Law on Sales, Agency for lesson 10 BSHM 4TH YEAR.pptx

lesson 10: Law on Sales, Agency

1. Law on Sales, Agency and Credit Transactions Lesson 10

2. Learning Objectives: At the end of the lesson, you should be able to: describe and explain the nature of sales transactions; identify the functions and operation of agencies in the industry; identify ways of handling credit transactions.

3. Law on Sales In the tourism, travel and hospitality industry, agreements arising from contracts will have to be made, and potential breach from these agreements will be encountered. A contract of sale is one of the usual contracts being encountered by the industry concerned. This will give you an overview of the different sales transactions which may be encountered, including the remedies of the parties concerned. The Law Article 1458. By the contract of sale, one of the contracting parties obligates himself to transfer ownership of and to deliver a determinate thing, and other to pay therefore a price certain in money or its equivalent. A contract of sale may be absolute or conditional.

4. Discussion of the Law Characteristics of a Contract of Sale 1. Consensual – A contract of sale is perfected by mere consent. No form is prescribed for the perfection in a contract of sale, except in the following instances: a. Those covered under the Statute of Frauds which must appear in writing, otherwise, the sale is considered unenforceable (i.e., Sale of real property or any interest therein; and Sale of chattels or goods for a price not less than 5500.00). b. Sale of real property made through an agent, in which case, the agent‟s authority must be in writing; otherwise, the agency and sale made through an agent is void.

5. Bilateral – because it gives rise to reciprocal obligations. Principal – because it can stand by itself without need of another contract; Onerous – because the consideration for each party is the delivery of the thing or the payment of the price. Commutative – because what the vendor (seller) delivers is considered equivalent of the price paid by the vendee (buyer). Nominate – because it has a designated name under the Civil Code of the Philippines which is “sale.” Transmissive of ownership – because the vendor transfers ownership of the subject matter to the vendee.

6. Requisites of a Contract of Sale Consent – Consent is manifested as the meeting of the offer (which must be certain) and the acceptance (which must be absolute) upon the thing and the cause which are to constitute the contract. The following are disqualified to enter into a contract: Husband and Wife. – A sale between husband and wife in violation of Article 1490 is inexistent and void from the beginning because such contract is expressly prohibited by law. The following persons cannot acquire by purchase even at public auction or judicial auction, either in person or through the mediation of another: The guardian, the property of the person or persons who may be under his guardianship;

7. Agents, the property whose administration or sale may have been entrusted to them, unless the consent of the principal has been given. The guardian, the property of the person or persons who may be under his guardianship; Agents, the property whose administration or sale may have been entrusted to them, unless the consent of the principal has been given. Executors and administrators, the property of the estate under administration; Public officers and employees, the property of the State or any of the subdivision thereof, or of any government owned or controlled corporation, or institution, the administration of which has been intrusted to them;

8. Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice, the property and rights in litigation or levied upon on execution before the court within whose jurisdiction or territory they exercise their respective functions. Any others especially disqualified by law. Contracts entered in violation of the above shall render the contracts void by reason of public policy and because such contracts are also expressly prohibited by law.

9. Application of the Law Case: On January 4, 1979, Ronald Coloma sold his hotel in favor of Spouses Leo and Vanessa Uy. A deed of sale was executed but Spouses Uy named Johnny Uy (their unborn son) as the buyer in the contract of sale. Accordingly, Johnny Uy was named as the buyer in the deed of sale by virtue of a Chinese custom naming children as the heir of their parents‟ properties. It was only on March 1, 1980 that Johnny Uy was born. Is the contract of sale valid? Legal Opinion: It was held that the contract of sale is void for being simulated and fictitious. Johnny Uy was not even conceived yet at the time of the alleged sale, hence had no legal personality to be named as a buyer in the said deed of sale. Neither could he have given his consent thereto. The contract of sale is perfected at the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the price.

10. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. Unemancipated minors, insane or demented persons, and deaf-mutes who do not know how to read and write cannot validly give consent to contracts.

11. In the instant case, Johnny Uy could not have validly given his consent to the contract of sale, as he was not even conceived yet at the time of its alleged perfection. Therefore, for lack of consent of one of the contracting parties, the deed of sale is null and void. Object or Subject Matter – The requisites are as follows: it must be existing11 or possible; it must be licit12; and it must be determinate. In a contract of sale, the thing and the price are the subject matter. The price must be understood to be in money or its equivalent.

