper documents. Thus, they are admissible as evidence in court.

" In assessing the evidential weight of an electronic data message or electronic document, the reliability of the manner in which it was generated, stored or communicated, the reliability of the manner in which its originator was identified is given regard

• Partial Execution (Article 1405) Ortega v. Leonardo, 103 Phil. 870 (1958); Claudel v. Court of Appeals, 199 SCRA 113 (1991).

1 Berg v. Magdalena Estate, Inc., 92 Phil. 110 (1952); Limketkai Sons Milling, Inc. v. CA, 250 SCRA 523 (1995); First Philippine Int’l Bank v. CA, 252 SCRA 259 (1996).

Ortega v. Leonardo

Facts: Ortega occupied a parcel of land. After the liberation, the government assigned the lot to the Rural Progress Admin. She asserted her right thereto; but was disputed by Leonardo. Ortega and Leonardo agreed to a compromise. The agreement was for Ortega to desist from pressing her claim, and Leonardo, upon getting the lot, would sell to her a portion thereof provided she paid for the surveying of the lot. If he acquired title, she could stay as tenant. Ortega thus desisted from her claim, paid for the surveying of the lot and the preparation of the plan, and regularly paid him a monthly rental. When she remodeled her son’s house beside the lot, it extended over the subject lot. When Leonardo acquired title, he refused to sell the portion agreed upon. He claims that the contract is unenforceable based on the Statute of Frauds. Issue: Whether or not the contract is unenforceable. Held: NO. The contract is enforceable because there was partial performance. Ortega made substantial improvements on the lot, desisted from her claim, continued possession, and paid for the surveying, and also paid the rentals. All these put together amount to partial performance, which takes the verbal agreement out of the operation of the Statute of Frauds. Doctrine: Partial payment of the purchase price is not the only manner of partial performance. Other modes of partial performance include:

• Possession • Making of improvements o Rendition of services



• Payment of taxes • Relinquishment of rights

Claudel v. Court of Appeals

Facts: Cecilio Claudel acquired a lot from the Bureau of Lands. He occupied the same, declared it in his name and dutifully paid his taxes. After his death, his heirs and siblings contested each other claiming ownership thereof. It was his heirs who were in possession of the property. They partitioned it amongst themselves, registered each portion under the Torrens System, and each paid their respective taxes. The siblings filed a case for cancellation of titles and reconveyance arguing that there was a verbal sale between Cecilio and their parents over the lot. As evidence, they presented a subdivision plan. Issue: Whether or not there was a valid sale. Held: NO. The general rule is that a sale once consummated is valid regardless of its form; however, proving that the sale is valid and existing is a different matter. However, in the event that a 3rd party disputes the ownership, there is no such proof in support of the ownership. As such, it cannot prejudice third persons, such as the heirs in this case. Also, the heirs had a right to rely upon their Torrens titles, which, as opposed to the subdivision plans, are definitely more credible. Doctrine:

o Requisites of partial performance:

i. Must pertain to the subject matter or the price of the sale

ii. Must involve an act or “complicity” on the party sought to be charged

o Definition: Partial performance is not limited to the giving of money. Contracts covered by the Statute of Frauds are ratified by acceptance of benefits under them. (Article 1405)

" Partial performance must amount to estoppel against the party sought to be charged.

" Partial performance of a sale of real property will take it out of the Statute of Frauds even if the formal requirements (i.e. it must be in writing) are not complied with, as long as the essential requisites of sale are present. Vda. de Jomoc v. Court of Appeals 200 SCRA 74 (1991).

