F. Breach of contract

1. Remedies

a. REMEDIES OF SELLERS

Seller’s remedies:
1) Action for the price of goods;
2) Action for damages; or
3) Action for rescission.

Action for the price of goods

If ownership has passed to the buyer. Where, under a contract of sale, the ownership of the goods has passed to the buyer and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract of sale, the seller may maintain an action against him for the price of the goods. (Article 1595, Ibid.)

If ownership has not passed. Where, under a contract of sale, the price is payable on a certain day, irrespective of delivery or of transfer of title and the buyer wrongfully neglects or refuses to pay such price, the seller may maintain an action for the price although the ownership in the goods has not passed. But it shall be a defense to such an action that the seller at any time before the judgment in such action has manifested an inability to perform the contract of sale on his part or an intention not to perform it. (Paragraph 2, Article 1595, Ibid.)

If goods cannot readily be sold for a reasonable price – even if ownership has passed. Although the ownership in the goods has not passed, if they cannot readily be resold for a reasonable price, and if the provisions of Article 1596, fourth paragraph, are not applicable, the seller may offer to deliver the goods to the buyer, and, if the buyer refuses to receive them, may notify the buyer that the goods are thereafter held by the seller as bailee for the buyer. Thereafter the seller may treat the goods as the buyer’s and may maintain an action for the price. (Paragraph 3, Article 1595, Ibid.)

Cross-referenced article/s
If, while labor or expense of material amount is necessary on the part of the seller to enable him to fulfill his obligations under the contract of sale, the buyer repudiates the contract or notifies the seller to proceed no further therewith, the buyer shall be liable to the seller for labor performed or expenses made before receiving notice of the buyer’s repudiation or countermand. The profit the seller would have made if the contract or the sale had been fully performed shall be considered in awarding the damages. (Paragraph 4, Article 1596)

Action for damages

Where buyer wrongfully neglects or refuses to accept and pay. Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may maintain an action against him for damages for nonacceptance. (Article 1596, Ibid.)

Measure of damages. The measure of damages is the estimated loss directly and naturally resulting in the ordinary course of events from the buyer’s breach of contract. (Paragraph 2, Article 1596, Ibid.)

⦁ Where there is an available market for the goods in question, the measure of damages is, in the absence of special circumstances showing proximate damage of a different amount, the difference between the contract price and the market or current price at the time or times when the goods ought to have been accepted, or, if no time was fixed for acceptance, then at the time of the refusal to accept. (Paragraph 3, Article 1596, Ibid.)

Labor and/or materials. If, while labor or expense of material amount is necessary on the part of the seller to enable him to fulfill his obligations under the contract of sale, the buyer repudiates the contract or notifies the seller to proceed no further therewith, the buyer shall be liable to the seller for labor performed or expenses made before receiving notice of the buyer’s repudiation or countermand. The profit the seller would have made if the contract or the sale had been fully performed shall be considered in awarding the damages. (Paragraph 4, Article 1596, Ibid.)

Action for rescission

⦁ Where the goods have not been delivered to the buyer, and the buyer has repudiated the contract of sale, or has manifested his inability to perform his obligations thereunder, or has committed a breach thereof, the seller may totally rescind the contract of sale by giving notice of his election so to do to the buyer. (Article 1597, Ibid.)

⦁ Should the seller have reasonable grounds to fear the loss of immovable property sold and its price, he may immediately sue for the rescission of the sale. Should such ground not exist, the provisions of Article 1191 shall be observed. (Paragraph 2, Article 1591, Ibid.)

Cross-reference article/s
The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. (Article 1191, Ibid.)

⦁ With respect to movable property, the rescission of the sale shall of right take place in the interest of the seller, if the buyer, upon the expiration of the period fixed for the delivery of the thing, should not have appeared to receive it, or, having appeared, he should not have tendered the price at the same time, unless a longer period has been stipulated for its payment. (Article 1593, Ibid.)

1) Unpaid Seller

The seller of goods is deemed to be an unpaid seller:
1) When the whole of the price has not been paid or tendered;
2) When a bill of exchange or other negotiable instrument has been received as conditional payment, and the condition on which it was received has been broken by reason of the dishonor of the instrument, the insolvency of the buyer, or otherwise. (Article 1525, Ibid.)

In Articles 1525 to 1535 the term “seller” includes an agent of the seller to whom the bill of lading has been indorsed, or a consignor or agent who has himself paid, or is directly responsible for the price, or any other person who is in the position of a seller. (Paragraph 2, Article 1525, Ibid.)

Rights of unpaid seller.

