PLEDGE CHAPTER 1 Provisions Common to Pledge and Mortgage Article 2085.

The following requisites are essential to the contracts of pledge and mortgage: (1) That they be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. Third persons who are not parties to the principal obligation may secure the latter by pledging or mortgaging their own property. (1857) Article 2086. The provisions of article 2052 are applicable to a pledge or mortgage. (n) Article 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. (1858) Article 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. (1859a) Article 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor or of the creditor.

Therefore, 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. Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to the prejudice of the other heirs who have not been paid. From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of them guarantees only a determinate portion of the credit. The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for which each thing is specially answerable is satisfied. (1860) Article 2090. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors are not solidarily liable. (n) Article 2091. The contract of pledge or mortgage may secure all kinds of obligations, be they pure or subject to a suspensive or resolutory condition. (1861) Article 2092. A promise to constitute a pledge or mortgage gives rise only to a personal action between the contracting parties, without prejudice to the criminal responsibility incurred by him who defrauds another, by offering in pledge or mortgage as unencumbered, things which he knew were subject to some burden, or by misrepresenting himself to be the owner of the same. (1862)

Definition Pledge is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable or document evidencing incorporeal rights for the purpose of securing the fulfilment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions. Kinds of Pledge Voluntary or conventional one created by agreement of the parties. 2) Legal one created by operation of law. 1) Characteristics of Pledge Real contract Accessory contract Unilateral contract Subsidiary contract Essential Elements of Pledge and Mortgage Constituted to secure fulfilment of a principal obligation; Pledgor or mortgagor is absolute owner of the thing pledged or mortgaged; Pledgor or mortgagor has free disposal of property or has legal authority to dispose of the same; Thing pledged or mortgaged may be alienated; Thing pledged must be delivered to the creditor or a third person by common agreement. Right of Creditor to Appropriate Thing Pledged or Mortgaged The property given in pledge or mortgage stands as security for the fulfilment of the principal obligation. If the debtor fails to comply with the obligation at the time it falls due, the creditor is merely entitled to move for the sale of the thing pledged with the formalities required by law.

1) 2) 3) 4)

Prohibition Refers to Stipulation Authorizing Automatic Appropriation What is prohibited by Art. 2088 in connection with pacto commissorio is the automatic appropriation by the creditor of the thing pledged or mortgaged upon failure of the debtor to pay the debt within the period agreed upon by virtue of the authority or right previously given the creditor. The prohibition does not include a subsequent voluntary act of the debtor making cession of the property mortgaged in payment of the debt which amounts in legal effect to a novation of the original contract and to a voluntary sale of the said property for the amount of the debt [Ocampo et.al., vs. Potenciano, et.al., (CA) 48 O.G. 2230]; nor to a promise to assign or sell said property in payment of the obligation if, upon its maturity, it is not paid because the title thereto remains in the debtor. The promise is merely a personal obligation and does not in any way bind the property (Dulay vs. Aquiatin & Maximo, 47 Phil. 951; Guerrero vs. Yuigo & CA, 96 Phil. 77). Pledge or Mortgage is Indivisible Pledge or mortgage is indivisible as to the contracting parties. The rule applies even if the obligation is joint and not solidary. All Kinds of Obligation Can Be Secured by Pledge or Mortgage Any kind of obligation, whether pure or conditional, may be secured by a contract of pledge or mortgage. The same applies in guaranty which may also secure a conditional obligation. Promise to Constitute Pledge or Mortgage Not a Real Right A promise to constitute pledge or mortgage, if accepted, gives rise only to a personal right binding upon the parties and creates NO real right in the property. Criminal Responsibility of Pledgor or Mortgagor Under the RPC, estafa is committed by a person who, pretending to be the owner of any real property, shall convey, sell, encumber, or mortgage the same, or knowing that the real property is encumbered, shall dispose of the same as unencumbered. It is

1) 2) 3) 4) 5)

essential that fraud or deceit be practiced upon the vendee at the time of the sale. CHAPTER Provisions applicable only to pledge 2

-confined and limited to personal property and it cannot be extended or made to apply to real property. 416- The ff things are deemed to be personal property: 1. Those movables susceptible of appropriation which are not included in the preceding article (immovables); 2. Real property which by any special provision of law is considered as personalty; 3. Forces of nature which are brought under control by science; and 4. In general, all things which can be transported from place to place without impairment of the real property to which they are fixed. 417- The ff are also considered as personal property: 1. Obligations and actions which have for their object movables or demandable sums; and 2. Shares of stock of agricultural, commercial and industrial entities, although they may have real estate. chattel n. an item of personal property which is movable, as distinguished from real property (land and improvements). A chattel mortgage is a loan arrangement with movable personal property as the security for the loan

Article 2093. In addition to the requisites prescribed in article 2085, it is necessary, in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement. (1863) Actual transfer of possession essential in pledge A pledge is a real contract which requires delivery for its perfection. 1316- Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation. An agreement to constitute a pledge only gives rise to a personal action between the contracting parties. (2092) 1. Unless the movable given as security by way of pledge be delivered to and placed in the possession of the creditor or a third person designated by common agreement, the creditor acquires no right to the property. Pledge is merely a lien (legal claim on a piece of property) and possession is indispensable (absolutely necessary) to the right of lien. 2. Delivery of possession that is essential to the validity of the pledge ACTUAL possession. Mere symbolic delivery may not be sufficient.

Article 2095. Incorporeal rights, evidenced by negotiable instruments, bills of lading, shares of stock, bonds, warehouse receipts and similar documents may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. (n) Incorporeal rights evidenced by documents whether negotiable or not may also be pledged. If negotiable must be indorsed in favor of the creditor

Article 2094. All movables which are within commerce may be pledged, provided they are susceptible of possession. (1864) Subject matter of pledge (or chattel mortgage)

*indorse - To sign a paper or document, thereby making it possible for the rights represented therein to pass to another individual Title to goods may be conveyed by either the transfer (1514) or negotiation (1513) of the document of title. Article 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. (1865a) Public instrument necessary to bind third person -in addition to the delivery of the thing pledged, the contract of pledge shall be embodied in a public instrument wherein shall appear: 1. the description of the thing pledged 2. the date of the pledge. -to forestall fraud debtor may attempt to conceal his property from his creditors when he sees it in danger of execution by simulating a pledge thereof with an accomplice Article 2097. With the consent of the pledgee, the thing pledged may be alienated by the pledgor or owner, subject to the pledge. The ownership of the thing pledged is transmitted to the vendee or transferee as soon as the pledgee consents to the alienation, but the latter shall continue in possession. (n) Alienation by pledgor of thing pledged The pledgor retains his ownership of the thing pledged. He may sell the same provided the pledgee consents to the sale. As soon as the pledgee gives his consent, the ownership of the thing pledged is transferred to the vendee subject to the rights of the pledgee: 1. The thing sold may be alienated to satisfy the obligation (2112) 2. The pledgee must continue in possession during the existence of the pledge (2093, 2098)

The pledge would not bind or adversely affect third persons unless 2096 has been followed. 2112- The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim. (1872a) Alienation- the legal transfer of title of ownership to another party

Article 2098. The contract of pledge gives a right to the creditor 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. (1866a) Right of pledgee to retain the thing pledged -possession of the pledge constitutes his security -debtor cannot demand its return until the debt secured by it is paid -right of retention is LIMITED only to the fulfillment of the principal obligation for which the pledge was created 2105- The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in proper case. Article 2099. The creditor shall take care of the thing pledged with the diligence of a good father of a family; he has a right to the reimbursement of the expenses made for its preservation, and is

liable for its loss or deterioration, in conformity with the provisions of this Code. (1867) Obligation of pledgee to take due care of thing pledged -the pledgee must return the thing pledged upon the fulfillment of the principal obligation -having possession of the property, he has the obligation to take care of it with the diligence of a good father of a family (1163) -he is, however, entitled to reimbursement of the expenses incurred for its preservation In case of loss or deterioration of the thing pledged due to fortuitous event, the pledgee cannot be held responsible. (1174) He is liable for loss or deterioration by reason of fraud, negligence, delay or violation of the terms of the contract. (1170) Article 2100. The pledgee cannot deposit the thing pledged with a third person, unless there is a stipulation authorizing him to do so. The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged. (n) Obligation of pledge not to deposit thing pledged with another While the pledge is entitled to retain the possession of thing pledged until the debt is paid, he is not authorized to transfer possession to a third person. EXCEPTION: when there is a stipulation authorizing him to do so The pledgee is responsible for the acts of his agents or employees with respect to the thing pledged because their acts are, in legal effect, deemed his. Article 2101. The pledgor has the same responsibility as a bailor in commodatum in the case under article 1951. (n)