12. Cause or Consideration – It represents the why of the contracts, the essential reason which moves the contracting parties to enter into the contract. For the seller, the consideration is the price certain in money or its equivalent. For the buyer, the consideration is the thing in a contract of sale. Application of the Law Case: Mr. Danilo Santos bought 10 boxes of Fundador Brandy at a price of 510,000 pesos per box from his supplier, Mr. John Smith, proprietor of Exquisite Wines & Brandy, Inc. Determine the requisites of such contract of sale.

13. Legal Opinion: The consent refers to the meeting of minds as when Mr. John Smith (the seller) offered Mr. Danilo Santos to sell the 10 boxes of Fundador Brandy at a price of 510,000 pesos per box and when Mr. Danilo Santos agreed to buy the said 10 boxes of Fundador Brandy at the price of 510,000 pesos per box. The object or subject matter refers to the 10 boxes of Fundador Brandy and the price of 510,000 pesos per box. As to the seller, the cause is the price of 510,000 pesos per box. As to the buyer, the cause is the 10 boxes of Fundador Brandy.

14. Effect of Loss of the Object in a Contract of Sale The Law Article 1480. Any injury to or benefit from the thing sold, after the contract has been perfected, from the moment of the perfection of the contract to the time of delivery, shall be governed by Articles 1262. Article 1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay.

15. Article 1496. The ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any manner of the ways specified in Articles 1497 to 1501, or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee. Discussion of the Law If the thing is lost before perfection of the contract. The contract is considered inexistent, therefore the loss is borne by the seller based on the principle of res perit domino (it is the owner of the thing who bears the consequences of the loss). If the thing is lost at the time of the perfection of the contract. The contract shall be considered without any effect. The legal effect is the same as the object is lost before perfection of the contract of sale. If the thing is lost after delivery. The buyer bears the risk of loss since delivery transfers ownership, following the principle of res perit domino.

16. Article 1496. The ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any manner of the ways specified in Articles 1497 to 1501, or in any other manner signifying an agreement that the possession is transferred from the vendor to the vendee.

17. Discussion of the Law If the thing is lost before perfection of the contract. The contract is considered inexistent, therefore the loss is borne by the seller based on the principle of res perit domino (it is the owner of the thing who bears the consequences of the loss). If the thing is lost at the time of the perfection of the contract. The contract shall be considered without any effect. The legal effect is the same as the object is lost before perfection of the contract of sale. If the thing is lost after delivery. The buyer bears the risk of loss since delivery transfers ownership, following the principle of res perit domino.

18. If the thing is lost after perfection but before delivery. The seller bears the risk of loss since there is no delivery yet, hence, no transfer of ownership to the buyer. This is considered just and equitable, being more in conformity with the principle of res perit domino. In this case, the buyer may demand the return of the price, in case payment has been made. The reciprocal nature of a contract of sale dictates that when there is an obligation to deliver a determinate object, there is also an correlative obligation to pay the price. Therefore, once the obligation to deliver is extinguished, the correlative obligation to pay the price is also extinguished. This rule will apply even if the thing is lost through a fortuitous event or even without the fault of the debtor.

19. Application of the Law Case: On September 14, 1979, Spouses Bernal purchased from Union Motor Corporation a Cimarron Jeepney, possibly to be used for city tours, for Thirty-Seven Thousand Seven Hundred Fifty-Eight Pesos and Sixty Centavos (537,758.60) to be paid in installments. For this purpose, Spouses Bernal executed a promissory note and a deed of chattel mortgage in favor of Union Motor Corporation. Meanwhile, Union Motor Corporation entered into a contract of assignment of the promissory note and chattel mortgage with Jardine-Manila Finance, Inc. In this regard the parties agreed that Spouses Bernal would pay the amount of the promissory note to Jardine- Manila Finance, Inc., the latter being the assignee of Union Motor Corporation. To effectuate the sale as well as the assignment of the promissory note and chattel mortgage, Spouses Bernal were required to sign a notice of assignment, a deed of assignment, a sales invoice, a registration certificate, an affidavit, and a disclosure statement.

