The Professional CPA Review School

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BUSINESS LAW ATTY. MARY ANN SAGANA

LECTURE AID - SALES

SALE - A contract where one party obligates himself to transfer the ownership of and to deliver a
determinate thing, while the other party obligates himself to pay for said thing a price certain in
money or its equivalent.

Requisites:
a. Consent or meeting of minds - transfer the ownership of and to deliver on the part of the seller,
to pay on the part of the buyer
b. Object or subject matter determinate or specific
c. Cause or consideration price certain in money or its equivalent

Elements: Parties:
a. Essential: a. vendor/seller
1. Consent or meeting of minds b. vendee/buyer
2. Determinate subject matter
3. Price certain in money or its equivalent
b. Natural:
1. warranty against eviction
2. warranty against hidden defects
c. Accidental: stipulations of the parties

Kinds of Sale:
a. Absolute the contract is not subject to any condition and title passes to the buyer upon
delivery of the thing
b. Conditional the contract contemplates a contingency, usually payment of the price

Essential Characteristics:
a. Consensual d. Commutative
b. Bilateral/reciprocal e. Principal
c. Onerous f. Nominate

SALE DACION EN PAGO

1. no pre-existing credit 1. there is a pre-existing credit
2. give rise to obligations 2. extinguishes obligations
3. the cause or consideration here is the3. the cause or consideration here, from the viewpoint of
price, from the viewpoint of the seller; or
the person offering the dation in payment, is the
the obtaining of the object, from the view
extinguishment of his debt; from the viewpoint of the
point of the buyer creditor, it is the acquisition of the object offered in lieu of
the original credit
4. there is greater freedom in the 4. there is less freedom in the determination of the price
determination of the price
5. the giving of the price may generally 5. the giving of the object in lieu of the credit may
end the obligation of the buyer extinguish completely or partially the credit (depending on
the agreement)

RELATED CONCEPTS
1. Pactum Reservati Dominii (Contractual Reservation of Title) - A stipulation stating that
despite delivery, the ownership of the thing shall remain with the seller until the buyer
has fully paid the price.

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2. Assignment of Credit - a contract by virtue of which one person transfers to another his
rights and actions against a third person in consideration of a price certain in money or
its equivalent.
3. Barter - One of the parties binds himself to give one thing in consideration of the other's
promise to give another thing.
RULES If the consideration is partly in money and partly in another thing:
a. The manifest intention of the parties;
b. If the intention is unclear, it shall be a barter if the value of the consideration
exceeds the amount of the money; otherwise, it is a sale.

4. Policitacion An unaccepted unilateral promise to buy or to sell a thing.

5. Option Contract An accepted unilateral promise to buy or to sell which is not binding upon
the promissory unless supported by a consideration separate and distinct from the
purchase price

EARNEST MONEY OPTION MONEY

1. partial payment of the purchase 1. not part of the purchase price
price
2. considered as proof of the 2.proof of the perfection of the option contract
perfection of the sale
3. deductible on the purchase price 3. not deductible
in case the contract of sale is
consummated
4. Injured party may file action for 4. Specific performance only
specific performance or rescission

6. Auction sale (perfection) When the auctioneer announces end of bidding by the fall of the
hammer, or in any other customary manner.
7. By-bidding or Puffing - persons who have no intention to buy but are employed by the
seller in auction sale to raise the price by fictitious bids.
8. Sale or return property is sold, but the buyer, who becomes the owner of the property
upon delivery, has the option to return the same to the seller instead of paying the price
9. Sale on trial, satisfaction or approval there is delivery to the buyer but he has an option
to purchase if the goods prove satisfactory therefore ownership shall be reserved to the
seller until acceptance by the buyer
10. Contract for a Piece of Work (Massachusetts Rule) If the thing is particularly
made/manufactured for a specific person only.