Liability to pay damages for known hidden flaws 1951. The bailor, who, knowing the flaws of the thing loaded, does not advise the bailee of the same, shall be liable to the latter for damages which he may suffer by reason thereof. Requisites which must concur for the application of 1951: 1. There is a flaw or defect in the thing loaned; 2. The flaw or defect is hidden; 3. The bailor is aware thereof; 4. He does not advise the bailee of the same; and 5. The bailee suffers damages by reason of said flaw or defect. *commodatum is gratuitous (bailee acquires the use of the thing loaned but not its fruits) Article 2102. If the pledge earns or produces fruits, income, dividends, or interests, the creditor shall compensate what he receives with those which are owing him; but if none are owing him, or insofar as the amount may exceed that which is due, he shall apply it to the principal. Unless there is a stipulation to the contrary, the pledge shall extend to the interest and earnings of the right pledged. In case of a pledge of animals, their offspring shall pertain to the pledgor or owner of animals pledged, but shall be subject to the pledge, if there is no stipulation to the contrary. (1868a) Right of pledgee to compensate earnings of pledge with debt The pledge has no right to use the thing pledged or to appropriate the fruits thereof without the authority of the owner (2104) 1977- The depositary cannot make use of the thing deposited without the express permission of the depositor Otherwise, he shall be liable for damages But the pledgee can apply the fruits, income, dividends, or interest earned or produced by the thing pledged to the payment of the

interest, if owing, and thereafter to the principal of his credit. (2132antichresis) Unless there is a stipulation to the contrary, the interest and earnings of the right pledged and in the case of animals, their offsprings (2127), are included in the pledge. Article 2103. Unless the thing pledged is expropriated, the debtor continues to be the owner thereof. Nevertheless, the creditor may 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. (1869) Right of pledgee against third persons The creditor to whom the property pledged has been delivered is obliged to take care of it with the diligence of a good father of a family(2099). Hence, he is authorized to bring such actions as pertain to the owner in order to recover it or defend it against claims of third persons. Unless given the right, the creditor might be prejudiced by the negligence of the owner. The right of a pledgee is a real right enforceable against third persons but it is necessary that the contract of pledge be embodied in a public instrument which shall contain the description of the thing pledged and the date of the pledge (2096) Article 2104. The creditor cannot use the thing pledged, without the authority of the owner, and if he should do so, or should misuse the thing in any other way, the owner may ask that it be judicially or extrajudicially deposited. When the preservation of the thing pledged requires its use, it must be used by the creditor but only for that purpose. (1870a) Obligation of pledgee not to use thing pledged -no right to make use of it without permission from the owner -same rule as in deposit

-In consequence of the fact that the pledgor, in parting with his property, transmits only the possession but not ownership.

Cases when the owner may to ask that thing pledged be deposited judicially or extrajudicially: 1. If the creditor uses the thing without authority; 2. If he misuses the thing in any other way; or 3. If the thing is in danger of being lost or impaired because of the negligence or willful act of the pledgee (2106) Article 2105. The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest, with expenses in a proper case. (1871) Right of debtor to demand return of thing pledged The thing pledged stands as security for the fulfillment of the pledgors obligation. Hence, he cannot ask for its return until such obligation is fully paid including interest due thereon and expenses incurred for its preservation (2099) EXCEPTION: the pledgor is allowed to substitute the thing pledged which is in danger of destruction or impairment with another thing of the same kind and quality (2107) Article 2106. If through the negligence or wilful act of the pledgee, the thing pledged is in danger of being lost or impaired, the pledgor may require that it be deposited with a third person. (n) Right of pledgor to ask for deposit of thing pledged Pledge preserve due diligence If the thing should be exposed to loss or impairment through the negligence or willful act of the pledge, the pledgor may demand that it be deposited with a third person. The pledgor may also require such deposit should the pledge use the thing without authority or misuse it in any other way (2104)

Article 2107. If there are reasonable grounds to fear the destruction or impairment of the thing pledged, without the fault of the pledgee, the pledgor may demand the return of the thing, upon offering another thing in pledge, provided the latter is of the same kind as the former and not of inferior quality, and without prejudice to the right of the pledgee under the provisions of the following article. The pledgee is bound to advise the pledgor, without delay, of any danger to the thing pledged. (n) Right of pledgor to substitute thing pledged 2 remedies granted by 2107: 1. To the pledgor, the right to demand the return of the thing pledged upon offering another thing in pledge 2. To the pledgee, the right to cause the same to be sold at a public sale (2108) Requisites for the application of 2107: 1. The pledgor has reasonable grounds to fear the destruction or impairment of the thing pledged; 2. There is no fault on the part of the pledgee; 3. The pledgor is offering in place of the thing another thing in pledge which is of the same kind and quality as the former; and 4. The pledgee does not choose to exercise his right to cause the thing pledged to be sold at public auction. Article 2108. If, without the fault of the pledgee, there is danger of destruction, impairment, or diminution in value of the thing pledged, he may cause the same to be sold at a public sale. The proceeds of the auction shall be a security for the principal obligation in the same manner as the thing originally pledged. (n) Right of pledgee to cause sale of thing pledged

The pledgees right to have the thing pledged sold at public sale granted under 2108 is superior to that given to the pledgor to substitute the thing pledged under 2107. 2107-says the pledgor is given the right without prejudice to the right of the pledge **The sale must be a public sale. *The pledge shall keep the proceeds of the sale as security for the fulfillment of the principal obligation. Article 2109. If the creditor is deceived on the substance or quality of the thing pledged, he may either claim another thing in its stead, or demand immediate payment of the principal obligation. (n) Right of the pledge to demand substitute or immediate payment 2 remedies to the pledgee in case he is deceived as to the substance or quality of the thing pledged: 1. To claim another thing in pledge; and 2. To demand immediate payment of the principal obligation. ^Remedies are alternative - only one, not both. Article 2110. If the thing pledged is returned by the pledgee to the pledgor or owner, the pledge is extinguished. Any stipulation to the contrary shall be void. If subsequent to the perfection of the pledge, the thing is in the possession of the pledgor or owner, there is a prima facie presumption that the same has been returned by the pledgee. This same presumption exists if the thing pledged is in the possession of a third person who has received it from the pledgor or owner after the constitution of the pledge. (n) Extinguishment of pledge by return of thing pledged -object be placed in possession of the creditor, or of a third person by common agreement one the essential requisites of pledge (2093) -pledge is extinguished if the object is returned by the pledgee

-TRUE, notwithstanding any stipulation that the pledge would continue although the pledgee is no longer in possession. Presumption where thing pledged in possession of pledgor or owner subsequent to the perfection of pledge -prima facie presumption that the thing has been returned, and therefore, the pledge has been extinguished -may be REBUTTED by evidence to the contrary (e.g. the return was merely for the substitution of the thing pledged (2105) or the thing was stolen and given by the thief to the pledgor or owner) When the thing pledged is later found in the hands of the pledgor or the owner, only the accessory obligation of pledge is presumed remitted, not the principal obligation itself (1274) 1274- it is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing. Article 2111. A statement in writing by the pledgee that he renounces or abandons the pledge is sufficient to extinguish the pledge. For this purpose, neither the acceptance by the pledgor or owner, nor the return of the thing pledged is necessary, the pledgee becoming a depositary. (n) Extinguishment of pledge by renunciation or abandonment The pledge is a personal right of the pledgee which may be waived. Under 2111, renunciation or abandonment must be in writing to extinguish the pledge, and such renunciation is not conditioned upon the acceptance by the pledgor or owner nor upon the return of the thing pledged. The waiver transforms the pledge into a depositary with the rights and obligations of one.