If ownership passed to the buyer. –

Notwithstanding that the ownership in the goods may have passed to the buyer, the unpaid seller of goods, as such, has:
1) A lien on the goods or right to retain them for the price while he is in possession of them;
2) In case of the insolvency of the buyer, a right of stopping the goods in transitu after he has parted with the possession of them;
3) A right of resale;
4) A right to rescind the sale. (Article 1526, Ibid.)

If ownership has not passed to the buyer. Where the ownership in the goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies a right of withholding delivery similar to and coextensive with his rights of lien and stoppage in transitu where the ownership has passed to the buyer. (Paragraph 2, Article 1526, Ibid.)

If seller is in possession of the goods. –

The unpaid seller of goods who is in possession of them is entitled to retain possession of them until payment or tender of the price in the following cases, namely:
1) Where the goods have been sold without any stipulation as to credit;
2) Where the goods have been sold on credit, but the term of credit has expired;
3) Where the buyer becomes insolvent. (Article 1527, Ibid.)

Right of lien

⦁ The seller may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for the buyer. (Paragraph 2, Article 1527, Ibid.)

If seller made part delivery. Where an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the remainder, unless such part delivery has been made under such circumstances as to show an intent to waive the lien or right of retention. (Article 1528, Ibid.)

When unpaid seller loses his lien. –

The unpaid seller of goods loses his lien thereon:
1) When he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the ownership in the goods or the right to the possession thereof;
2) When the buyer or his agent lawfully obtains possession of the goods;
3) By waiver thereof. (Article 1529, Ibid.)

The unpaid seller of goods, having a lien thereon, does not lose his lien by reason only that he has obtained judgment or decree for the price of the goods. (Paragraph 2, Article 1529, Ibid.)

Right of stoppage in transitu of unpaid seller

⦁ When the buyer of goods is or becomes insolvent, the unpaid seller who has parted with the possession of the goods has the right of stopping them in transitu, that is to say, he may resume possession of the goods at any time while they are in transit, and he will then become entitled to the same rights in regard to the goods as he would have had if he had never parted with the possession. (Article 1530, Ibid.)

When are goods considered in transit. –

When goods are in transit:
1) From the time when they are delivered to a carrier by land, water, or air, or other bailee for the purpose of transmission to the buyer, until the buyer, or his agent in that behalf, takes delivery of them from such carrier or other bailee;
2) If the goods are rejected by the buyer, and the carrier or other bailee continues in possession of them, even if the seller has refused to receive them back. (Article 1531, Ibid.)
When goods are no longer in transit:
1) If the buyer, or his agent in that behalf, obtains delivery of the goods before their arrival at the appointed destination;
2) If, after the arrival of the goods at the appointed destination, the carrier or other bailee acknowledges to the buyer or his agent that he holds the goods on his behalf and continues in possession of them as bailee for the buyer or his agent; and it is immaterial that further destination for the goods may have been indicated by the buyer;
3) If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent in that behalf. (Paragraph 2, Article 1531, Ibid.)

If the goods are delivered to a ship, freight train, truck, or airplane chartered by the buyer, it is a question depending on the circumstances of the particular case, whether they are in the possession of the carrier as such or as agent of the buyer. (Paragraph 3, Article 1531, Ibid.)

If part delivery has been made. –

General Rule: If part delivery of the goods has been made to the buyer, or his agent in that behalf, the remainder of the goods may be stopped in transit.
Exception: … unless such part delivery has been under such circumstances as to show an agreement with the buyer to give up possession of the whole of the goods. (Paragraph 4, Article 1531, Ibid.)

How right of stoppage in transitu is exercised. –

The unpaid seller may exercise his right of stoppage in transitu either:
1) by obtaining actual possession of the goods; or
2) By giving notice of his claim to the carrier or other bailee in whose possession the goods are. (Article 1532, Ibid.)

Such notice may be given either to the person in actual possession of the goods or to his principal. In the latter case the notice, to be effectual, must be given at such time and under such circumstances that the principal, by the exercise of reasonable diligence, may prevent a delivery to the buyer. (Ibid.)

Effects of notice of stoppage in transit. – When notice of stoppage in transitu is given by the seller to the carrier, or other bailee in possession of the goods, he must redeliver the goods to, or according to the directions of, the seller. The expenses of such delivery must be borne by the seller. (Paragraph 2, Article 1532, Ibid.

If, however, a negotiable document of title representing the goods has been issued by the carrier or other bailee, he shall not obliged to deliver or justified in delivering the goods to the seller unless such document is first surrendered for cancellation. (Ibid.)

Right of resale of unpaid seller.