20. A down payment worth Ten Thousand Thirty-Seven Pesos (510,037.00) was made by Spouses Bernal although the jeepney has not yet been physically possessed by them. Under the facts given, who bears the risk of loss? Are the Spouses Bernal still entitled to recover the down payment in case the jeepney can no longer be physically possessed by them? Legal Opinion: It is the seller (Union Motor Corporation) who bears the risk of loss following the principle of res perit domino. The registration certificate, receipt and sales invoice were merely signed as part of the processing and for the approval of the application to buy the subject motor vehicle. The documents were not therefore an acknowledgment by the spouses of the physical acquisition of the subject motor vehicle but merely a requirement of Union Motor Corporation so that the said subject motor vehicle would be delivered to the buyers.

21. The registration certificate signed by Spouses Bernal does not conclusively prove that constructive delivery was made nor that ownership has been transferred. In all forms of delivery, it is necessary that the act of delivery, whether constructive or actual, should be coupled with the intention of delivering the thing. The act, without the intention, is insufficient. Union Motor Corporation should therefore bear the loss of the subject motor. Hence, Spouses Bernal may be entitled to recover the down payment in case the jeepney can no longer be delivered.

22. Sale of Personal Property Payable in Installments It is possible that in buying personal properties used for public transportation or delivery of goods (i.e., buses, cruise ships, FX and delivery trucks) this provision will be useful for the contracting parties in case of sale of personal properties payable in installments. The Law Article 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: Exact fulfillment of the obligation should the vendee fail to pay; Cancel the sale, should the vendee‟s failure to pay cover two or more installments; Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee‟s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. (1454-A-a)

23. Discussion of the Law In order for the above provision to apply, the following requisites must concur: Contract must be of sale (absolute sale, not a contract to sell or a contract of loan or apacto de retro transaction where redemption is effected in installments). What is sold is personal property (not real property). The sale must be on an installment plan (it must contain at least three installments). If the sale is for cash or on straight terms (here after an initial payment, the balance is paid in its totality at the time specified), Article 1484 does not apply.

24. Application of the Law Case: On April 17, 1980, PAMECA Wood Treatment Plant, Inc. (PAMECA) obtained a loan of US $267,881.67, or the equivalent of 52,000,000.00 from the Development Bank of the Philippines (DBP). By virtue of this loan, petitioner PAMECA, through its President, petitioner Herminio C. Teves , executed a promissory note for the said amount, promising to pay the loan by installment. As security for the said loan, a chattel mortgage was also executed over PAMECA‟s properties in Dumaguete City, consisting of inventories, furniture and equipment, to cover the whole value of the loan. On January 18, 1984, and upon petitioner PAMECA‟s failure to pay, DBP extrajudicially foreclosed the chattel mortgage, and, as sole bidder in the public auction, purchased the foreclosed properties for a sum of 5322,350.00.

25. On June 29, 1984, DBP fi led a complaint for the collection of the balance of 54,366,332.46 with Branch 132 of the Regional Trial Court of Makati City against PAMECA and Herminio Teves as a solidary debtor with PAMECA under the promissory note. Can DBP recover the balance against PAMECA and Herminio Teves despite the prohibition under Article 1484 (3) of the Civil Code of the Philippines? Legal Opinion: Yes, DBP can recover the balance under Act No. 1508 (Chattel Mortgage Law). It appears from the facts that what was entered is a chattel mortgage a conditional sale of personal property as security for the payment of a debt, or for the performance of some other obligation specified therein. We cannot apply by analogy Article 1484 of the Civil Code to the instant case, the said Article applies clearly and solely to the sale of personal property the price of which is payable in installments.

26. Although Article 1484, paragraph (3) expressly bars any further action against the purchaser to recover an unpaid balance of the price, where the vendor opts to foreclose the chattel mortgage on the thing sold, should the vendee‟s failure to pay cover two or more installments, this provision is specifi cally applicable to a sale on installments.

27. Case: On July 15, 1963, Ruperto G. Cruz purchased on installments from the Far East Motor Corporation, one (1) unit of Isuzu Diesel Bus for 544,616.24, Philippine Currency, payable in installments of 51,487.20 per month for thirty (30) months, beginning October 22, 1963, with 12% interest per annum, until fully paid. As evidence of said indebtedness, plaintiff Cruz executed and delivered to the Far East Motor Corporation a negotiable promissory note in the sum of 544,616.24. To secure the payment of the promissory note, Cruz executed in favor of the seller Far East Motor Corporation, a chattel mortgage over the aforesaid motor vehicle. As no down payment was made by Cruz (the seller) Far East Motor Corporation required Cruz an additional security for his obligation besides the chattel mortgage, of which Cruz agreed. The additional security is in the form of a real estate mortgage involving a parcel of land together with the building and improvements thereon, in San Miguel, Bulacan.