The principal debt, however, is not affected by the waiver of the pledge. But the waiver of the principal obligation carries with it that of the pledge (1273) 1273 the renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force. Other causes of extinguishment of pledge: -prescription -loss of the thing -merger -compensation -novation 1231 obligations are extinguished: 1. By payment or performance 2. By the loss of the thing due 3. By the condonation or remission of the debt 4. By the confusion or merger of the rights of creditor and debter 5. By compensation 6. By novation Other causes: -annulment -rescission -fulfillment of a resolutory condition -prescription

Article 2112. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim. (1872a) Right of pledgee to cause sale of thing pledged The object pledged may be alienated for the payment to the creditor when the principal obligation becomes due (2087) one of the essential requisites of pledge Formalities required for such sale: 1. The debt is due and unpaid; 2. The sale must be at a public auction; 3. There must be notice to the pledgor and owner, stating the amount due; and 4. The sale must be made with the intervention of a notary public Right of pledgee to appropriate the thing pledged -can be availed if after the first and second auctions, the thing is not sold -if creditor appropriates the thing, it shall be considered as full payment for his entire claim, and is thus obliged to give an acquittance for the same (2115) Article 2113. At the public auction, the pledgor or owner may bid. He shall, moreover, have a better right if he should offer the same terms as the highest bidder. The pledgee may also bid, but his offer shall not be valid if he is the only bidder. (n)

Article 2114. All bids at the public auction shall offer to pay the purchase price at once. If any other bid is accepted, the pledgee is deemed to have been received the purchase price, as far as the pledgor or owner is concerned. (n) Right of pledgor and pledgee to bid at public sale If the debt is not paid and a public sale takes place, both the pledgor and pledgee may bid. The pledgor shall be preferred if he offers the same terms as the highest bidder, for after all, the thing belongs to him. To avoid fraud, the pledgee is not allowed to acquire the thing pledged if he is the only bidder. ALL BIDS, including that of the pledgor, must be for CASH. If the pledge accepts a bid other than for cash, the pledgor or owner has the right to consider that the pledge has received that purchase price in cash. Article 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. (n) Effect of sale of thing pledged -extinguishes the principal obligation whether the price of the sale is more or less than the amount due 1. if the price of the sale is more than the amount due, the debtor is not entitled to the excess, unless the contrary is provided.

2. in the same way, if the price of the sale is less, neither is the creditor entitled to recover the deficiency. A contrary stipulation is VOID. a. REASON: to compel the creditor to hold an honest public sale b. furthermore, the creditor should see to it, which he usually does, that he loans only as much as he is likely to realize at a public sale. Right of debtor to excess GENERAL RULE: the debtor is not entitled to the excess unless there is an agreement to the contrary -rather unfair since the obligation is fully satisfied -in effect, the rule would amount to a pacto comisorio which is prohibited Under the Chattel Mortgage Law, the mortgagor is entitled to recover the excess of the proceeds of the sale in foreclosure proceedings. Right of creditor to recover deficiency -creditor not entitled to recover deficiency in all cases -by electing to sell the thing pledged, instead of suing on the principal obligation, the creditor waives any other remedy, and must abide by the results of the sale. -creditor may sue on the principal obligation instead of electing to sell the thing pledged, and in such case, he may recover the deficiency from the debtor. Article 2116. After the public auction, the pledgee shall promptly advise the pledgor or owner of the result thereof. (n) Obligation of pledge to advise pledgor or owner of result of sale PURPOSE OF 2116: to enable the pledgor or owner to take steps for the protection of his rights where he has reasonable grounds to believe that the sale was not an honest one.

Article 2117. Any third person who has any right in or to the thing pledged may satisfy the principal obligation as soon as the latter becomes due and demandable. (n) Right of third person to satisfy obligation GENERAL RULE: creditor is not bound to accept payment or performance by a third person who has NO interest in the fulfillment of the obligation (1236, unless there is a stipulation to the contrary) A third person who has any right in or to the thing pledged (as when the pledgor has contracted to sell it to him) may pay the debt as soon as it becomes due and demandable and the creditor cannot refuse to accept the payment. Article 2118. If a credit which has been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the surplus, should there be any, to the pledgor. (n) Right of pledge to collect and receive amount due on credit pledged. It would seem that under this article, it is not obligatory for the pledgee to collect and receive the amount due on the credit pledged but he is merely given the right to do so. However, in view of article 2009 which imposes upon him the obligation to take care of the thing pledged with the diligence of a good father of a family, he has duty to collect if delay would endanger the recovery of the credit. Article 2119. If two or more things are pledged, the pledgee may choose which he will cause to be sold, unless there is a stipulation to the contrary. He may demand the sale of only as many of the things as are necessary for the payment of the debt. (n)

Right of pledgee to choose which one of several things pledged shall be sold -limited only by stipulation -after sufficient property has been sold to satisfy the obligation plus interests and expenses (2115), NO MORE shall be sold USUALLY, the value of the property pledged EXCEEDS the amount of the debt guaranteed. ARTICLE 2120. If a third party secures an obligation by pledging his own movable property under the provisions of article 2085 he shall have the same rights as a guarantor under articles 2066 to 2070, and articles 2077 to 2081. He is not prejudiced by any waiver of defense by the principal obligor. (n) Right of third person who pledged his own property A third person who is not a party to the principal obligation may secure the latter by pledgin his own property (2085 par 2) The law grants him the same rights as a guarantor (2066-2070, 2077-2081) and he cannot be prejudiced by any waiver of defense by the principal debtor. Article 2121. Pledges created by operation of law, such as those referred to in articles 546, 1731, and 1994, are governed by the foregoing articles on the possession, care and sale of the thing as well as on the termination of the pledge. However, after payment of the debt and expenses, the remainder of the price of the sale shall be delivered to the obligor. (n) Article 2122. A thing under a pledge by operation of law may be sold only after demand of the amount for which the thing is retained. The public auction shall take place within one month after such demand. If, without just grounds, the creditor does not cause the public sale to be held within such period, the debtor may require the return of the thing. (n)

Instances of legal pledges (pledges which are created by operation of law) 1. Article 546 Necessary expenses shall be refunded to every possessor; but only the possessor in good faith may retain the thing until he has been reimbursed therefor. Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired by reason thereof. 2. Article 1731 he who has executed work upon a movable has a right to retain it by way of pledge until he is paid. 3. Article 1914 the agent may retain in pledge the things which are the object of the agency until the principal effects the reimbursement and pays the indemnity set forth in the two preceding articles 4. Article 1707 the laborers wages shall be a lien on the goods manufactured or the work done Article 1994 refers to a depositary Article 2004 also an instance of a legal pledge and refers to a hotelkeeper Rules in case of pledge by operation of law 1. The provisions on the possession (2098), care (2099) and sale of the thing pledged (2112) as well as on the extinguishment of the pledge (2110, 2111) governing conditional pledges are applicable to pledges created by operation of law. Unlike, however, in conventional pledge, the debtor is not entitled to the excess unless it is otherwise agreed (2115) In legal pledge, the remainder of the price of the sale after payment of the debt and expenses, shall be delivered to the debtor (2121)

2. In legal pledge, there is no definite period for the payment of the principal obligation. The pledge must, therefore, make a demand for the payment of the amount due him. Without such demand, he cannot exercise his right of sale at public auction (2112) The pledge must proceeds with the sale within one month otherwise the debtor may require him to return the thing returned (2122) Article 2123. With regard to pawnshops and other establishments, which are engaged in making loans secured by pledges, the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions of this Title. (1873a) Rules as to pawnships and other establishments *TITLE- title XVI on pledge, mortgage, and antichresis (articles 2085 to 2141)

in a public instrument wherein shall appear (1) the description of the thing pledged, and (2) the date of the pledge. Alienation of Thing Pledged The pledgor retains his ownership of the thing pledged. He may sell the same provided the pledgee consents to the sale. Right of Pledgee to Retain Thing Pledged The possession of the pledgee constitutes his security. Hence, the debtor cannot demand for its return until the debt secured by it is paid. Obligation of Pledgee to Take Due Care of thing Pledged Upon fulfilment of the principal obligation, the pledge must return the thing pledged. Having possession of the property, he has the obligation to take care of the same with the diligence of a good father of a family. Obligation of Pledgee Not to Deposit Thing Pledge With Another The pledge is not authorized to transfer possession of the thing pledged to a third person, except when there is a stipulation authorizing him to do so. Responsibility of Pledgor for Flaws of the Thing Pledged Art. 1951 The bailor, who, knowing the flaws of the thing loaned, does not advise the bailee of the same, shall be liable to the latter for the damages which he may suffer by reason thereof. Requisites: 1) There is a flaw or defect in the thing loaned/pledged; 2) The flaw or defect is hidden; 3) The bailor/pledgor is aware thereof; 4) He does not advise the bailee/pledge of the same; and 5) The bailee/pledgee suffers damages by reason of said flaw or defect.

