CHAPTER 5

Formation of Contract of Sale

Policitacion Stage (Art
1497)
Policitation stage covers the doctrine of
freedom to contract which signifies 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. Gabelo v. CA, 316 SCRA 386 (1999)
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. CA, 302
SCRA 718 (1999).
Separate Consideration
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.
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
No Separate Consideration: Void
as Option, Valid as a Certain Offer
If the option is without any consideration,
the offeror may withdraw his offer by
communicating such withdrawal to the
offeree at any time before acceptance. If it
is founded upon a consideration, the offeror
cannot withdraw his offer before the lapse
of the period agreed upon.
There Must Be Acceptance of
Option Offer.
Proper Exercise of Option
Contract.
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.
Proper exercise of an option gives rise to

the reciprocal obligations of sale which

must be enforced with ten (10) years as
provided under Art. 1144
. RIGHT OF FIRST REFUSAL
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. CA, 380 SCRA 245 (2002).
 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)
MUTUAL PROMISES TO BUY
AND SELL (Art. 1479)
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
Even in this case the certainty of the price

must also exist, otherwise, there is no valid

and enforceable contract to sell.
Perfection Stage (Arts. 1475,
1319, 1325 and 1326)
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
1. Absolute Acceptance of a
Certain Offer (Art. 1475)
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).
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 vendors 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). 53
Sale by Auction (Arts. 1476,
1403(2)(d), 1326)
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).
Earnest Money (Art. 1482)
Earnest money given by the buyer shall be
considered as part of the price and as proof of
the perfection of the contract. It constitutesan
advance payment to be deducted from the total
price. xEscueta v. Lim, 512 SCRA 411 (2007).
Article 1482 does not apply when earnest
money given in a contract to sell, 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.
Difference Between Earnest
Money and Option Money.
Sale Deemed Perfected Where
Offer Was Made. (Art. 1319)
C. FORMAL REQUIREMENTS OF SALES
(Arts. 1357, 1358, 1406 and 1483)
Articles 1357 and 1358, in relation to Art.
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);58 but
both its due execution and its authenticity
must be proven, pursuant to Sec. 20, Rule
132 of the Rules of Court. xTigno v. Aquino,
444 SCRA 61 (2003).
Other Rulings on Deeds of Sale
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.
WHEN FORM IS IMPORTANT IN
SALE
To Bind Third Parties
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.
For Enforceability Between the Parties:
STATUTE OF FRAUDS (Arts. 1403 and 1405)
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 Tondea, 68 Phil. 24 (1939).
Coverage
Memorandum
Under Art. 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, and constitutes the 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
evidencedby 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).
EXCEPTION: Electronic Documents under the E-

COMMERCE ACT (R.A. 8792)

Partial Execution (Art.
1405)
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)
Waiver
When the purported buyers 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 sellers 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).
Receipts and Other Documentary
Evidence of Sale
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 transactionsthey 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.
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.
For Validity: Sale of Realty Through Agent,
Authority Must Be in Writing (Art. 1874)
When 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, even when:
Agent is the son of the owner.
There is partial payment of the price received by
the supposed agent.
In the case of a corporate owner of realty.
SIMULATED SALES
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)
When Motive Nullifies the
Sale
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.
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.
Effect When Sale Declared
Void
The action for the declaration of the contracts nullity
is imprescriptiblean action for reconveyance of
property on a void contract of sale does not prescribe.
Possessor is entitled to keep the fruits during the
period for which the buyer held the property in good
faith
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.