SALES: 2nd EXAM
REVIEWER
3. Inadequacy of price
Article 1355. Except in cases specified by law, lesion or
inadequacy of cause shall not invalidate a contract, unless
there has been fraud, mistake or undue influence. (n)
The same principle or concept is emphasized in
a contract of sale and we have Article 1470.
Article 1470. Gross inadequacy of price does not affect a
contract of sale, except as it may indicate a defect in the
consent, or that the parties really intended a donation or
some other act or contract. (n)
Gross inadequacy of price Simulated price
EFFECT Does not necessarily mean NO perfected
that there is NO perfected contract contract of sale
of sale
DIRECTOR OF LANDS VS ABARCA
ISSUE: WON the amount of P877.25 for the property is
adequate in price.
HELD: NO.
The sheriff's sale null and void on the ground of the
inadequacy of the price paid. It appears that in 1927 the
assessed value of the contested property was more than
P60,000. A judicial sale of real property will be set aside
when the price is so inadequate as to shock the
conscience of the court. In the instant case there is another
important consideration. In fairness and equity, which after
all are the true aims of the law, the amount paid by Datu
Bualan and his co-claimants for taxes and penalties due on
the contested property should be credited on the judgment
obtained by Sarenas and Braganza in civil case No. 607.
Such taxes and penalties accrued while the property was in
that possession under a claim of ownership
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*General Rule: Gross inadequacy of price does not affect
the validity of the contract of sale.
*Exception: If it is a judicial sale, if the price is so
inadequate as to shock the conscience of the court, then
the judicial sale of the real property will be set aside.
*Exception to the Exception: When there is a
judicial sale, but there is a right of redemption given to the
owner.
It is because in that instance, lower purchase
price would be favourable to the redemptioner. The proper
remedy for such instance is not to question the sale but to
redeem it because the lower price is favourable to you as
the owner or redemptioner. When there is right to redeem
in a foreclosure sale, inadequacy of price is not material.
Because the lesser the price, the easier it will be for the
owner to effect the redemption.
BRAVO-GUERRERO VS GUERRERO
ISSUE: WON the sale was void for gross inadequacy of
price?
HELD: NO
U P1,000 plus assumption of mortgage is not grossly
inadequate to shock the moral senses.
U Simulation of contract and gross inadequacy of price are
distinct legal concepts, with different effects. When the
parties to an alleged contract do not really intend to be
bound by it, the contract is simulated and void. A simulated
or fictitious contract has no legal effect because there is no
real agreement between the parties.
U In contrast, a contract with inadequate consideration may
nevertheless embody a true agreement between the
parties. A contract of sale is a consensual contract, which
becomes valid and binding upon the meeting of minds of
the parties on the price and the object of the sale. The
concept of a simulated sale is thus incompatible with
inadequacy of price.
Inadequacy of cause will not invalidate a contract unless
Red Team 1
there has been fraud, mistake or undue influence. In this
case, respondents have not proved any of the instances
that would invalidate the Deed of Sale.
U Respondents even failed to establish that the
consideration paid by the vendees for the Properties was