Actual Transfer of Possession Essential in Pledge A pledge is a real contract which requires delivery for its perfection. An agreement to constitute a pledge only gives rise to a personal action between the contracting parties. The delivery of possession essential to the validity of a pledge means actual possession of the property pledged, and a mere symbolic delivery is not sufficient. Subject Matter of Pledge A pledge is confined and limited to personal property. It cannot be extended or made to apply to real property. Incorporeal rights evidenced by documents whether negotiable or not may also be pledged. If negotiable, the document must be indorsed in favour of the creditor. Public Instrument Necessary to Bind Third Persons The contract of pledge is not effective against third persons unless in addition to the delivery of the thing pledged, it is embodied

Right of Pledgee to Compensate Earnings of Pledge With Debt The pledgee has no right to use the thing pledged or to appropriate the fruits thereof without the authority of the owner. But the pledge can apply the fruits, income, dividends, or interest earned or produced by the thing pledged to the payment of interest, if owing, and thereafter to the principal of his credit. Right of Pledgee Against Third Persons The creditor to whom the property pledged has been delivered is obliged to take care of it with the diligence of a good father of a family. Hence, he is authorized to bring such actions as pertains to the owner in order to recover it or defend it against claims of third persons. Obligation of Pledgee Not to Use Thing Pledged The pledge who is in possession of the thing pledged has no right to make use of it without permission from the owner. This is the same rule in deposit. Right of Debtor to Demand Return of Thing Pledged The thing pledged stands as security for the fulfilment of the debtors obligation. Hence, he cannot ask for its return until said obligation is fully paid including interest thereon and expenses incurred for its preservation. Right of Pledgor to Ask for Deposit of Thing Pledged The pledge has the duty to preserve the thing pledged with the diligence of a good father of a family. If the thing should be exposed to loss or impairment through the negligence or wilful act of the pledgee, the pledgor may demand that it be deposited with a third person. Right of Pledgor to Substitute Thing Pledged Requisites: 1) The pledgor has reasonable grounds to fear the destruction or impairment of the thing pledged;

2) There is no fault on the part of the pledgee; 3) The pledgor is offering in place of the thing another thing in pledge which is of the same kind and quality as the former; and 4) The pledgee does not choose to exercise his right to cause the thing pledged to be sold at public auction. Right of Pledgee to Cause Sale of Thing Pledged The pledgees right to have the thing pledged sold at public sale granted under Art. 2108 is superior to that given to the pledgor to substitute the thing pledged under Art. 2107. Right of Pledgee to Demand Substitute or Immediate Payment The two (2) alternative remedies granted to the pledgee in case he is deceived as to the substance or quality of the thing pledged: 1) To claim another thing in pledge; and 2) To demand immediate payment of the principal obligation. Extinguishment of Pledge by Return of Thing Pledged Notwithstanding contrary stipulation, the extinguished if the object is returned by the pledgee.

pledge

is

Presumption Where Thing Pledged in Possession of Pledgor or Owner The possession of the thing pledged by the debtor or owner subsequent to the perfection of the pledge gives rise to a prima facie presumption that the thing has been returned and, therefore, the pledge has been extinguished. The presumption may be rebutted by evidence to the contrary. When the thing pledged is later found in the hands of the pledgor or the owner, only the accessory obligation of pledge is presumed remitted, not the principal obligation. Extinguishment of Pledge by Renunciation or Abandonment Renunciation or abandonment must be in writing to extinguish the pledge, and such renunciation is not conditioned upon the acceptance by the pledgor or owner nor upon the return of the thing

pledged. The waiver transforms rhe pledge into a depositary with the rights and obligations of one. The principal debt, however, is not affected by the waiver of the pledge. But the waiver of the principal obligation carries with it that of the pledge. Right of Pledgee to Cause Sale of Thing Pledged One of the essential requisites of pledge is that the object pledged may be alienated for the payment to the creditor when the principal obligation becomes due. The formalities required for such sale are: The debt is due and unpaid; The sale must be at a public auction; There must be notice to the pledgor and owner, stating the amount due; and The sale must be made with the intervention of a notary public. Right of Pledgee to Appropriate Thing Pledged The pledgee may appropriate the thing pledged if after the first and second auctions, the thing is not sold. If the creditor appropriates the thing, it shall be considered as full payment for his entire claim. Right of Pledgor and Pledgee to Bid at Public Sale Both the pledgor and the pledgee may bid. The pledgor shall be preferred if he offers the same terms as the highest bidder, for after all, the thing belongs to him. To avoid fraud, the pledgee is not allowed to acquire the thing pledged if he is the only bidder. Effect of Sale of Thing Pledged The sale of the thing pledged extinguishes the principal obligation whether the price of the sale is more or less than the amount due. If the price of the sale is more than the amount due, the debtor is NOT entitled to the excess unless the contrary is provided. If the price of the sale is less, neither is the creditor entitled to recover the deficiency. A contrary stipulation is void. The reason is to compel the creditor to hold an honest public sale. Furthermore, the creditor should see to it, which he usually

does, that he loans only as much as he is likely to realize at a public sale. Obligation of Pledgee to Advise Pledgor or Owner of Result of Sale This is to enable the pledgor or owner to take steps for the protection of his rights where he has reasonable grounds to believe that the sale was not an honest one. Right of Third Person to Satisfy Obligation As a general rule, the creditor is not obliged to accept payment or performance by a third person who has no interest in the fulfilment of the obligation. However, a third person who has any right in or to the thing pledged (as when the pledgor has contracted to sell it to him) may pay the debt as soon as it becomes due and demandable and the creditor cannot refuse to accept the payment. Right of Pledgee to Collect and Receive Amount Due on Credit Pledged It is not obligatory for the pledge to collect and receive the amount due on credit pledged but he is given merely the right to do so. Right of Pledgee to Choose Which One of Several Things Pledged Shall Be Sold The right of choice given to the pledge as to which of the things pledged he shall cause to be sold is limited only by stipulation. After sufficient property has been sold to satisfy the obligation plus interest and expenses, no more shall be sold. Right of Third Person Who Pledged His Own Property A third person who is not a party to the principal obligation may secure the latter by pledging his own property. The law grants him the same rights as a guarantor and he cannot be prejudiced by any waiver of defense by the principal debtor.

1) 2) 3) 4)

Instances of Legal Pledges A legal pledges is created by operation of law. Examples below: Article 546. Necessary expenses shall be refunded to every possessor, but only the possessor in good faith may retain the thing until he has been reimbursed therefor. Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired by reason thereof. Article 1731. He who has executed work upon a movable has a right to retain it by way of pledge until he is paid. Article 1914. The agent may retain in pledge the things which are the object of the agency until the principal effects the reimbursement and pays the indemnity set forth in the two preceding articles. Article 1707. The laborers wages shall be a lien on the goods manufactured or the work done. Others: Article 1994 legal pledge involving depository Article 2004 legal pledge involving hotel-keeper

of the price of the sale after payment of the debt and expenses shall be delivered to the debtor. In legal pledge there is no definite period for the payment of the principal obligation. The pledge, therefore, must make a demand for the payment of the amount due him. Without such demand, he cannot exercise the right of sale at public auction. The pledgee must proceed with the sale within one (1) month after demand otherwise the debtor may require him to return the thing retained.