28. On the same date of July 15, 1963, the Far East Motor Corporation indorsed the promissory note and assigned all its rights and interest in the Deeds of Chattel Mortgage and in the Deed of Real Estate Mortgage to Filipinas Investment & Finance Corporation, with due notice of such assignment to Ruperto Cruz. Mr. Cruz defaulted in the payment of the promissory note as he made no payment on any of the installments stipulated in the promissory note, except for the payment of 5500.00.In this regard, Filipinas Investment and Finance Corporation took steps to foreclose the chattel mortgage on the bus. The proceeds of the sale of the bus after the foreclosure of the chattel mortgage was not suffi cient , hence, Filipinas Investment and Finance Corporation fi led another action for the foreclosure of the real estate mortgage. Can Filipinas Investment and Finance Corporation recover the unpaid balance?

29. Legal Opinion: No, Filipinas Investment and Finance Corporation cannot recover the unpaid balance for this will be in violation of Article 1484 (3), Civil Code of the Philippines. This provision prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment. The prohibition does not only apply to a purchaser but also to a guarantor (such as Filipinas Investment and Finance Corporation).

30. Double Sale Caution should be practiced by real estate developers engaging in the hotel industry, especially on real property located in potential yet unexplored provinces. The principles on double sale will be useful in case an issue on a sale of a real property to different vendees shall be brought before the courts of law. The Law Article 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have fi rst taken possession in good faith, if it should be movable property.

31. Double Sale Caution should be practiced by real estate developers engaging in the hotel industry, especially on real property located in potential yet unexplored provinces. The principles on double sale will be useful in case an issue on a sale of a real property to different vendees shall be brought before the courts of law. The Law Article 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have fi rst taken possession in good faith, if it should be movable property. Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in the Registry of Property. Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and in the absence thereof, to the person who presents the oldest title, provided there is good faith.

32. Discussion of the Law The above provision pertains to the same property which has been sold to different buyers or vendees. In case an immovable property covered under the Torrens Title is sold to different vendees, the one who is the first registrant in good faith at the Registry of Deeds where the property is located shall be preferred.

33. Application of the Law Case: Rizal, Anselmo, Gregorio, Filomeno and Domingo, all surnamed Madriarca (hereafter the Madriarca brothers), were the registered owners of Lot No. 7036-A situated in San Mateo, Isabela under TCT No. T-8121 issued by the Register of Deeds of Isabela in September 1956. On 15 August 1957, Rizal Madriarca sold a portion of his share of Lot No. 7036-A to Aleja Giron (hereafter Giron) by virtue of a Deed of Sale, to which his brothers Anselmo, Gregorio, Filomeno and Domingo offered no objection as evidenced by their Joint Affi davit dated 14 August 1957. The deed of sale was not registered with the Offi ce of the Register of Deeds of Isabela. However, Giron declared the property for taxation purposes in her name on March 1964. In a Deed of Saledated 15 June 1976, the Madrid brothers conveyed all their rights and interests over Lot No. 7036-A (including the supposedly share of Rizal Madriarca which was already sold to Giron) to Paciano Marquez (hereafter, Marquez), which the former confi rmed on 28 February 1983.

34. The deed of sale in favor of Marquez was registered with the Offi ce of the Register of Deeds of Isabela on 2 March 1982. Who has a better right with respect to the share of Rizal Madrid which was sold to different vendees, namely: Giron and Marquez? Legal Opinion: If Paciano Marquez was in good faith and was not aware of the prior sale, he has a better right to the land than Aleja Giron. This is explicitly supported by the law on double sales of immovable property in Article 1544 of the Civil Code. According to the law, the ownership of the land shall belong to the person who in good faith recorded the sale in the Registry of Property.

35. Pacto de Retro Sale (Conventional Redemption) The Law Article 1601. Conventional redemption shall take place when the vendor reserves the right to repurchase the thing sold, with the obligation to comply with the provisions of Article 1616 and other stipulations which may have been agreed upon. Discussion of the Law As between an absolute sale and a sale with right to repurchase, no difference exists, except that in the latter, the ownership of the purchaser is subject to the resolutory condition that the vendor exercises his right to repurchase within the time agreed upon. The vendor a retro has no right over the thing pending the redemption. He may, however register the property in his name, with an express statement of the purchaser‟s right thereto.