" Sale of real property which are not in writing but are partially executed still do not bind third parties. In addition, under our Torrens system, execution of a public document is not enough to bind third persons. Registration with the Registry of Deeds is the operative act. Secuya v. Vda. De Selma, 326 SCRA 244 (2000).

o BUT: Delivery of the deed to buyer’s agent, with no intention to part with the title until the purchase price is paid, does not take the case out of the Statute of Frauds. xBaretto v. Manila Railroad Co., 46 Phil. 964 (1924).



o The Statute of Frauds only applies to executory contracts. The Statute of Frauds does not apply to contracts either partially or totally performed. In addition, a contract that violates the Statute of Frauds is ratified by the acceptance of benefits under the contract, such as the acceptance of the purchase price and using the proceeds to pay outstanding loans. Alfredo v. Borras, 404 SCRA 145 (2003).1

Spouses Alfredo v. Spouses Borras

Facts: Godofredo & Carmen mortgaged their land to the DBP for P 7,000.00. To pay their debt, they sold the land to Armando & Adelia for P 15,000.00, the latter also assumed to pay the loan. Carmen issued Armando & Adelia a receipt for the sale. They also delivered to Armando & Adelia the Original Cert. of Title, tax declarations, and tax receipts. They also introduced Armando & Adelia to the Natanawans, the tenants of the said property as the new lessors. They thereafter took possession of the said land. Later they found out that Godofredo & Carmen sold the land again to other buyers by securing duplicate copies of the OCTs upon petition w/ the court. Thus, they filed a case entitled Specific Performance. Godofredo & Carmen claim that the sale, not being in writing, is unenforceable under the Statute of Frauds. Issue:

1 Vda. de Jomoc v. CA, 200 SCRA 74 (1991); Soliva v. The Intestate Estate of Marcelo M. Villalba, 417 SCRA 277 (2003); Ainza v. Padua, 462 SCRA 614 (2005); De la Cena v. Briones, 508 SCRA 62 (2006); Yaneza v. Court of Appeals, 572 SCRA 413 (2008).

1. Whether or not sale of land in favor of Borras is valid even if orally entered. ! YES

2. Whether or not Statute of Frauds is applicable ! NO Held: The Statute of Frauds in applicable only to executory contracts, not those that have already been partially or completely consummated. In this case the sale of the land to Armando & Adelia had already been consummated. The ownership over the land was also transferred to Armando & Adelia when they were introduced to the Natanawans and took possession thereof. Therefore, when Godofredo & Carmen sold the land to the other buyers, it was no longer theirs to sell. The Statute of Frauds likewise does not apply considering that Godofredo & Carmen had already derived the benefits from the sale – such as the money to pay for the loan. The receipt also suffices to constitute the “memorandum” required by the Statute of Frauds Doctrine:

o Effect Of Partial Execution On Third Parties: Sale of real property which are not in writing but are partially executed still do not bind third parties.

" Formal requirements are for the benefit of third parties. Non-‐compliance does not affect the validity of the contract. Fule v. Court of Appeals, 286 SCRA 698 (1998)

" If a third party disputes the ownership of the property, the person against whom that claim is brought cannot present any proof of such sale and hence, has no means to enforce the



contract. Thus, the Statute of Frauds is for the benefit of the parties in the sale. Claudel v. Court of Appeals (199 SCRA 113)

• This Claudel v. Court of Appeals, 199 SCRA 113 (1991) confirms the variance in principles involving movables and immovables. Article 1403 treats partial execution as applicable only to “goods and chattel.”

• For movables, mere possession is enough to give a presumption of ownership (Article 559). For immovables, a Torrens title is needed.

• Note the difference in the ruling of Claudel v. Court of Appeals, 199 SCRA 113 (1991) and Vda. de Jomoc v. Court of Appeals 200 SCRA 74 (1991). The controlling doctrine is that of Vda. de Jomoc v. Court of Appeals 200 SCRA 74 (1991): partial performance in sales of real property takes it out of the Statute of Frauds. However, it is still the registration in the Registry of Deeds which will bind third parties.

• Claudel v. Court of Appeals, 199 SCRA 113 (1991) shows the effect of having a sale of real property which isn’t reduced to writing. Thus, it emphasizes the importance of the Statute of Frauds.

(Claudel v. Court of Appeals, 199 SCRA 113 (1991) was decided based on prescription, not according to the Statute of Frauds.)

" Reliance on testimony of witnesses as secondary evidence to prove a sale of real property will not prosper because such a sale must be evidenced by a written instrument when it involves 3rd parties. Alba Vda. De Rax v. Court of Appeals, 314 SCRA 36, 54-‐55 (1999).