grossly inadequate. As the trial court pointed out, the Deed
of Sale stipulates that, in addition to the payment of
P1,000, the vendees should assume the mortgage loans
from PNB and DBP. The consideration for the sale of the
Properties was thus P1, 000 in cash and the assumption of
the P15, 000 mortgage.
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Again, just take note of the rules with regard to
the inadequacy of the price. Inadequacy of price, we could
also relate it to what we have discussed in Obli-Con, lesion
or inadequacy, Article 1381;
Article 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever
the wards whom they represent suffer lesion by more than
one-fourth of the value of the things which are the object
thereof;
(2 Those agreed upon in representation of absentees, if the
latter suffer the lesion stated in the preceding number;
Xxx Xxx Xxx
Article 1386. Rescission referred to in Nos. 1 and 2 of
article 1381 shall not take place with respect to contracts approved by
the courts. (1296a)
Art. 1602. The contract shall be presumed to be an
equitable mortgage, in any of the following cases:
(1) When the price of a sale with right to repurchase is
unusually inadequate;
(2) When the vendor remains in possession as lessee or
otherwise;
(3) When upon or after the expiration of the right to
repurchase another instrument extending the period of
redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the
purchase price;
(5) When the vendor binds himself to pay the taxes on the
thing sold;
(6) In any other case where it may be fairly inferred that the
real intention of the parties is that the transaction shall
secure the payment of a debt or the performance of any
other obligation.
Whether it is an absolute sale or a sale with a
right to repurchase, gross inadequacy of the price may give
rise to an equitable mortgage under Article 1602. And the
parties may seek for the reformation of the contract from
sale to a mortgage contract, to show the real intention of
the parties.
PARTT 3: FORMATION OF A CONTRACT OF SALE.
I. POLICITACION
Now what happens in policitacion? There’s an
offer, remember it’s a preparatory stage. There is a
unilateral promise to buy or sell but there’s still no
obligation imposed upon the parties, for the offer given may
be withdrawn or it may be accepted. When it is accepted
and the acceptance is absolute, there is a meeting of the
minds which would give rise now to a perfected contract of
sale.
In policitacion, negotiation is formally initiated
by an offer, which we all know must be certain. At any time
prior to perfection, either negotiating party may stop the
negotiation; at this stage the offer may be withdrawn. The
withdrawal is effective immediately after its manifestation.
To convert the offer into a contract, there must be an
acceptance which must be absolute and must not qualify
the terms of the offer. It must be clear, unequivocal,
unconditional and without variance of any sort from the
proposal.
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1.) Option Contract - An option contract is an agreement between a
buyer and seller that gives the purchaser of the option the right to
buy or sell a particular property at a later date at an agreed
upon price.
TAYAG VS LACSON
ISSUE: WON there was a valid option contract between
petitioner Tayag and the farmers/tillers
agreed to buy the 300 square meter portion of private
respondents' land at P70.00 per square meter"which was
greatly higher than the actual reasonable prevailing price.
.ii What if there’s no separate consideration in
An option contract?
SANCHEZ VS. RIGOS