36. The vendee a retro immediately acquires title and possession of the property sold, subject only to the vendor‟s right of redemption. The vendee, who acquires the ownership of the property, may dispose of the same as any other owner; he may therefore, alienate, make dispositions mortis causa or inter vivos , mortgage or encumber the same, without any other limitations than those imposed upon all owners. But although the right of the vendee is strictly without limitation, it is subject to a resolutory condition; hence, all the acts of disposition that he may make pending the condition are as revocable as is his right. The vendee a retro who takes possession of the property sold under a contract of sale with pacto de retro, is under the obligation to take care of the thing sold during the period of the right to repurchase as a good father of a family who would take care of his own property. The period of redemption shall be four years from the date of the contract, in the absence of

37. any express agreement. Should there be an agreement, the period for redemption cannot exceed 10 years. Application of the Law Case: Mr. John Michael Aldeguer , is an owner of a real property where his 5-star hotel is also erected. By reason of his dire need of money, he sold his real property together with the 5-star hotel to Don Victor Diangson . By this reason, Mr. Aldeguer executed a contract of sale of his real property, together with the hotel, but with the right to repurchase. However, no period for the redemption of the property is specifi ed in the agreement. Until when should Mr. Aldeguer have the privilege to redeem his property from Don Victor Diangson ? Legal Opinion: Mr. Aldeguer may redeem his property within a period of four years from the date of the contract, in the absence of any agreement.

38. Obligations of the Vendor The Law Article 1495. The vendor is bound to transfer the ownership of and deliver, as well as warrant the thing which is the object of the sale. Article 1496 . The ownership of the thing sold is acquired by the vendee from the moment it is delivered to him. Article 1497. The thing sold shall be understood as delivered, when it is placed in the control and possession of the vendee (1462a).

39. Discussion of the Law Under the above provisions, the obligations of the vendor are: (1) to deliver the thing; (2) to transfer ownership of the thing; and (3) to warrant against eviction and against hidden defects. Delivery is not only a necessary condition for the enjoyment of the thing, but is a mode of acquiring dominion and determines the transmission of ownership, the birth of a real right. The fact that the price of the property delivered has not yet been paid in full is not an obstacle to the acquisition of the ownership thereof by the vendee, if such condition has not been stipulated in the contract (as in a contract to sell). When goods are delivered to the buyer “on sale or return” to give the buyer an option to return the goods instead of paying the price, the ownership passes to the buyer on delivery, but he may revest the ownership in the seller by returning or tendering the goods within the time fixed in the contract, or if no time has been fixed, within a

40. reasonable time. When goods are delivered to the buyer “on approval” or “on trial” or other similar terms, the ownership passes to the buyer:   when he signifies his approval or acceptance to the seller or does any other act adopting the transaction; if he does not signify his approval or acceptance to the seller, but retains the goods without giving notice of rejection on the expiration of time as fixed for the return of the goods, or on the expiration of a reasonable time when no time has been fixed.

41. In a C.O.D agreement (cash on delivery) the risk should be borne on the buyer upon delivery of the thing sold or the beneficial interest has been transferred to him. Under an ordinary C.I.F. (Cost, Insurance and Freight) agreement, delivery to the buyer is complete upon the delivery of the goods to the carrier and tender of the shipping and other documents required by the contract and the insurance policy taken in the buyer‟s behalf. The parties may however agree by making the buyer‟s obligation depend only upon arrival and inspection of the goods, in which case, the risk is thrown upon the seller until arrival at the port of destination.F.O.B . (free on board) is a commercial term that signifies a contractual agreement between a buyer and a seller to have the subject of a sale delivered to a designated place, usually either the “place of shipment” or the “place of destination,” without expense to the buyer. “F.O.B shipping point” requires the seller to bear the expense

42. and the risk of putting the subject of the sale into the possession of the carrier, but the duty to pay the transportation charges from the f.o.b. point is on the buyer. Where the shipment is “F.O.B. destination point,” the seller is required to bear the transport until the buyer‟s point of destination.28 If no designation in the F.O.B. agreement is specified, it is understood that the seller‟s factory shall be the place of delivery.