REVIEW QUESTIONS BQ (1915, 1916, 1917, 1948, 1951) Define pledge. What are the essential requisites of a contract of pledge? Answer: Pledge is an accessory, real and unilateral contract by virtue of which the debtor or a third person delivers to the creditor or to a third person movable property as security for the performance of the principal obligation, upon the fulfilment of which the thing pledged, with all its accessions and accessories, shall be returned to the debtor or to the third person. The essential requisites of a contract of pledge are as follows: It must be constituted to secure the performance of a principal obligation; The pledgor must be the absolute owner of the thing pledged; The pledgor should have the free disposal of the thing pledged, and in the absence thereof, he should be legally authorized for the purpose; When the principal obligation becomes due, the thing pledged may be alienated for the payment of such obligation; The thing pledged must be placed in the possession of the creditor or of a third person by common agreement (Art. 2085, 2087, 2093, NCC) **********

1) 2) 3)

Rules in Case of Pledges by Operation of Law The provisions on the possession (Art. 2098), care (Art. 2099), and sale of the thing pledged (Art/ 2112) as well as the extinguishment of pledge (Art. 2110) governing conventional pledges are applicable to pledges created by operation of law. Unlike, however, in conventional pledge, the debtor is not entitled to the excess unless sit is otherwise agreed. In legal pledge, the remainder

4) 5)

Q. What is pactum commissorium? Is there an exception to this rule? Answer: Pactum commissorium is an agreement in a contract of pledge, mortgage, or antichresis by virtue of which if the debtor cannot fulfil his obligation, the creditor can appropriate or dispose of the thing given by way of pledge, mortgage, or antichresis. Such an agreement is prohibited by law. (Art.2088, NCC) The only exception is in the case of contract of pledge, but even then, certain conditions should be complied with. In pledge, if the debtor is unable to pay his obligation, the creditor has a right to have the thing pledged sold at public auction for the payment of his credit. If the thing is not sold, a second public auction should be held. If still it is not sold, then he may appropriate the thing (Art. 2112, NCC). ********** Q. D borrowed P500 from C. As security for the payment of the debt, the former pledged to the latter a diamond ring valued at P2,000. It was expressly stipulated in the contract that if D cannot pay his debt when it matures, the debt of P500 shall be considered as full payment of the diamond ring without further action. D was unable to pay when the debt matured. Can C now appropriate the ring? Reasons. Answer: C cannot appropriate the ring. The agreement stated in the contract constitutes pactum commissorium which is prohibited under Art. 2088 of the Civil Code, which states xxx the creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void. The prohibition has been interpreted by the Supreme Court to refer only to those cases where upon failure of redemption, the ownership of

the thing which is pledged or mortgaged automatically passes to the creditor. The above case falls squarely within the purview of this interpretation. (Reyes vs. Nebrija, 52 Off. Gaz. 1928)

Q. Suppose in the above problem, the agreement is to the effect that in case of non-payment when the debt matures, the same shall be paid with the ring given as security, or the debtor shall execute a deed of absolute sale of the ring in favour of the creditor, would your answer be the same? Answer: No. In both cases, there is no automatic transmission of the right of ownership over the ring which is given by way of pledge, but merely a promise to constitute an assignment of property. What is prohibited by law is the stipulation that would have the effect of giving to the creditor automatic ownership over the property. ********** Q. May the thing pledged be alienated by the pledgor or owner? If so, when does the vendee acquire ownership of the thing pledges? Answer: With the consent of the pledgee the thing pledged may be alienated by the pledgor or owner, subject to the pledge. The ownership of the thing pledged is transmitted to the vendee of transferee as soon as the pldegee consents to the alienation, but the latter shall continue in possession. (Art. 2097, NCC) **********

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-10881 September 30, 1958

EULOGIO DEL ROSARIO, AURELIO DEL ROSARIO, BENITO DEL ROSARIO, BERNARDO DEL ROSARIO, ISIDRA DEL ROSARIO, DOMINGA DEL ROSARIO and CONCEPCION BORROMEO, plaintiffappellees, vs. PRIMITIVO ABAD and TEODORICO ABAD, defendants-appellants. Baustita and Bautista for appellees. Agustin C. Bagasao for appellants. PADILLA, J.: Appeal from a judgment rendered by the Court of First Instance of Nueva Ecija in civil case No. 1084. The facts are undisputed, the parties having entered into an agreed statement thereof, the pertinent and materials part of which are: The plaintiffs are the children and heirs of the late Tiburcio del Rosario. On 12 December 1936, the Secretary of Agriculture and Commerce, by authority of the President of the Commonwealth of the Philippines, issued under the provisions of the Public Land Act (Act No. 2874) homestead patent No. 40596 to Tiburcio del Rosario. The homestead with an area of 9 hectares, 43 ares and 14 centares is situated in barrio San Mauricio, municipality of San Jose, province of Nueva Ecija. On 11 February 1937, the Registrar of Deeds in and for the province of Nueva Ecija issued original certificate of title No. 4820 in the name of the homesteader (Annex A, stipulation of facts, pp. 2530, Rec. on App.). On 24 February 1937, Tiburcio del Rosario obtained a loan from Primitivo Abad in the sum of P2,000 with interest at the rate of 12% per annum, payable on 31 December 1941. As security for the payment thereof he mortgaged the improvements of the

parcel of land in favor of the creditor (Annex B, complaint, pp. 10-13, Rec. on App.). On the same day, 24 February, the mortgagor executed an "irrevocable special power of attorney coupled with interest" in favor of the mortgagee, authorizing him, among others, to sell and convey the parcel of land (Annex A, complaint, pp. 7-9, Rec. on App.). Thereafter the mortgagor and his family moved to Santiago, Isabela, and there established a new residence. Sometime in December 1945 the mortgagor died leaving the mortgage debt unpaid. On 9 June 1947, Primitivo Abad, acting as attorney-in-fact of Tiburcio del Rosario, sold the parcel of land to his son Teodorico Abad for and in consideration of the token sum of P1.00 and the payment by the vendee of the mortgage debt of Tiburcio del Rosario to Primitivo Abad (Annex C, complaint, pp. 13-16, Rec. on App.). The vendee took possession of the parcel of land. Upon the filing and registration of the last deed of sale, the Registrar of Deeds in and for the province of Nueva Ecija cancelled original certificate of title No. 4820 in the name of Tiburcio del Rosario and in lieu thereof issued transfer certificate of title No. 1882 in favor of the vendee Teodorico Abad. On 29 December 1952 the plaintiffs brought suit against the defendants to recover possession and ownership of the parcel of land, damages, attorney's fees and costs. The defendants answered the complaint and prayed for the dismissal thereof, damages, attorney's fees and costs. On 25 October 1954, after the parties had submitted the case upon a stipulation of facts, the Court rendered judgment, the dispositive part of which is: WHEREFORE, the deed of sale executed by Primitivo Abad in favor of Teodorica Abad, Annex C, is hereby declared null and void; and Teodorico Abad is hereby ordered to execute a deed of reconveyance of the land originally with OCT No. 4820, now covered by Transfer Certificate of Title No. 1880, in favor of the plaintiffs. No pronouncement as to costs.