For perishable goods. Where the goods are of perishable nature, or where the seller expressly reserves the right of resale in case the buyer should make default, or where the buyer has been in default in the payment of the price for an unreasonable time, an unpaid seller having a right of lien or having stopped the goods in transitu may resell the goods.

No liability on seller to original buyer; Seller may recover damages. He shall not thereafter be liable to the original buyer upon the contract of sale or for any profit made by such resale, but may recover from the buyer damages for any loss occasioned by the breach of the contract of sale. (Article 1533, Ibid.)

Buyer has good title against original buyer. Where a resale is made, the buyer acquires a good title as against the original buyer. (Paragraph 2, Article 1533, Ibid.)

Notice to resell. –

General Rule: It is not essential to the validity of resale that notice of an intention to resell the goods be given by the seller to the original buyer. (Paragraph 3, Article 1533, Ibid.)
Exception: But where the right to resell is not based on the perishable nature of the goods or upon an express provision of the contract of sale, the giving or failure to give such notice shall be relevant in any issue involving the question whether the buyer had been in default for an unreasonable time before the resale was made. (Ibid.)

It is not essential to the validity of a resale that notice of the time and place of such resale should be given by the seller to the original buyer. (Paragraph 4, Article 1533, Ibid.)

Reasonable care and judgment. The seller is bound to exercise reasonable care and judgment in making a resale, and subject to this requirement may make a resale either by public or private sale.

Seller is prohibited from buying the goods. He cannot, however, directly or indirectly buy the goods. (Paragraph 5, Article 1533, Ibid.)

Right of rescission of unpaid seller

⦁ An unpaid seller having the right of lien or having stopped the goods in transitu, may rescind the transfer of title and resume the ownership in the goods, where he expressly reserved the right to do so in case the buyer should make default, or where the buyer has been in default in the payment of the price for an unreasonable time. (Article 1534, Ibid.)

No liability on seller to original buyer; Seller may recover damages. The seller shall not thereafter be liable to the buyer upon the contract of sale, but may recover from the buyer damages for any loss occasioned by the breach of the contract. (Ibid.)

Notice of rescission. The transfer of title shall not be held to have been rescinded by an unpaid seller until he has manifested by notice to the buyer or by some other overt act an intention to rescind. (Paragraph 2, Article 1534, Ibid.)

It is not necessary that such overt act should be communicated to the buyer, but the giving or failure to give notice to the buyer of the intention to rescind shall be relevant in any issue involving the question whether the buyer had been in default for an unreasonable time before the right of rescission was asserted. (Ibid.)

Buyer’s subsequent sale has no effect on unpaid seller’s right of lien or stoppage in transit. –

General Rule: The unpaid seller’s right of lien or stoppage in transitu is not affected by any sale, or other disposition of the goods which the buyer may have made, unless the seller has assented thereto. (Article 1535, Ibid.)
Exception: If, however, a negotiable document of title has been issued for goods, no seller’s lien or right of stoppage in transitu shall defeat the right of any purchaser for value in good faith to whom such document has been negotiated, whether such negotiation be prior or subsequent to the notification to the carrier, or other bailee who issued such document, of the seller’s claim to a lien or right of stoppage in transitu. (Paragraph 2, Article 1535, Ibid.)

c. BUYER’S REMEDY

Buyer’s remedies:
1) Action for specific performance;
2) Action for breach of warranty;
3) To suspend payment;
4) To pay for immovable even after expiration;

Action for specific performance

⦁ Where the seller has broken a contract to deliver specific or ascertained goods, a court may, on the application of the buyer, direct that the contract shall be performed specifically, without giving the seller the option of retaining the goods on payment of damages. The judgment or decree may be unconditional, or upon such terms and conditions as to damages, payment of the price and otherwise, as the court may deem just. (Article 1598, Ibid.)