43. Warranty in Case of Eviction A warranty in case of eviction is an implied warranty in contracts of sale, by virtue of which if the vendee is deprived of the whole or a part of the thing purchased by final judgment based on a right prior to the sale or an act imputable to the vendor, such vendor shall answer for the eviction even though nothing has been said in the contract on the subject. The requisites of eviction are: vendee is deprived of the thing purchased wholly or partially; the deprivation is by fi nal judgment; deprivation is based on a right prior to the sale or an act imputable to the vendor; and vendor was summoned in the suit for eviction at the instance of the vendee.

44. Liability for eviction includes: return of the value at the time of eviction; return of income or fruits that the buyer had to surrender; costs of the suit; expenses of the contract; and damages in case the vendor acted in bad faith.

45. Warranty Against Hidden Defects (Redhibitory) A defect is considered redhibitory if it is hidden, unknown to the buyer, existing prior to the sale at least in origin, and which renders the thing unfit for the use intended. The vendee may elect between withdrawing from the contract ( accion redhibitoria ) and demanding a proportionate reduction of the price ( accion quanti minoris ) with damages in either case. Generally, the period of prescription is six months. However, in redhibitory actions against on the faults or defects of animals, the period is forty days.32 The period must be counted from the date of delivery to the vendee. Obligations of the Vendee The Law Article 1582. The vendee is bound to accept delivery and pay the price of the thing sold at the time and place stipulated in the contract.

46. Discussion of the Law Actions for Breach of Contract of Sale Extrajudicial remedies: Of the buyer: The buyer need not pay unless there is delivery. The buyer may reject improper deliveries. The buyer may suspend payment if he is disturbed in the possession or ownership of the thing or has reasonable grounds to fear such disturbance. Of the seller: Vendor is not bound to deliver the thing sold if the vendee has not paid the price. Installment sales (Recto and Maceda Law). Judicial remedies: Of the buyer:

47. Of the buyer: Damages for breach of contract Of the seller: Recovery of the price Damages in case of bad faith

48. Application of the Law Case: Nenita‟s Seafood Mart (NSM) is the supplier of fresh seafood products of Taal Vista Hotel in Tagaytay City. The purchasing manager of the hotel ordered 100 kilos of tiger prawns, 6kilos of lapu-lapu , 40 kilos of Pacific lobster, 120 kilos of oysters, and 80 kilos of milkfish. NSM delivered substandard seafood items on the agreed date of delivery. The contract between the hotel and NSM clearly states that NSM must deliver high quality seafood products to the hotel at all times. Can the hotel reject the deliveries? If the hotel is forced to accept the deliveries as commitment has been made on the menu for banquet functions scheduled for the next day, can the hotel recover damages, i.e., in the form of a discount?

49. Legal Opinion: Yes, the hotel may, as one of the remedies, reject improper deliveries. If the hotel can no longer change the menu for a banquet commitment, and is forced to accept the seafood products, damages may be sought. Alternatively, discount on the price may be sought. Law on Agency The hotel, tourism and hospitality industry cannot do away with agencies which will facilitate various transactions in dealing with third persons. Hence, there is a need to understand the operation of agencies working on behalf of the principal belonging the hotel, tourism and hospitality industry. The Law Article 1868. By the contract of agency a person binds himself to render some service or to do something in representation or on behalf of another, with the consent or authority of the latter (1709a).

50. Discussion of the Law A contract of agency is a relation in which one person, the agent, acts on behalf of another with the authority of the latter, the principal. It is a “fiduciary” relation which results from the manifestation of consent by one person that another shall act on the former‟s behalf and subject to his control, with consent by the other so to act. The acts of the agent will be binding on his principal. The essential elements of agency are: (1) there is consent, express or implied; (2) the object is the execution of a juridical act in relation to a third person; (3) the agent acts as a representative and not for himself; and (4) the agent acts within the scope of his authority.

51. An agency is distinguished from the lease of work or services in that the basis of agency is representation, while in the lease of work or services (such as architect, construction building worker, painter, physician, professor, employees and house helpers) the basis is employment. The most distinctive feature of an agency relationship is the agent‟s power to bring about business relationship between his principal and third persons. The agent is destined to execute juridical acts (creation, modification or extinction of relations with third parties). Lease ofservices contemplates only material (non-juridical) acts.