The defendants appealed to the Court of Appeals, which certified the case to this Court as no question of fact is involved. Section 116 of the Public Land Act (Act No. 2874), under which the homestead was granted to the appellees' father, provides: Lands acquired under the free patent or homestead provisions shall not be subject to encumbrance or alienation from the date of the approval of the application and for a term of five years from and after the date of the issuance of the patent or grant, nor shall they become liable to the satisfaction of any debt contracted prior to the expiration of said period; but the improvements or crops on the land may be mortgaged or pledged to qualified persons, associations, or corporations. The encumbrance or alienation of lands acquired by free patent or homestead in violation of this section is null and void.1 There is no question that the mortgage on the improvements of the parcel of land executed by Tiburcio del Rosario in favor of Primitivo Abad (Annex B, complaint, pp. 10-13, Rec. on App.) is valid. The power of attorney executed by Tiburcio del Rosario in favor of Primitivo Abad (Annex A, complaint, pp. 7-9, Rec. on App.) providing, among others, that is coupled with an interest in the subject matter thereof in favor of the said attorney and are therefore irrevocable, and . . . conferring upon my said attorney full and ample power and authority to do and perform all things reasonably necessary and proper for the due carrying out of the said powers according to the true tenor and purport of the same, . . ." does not create an agency coupled with an interest nor does it clothe the agency with an irrevocable character. A mere statement in the power of attorney that it is coupled with an interest is not enough. In what does such interest consist must be stated in the power of attorney. The fact that Tiburcio del Rosario, the principal, had mortgaged the improvements of the parcel of land to Primitivo Abad, the agent, (Annex B, complaint, pp. 10-13, Rec. on App.) is not such an interest as could

render irrevocable the power of attorney executed by the principal in favor of the agent. In fact no mention of it is made in the power of attorney. The mortgage on the improvements of the parcel of land has nothing to do with the power of attorney and may be foreclosed by the mortgagee upon failure of the mortgagor to comply with his obligation. As the agency was not coupled with an interest, it was terminated upon the death of Tiburcio del Rosario, the principal, sometime in December 1945, and Primitivo Abad, the agent, could no longer validly convey the parcel of land to Teodorico Abad on 9 June 1947. The sale, therefore, to the later was null and void. But granting that the irrevocable power of attorney was lawful and valid it would subject the parcel of land to an encumbrance. As the homestead patent was issued on 12 December 1936 and the power of attorney was executed on 24 February 1937, it was in violation of the law that prohibits the alienation or encumbrance of land acquired by homestead from the date of the approval of the application and for a term of five years from and after the issuance of the patent or grant. Appellants contend that the power of attorney was to be availed of by the agent after the lapse of the prohibition period of five years, and that in fact Primitivo Abad sold the parcel of land on 9 June 1947, after the lapse of such period. Nothing to that effect is found in the power of attorney. Appellants claim that the trial court should have directed the appellees to reimburse Teodorico Abad for what he had paid to Primitivo Abad to discharge the mortgage in the latter's favor as part of the consideration of the sale. As the sale to Teodorico Abad is null and void, the appellees can not be compelled to reimburse Teodorico Abad for what he had paid to Primitivo Abad. The former's right of action is against the latter, without prejudice to the right of Primitive Abad to foreclose the mortgage on the improvements of the parcel of land if the mortgage debt is not paid by the appellees, as heirs and successors-in-interest of the mortgagor. The judgment appealed from is affirmed, with costs against the appellants.

Paras, C. J., Bengzon, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., and Endencia, JJ.,concur. Republic of the Philippines SUPREME COURT Manila EN BANC DECISION February 2, 1916 G.R. No. L-9184 MACONDRAY & CO., INC., plaintiff-appellee, vs. GEORGE S. SELLNER, defendant-appellant. D.R. Williams for appellant. Haussermann, Cohn and Fisher for appellee. Carson, J.: This action was brought to recover the sum of P17, 175 by way of damages alleged to have been suffered by the plaintiff as a result of the sale of a parcel of land which it is alleged was made by the defendant for and on behalf of the plaintiff after authority to make the sale had been revoked. Judgment was rendered in favor of the plaintiff for the sum of P3,435, together with interest at 6 per cent per annum from the date of the institution of this action. From this judgment defendant appealed, and brought the case have on his duly certified bill of exceptions. Early in 1912 the defendant, a real estate broker, sold the parcel of land described in the complaint to the plaintiff company for P17,175. The formal deed of sale was not executed and accepted until July 29, 1912, the agreement to purchase being conditioned on the delivery of a Torrens title, which was not secured until early in that month. In the meantime the land was flooded by high tides, and the plaintiff company became highly dissatisfied with its purchase. When the final transfer was made the plaintiff company informed defendant that the land was wholly unsuited for use as a coal-yard, for which it had been purchased, and requested him to find another purchaser. At that time it was expressly understood and agreed that the plaintiff company

was willing to dispose of the land for P17,175, and that defendant was to have as his commission for securing a purchaser anything over that amount which he could get. A short time thereafter, defendant reported to plaintiff that he had a purchaser for the land in the person of Antonio M. Barretto, who was willing to pay P2.75 per square meter, or a total of P18,892.50. Plaintiff thereupon executed a formal deed of conveyance which, together with the certificate of title (Torrens), was delivered to defendant, with the understanding that he was to conclude the sale, deliver the title-deed and certificate to Barretto, and received from him the purchase price. The deed was dated August 21, 1912. Thereafter defendant advised Barretto that plaintiff had executed the title-deed and that he was ready to close the deal. Barretto agreed to accept the land if, upon examination, the title and the deed should prove satisfactory; and defendant left the deed of conveyance with him, with the understanding that if the title and the deed of conveyance were as represented, Barretto would give him his check for the amount of the purchase price. Defendant retained possession of the Torrens certificate of title. A few days afterwards Barretto was compelled to go to Tayabas on business and was detained by a typhoon which delayed his return until the 31st of August. During Barrettos absence the plaintiff company advised defendant that he must consummate the sale and collect the purchase money without delay upon Barrettos return to Manila. On the arrival of Barretto on Saturday, August 31st, defendant called upon him and informed him that the plaintiff company desired to close up the transaction at once, and Barretto, who was somewhat indisposed from his trip, promised to examine the papers as soon as he could get to them, and assured the defendant that he would send his check for the purchased price in a day or two if he found the documents in proper shape. These assurance were reported to Young, the plaintiff companys general manager and representative throughout the transaction, on Monday morning, September 2d. Young then formally

notified defendant that unless the purchase price was paid before five oclock of that same afternoon the deal would be off. Defendants again called upon Barretto, who informed him that if he would turn over the Torrens certificate of title he would let him have a check for the purchase price. Defendant sent the certificate as requested, but did not receive the check until thirty-six hours afterwards, on Wednesday morning. On receipt of Barrettos check he immediately tendered plaintiff company a check for the agreed selling price, P17,175. Plaintiffs manager refused to accept the check and soon thereafter filed this action, claiming that the sale had been cancelled upon the failure of defendant to turn over the purchase price on the afternoon of Monday, September 2nd. The following is a copy of plaintiff companys letter to defendant advising him that the sale would be cancelled unless the purchase price was paid at five oclock of the day on which it was written. SEPT. 2, 1912. Mr. GEO. C. SELLNER, Manila. DEAR SIR: In accordance with our conversation today, this is to notify you that we consider the sale of our lot in Nagtajan to Antonio M. Barretto as cancelled in view of the nonpayment of the purchase price before five oclock this afternoon. Please confirm. Yours very truly, MACONDRAY & CO., INC., (Sgd.) CARLOS YOUNG, General Manager. As to the facts just narrated there is practically no dispute, the only matters of facts as to which there is any real contention in the record

being limited to question as to the value of the land, and as to the original instructions to defendant in regard to the delivery of the title deeds. Plaintiffs manager testified that as he had no confidence in Barretto, he expressly instructed defendant not to deliver the title deeds until Barretto turned over the purchase price. Defendant swore that he had received no such instruction. Upon this conflict of testimony we do not deem it necessary to make an express finding, because, as we view the transaction, it could in no event affect our disposition of this appeal. We are of opinion that the disputed evidence clearly discloses that on August 21st the plaintiff company, through the defendant real estate broker, agreed to sell the land to Barretto for P18,892.50, and that Barretto agreed to buy the land at that price on the usual condition precedent that before turning over the purchase price the title deeds and deed of transfer from the company should be found to be in due and legal form. That for the purpose of consummating the sale the plaintiff company turned over to the defendant a deed of transfer to Barretto, together with a Torrens title certificate to the land, executed as of the day when the agreement to sell was entered into. That the defendant, with full authority from plaintiff company, agreed to deliver the deed and certificate to Barretto on payment of the purchase price. That from the very nature of the transaction it was understood that the purchaser should have a reasonable time in which to examine the deed of transfer and the other documents of title, and that defendant exercising an authority impliedly if not expressly conferred upon him, gave the purchaser a reasonable time in which to satisfy himself as to the legality and correctness of the documents of title. That the company through its manager Young, acquiesced in and ratified what had been done by defendant in this regard when, with full knowledge of all the facts, Young advised the defendant, during Barrettos absence in Tayabas, that the deal must be closed up without delay on Barrettos return to Manila.