Action for breach of warranty

Where there is a breach of warranty by the seller, the buyer may, at his election:
1) Accept or keep the goods and set up against the seller, the breach of warranty by way of recoupment in diminution or extinction of the price;
2) Accept or keep the goods and maintain an action against the seller for damages for the breach of warranty;
3) Refuse to accept the goods, and maintain an action against the seller for damages for the breach of warranty;
4) Rescind the contract of sale and refuse to receive the goods or if the goods have already been received, return them or offer to return them to the seller and recover the price or any part thereof which has been paid.
When the buyer has claimed and been granted a remedy in anyone of these ways, no other remedy can thereafter be granted, without prejudice to the provisions of the second paragraph of Article 1191.
Where the goods have been delivered to the buyer, he cannot rescind the sale if he knew of the breach of warranty when he accepted the goods without protest, or if he fails to notify the seller within a reasonable time of the election to rescind, or if he fails to return or to offer to return the goods to the seller in substantially as good condition as they were in at the time the ownership was transferred to the buyer. But if deterioration or injury of the goods is due to the breach or warranty, such deterioration or injury shall not prevent the buyer from returning or offering to return the goods to the seller and rescinding the sale.
Where the buyer is entitled to rescind the sale and elects to do so, he shall cease to be liable for the price upon returning or offering to return the goods. If the price or any part thereof has already been paid, the seller shall be liable to repay so much thereof as has been paid, concurrently with the return of the goods, or immediately after an offer to return the goods in exchange for repayment of the price.
Where the buyer is entitled to rescind the sale and elects to do so, if the seller refuses to accept an offer of the buyer to return the goods, the buyer shall thereafter be deemed to hold the goods as bailee for the seller, but subject to a lien to secure payment of any portion of the price which has been paid, and with the remedies for the enforcement of such lien allowed to an unpaid seller by Article 1526.
5) In the case of breach of warranty of quality, such loss, in the absence of special circumstances showing proximate damage of a greater amount, is the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered to the warranty. (Article 1599, Ibid.)

To suspend payment

⦁ Should the buyer be disturbed in the possession or ownership of the thing acquired, or should he have reasonable grounds to fear such disturbance, by a vindicatory action or a foreclosure of mortgage, he may suspend the payment of the price until the seller has caused the disturbance or danger to cease, unless the latter gives security for the return of the price in a proper case, or it has been stipulated that, notwithstanding any such contingency, the buyer shall be bound to make the payment. (Article 1590, Ibid.)

⦁ A mere act of trespass shall not authorize the suspension of the payment of the price.(Ibid.)

To pay for immovable even after expiration

General Rule: In the sale of immovable property, even though it may have been stipulated that upon failure to pay the price at the time agreed upon the rescission of the contract shall of right take place, the buyer may pay, even after the expiration of the period. (Article 1592, Ibid.)
Exception: … as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act. After the demand, the court may not grant him a new term. (Article 1592, Ibid.)

2. Recto Law and Maceda Law

Recto LawMaceda Law
Recto Law involves a sale of personal property payable in installments.Maceda Law involves a sale of real property payable in installments.

a. RECTO LAW

Recto Law: In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies:
1) Exact fulfillment of the obligation, should the vendee fail to pay;
2) Cancel the sale, should the vendee’s failure to pay cover two or more installments;
3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. (Article 1484, Civil Code)

b. MACEDA LAW

Maceda Law: In all transactions or contracts involving the sale or financing of real estate on installment payments, including residential condominium apartments but excluding industrial lots, commercial buildings and sales to tenants under Republic Act Numbered Thirty-eight hundred forty-four, as amended by Republic Act Numbered Sixty-three hundred eighty-nine, where the buyer has paid at least two years of installments, the buyer is entitled to the following rights in case he defaults in the payment of succeeding installments:
1) To pay, without additional interest, the unpaid installments due within the total grace period earned by him which is hereby fixed at the rate of one month grace period for every one year of installment payments made: Provided, That this right shall be exercised by the buyer only once in every five years of the life of the contract and its extensions, if any.
2) If the contract is canceled, the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to fifty per cent of the total payments made, and, after five years of installments, an additional five per cent every year but not to exceed ninety per cent of the total payments made: Provided, That the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to the buyer.
Down payments, deposits or options on the contract shall be included in the computation of the total number of installment payments made. (Section 3, R.A. 6552, Realty Installment Buyer Act, a.k.a. Maceda Law)
In case where less than two years of installments were paid, the seller shall give the buyer a grace period of not less than sixty days from the date the installment became due.
If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act. (Section 4, R.A. 6552, Realty Installment Buyer Act, a.k.a. Maceda Law)

Mandatory Twin Requirements.

A valid and effective cancellation under R.A. 6552 must comply with the mandatory twin requirements of:
1) A notarized notice of cancellation; and
2) A refund of the cash surrender value. (Gatchalian Realty, Inc. v. Angeles, G.R. No. 202358, 27 November 2013)

Same; Void for non-compliance. No valid cancellation of the Contract to Sell in the absence of a refund of the cash surrender value. (Ibid.)

Disclaimer: All information herein is for educational and general information only intended for those preparing for the bar exam. These should not be taken as professional legal advice or opinion. Please consult a competent lawyer to address your specific concerns. Any statements or opinions of the author are solely his own and do not reflect that of any organization he may be connected.

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