" Londres v. Court of Appeals, 394 SCRA 133 (2002) summarized the rulings on the matter:

• Article 1358 is only for convenience • Registration of the instrument is

needed only to adversely affect third parties

• Non-‐compliance with formal requirements does not affect validity

" In the Torrens system, execution of a public document is not enough to bind third persons. Registration with the Registry of Deeds is the operative act. Secuya v. Vda. De Selma, 326 SCRA 244 (2000).

• Waiver – (Article 1405) Cross-‐examination on the contract is deemed a waiver of the defense of the Statute. xAbrenica v.



Gonda, 34 Phil. 739 (1916); Talosig v. Vda. De Nieba, 43 SCRA 472 (1972).1

o When a party fails to object during trial to the presentation of oral evidence to prove the contract, he is deemed to have waived the defects of the contract. Thus, the contract will be enforceable. (Article 1405)

o When the purported buyer’s exhibits failed to establish the perfection of the contract of sale, oral testimony cannot take their place without violating the parol evidence rule. It was therefore irregular for the trial court to have admitted in evidence testimony to prove the existence of a contract of sale of a real property between the parties, despite the persistent objection made by the purported seller’s counsel as early as the first scheduled hearing, even when cross-‐examination was made on the basis of the witnesses’ affidavit-‐form testimony. Limketkai Sons Milling, Inc. v. CA, 255 SCRA 6 (1996); 261 SCRA 464 (1996).

• Rulings On Receipts And Other Documentary Evidence Of Sale o Since a contract of sale is perfected by mere consent,

then when the dealer of motor vehicles accepts a deposit of P50,0000 and pulls out a unit from the assembler for that purpose, it was in breach of contract when it sold the car subsequently to another buyer. xXentrex Automotive, Inc. v. Court of Appeals, 291 SCRA 66 (1998).

1 Limketkai Sons Milling, Inc. v. CA, 250 SCRA 523 (1995); Lacanilao v. CA, 262 SCRA 486 (1996).

o A sales invoice is a commercial document-‐commercial documents or papers are those used by merchants or businessmen to promote or facilitate trade or credit transactions—they are not mere scraps of paper bereft of probative value, but vital pieces of evidence of commercial transactions, written memorials of the details of the consummation of contracts. Seaiol Petroleum Corp. v. Autocorp Group, 569 SCRA 387 (2008).

o Sales invoices are not evidence of payment of the price, but evidence of the receipt of the goods; since the best evidence to prove payment is the official receipt. El Oro Engravers Corp. v. Court of Appeals, 546 SCRA 42 (2008).

o A receipt which is merely an acknowledgment of the sum received, without any indication therein of the total purchase price of the land or of the monthly installments to be paid, cannot be the basis of valid sale. xLeabres v. CA, 146 SCRA 158 (1986).2

o In itself, the absence of receipts, or any proof of consideration, would not be conclusive of the inexistence of a sale since consideration is always presumed. xTigno v. Aquino, 444 SCRA 61 (2003).

o Receipts proves payment which takes the sale out of the Statute of Frauds. Toyota Shaw, Inc. v. Court of Appeals, 244 SCRA 320 (1995).

2 Limson v. CA, 357 SCRA 209 (2001).



Toyota Shaw v. Court of Appeals Facts: Luna Sosa wanted to buy a Toyota Lite Ace. He went to Toyota Shaw where he met Popong Bernardo, a sales rep. Sosa explained that he needed the Lite Ace by June 17, otherwise, he would become a laughing stock. Bernardo guaranteed that the vehicle would be delivered. They executed a document entitled Agreements between Sosa & Popong Bernardo of Toyota Shaw” where a P100K downpayment was stipulated and that the Lite Ace would be available at a given date. When the day of reckoning arrived, the Lite Ace was unavailable — the explanation of Bernardo being “nasulot ng ibang malakas.” However, according to Toyota, the true reason was that BA Finance, which was supposed to answer for the balance of the purchase price, did not approve Sosa’s application. Toyota also returned the downpayment. Thus, Sosa sued for damages amounting to P1.2M due to his humiliation, hurt feelings, sleepless nights, and so on. Issue: Whether or not there was a perfected contract of sale. Held: NO. There was no agreement as to the price and the manner of payment, which are both essential to the perfection of the sale Doctrine:

3. For Validity: Sale Of Realty Through Agent, Authority Must Be In Writing (Article 1874)

Article 1874. 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. (n)

• When sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing (special power of attorney); otherwise, the sale shall be void,1 even when:

o Agent is the son of the owner. An oral sale entered into by the son for the real property of his father is void. xDelos Reyes v. CA, 313 SCRA 632 (1999)

o There is partial payment of the price received by the supposed agent. xDizon v. CA, 396 SCRA 154 (2003).2

o In the case of a corporate owner of realty. Likewise, the agent of a corporation must have a written authority to sell a piece of land, otherwise, it will be void. Receipt of part of the purchase price by the agent will not validate the sale. xCity-‐Lite Realty Corp. v. CA, 325 SCRA 385 (2000).3

• However, the agent’s written authority alone will not exempt the sale from the Statute of Frauds. The Deed of Sale itself must be in writing and registered in order to be enforceable and binding to 3rd persons. Torcuator v. Bernabe, 459 SCRA 439 (2005)

• When Contract to Sell was signed by the co-‐owners themselves as witnesses, the written authority for their agent mandated

1 Alcantara v. Nido, 618 SCRA 333 (2010); Camper Realty Corp. V. Pajo-‐Reyes, 632 SCRA 400 (2010). 2 Firme v. Bukal Enterprises and Dev. Corp., 414 SCRA 190 (2003). 3 Pineda v. CA, 376 SCRA 222 (2002).



under Article 1874 of the Civil Code is no longer required. xOesmer v. Paraiso Dev. Corp., 514 SCRA 228, 237 (2007).

4. Sale Of Large Cattle (Article 1581; Section 529, Revised Administrative Code)

Article 1581. The form of sale of large cattle shall be governed by special laws. (n) REVISED ADMINISTRATIVE CODE Section 529. Registration necessary to validity of transfer. No transfer of large cattle shall be valid unless the same is registered and a certificate of transfer obtained as herein provided; but large cattle under two years of age may be registered and branded gratis for the purpose of effecting a valid transfer, if the registration and transfer are made at the same time.

5. Sales Effected as Electronic Commerce (R.A. No. 8792) • The main point of this entire section in the book is this:

electronic documents are given the same legal recognition as paper documents. Thus, they are admissible as evidence in court.

• In assessing the evidential weight of an electronic data message or electronic document, the reliability of the manner in which it was generated, stored or communicated, the reliability of the manner in which its originator was identified is given regard.

6. Form in Equitable Mortgage Claims

• The Statute of Frauds does not stand in the way of treating an absolute deed of sale as a mortgage, when such was the intention of the parties. Cuyugan v. Santos, 34 Phil. 100 (1916)

• A contract should be construed as a mortgage or a loan instead of a pacto de retro sale when its terms are ambiguous or the circumstances surrounding its execution or its performance are incompatible with a sale. Parol evidence becomes admissible to prove that the instrument was intended to be a security for a loan. Lapat v. Rosario, 312 SCRA 539 (1999)

• An equitable mortgage is not different from a real estate mortgage, and the lien created thereby ought not to be defeated by requiring compliance with the formalities necessary to the validity of a voluntary real estate mortgage. Rosales v. Suba, 408 SCRA 664 (2003)

7. Form in “Sales on Return or Approval” (Article 1502)

Article 1502. When goods are delivered to the buyer “on sale or return” to give the buyer an option to return the goods instead of paying the price, the ownership passes to the buyer on delivery, but he may revest the ownership in the seller by returning or tendering the goods within the time fixed in the contract, or, if no time has been fixed, within a reasonable time. (n) When goods are delivered to the buyer on approval or on trial or on satisfaction, or other similar terms, the ownership therein passes to the buyer:



(1) When he signifies his approval or acceptance to the seller or does any other act adopting the transaction; (2) If he does not signify his approval or acceptance to the seller, but retains the goods without giving notice of rejection, then if a time has been fixed for the return of the goods, on the expiration of such time, and, if no time has been fixed, on the expiration of a reasonable time. What is a reasonable time is a question of fact. (n)

• The Court has held that the conditions in Article 1502 will only apply if there is an express stipulation that the sale is either a “sale on return” or a “sale on approval.” Industrial Textile Manufacturing Company of the Phil., Inc. v. Enterprises, Inc., 217 SCRA 322 (1993)

• Parol evidence will not be admitted to prove that a sale was a “sale on return” or “sale on approval.”

• The buyer cannot accept part of the goods and reject the rest.

8. Right of First Refusal Must Be Contained in Written Contract • Verbal grants of such right are not enforceable. In effect, this is

an addition to the Statute of Frauds. Sen Po Ek Marketing Corp. v. Martinez, 325 SCRA 210 (2000)

V. Simulated Sales

• “Simulation” ! declaration of a fictitious will, made by agreement of the parties, in order to produce, for the purposes of deception, the appearance of a juridical act which does not exist or is different from what was really executed. Loyola v. Court of Appeals, 326 SCRA 285 (2000)

o When a sale is absolutely simulated, it is always completely void and non-‐existent.

o When a sale is relatively simulated, there is another intent. As such, it is valid and subject to reformation.

• If the parties enter into a sale to which they did not intend to be legally bound, the contract is void and not susceptible to ratification. Rosario v. Court of Appeals, 310 SCRA 464 (1999)

o In simulated contracts, the parties do not intend to be bound by the contract and the apparent contract is not really desired or intended to produce legal effect.

• Characteristic of simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the parties’ juridical situation, or that the parties have no intention to be bound by the contract. The requisites are: (a) an outward declaration of will different from the will of the parties; (b) false appearance must have been intended by mutual agreement; and (c) purpose is to deceive third persons. xManila Banking Corp. v. Silverio, 466 SCRA 438 (2005).1

A. Requisites Of Simulated Sales

1. An outward declaration of will different from the will of the parties;

2. False appearance must have been intended by mutual agreement; and

3. Purpose is to deceive third persons. Manila Banking Corp. v. Silverio (466 SCRA 438)

1 Rosario v. CA, 310 SCRA 464 (1999); Loyola v. CA, 326 SCRA 285 (2000); Yu Bun Guan v. Ong, 367 SCRA 559 (2001); Payongayong v. CA, 430 SCRA 210 (2004).



B. Badges And Non-‐badges Of Simulation • Non-‐payment of the stipulated consideration, absence of any

attempt by the buyers to assert their alleged rights over the subject property. xVillaflor v. CA, 280 SCRA 297 (1997).1

• Failure of alleged buyers to collect rentals from alleged seller. xSantiago v. CA, 278 SCRA 98 (1997); but not when there appears a legitimate lessor-‐lessee relationship between the vendee and the vendor. xUnion Bank v. Ong, 491 SCRA 581 (2006).

• Although the agreement did not provide for the absolute transfer ownership of the land to buyer, that did not amount to simulation, since delivery of certificate of ownership and execution of deed of absolute sale were expressly stipulated as suspensive conditions, which gave rise to the corresponding obligation on part of buyer to pay the last installments. xVillaflor v. CA, 280 SCRA 297 (1997).

• When signature on a deed of sale is a forgery. Fidel v. Court of Appeals, 559 SCRA 186 (2008).2 But bare assertions that the signature appearing on the Deeds of Sale is not that of her husband is not enough to allege simulation, since forgery is not presumed; it must be proven by clear, positive and convincing evidence. xR.F. Navarro & Co. v. Vailoces, 361 SCRA 139 (2001).