No reason appears, nor had any reason been assigned for the demand by the plaintiff company for the delivery of the purchase price at the hour specified under threat in the event of failure to make payment at that hour it would decline to carry out the agreement, other than that the manager of the plaintiff company had been annoyed by the delays which occurred during the earlier stage of the negotiations, and had changed his mind as to the desirability of making the sale at the price agreed upon, either because he believed that he could get a better price elsewhere, or that the land was worth more to his company than the price he had agreed to take for it. It is very evident that plaintiff companys manager hoped that by setting a limit of a few hours upon the time within which he would receive the money, his company would be relieved of the obligation to carry out its contract. Upon the question of the value of the land we think that the evidence clearly discloses that at the date of the sale its actual and its true market value was not more than the amount paid for it by Barretto, that is to say, P18,892.50. The evidence discloses that it had been in the hands of an expert real estate agent for many months prior to the sale, with every inducement to him to secure the highest cash price which could be gotten for it. That he actually sold it to the plaintiff company, a few months prior to the sale to Barretto, for P17,175. That the plaintiff company was highly dissatisfied with its purchase, and readily agreed to resell at that price. That the defendant, in his company was highly dissatisfied with its purchase, and readily agreed to resell at that price. That the defendant, in his capacity as a real estate agent, with a personal and direct interest in securing the highest possible price for the land, sold it to Barretto for P18,892.50. The only evidence in the record tending to prove that the land had a higher market value than the price actually paid for it under such circumstances is the testimony of a rival real estate broker, who had never been on the land, but claimed that he was familiar with its general location from maps and description, and asserted that in his

opinion it was worth considerably more than the price actually paid for it, and that he thought he could have sold the land for P3 a meter, or approximately P20,610. Of course an expert opinion of this kind, however sincere and honest the witness may have been in forming it, is wholly insufficient to maintain a finding that the land was worth any more than it actually brought when sold under the conditions above set forth. It may be that the land has a speculative value much higher than the actual market value at the time of the sale, so that if held for an opportune turn in the market, or until a buyer of some special need for it happened to present himself, a price approximating that indicated by this witness might be secured for it. But the question of fact ruled upon is the actual market value of the land at the time of its sale to Barretto, and not any speculative value which might be assigned to it in anticipation of unknown, indefinite and uncertain contingencies. Among other definitions of market value to be found in Words and Phrases, vol. 5, p. 4383, and supported by citation of authority, are the following: The market value of property is the price which the property will bring in a fair market after fair and reasonable efforts have been made to find a purchaser who will give the highest price for it. xxx xxx xxx The market value of land is the price that would in all probability result form fair negotiations where the seller is willing to sell and the buyer desires to buy. Upon the foregoing statement of the facts disclosed by the record, we are of opinion that the judgment entered in the court below should be reversed and the complaint dismissed without costs in this instance.

1. Even were we to admit, which we do not, that the plaintiff company had the right to terminate the negotiations at the time indicated by its manager, and to direct its real estate not make the sale of Barretto after the hour indicated, nevertheless we would be compelled to hold, upon the evidence before us, that the plaintiff company has no cause of action for monetary damages against the defendant real estate agent. The measure of the damages which the plaintiff would be entitled to recover from the real estate agent for the unauthorized sale of its property would be the actual market value of the property, title to which had been lost as a result of the sale. We are not now considering any question as to the right of the owner, under such circumstances, to recover the property from the purchaser, or damages for its detention or like; but merely his right to recover monetary damages from his agent should he elect, as the plaintiff company did in this case, to ratify the sale and recoup from the agent any loss resulting from his alleged unauthorized consummation of the sale. The market value of the land in question was P18,892.50. Of this the plaintiff company has received P17,175, leaving a balance of P1,717.50 unpaid. But, whatever may be the view which should taken as to the right of the plaintiff company to terminate the negotiations for the sale of the property to Barretto at the time fixed by it in its letter to the defendant real estate agent, there can be no question as to the liability of the plaintiff company to the real estate agent, in the event that it did so terminate the negotiations, for the amount of the commission which it agreed to pay him should he find a purchaser for the land at the price agreed upon in his agency contract. The commission agreed upon was all over P17,175 which the defendant could secure from the property, and it is clear that allowing the defendant this commission, and offsetting it against the unpaid balance of the market value of the land, the plaintiff company is not entitled to a money judgment against defendant.

We do not mean to question the general doctrine as to the power of a principal to revoke the authority of his agent at will, in the absence of a contract fixing the duration of the agency (subject, however, to some well defined exceptions). Our ruling is that at the time fixed by the manager of the plaintiff company for the termination of the negotiations, the defendant real estate agent had already earned the commissions agreed upon, and could not be deprived thereof by the arbitrary action of the plaintiff company in declining to execute the contract of sale for some reason personal to itself. The question as to what constitutes a sale so as to entitle a real estate broker to his commissions is extensively annotated in the case of Lunney vs. Healey (Nebraska) 56313 reported in 44 Law Rep. Ann., 593 [Note], and the long line of authorities there cited support the following rule: The business of a real estate broker or agent, generally, is only to find a purchaser, and the settled rule as stated by the courts is that, in the absence of an express contract between the broker and his principal, the implication generally is that the broker becomes entitled to the usual commissions whenever he brings to his principal a party who is able and willing to take the property and enter into a valid contract upon the terms then named by the principal, although the particulars may be arranged and the matter negotiated and completed between the principal and the purchaser directly. In the case of Watson vs. Brooks (17 Fed. Rep., 540; 8 Sawy., 316), it was held that a sale of real property entitling a broker to his commissions, was an agreement by the vendor for a certain valuable consideration then or thereafter to be paid, and was complete without conveyance, although the legal title remained in the vendor. The rights of a real estate broker to be protected against the arbitrary revocation of his agency, without remuneration for services rendered in finding a suitable purchaser prior to the revocation, are clearly and

forcefully stated in the following citation form the opinion in the case of Blumenthal vs. Goodall (89 Cal., 251). The act of the agent in finding a purchaser required time and labor for its completion, and within three days of the execution of the contract, and prior to its revocation, he had placed the matter in the position that success was practically certain and immediate, and it would be the height of injustice to permit the principal then to withdraw the authority and terminate the agency as against an express provision of the contract, and perchance reap the benefit of the agents labors, without being liable to him for his commissions. This would be to make the contract an unconscionable one, and would offer a premium for fraud by enabling one of the parties to take advantage of his own wrong and secure the labor of the other without remuneration. 2. We are of opinion that under all the circumstances surrounding the negotiations as disclosed by the practically undisputed evidence of record, the plaintiff company could not lawfully terminate the negotiations at the time it attempted to do so and thereafter decline to convey the land to Barretto, who had accepted an offer of sale made to him by the plaintiffs duly authorized agent, subject only to an examination of the documents of title, and stood ready to pay the purchase price upon the delivery of the duly executed deed of conveyance and other necessary documents of title. We are not now considering the right or the power of the plaintiff company to terminate or revoke the agency of the defendant at that time. The revocation of the agents authority at that time could in no wise relieve the plaintiff company of its obligation to sell the land to Barretto for the price and on the terms agreed upon before the agency was revoked. If we are correct in our conclusions in this regard, it follows, of course that no matter hat was the actual value of the land, the plaintiff company suffered no damage by the delivery of the title deeds to