HELD: NO. ISSUE: WON Rigos should accept the payment and
In this case, the defendants-tenants-subtenants, under the execute the deed of conveyance.
deeds of assignment, granted to Tayag not only an option HELD: YES. This case admittedly hinges on the proper
but the exclusive right to buy the landholding. BUT the application of Article 1479. In order that said unilateral
grantors were merely the defendants-tenants, and NOT the promise may be binding upon the promisor, Article 1479
Lacsons, the registered owners of the property. Not being requires the concurrence of a condition, namely, that the
the registered owners of the property, the defendantstenants promise be "supported by a consideration distinct from the
could not legally grant to the petitioner the option, price.
much less the "exclusive right" to buy the property. As the The Supreme Court held that without a
Latin saying goes, "NEMO DAT QUOD NON HABET." consideration separate from the purchase price, an
option contract would be void as a contract, but would
still constitute a valid offer. If the option is exercised prior
ADELFA PROPERTIES VS CA to its withdrawal, that is equivalent to an offer being
accepted prior to withdrawal and would give rise to a
Issue: WON the agreement between Adelfa and Private valid and binding sale.
Respondents was strictly an option contract In an accepted unilateral promise to sell, since
there may be no valid contract without a cause or
Ruling: NO. The agreement between the parties is a consideration, the promissor is not bound by his promise
contract to sell, and not an option contract or a contract and may, accordingly, withdraw it. Pending notice of its
of sale. withdrawal, his accepted promise partakes, however, of the
nature of an offer to sell which, if accepted, results in a
Contract to Sell vs Contract of Sale perfected contract of sale.
The Sanchez doctrine expressly affirmed the
CONTRACT TO SELL CONTRACT OF SALE earlier ruling in Atkins, Kroll & Co., Inc. vs. Cua, which
By agreement the The vendor has lost and treated an accepted promise to sell, although not binding
ownership is reserved in cannot recover ownership as a contract for lack of separate consideration,
the vendor and is not to until and unless the nevertheless, having capacity to generate a bilateral
pass until the full payment contract is resolved or contract of sale upon acceptance. It also conformed with
of the price. rescinded. the earlier case of Beaumont vs. Prieto, which held that -
Title is retained by the The title passes to the There is in fact practically no difference between a contract
vendor until the full vendee upon the delivery of option to purchase land and an offer or promise to sell it.
payment of the price, such of the thing sold. ____________________________________________
payment being a positive Moreover, the Sanchez Doctrine expressly
suspensive condition. overturned the rulings in Southwestern Sugar Molasses
Co. vs. Atlantic Gulf and Pacific Corporation and Mendoza
Here the Supreme Court ruled that the parties never vs. Comple, which held that an option is not supported by a
intended to transfer ownership, which is a distinction separate consideration, is void and can be withdrawn
between a contract of sale and a contract to sell. notwithstanding the acceptance made previously by the
As to P50,000.00 , the SC ruled that it is an earnest offeree.
money, however, it is an earnest money to a contract to In other words, since there may be no valid
sell and not to a contract of sale. contract without a cause or consideration, the
The court also made a distinction of earnest money and promissor is not bound by his promise and may,
option money to take note of that. accordingly, withdraw it. Pending notice of its
withdrawal, his accepted promise partakes, however,
Earnest money vs Option money of the nature of an offer to sell which, if accepted,
results in a perfected contract of sale.
EARNEST MONEY OPTION MONEY
Part of the purchase price The money given as a Art. 1479. A promise to buy and sell a determinate thing for
distinct consideration for a price certain is reciprocally demandable.
an option contract An accepted unilateral promise to buy or to sell a
Given only where there is Applies to a sale not yet determinate thing for a price certain is binding upon the
already sale perfected promissor if the promise is supported by a consideration
When earnest money is When the would-be buyer distinct from the price. (1451a)
given, the buyer is bound gives option money, he is _______________________________________________________
to pay the balance. not required to buy. Art. 1354. Although the cause is not stated in the contract,
it is presumed that it exists and is lawful, unless the debtor
proves the contrary. (1277)
.i Meaning of Separate Consideration
Diamante vs. CA
Take note that for a valid option contract,
there must be a consideration. What is the nature of In this case, there was a statement there, even if
this consideration? the promise was accepted, private respondent was not
bound in the absence of a distinct consideration, how do
VILLAMOR VS. CA you reconcile that with the case of Sanchez?
This statement was taken from the case of
ISSUE: WON the option contract is void for lack of Mendoza vs Comple (see footnote of above-said statement
consideration? in the case). If you look at this case, it cited Southwestern
HELD: NO. SC, in this case, ruled that there was case which was already abandoned insofar as inconsistent
consideration for the option contract which consists of the with Sanchez case. The Sanchez case was not overturned
difference between the purchase price of the 300 square by this statement. Sanchez case still remains; no separate
meter portion of the lot in 1971 (P70.00 per sq.m.) and the consideration, void option contract, but acceptance before
prevailing reasonable price of the same lot in 1971. withdrawal gives rise to a perfected COS.
Whatever it is, (P25.00 or P18.00) though not specifically Notice in the case of Sanchez vs Rigos, all the
stated in the deed of option, was ascertainable. elements of a valid COS was present. You already have
Consideration is "the why of the contracts, the essential there the subject matter, as well as the price (P1,510), and
reason which moves the contracting parties to enter into there was also consent.
the contract." The cause or the impelling reason on the part If we apply the same in this case of Diamante vs
of private respondent executing the deed of option as CA, even if there was acceptance, do you think it will
appearing in the deed itself is the petitioner's having still give rise to a perfected COS?