PERSONS INCAPACITATED TO ENTER IN A CONTRACT OF SALE:

a. Minors and other incapacitated persons
b. Husband and wife, except:
1. When separation of property was agreed upon in the marriage settlement
2. When there has been judicial separation of property
c. Persons whos position and relation with the owner is fiduciary in nature
1. guardians
2. agents
3. executors and administrators
4. public officers and employees
5. judicial officers and employees
6. lawyers
d. the seller in an auction sale cannot bid unless there has been reservation of the right
e. unpaid seller cannot buy the goods sold by him in case of resale

REQUISITES BEFORE A THING COULD BE A VALID OBJECT:

a. the thing must be existing or have a future or contingent existence
emptio rei sperati/speratae sale of future things
emptio spei sale of hope or expectancy
b. must be licit/legal
c. must be determinate
d. there is a right on the part of the vendor to transfer ownership at the time of delivery

CERTAINTY AS TO THE PRICE

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a. both the seller and the buyer fixed or agreed upon a definite amount
b. fixed with reference to another thing certain
c. the determination of the price is left to the judgment of a specified third person
d. if the third person will act in bad faith or by mistake, the court will fix the price

NOTE: If the price is simulated, the contract is void, unless it can be shown that it is really a donation or
some other contract

OBLIGATIONS OF THE VENDOR:

1. Deliver thing sold (including fruits and accessories)
2. Transfer ownership
3. Warranties
4. Exercise diligence pending delivery
5. Pay for the expenses of the contract, unless there is a stipulation to the contrary

KINDS OF DELIVERY (traditio)

a. Actual or real physical transfers of control and possession of the thing
b. Constructive
1. Legal formalities or execution of public instrument
2. Quasi-traditio
3. Traditio simbolica
4. Traditio longa manu
5. Traditio brevi manu
6. Constitutum possesorium

LOSS OF THE OBJECT:

1. Before perfection - seller bear the loss. (res perit domino)
2. At the time of perfection - contract is void or inexistent. Seller bears the loss.
3. After the perfection but before delivery - buyer bears the loss
(exception to the rule of res perit domino)
4. After delivery - buyer bears the loss.

OBLIGATIONS OF THE VENDEE:

1. Payment of the price
2. Accept the delivery
3. Pay the expenses of the contract (if stipulated)

GENERAL RULE: In case of sale by a person who is not the owner, the buyer acquires no title even
if in good faith and for value. "Nemo dat qui non habet" (you cannot give what you do not
have).

EXCEPTIONS:
In the following cases the buyer acquires a valid title:
a. The owner is estopped by his conduct
b. Under recording laws
c. Sales sanctioned by judicial or statutory authority
d. Purchases in a merchant's store, fairs or markets.
e. Title of the seller was merely voidable/defective at the time of sale

REMEDIES OF AN UNPAID SELLER:

a. General Remedies:
1. Action for specific performance with damages
2. Action for rescission with damages
b. Special Remedies:
1. Sale of personal property in installment basis [RECTO LAW]
a. Specific performance in case the buyer fails to pay.
b. Rescission of the sale in case of default of 2 or more installments.
c. Foreclose the chattel mortgage on the thing sold in case of default of 2 or more
installments. In this case, the seller shall have no further action for deficiency
judgment.
NOTE:
Aside from the above remedies, the seller can also retain the installments paid provided
that the forfeiture was part of the stipulations of the parties and the same is not
unconscionable.
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The remedies are alternative and not cumulative.

Art. 1484 does not apply in:
1. Sale of real property
2. Mortgage of real property
3. Sale of a personal property on straight terms