Barretto, and the consummation of the sale by the defendant upon the terms and at the price agreed upon prior to the revocation of his agency. Without considering any of the disputed questions of fact it clearly appears that before the manager of the plaintiff company wrote the letter dated September 2, 1912, which is set forth in the foregoing statement of facts, and before the conversation was had to which that letter refers, the defendant real estate agent had offered to sell the land to Barretto for P18,892.50 and that he did so with the knowledge and consent, and under the authority of the plaintiff company. It further clearly appears that this offer had been duly accepted by Barretto, who stood ready and willing to pay over the agreed purchase price, upon the production and delivery of the necessary documents of title, should these documents be found, upon examination, to be executed in due and legal form. The only question, then, which we need consider, is whether the plaintiff company could lawfully cancel or rescind this agreement for the sale and purchase of the land, on the sole ground that the purchase price was not paid at the hour designated in the letter to the defendant. The only reasons assigned for the sudden and arbitrary demand for the payment of the purchase price which was made with the manifest hope that it would defeat the agents deal with Barretto, are that the plaintiff companys manager had become satisfied that the land was worth more than he had agreed to accept for it; and that he was piqued and annoyed at the delays which marked the earlier stages of the negotiations. Time does not appear to have been of the essence of the contract. The agreement to sell was made without any express stipulation as to the time within which the purchase price was to be paid, except that the purchaser reserved the right to examine the documents of title before making payment of the purchase price, though it was

understood that the sale was for cash upon the delivery of the documents of title executed in due form. Under the agreement with the agent of the plaintiff company, the purchaser had a perfect right to examine the documents of title; and in the absence of an express agreement fixing the time to be allowed therefore, he was clearly entitled to such time as might be reasonably necessary for that purpose. The plaintiff company, through its agent, had given Barretto an opportunity to examine the documents of title, with the express understanding that if they were satisfactory he would hand the agent his check for the purchase price, and it is very clear that the plaintiff company could not arbitrarily, and for its own convenience, deprive Barretto of this opportunity to make such examination of the documents as might be reasonably necessary. Of course we are not to be understood as denying the right of the vendor to couple his agreement to sell with a stipulation that the purchase price must be paid at a specific day, hour and minute; nor that the obligation to pay over the purchase price forthwith may not be inferred from all the circumstances surrounding the transaction in a particular case. Time may be, and often is of the very essence of the contract. But in a contract for the sale of real estate, where no agreement to the contrary appears, it may fairly be assumed that it was the intention of the parties to allow a reasonable time for the examination of the documents of title; and in any case in which time has been expressly allowed for that purpose, the vendor cannot arbitrarily demand the payment of the purchase price before the expiration of the time reasonably necessary therefor. The doctrine supported by citation of authority is set forth as follows on page 165, Maupin on Marketable Title to Real Estate: The contract of sale usually specifies a time in which the purchaser may examine the title before completing the purchase. If no time be specified, he will be entitled to a reasonable time for that purpose,

but cannot keep the contract open indefinitely so as to avail himself of a rise in the value of the property or escape loss in case of depreciation. He cannot be required to pay the purchase money before he has examined the abstract, unless he has expressly stipulated so to do. It has been held that if the contract provide that the purchaser shall be furnished an abstract of title, and shall have a specified time in which to examine the title and pay the purchase money, the purchaser must determine in that time whether he will take the title, and that he cannot tender the purchase money after that time, even though no abstract of the title was furnished. The purchaser is entitled to a reasonable time within which to determine by investigation the validity of apparent liens disclosed by the record. After the purchaser has examined the abstract, or investigated the title in the time allowed for that purpose, it is his duty to point out or make known his objections to the title, if any, so as to give the vendor an opportunity to remove them. In the case of Hoyt vs. Tuxbury (70 Ill., 331, 332), the rule is stated as follows: Where the purchase of land is made upon condition the title is found good, the purchaser is only entitled to a reasonable time in which to determine whether he will take the title the vendor has, or reject it. He cannot keep the contract open indefinitely, so as to avail of a rise in the value of the property, or relieve himself in case of a depreciation. In the case of Easton vs. Montgomery (90 Cal., 307), the rule is set forth as follows: A contract for the sale of land which provides title to prove good or no sale, without specifying the time within which the examination is to be made, implies a reasonable time.

In 39 Cyc., 1332, the general rule, supported by numerous citations, is set forth as follows: If the contract of sale does not specify the time of performance, a reasonable time will be implied. In other words a reasonable time for performance will be allowed, and performance within a reasonable time will be required. What is a reasonable time necessarily depends upon the facts and circumstances of the particular case. The rule permitting and requiring performance within a reasonable time applies both to the time for making and executing the conveyance by the vendor, and to the time for making or tendering payment by the purchaser; and where some precedent act or demand is necessary, the rule applies to the time of performance after such act is done, or after such demand has been made. It also applies to the time within which any conditions precedent is to be performed, or within which a contingency upon which the transaction depends is to happen, and to the performance of various acts by the parties such as the furnishing of an abstract of title, or making a survey, or any act which is to precede or may affect the time of conveyance or payment, or which one of the parties may do at his option which may affect the rights of the parties under the contract. If the purchaser is entitled to an examination of the title a reasonable time therefor will be implied. Under all the circumstances surrounding the transaction in the case at bar, as they appear from the evidence of record, we have no hesitation in holding that the plaintiff companys letter of September 2, 1912 demanding payment before five oclock of the afternoon of that day, under penalty of the cancellation of its agreement to sell, was an arbitrary unreasonable attempt to deny to the purchaser the reasonable opportunity to inspect the documents of title, to which he was entitled by virtue of the express agreement of the plaintiff companys agent before any attempt was made to revoke his agency. It follows that Barrettos right to enforce the agreement to sell was in no wise affected by the attempt of the plaintiff company to cancel the agreement; and that the plaintiff company suffered no damage by

the consummation of the agreement by the acceptance of the stipulated purchase price by the defendant real estate agent. Perhaps we should indicate that in arriving at these conclusions we have not found it necessary to pass upon the disputed question of fact, as to whether or not the plaintiff companys manager instructed the defendant not to deliver the title-deed until he had received the purchase price. On this point there is a direct conflict of evidence. But as we understand the transaction, it was clearly understood that the purchaser would have a reasonable opportunity to inspect and examine the documents of title before paying over a large sum of money in exchange therefor, whether the agent did or did not have the authority to make actual delivery of the title deed for that purpose. Twenty days hereafter let judgment be entered reversing the judgment entered in the court below without costs in this instance, and directing the dismissal of the complaint with the costs in first instance against the plaintiff company, and ten days thereafter let the record be returned to the court wherein it originated. So ordered. Arellano, C.J., Torres, Moreland, Trent and Araullo, JJ., concur.

Obligations and liabilities of principals to agents How is agency extinguished? Macondray v. Sellner Del Rosario v. Abad, 104 Phil. 648 -PoA does not create an agency coupled with an i n t e r e s t n o r d o e s i t clothe the agency with an irrevocable character; therefore, agency was terminated upon death of principal- A m e r e s t a t e m e n t i n P o A t h a t a g e n c y i s c o u p l e d w i t h a n i n t e r e s t i s n o t enough; such interest must be stated in the PoA- S a l e o f t h e property was void since alienation of land a c q u i r e d b y f r e e patent is void -purchaser has a perfect right to examine the d o c u m e n t s ; i t w a s understood that the purchaser should have a reasonable time; also, time does not appear to be of the essence to the contract- c o m p a n y s l e t t e r d e m a n d i n g i m m e d i a t e p a y m e n t u n d e r p e n a l t y o f cancellation of the agreement was an unreasonable attempt to deny purchaser reasonable opportunity to inspect docs.- R e a l estate agent already earned commissions and c o u l d n o t b e deprived thereof - C o m p a n y c o u l d n o t lawfully terminate negotiations at the time it attempted to do so
Macondray & Co. v. Sellner - Our ruling is that at the time fixed by the manager of the plaintiff company for the termination of the negotiations, the defendant real estate agent had already earned the commissions agreed upon, and could not be deprived thereof by the arbitrary action of the plaintiff company in declining to execute the contract of sale for some reason personal to itself. In Macondray & Co. v. Sellner, the Court recognized the right of a broker to his commission for finding a suitable buyer for the sellers property even though the seller himself consummated the sale with the buyer. The Court held that it would be in the height of injustice to permit the principal to terminate the contract of agency to the prejudice of the broker when he had already reaped the benefits of the brokers efforts.