• Simulation of contract and gross inadequacy of price are distinct legal concepts, with different effects – the concept of a simulated sale is incompatible with inadequacy of price. When

1 Solidstate Multi-‐Products Corp. v. Catienza-‐Villaverde, 559 SCRA 197 (2008). 2 Rufloe v. Burgos, 577 SCRA 264, 272-‐273 (2009).

the parties to an alleged contract do not really intend to be bound by it, the contract is simulated and void. Gross inadequacy of price by itself will not result in a void contract, and it does not even affect the validity of a contract of sale, unless it signifies a defect in the consent or that the parties actually intended a donation or some other contract. xBravo-‐Guerrero v. Bravo, 465 SCRA 244 (2005).

C. When Motive Nullifies The Sale

• General Rule: Motive does not nullify a sale o Exception: When motive predetermines cause, it may

be regarded as the cause (e.g. when there was a mistake in the quality of land, the motive/cause was negated. And thus the contract was inexistent.)

• In sale, consideration is, as a rule, different from the motive of parties, and when the primary motive is illegal, such as when the sale was executed over a land to illegally frustrate a person's right to inheritance and to avoid payment of estate tax, the sale is void because illegal motive predetermined purpose of the contract. xOlegario v. CA, 238 SCRA 96 (1994).3

• Cause v. Motive o Cause ! Essential reason which moves parties to enter

into the contract and is the “immediate, direct and proximate reason” to create the obligation (e.g. cause of vendor to sell the land is to obtain the price, and for the vendee, the acquisition of the land.)

3 Uy v. CA, 314 SCRA 69, 81 (1999).



o Motive ! Particular reason of a contracting party which does not affect the other party (e.g. Motive of the vendor is to use the lands for housing)

• Where the parties to a contract of sale agreed to a consideration, but the amount reflected in the final Deed of Sale was lower, their motivation being to pay lower taxes on the transaction, the contract of sale remains valid and enforceable upon the terms of the real consideration. Although illegal, the motives neither determine nor take the place of the consideration. xHeirs of Spouses Balite v. Lim, 446 SCRA 54 (2004).

• An action or defense for the declaration of the inexistence of a contract is imprescriptible. On the other hand, an action to rescind is founded upon and presupposes the existence of a contract. A contract which is null and void is no contract at all and hence could not be the subject of rescission. xCampos v. Pastrana, 608 SCRA 55 (2009).

D. Remedies Allowed When Sale Simulated

• When a contract of sale is void, the right to set up its nullity or non-‐existence is available to third persons whose interests are directly affected thereby. Likewise, the remedy of accion pauliana is available when the subject matter is a conveyance, otherwise valid, undertaken in fraud of creditors. xManila Banking Corp. v. Silverio, 466 SCRA 438 (2005).

• The rescissory action to set aside contracts in fraud of creditors is accion pauliana, essentially a subsidiary remedy accorded under Article 1383 which the party suffering damage can avail of only when he has no other legal means to obtain reparation

for the same. In such action, it must be shown that both contracting parties have acted maliciously so as to prejudice the creditors who were prevented from collecting their claims. Rescission if generally unavailing should a third person, acting in good faith, is in lawful possession of the property since he is protect by law against a suit for rescission by the registration of the transfer to him in the registry. xUnion Bank v. Ong, 491 SCRA 581 (2006)

E. Effect When Sale Declared Void

• The action for the declaration of the contract’s nullity is imprescriptible—an action for reconveyance of property on a void contract of sale does not prescribe. Fil-‐Estate Golf and Dev., Inc. v. Navarro, 526 SCRA 51 (2007).

• Possessor is entitled to keep the fruits during the period for which the buyer held the property in good faith. xDBP v. CA, 316 SCRA 650 (1999).

• Then restoration of what has been given is in order, since the relationship between parties in any contract even if subsequently voided must always be characterized and punctuated by good faith and fair dealing. xDe los Reyes v. CA, 313 SCRA 632 (1999); xHeirs of Ignacia Aguilar-‐Reyes v. Mijares, 410 SCRA 97 (2003).

• Alien who purchases land in the name of his Filipina lover, has no standing to seek legal remedies to either recover the property or the purchase price paid, since the transaction is void ab initio for being in violation of the constitutional prohibition. xFrenzel v. Catito, 406 SCRA 55 (2003).