2. Sale of goods
Unpaid seller of goods 1. one who has not been paid or tendered the whole price
2. one who has received a bill of exchange or other negotiable
instrument as conditional payment and the condition on which it was
received has been broken by reason of the dishonor of the instrument.
a. Lien on goods while in his possession
Requisites:
1. the seller is unpaid
2. the buyer is insolvent
3. the goods are in the possession of the seller
4. the goods have been sold
a. without stipulation as to credit
b. with a stipulation as to credit but the term has expired
NOTE: Possessory lien will be lost:
1. when the goods are delivered to the common carrier or other bailee without
reservation of ownership;
2. when the buyer or his agent lawfully obtains possession of the goods
3. when there is waiver on the part of the seller
b. Stoppage in transitu (Goods are in transit from the time they are delivered to the
carrier for the purpose of delivery to the buyer or his agent)
Requisites:
1. the seller is unpaid
2. buyer is insolvent
3. the goods are in transit
4. seller will bear the expenses of delivery of the goods after the exercise of the
right
c. Resale of thing
Requisites:
1. the seller is unpaid
2. the buyer is in default in the payment of the price
3. the goods are perishable in nature
4. the right is expressly reserved
5. the seller can either exercise possessory lien or stoppage in transitu
d. Rescission of the contract
Requisites:
1. the seller is unpaid
2. the right is expressly reserved
3. the buyer has been in default in the payment of the price for an unreasonable time
4. the seller can exercise right of lien or stoppage in transit

3. Sale of real estate in installment (R.A. 6552) [MACEDA LAW]

a. Right of specific performance - the seller must observe the grace period granted to
the buyer to pay, without additional interest, the unpaid installment.
b. Right of rescission - cancellation can only take place after 30 days from receipt of
the notice of cancellation or demand for rescission by a notarial act.
c. Right on installments - seller can retain not more than 50% of the installments paid.
But if the installments paid were less than 2 years, the seller can have absolute
forfeiture over the installments paid.

RULES IN CASE OF DOUBLE SALE:

1. Personal Property - to the first possessor in good faith:
2. Real Property - the person who first recorded the sale in the Registry of Property (Register of
Deeds) in good faith.
if not recorded, to the first possessor in good faith;
if none of the above, to the person with the oldest title, in good faith.

Rules in case area/number is greater/lesser than that stated in the contract

1. If area was stated at the rate of a certain price for a unit or number
a. In case of excess the buyer may choose to:
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1. pay for the agreed area and refuse the rest

2. accept everything but will pay for the excess
b. In case of deficiency the buyer may choose:
1. proportional reduction of the price
2. cancellation of the contract if deficiency is at least 10% of that stated
2. If the sale was made for a lump sum: no decrease or increase in the price

WARRANTY
- A statement or representation made by the seller of goods, contemporaneously and as a part
of the contract of sale, having reference to the character, 1 quality or title of the goods, and by
which he promises or undertakes to insure that certain facts are or shall be as he then
represents.

Kinds of warranty:
1. Express
2. Implied

Kinds of Implied Warranties:

1. Warranty against eviction

Elements:
a. Vendee is deprived of the thing purchased;
b. The deprivation is by virtue of a final judgment;
c. The judgment is base on a prior right to the sale or an act imputable to the vendor;
d. The vendor was summoned in the suit for eviction at the instance of the vendee;
e. No waiver of warranty by the vendee.

Remedies of the Vendee:

1. Total eviction - the vendee can demand the following:
a. Value of the thing at the time of eviction;
b. Income or fruits if he has been ordered to deliver them to the party who won the
suit;
c. Costs of the suit;
d. Expenses of the contract;
e. Damages and interest if the sale was in bad faith.

2. Partial eviction
a. The vendee can rescind the contract;
b. The vendee can demand the following;
1. Value of the thing at the time of eviction;
2. Income or fruits if he has been ordered to deliver them to the party who won the
suit;
3. Costs of the suit;
4. Expenses of the contract;
5. Damages and interest if the sale was in bad faith.

Waiver of eviction:
1. Consciente - waiver without knowledge of the risk of eviction
2. Intencionada - waiver with knowledge of the risks of eviction coupled with an assumption of
its consequences

2. Warranty against hidden defects

Elements:
a. defect must be serious or important;
b. it must be hidden;
c. it must exist at the time of the sale;
d. vendee must give notice of the defect to the vendor within a reasonable time;
e. no prescription yet (6 months from delivery of thing or 40 days in case of animals)
f. no waiver of warranty

Remedies of the Vendee:

a. Accion redhibitoria (rescission)
b. Accion quanti minoris (reduction of the price)

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Redhibition: the avoidance of a sale on account of some vice or defect in the thing sold

3. Warranty as to Fitness or Merchantability

- goods are reasonably fit for the purpose for which they are sold.