There was no purchase price for COS. Kahit pa
sabihin natin na there was acceptance, there was still no
consideration or purchase price for the perfection of COS.
The conclusion will still be the same. Consistent man siya
sa case of Sanchez vs Rigos, doon lang sa line citing
Mendoza vs Comple, yun ang kelangan natin i-address.
Bible Baptist vs. CA
ISSUE: WON there is a separate consideration that would
render the option contract valid and binding.
HELD: NO. An option contract, to be valid and binding,
needs to be supported by a separate consideration. The
consideration need not be monetary but could consist of
other things or undertakings.
However, if the consideration is not monetary, these must
be things or undertakings of value, in view of the onerous
nature of the contract of option. Furthermore, when a
consideration for an option contract is not monetary, said
consideration must be clearly specified as such in the
option contract or clause.
Having found that the option to buy granted to the
petitioner Baptist Church was not founded upon a separate
consideration, and hence, not enforceable against
respondents, this Court finds no need to discuss whether a
price certain had been fixed as the purchase price.
______________________________________________
If we try to apply what we learned in Sanchez vs Rigos: No separate
consideration, no valid option
contract. If there is acceptance before withdrawal,
there can be valid COS.
______________________________________________________
Navotas vs. Cruz
ISSUE: WON there was a valid option?
HELD: NO. It must be stressed that an option contract is
a contract granting a privilege to buy or sell within an
agreed time and at a determined price. Such a contract is a
separate and distinct contract from the time the parties may
enter into upon the construction of the option.
In the present case, there was no given period for the
petitioner to exercise its option; it had yet to be determined
and fixed at a future time by the parties, subsequent to the
execution of the Supplementary Lease Agreement. There
was, likewise, no consideration for the option. The amount of
P42,000.00 paid by the petitioner to Carmen Cruz on
July 30, 1977 was payment for rentals from October 1,
1990 to September 30, 1991, and not as a consideration
for the option granted to the petitioner. Here, Carmen was no longer
the owner or the
property when she executed the supplementary lease
and contract of lease, and the claim that petitioner has
the option to buy the property or to compel the respondents
to sell the property has no legal and factual basis.
______________________________________________________
PNOC V KEPPEL
II. The validity of the option contract
II.A An option contract must be supported by a separate
consideration that is either clearly specified as such in the
contract or duly proven by the offeree/promisee.
In considering Keppel's submission, we note that the Court's ruling in
1969 in Vda. de Quirino v. Palarcahas been taken out of context and
erroneously applied in subsequent cases. In 2004, through Bible
Baptist Church v. CA73 we revisited Vda. de Quirino v. Palarca and
observed that the option to buy given to the lessee Palarca by the
lessor Quirino was in fact supported by a separate consideration:
Palarca paid a higher amount of rent and, in the event that he does
not exercise the option to buy the leased property, gave Quirino the
option to buy the improvements he introduced thereon. These
additional concessions were separate from the purchase price and
deemed by the Court as sufficient consideration to support the option
contract.
Vda. de Quirino v. Palarca, therefore, should not be regarded as
authority that the mere inclusion of an option contract in a reciprocal
lease contract provides it with the requisite separate consideration for
its validity. The reciprocal contract should be closely scrutinized
and assessed whether it contains additional concessions that
the parties intended to constitute as a consideration for the
option contract, separate from that of the purchase price.
In the present case, paragraph 5 of the agreement provided that
should Keppel exercise its option to buy, Lusteveco could opt to
SALES: 2nd EXAM
REVIEWER
Red Team 3
convert the purchase price into equity in Keppel. May Lusteveco's
option to convert the price for shares be deemed as a sufficient
separate consideration for Keppel's option to buy?
As earlier mentioned, the consideration for an option contract does
not need to be monetary and may be anything of
value.74 However, when the consideration is not monetary, the
consideration must be clearly specified as such in the option contract
or clause. When the written agreement itself does not state the