EXTINGUISHMENT OF SALE
1. Same causes as all other obligations
2. Conventional Redemption - The vendor reserved the right to reacquire the property sold.

When to exercise the right of redemption:

1. if there is no agreement to redeem --- there is no right to redeem (sale is absolute)
2. if there is an agreement to redeem ---
a. but no express stipulation as to time ---- 4 years form date of contract
b. period was fixed or intended --- not to exceed 10 years
NOTE: period of redemption may be extended ONLY before its expiration but the
extension plus the original term should not exceed 10 years

HOWEVER, the vendor may still exercise the right to repurchase within 30 days from the
time the final judgment was rendered in a civil action on the basis that the contract was a
true sale with right of repurchase.

3. Legal Redemption - the right to be subrogated, upon the same terms and conditions
stipulated in the contract, in the place of one who acquires a thing by purchase or
donation in payment, or by any other transaction whereby ownership is transferred by
onerous title.

Conventional redemption is considered to be an equitable mortgage in any of the following:

1. Price of sale is unusually inadequate;
2. Vendor remains in possession;
3. Period of redemption is extended after expiration;
4. Purchaser retains part of the purchase price;
5. Vendor binds himself to pay the taxes of the thing sold;
6. Other cases where the parties really intended that the transaction shall secure the payment of
a debt or the performance of any obligation.

Vendor should pay the following in case of redemption:

1. Price of the sale
2. Expenses of the contract
3. necessary and useful expenses made upon the thing sold

INSTANCES OF REDEMPTION:
1. Under the Civil Code (legal redemption)
a. Sale of co-owner by his share to a stranger
b. When a credit or other incorporeal right in litigation is sold
c. Sale of an heir of his hereditary rights to a stranger
d. Sale of adjacent rural lands not exceeding 1 hectare
e. Sale of small urban lands bought merely for speculation.

2. Under special laws

a. An equity of redemption in case of judicial foreclosures;
b. A right of redemption in cases of extra-judicial foreclosures.

LECTURE AID IN AGENCY

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AGENCY - a contract wherein a person binds himself to render some service or to do something in
representation or on behalf of another, with the consent or authority of the latter.

Characteristics: Purpose: to extend the personality of the principal

1. Consensual Basis: representation
2. Principal Nature: fiduciary
3. Preparatory
4. Bilateral Parties: 1. Principal
5. Nominate 2. Agent
6. Onerous

KINDS OF PRINCIPAL KINDS OF AGENT:

1. Disclosed principal 1. Universal
2. Partially disclosed principal 2. General
3. Undisclosed principal 3. Special

Acts that may be delegated: All acts that the principal may do
Exceptions:
1. Personal acts
2. Criminal acts

RELATED TERMS
1. Commission Agent/Factor - one engaged in the purchase and sale for a principal of
personal property, which for this purpose, has to be placed in his possession and at his
disposal.
2. Broker - a middleman or intermediary who, in behalf of others and for a commission or fee,
negotiates contracts/transactions relating to real or personal property.
3. Factorage - compensation of a factor or commission agent.
4. Ordinary commission - compensation for the sale of goods which are placed at the
possession or disposal of the agent.
5. Guaranty commission (Del credere) - fee that is given in return for the risk which the agent
has to bear in the collection of credits.
6. Agency by operation of law - the heirs of the agent are constituted as temporary agents for
the purpose of consummating the obligation of the agent.
7. Sub-agent (substitute) - a person authorized by the agent to act as his agent in the
performance of an act for the agents principal

NOTE:
The agent may appoint a substitute, except when he has been prohibited by the principal
The agent shall be responsible for the acts of the substitute:
1. when he was not given any power to appoint
2. when he was given such power but without designating the person and the person
appointed as notoriously incompetent or insolvent.

RULES: 1. Responsibility of two or more agents is not solidary unless it is expressly stipulated
2. Responsibility of two persons appointing an agent for a single transaction is solidary

AUTHORITY - the right of an agent to effect the legal relations to his principal by the performance of
acts effectuated in accordance with the principal's manifestation of consent.

Authority of an Agent Power of an Agent

1. Mandate given to the agent by his 1. Extent of the mandate or agency
principal
2. The 'Cause' 2. The' Effect'

Communication of existence of agency:

1. Special information - the person appointed as agent is considered such with respect to the
person to whom it was given (e.g. by letter)
2. Public advertisement - agent is considered such with regard to any person (through
newspaper, radio, etc.)

Kinds of Authority:
1. Express - clearly defined
2. Implied - includes necessary acts to accomplish purpose

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3. General - agent's discretion is complete

4. Special - particular instructions are given
5. Apparent - agent or third person was led by the principal's conduct or word to believe that the
agent was indeed authorized, when in fact he was not.

Implied Agency Agency by Estoppel

1. De Jure Agent 1. Not really an agent
2. Binds the principal for acts within the 2. Only the purported agent is liable
scope of his authority

GENERAL RULE: Knowledge of the agent is knowledge of the principal

EXCEPTIONS:
1. Agent's interests are adverse to those of the principal
2. Agent's duty is not to disclose the information as when he is informed by way of confidential
information
3. Where the person claiming the benefit of the rule colludes with the agent to defraud the
principal.

EFFECTS OF AGENTS ACT:

1. With authority
a. in principals' name - valid
b. in his own name - not binding on the principal; agent and stranger are the only parties,
except regarding things belonging to the principal or when the principal ratifies the
contract or derives benefit there from.
2. Without authority
a. in principal's name - unauthorized and unenforceable but may be ratified, in which
case, may be validated retroactively from the beginning.
b. in his own name - valid as between the agent and the third person.

AGENCY COUCHED IN GENERAL TERMS

- May be a general agency or a special agency. It includes only acts of administration and
express power is necessary to perform any act of strict ownership even if the principal states that;
1. he withholds no power;
2. the agent may execute such acts as he may consider appropriate;
3. authorizes a general or unlimited management

Special powers of attorney are necessary in the following cases: (Acts of strict dominion)
1. To make such payments as are not usually considered as acts of administration
2. To effect novations which put an end to obligations already in existence at the time the
agency was constituted
3. To compromise, to submit questions to arbitration, to renounce the right to appeal from a
judgment, to waive objections to the venue of an action or to abandon a prescription
already acquired
4. To waive any obligation gratuitously
5. To enter into any contract by which the ownership of an immovable is transmitted or
acquired either gratuitously or for a valuable consideration
6. To make gifts, except customary ones for charity or those made to employees in the
business managed by the agent
7. To loan or borrow money, unless the latter act be urgent and indispensable for the
preservation of the things which are under administration
8. To lease any real property to another person for more than one year
9. To bind the principal to render some service without compensation
10. To bind the principal in a contract of partnership
11. To obligate the principal as a guarantor or surety
12. To create or convey real rights over immovable property
13. To accept or repudiate an inheritance
14. To ratify or recognize obligations contracted before the agency
15. Any other act of strict dominion

NOTE:
1. the power to sell does not include the power to mortgage; and the power to mortgage does not
include the power to sell
2. the power to compromise does not include the power to submit the dispute to arbitration.
3. the agent cannot borrow if the authority is to lend

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4. if the authority is to sell a land, the authority must be in writing otherwise the contract of sale is
void

Fundamental obligations of an agent:

1. Carry out the agency in accordance with its terms
2. Act within the scope of his authority
3. Act in behalf of the principal
4. Answer for the damages which through his non-performance the principal may suffer
5. Exercise diligence
6. Not to carry out the agency if its execution would result in loss or damage to the principal
7. Not to prefer his own interest to that of his principal
8. Render an account of his transactions
9. Answer for his fraud or negligence
10. Pay interest on funds he has applied to his own use

Obligations of the principal:

1. comply with all the obligations which the agent may have contracted within the scope of his
authority
2. advance to the agent sums necessary for the execution of the agency
3. reimburse the agent for all advances made
4. indemnify the agent for all the damages which the agent may suffer
5. pay the agent the compensation agreed upon

MODES OF EXTINGUISHMENT OF AGENCY (RWDEAD?)