consideration for the option contract, the offeree or promisee bears
the burden of proving the existence of a separate consideration for
the option.81 The offeree cannot rely on Article 1354 of the Civil
Code,82 which presumes the existence of consideration, since Article
1479 of the Civil Code is a specific provision on option contracts that
explicitly requires the existence of a consideration distinct from the
purchaseprice.83
In the present case, none of the above rules were observed. We find
nothing in paragraph 5 of the Agreement indicating that the grant to
Lusteveco of the option to convert the purchase price for Keppel
shares was intended by the parties as the consideration for Keppel's
option to buy the land; Keppel itself as the offeree presented no
evidence to support this finding. On the contrary, the option to convert
the purchase price for shares should be deemed part of the
consideration for the contract of sale itself, since the shares are
merely an alternative to the actual cash price.
For uniformity and consistency in contract interpretation, the better
rule to follow is that the consideration for the option contract
should be clearly specified as such in the option contract or
clause. Otherwise, the offeree must bear the burden of proving
that a separate consideration for the option contract exists.
Given our finding that the Agreement did not categorically refer to any
consideration to support Keppel's option to buy and for Keppel's
failure to present evidence in this regard, we cannot uphold the
existence of an option contract in this case.
II. An option, though unsupported by a separate
B. consideration, remains an offer that, if duly accepted,
generates into a contract to sell where the parties'
respective obligations become reciprocally demandable
The absence of a consideration supporting the option contract,
however, does not invalidate an offer to buy (or to sell). An option
unsupported by a separate consideration stands as an
unaccepted offer to buy (or to sell) which, when properly
accepted, ripens into a contract to sell. This is the rule established
by the Court en banc as early as 1958 in Atkins v. Cua Hian
Tek,96 and upheld in 1972 in Sanchez v. Rigos.97chanrobleslaw
Sanchez v. Rigos reconciled the apparent conflict between Articles
1324 and 1479 of the Civil Code, which are quoted
below:ChanRoblesVirtualawlibrary
Article 1324. When the offerer has allowed the offeree a certain
period to accept, the offer may be withdrawn at any time before
acceptance by communicating such withdrawal, except when the
option is founded upon a consideration, as something paid or
promised.
Article 1479. A promise to buy and sell a determinate thing for a price
certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate
thing for a price certain is binding upon the promissor if the
promise is supported by a consideration distinct from the
price, [emphases supplied]
The Court en banc declared that there is no distinction between these
two provisions because the scenario contemplated in the second
paragraph of
Article 1479 is the same as that in the last clause of Article
1324.98 Instead of finding a conflict, Sanchez v. Rigos harmonised the
two provisions, consistent with the established rules of statutory
construction.99chanrobleslaw
Thus, when an offer is supported by a separate consideration, a valid
option contract exists, i.e., there is a contracted offer100 which the
offerer cannot withdraw from without incurring liability in damages.
On the other hand, when the offer is not supported by a separate
consideration, the offer stands but, in the absence of a binding
contract, the offeror may withdraw it any time.101 In either case, once
the acceptance of the offer is duly communicated before the
withdrawal of the offer, a bilateral contract to buy and sell is
generated which, in accordance with the first paragraph of Article
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4 Emille Dane S. Viola

1479 of the Civil Code, becomes reciprocally demandable

.iii How do you properly exercise an option contract?

1. It must be timely after all it is one that must

exercised within a specified time period, it must
be affirmative and clearly accepted;

2. The optionee must clearly advice the optioner of

his acceptance and readiness to pay the price;
If the option period lapses without any acceptance,
then he forfeits his right to purchase the property. However,
please do take note that acceptance need not be coupled
with immediate payment. What is essential is that payment
should actually be made when the sale is eventually
consummated.

So, what will be the effect of acceptance? It would

give rise to a perfected contract of sale.