1. Revocation
2. Withdrawal of the agent
3. Death, civil interdiction, insanity or insolvency of the principal or of the agent
4. Dissolution of the firm or corporation which entrusted or accepted the agency
5. Accomplishment of the object or purpose of the agency
6. Expiration of the period for which the agency was constituted

Other Modes:
1. mutual consent of the parties
2. novation
3. loss of the subject matter of the agency
4. outbreak of war if inconsistent with the agency

GENERAL RULE: Agency is revocable at will of the principal

EXCEPTIONS:
1. if bilateral contract depends upon it
2. if it is the means of fulfilling an obligation already contracted
3. if a partner is appointed manager of a partnership and his termination is unjustifiable
4. if it is created not only for the interest of the principal but also for the interest of third persons
5. if there is a stipulation

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LECTURE AID IN PLEDGE AND MORTGAGE

RELATED LAWS AND CONCEPTS

LOAN - By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case
the contract is called a commodatum; or money or other consumable thing, upon the condition
that the same amount of the same kind and quality shall be paid, in which case the contract is
simply called a loan or mutuum.

Commodatum
a. essentially gratuitous, otherwise it will be another contract
b. bailor/lender retains the ownership of the thing loaned
c. perfected upon delivery of the thing
d. consumable goods may be the subject of commodatum if the purpose of the contract is not
the consumption of the object, as when it is merely for exhibition
e. movable or immovable property may be the object of commodatum
f. the bailor in commodatum need not be the owner of the thing loaned
g. commodatum is purely personal in character. Consequently:
(1) The death of either the bailor or the bailee extinguishes the contract;
(2) The bailee can neither lend nor lease the object of the contract to a third person. However,
the members of the bailee's household may make use of the thing loaned, unless there is
a stipulation to the contrary, or unless the nature of the thing forbids such use.
h. a stipulation that the bailee may make use of the fruits of the thing loaned is valid
i. the bailor may demand the thing at will, and the contractual relation is called a precarium, in
the following cases:
(1) If neither the duration of the contract nor the use to which the thing loaned should be
devoted, has been stipulated; or
(2) If the use of the thing is merely tolerated by the owner
j. when there are two or more bailees to whom a thing is loaned in the same contract, they are
liable solidarily

Mutuum
a. Simple loan may be gratuitous or with a stipulation to pay interest.
b. A person who receives a loan of money or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal amount of the same kind and quality.

Guaranty - a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
a. If a person binds himself solidarily with the principal debtor, the contract is called a
suretyship.
b. The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the
property of the debtor, and has resorted to all the legal remedies against the debtor.

Deposit - A deposit is constituted from the moment a person receives a thing belonging to another,
with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing
delivered is not the principal purpose of the contract, there is no deposit but some other contract.
a. An agreement to constitute a deposit is binding, but the deposit itself is not perfected until the
delivery of the thing.
b. A deposit is a gratuitous contract, except when there is an agreement to the contrary, or
unless the depositary is engaged in the business of storing goods.
c. Only movable things may be the object of a deposit.

Antichresis - the creditor acquires the right to receive the fruits of an immovable of his debtor, with the
obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of
his credit.
a. The actual market value of the fruits at the time of the application thereof to the interest and
principal shall be the measure of such application.
b. The amount of the principal and of the interest shall be specified in writing; otherwise, the
contract of antichresis shall be void.

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c. The creditor, unless there is a stipulation to the contrary, is obliged to pay the taxes and
charges upon the estate. `
d. The creditor is also bound to bear the expenses necessary for its preservation and repair
and shall be deducted from the fruits.

PLEDGE - a contract by virtue of which the debtor or a third person delivers to the creditor or to a third
person a movable or document evidencing incorporeal rights for the purpose of securing the
fulfillment of a principal obligation with the understanding that when the obligation is fulfilled the
thing delivered shall be returned with all the fruits and accessions.

Characteristics: Kinds:
a. accessory a. voluntary or conventional
b. real b. legal
c. unilateral

PLEDGE REAL MORTGAGE CHATTEL MORTGAGE

1. accessory contract
2. pledgor/mortgagor must be absolute owner of property pledged/mortgaged
3. pledgor/mortgagor must have free disposal or be authorized
4. thing pledged/mortgaged may be alienated when principal obligation becomes due for payment
5. 3rd persons NOT parties may be the pledgor/mortgagor
6. can secure pure, conditional, natural obligations, voidable and unenforceable contracts
7. indivisible
1. Real contract 1. Consensual contract 1. Consensual contract
2. constituted on 2. constituted on 2. constituted on movables
movables immovables
3. property is delivered 3. delivery is not necessary 3. delivery is not necessary
to pledgee/3rd person
4. not valid against 3rd 4. not valid against 3 4. Registration in Chattel Mortgage Register is
persons unless a persons if not registered necessary for validity
description of the thing
pledged and the date of
the pledge appear in
public instrument
5. Debtor not entitled to 5. If property is foreclosed, 5. If property is foreclosed, the excess over the amount
excess unless the excess over the amount due goes to the debtor
otherwise agreed or due goes to the debtor
except in case of legal
pledge
6. Creditor not entitled 6. If property is foreclosed 6. If property is foreclosed and there is deficiency,
to deficiency and there is deficiency, creditor is entitled to recover the deficiency from the
notwithstanding creditor is entitled to recover debtor
stipulation to the the deficiency from the
contrary debtor

Related Rules on Indivisibility:

1. The debtor's heir who has paid a part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.
2. The creditor's heir who received his share of the debt cannot return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not been paid.
3. In case there are several things given in mortgage or pledge, each one of them guarantees
only a determinate portion of the credit.
4. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not
solidarily liable.

Pactum commissorium - a stipulation whereby the thing pledged or mortgaged or under

antichresis shall automatically become the property of the creditor (appropriation of the thing) in the
event of non-payment of the debt within the term fixed. Such stipulation is null and void.
Note: Dacion en pago is not pactum commissorium

Rules:
1. The thing pledged cannot be deposited with a third person without the consent of the
pledgor
2. Pledgor retains ownership of the thing pledged.
3. Pledgor transmits possession not ownership
4. Debtor cannot demand the return of the thing pledged until the debt secured by it is paid

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5. The pledgee who is in possession of the thing pledged has no right to make use of it without
permission from the owner.
6. Pledge shall extend to offsprings of the animals pledged, unless otherwise stipulated.
7. The pledgee shall apply the fruits and earnings pledged in payment of the expenses
incurred, interest if any, and the principal obligation.

RIGHTS OF THE PLEDGOR:

1. To continue to be the owner of the thing pledged, until its sale, unless it is expropriated
2. To demand the deposit of the thing pledged should the creditor use it without authority, or
misuse it in any other way
3. To substitute the thing pledged if it is endangered without fault of the pledgee without
prejudice to pledgee's right to have the thing sold at public sale
4. To bid and have preference at the foreclosure sale if he should offer the same terms as the
bidder
5. To demand the return of the thing pledged upon the extinction of the principal obligation

RIGHTS OF THE PLEDGEE:

1. To retain the thing in his possession or in that of a third person to whom it has been
delivered, until the debt is paid
2. To be reimbursed for expenses incurred in its preservation
3. To compensate (set-off) the fruits, income, dividends, or interests earned or produced by the
thing pledged and received with those which are due to him
4. To bring the actions which pertain to the owner of the thing pledged in order to recover it
from, or defend it against a third person
5. To sell the thing pledged at public auction, if without his fault, there is danger of destruction,
impairment or diminution in the value of the thing
6. To claim a substitute or demand immediate payment, if he is deceived in the substance or
quality of the thing pledged
7. To sell the thing pledged at public auction if the obligation secured is not paid
8. To bid at the public sale
9. To collect the amount that becomes due on a credit pledged before such credit is redeemed
10. To choose which one of several things pledged shall be sold

OBLIGATIONS OF THE PLEDGOR:

1. To notify the pledgee of any flaw or defect of the thing pledged known to him; otherwise, he
answers for damages suffered by the pledgee
2. To reimburse the pledgee for expenses made for its preservation
3. To fulfill his principal obligation.

OBLIGATIONS OF THE PLEDGEE:

1. To take care of the thing pledged with the diligence of a good father of a family
2. To answer for its loss or deterioration in the proper case
3. Not to deposit the thing pledged with a third person unless authorized
4. To be responsible for the acts of his agents or employees with respect to the thing pledged
5. Not to use the thing pledged unless authorized or its preservation so requires
6. To advise the pledgor or owner in case of sale at public auction of the result thereof
7. To return the thing pledged when the principal obligation is paid.

EXTINGUISHMENT OF PLEDGE:
1. return of the thing pledged to the pledgor
2. statement in writing by the pledgee that pledge is renounced or abandoned
3. public sale of the thing when credit was not satisfied in due time

Rules:
a. the pledgee has the right to sell the thing pledged in an auction sale done through a
notarial act
b. the pledgor/owner may bid at public auction
c. the pledgor will be preferred over other highest bidders offering the same terms
d. the pledgee can bid but if he is the only bidder the bid is not valid
exception: failure to sell the thing after 2 auction sales
effect: the thing will be appropriated in favor of the pledge

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IMPORTANT: after the foreclosure sale the obligation is extinguished whether or not the
proceeds of the sale is sufficient to cover the debt secured. Contrary stipulation is
always VOID.
4. destruction or loss of the thing pledged
5. extinction of the principal obligation by payment
6. other causes of extinguishment of ordinary obligations

MORTGAGE - a contract whereby the debtor secures to the creditor the fulfillment of a principal
obligation, especially subjecting to such security immovable property or real rights over
immovable property in case the principal obligation is not complied with at the time stipulated.

Characteristics: Object of mortgage:

1. real right 1. immovables
2. accessory contract 2. alienable real rights upon immovables
3. indivisible 3. movables chattel mortgage
4. inseparable
5. real property
6. limitation on ownership
7. can secure all kinds of obligations
8. property cannot be appropriated
9. lien

Kinds of Real Mortgage:

1. Voluntary or Conventional - created by the parties
2. Legal - one required by law to guarantee performance
3. Equitable - one which reveals an intent to make the property a security, even if the contract
lacks the proper formalities of a real estate mortgage.

NOTE:
Future property cannot be the object of a contract of mortgage
Contract of mortgage must appear in a public document duly recorded in the Registry of
Property in order to bind third persons
Registration is not a requirement for the validity of the contract or alienation or assignment
of the mortgage
Stipulation forbidding the owner from alienating the immovable mortgaged shall be void

EXTENT OF MORTGAGE: natural accessions, improvements, growing fruits and rents or

income not yet received when the obligation becomes due.

FORECLOSURE - remedy available to the mortgagee by which he subjects the mortgaged property to
the satisfaction of the obligation to secure which the mortgage was given through the sale of the
property at public auction and the application of the proceeds thereof to the payment of his
claims.

Stipulation of upset price (TIPO) - minimum price at which the property shall be sold is null and void.

REDEMPTION - a transaction by which the mortgagor reacquires or buys back the property which may
have passed under the mortgage or divests the property of the lien which the mortgage may have
created.

Redemption is allowed:
1. Foreclosure in favor of banking or credit institutions
2. Extra-judicial foreclosures

Kinds of Redemption:

1. Equity of Redemption - right of the mortgagor to redeem the mortgaged property after his
default in the performance of the conditions of the mortgage but before the sale of the
mortgaged property or confirmation of the sale.

2. Right of Redemption - right of mortgagor to redeem the mortgaged property within a

certain period after it was sold for the satisfaction of the mortgage debt (exercised within 1
year from registration of the sale).
/mrs
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