52. Application of the Law Case: In May 1991, Estela L. Crisostomo (Estela) contracted the services of Caravan Travel and Tours International, Inc. (Caravan Travel) to arrange and facilitate her booking, ticketing and accommodation in a tour dubbed “Jewels of Europe.” The package tour was pegged at 574,322.70. Estela was given a 5% discount on the amount, which included airfare, and the booking fee was also waived because Estela‟s niece, Meriam Menor, was Caravan Travel‟s ticketing manager. Pursuant to said contract, Meriam went to her aunt‟s residence on June 12, 1991 – a Wednesday – to deliver petitioner‟s travel documents and plane tickets. Estela, in turn, gave Meriam the full payment for the package tour. Meriam then told her to be at the Ninoy Aquino International Airport (NAIA) two hours before her flight on board British Airways. Without checking her travel documents, Estela went to NAIA on Saturday, June 15, 1991, to take the flight for the first leg of her journey from Manila to Hong Kong.

53. To Estela‟s dismay, she discovered that the flight she was supposed to take had already departed the previous day. She learned that her plane ticket was for the flight scheduled on June 14, 1991. Thus, she called up Meriam to complain. Subsequently, Meriam prevailed upon Estela to take another tour – the “British Pageant.” For this tour package, Estela was asked anew to pay US$785.00 or 520,881.00 (at the then prevailing exchange rate of P26.60). She gave Caravan Travel through Meriam US$300 or 57,980.00 as partial payment and commenced the trip in July 1991. Upon Estela‟s return from Europe, she demanded from Caravan Travel the reimbursement of 561,421.70, representing the difference between the sum she paid for “Jewels of Europe” and the amount she owed from the latter for the “British Pageant” tour. Despite several demands, Caravan Travel refused to reimburse the amount, contending that the same was non-refundable.

54. Estela was thus constrained to fi le a complaint against respondent for breach of contract of carriage and damages. Is Caravan Travel & Tours International Inc. a common carrier? What is the nature of the business of travel agencies such as Caravan Travel & Tours International, Inc.? Legal Opinion: By definition, a contract of carriage or transportation is one whereby a certain person or association of persons obligate themselves to transport persons, things, or news from one place to another for a fixed price. Such person or association of persons are regarded as carriers and are classified as private or special carriers and common or public carriers. A common carrier is defined under Article 1732 of the Civil Code as persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water or air, for compensation, offering their services to the public. It is obvious from the above definition that Caravan Travel & Tours International, Inc.

55. Case: On September 18, 1981, Daniel Chiok ( Chiok ) purchased from China Airlines, Ltd. (CAL for brevity) an airline passenger ticket for air transportation covering Manila-Taipei-Hong Kong- Manila. Said ticket was exclusively endorseable to Philippine Airlines, Ltd. (PAL). Subsequently, on November 21, 1981, Chiok took his trip from Manila to Taipei using the CAL ticket. When he arrived in Taipei, he went to the CAL office and confirmed his Hong Kong to Manila trip on board PAL Flight No. PR 311. The CAL office confirmed his flight status as OK. When Chiok reached Hong Kong, he went to the PAL office and sought to reconfirm his flight back to Manila. The PAL office confirmed his return trip on board Flight No. PR 311 and attached its own sticker. On November 24, 1981, Chiok proceeded to Hong Kong International Airport for his return trip to Manila.

56. However, upon reaching the PAL counter, Chiok saw a poster stating that PAL Flight No. PR 311 was cancelled because of a typhoon in Manila. He was then informed that all the confirmed ticket holders of PAL Flight No. PR 311 were automatically booked for its next flight, which was to leave the next day. He then informed PAL personnel that, being the founding director of the Philippine Polysterene Paper Corporation, he had to reach Manila on November 25, 1981 because of a business option which he had to execute on said date. On November 25, 1981, Chiok went to the airport. Carmen Chan (hereafter referred to as Carmen), PAL‟s terminal supervisor, informed Chiok that his name did not appear in PAL‟s computer list of passengers and therefore could not be permitted to board PAL Flight No. PR 307.

57. Meanwhile, Chiok requested Carmen to put into writing the alleged reason why he was not allowed to take his flight. The latter then wrote the following, to wit: „PAL staff Carmen Chan Chkd with R/C Kenny at 1005H No such name in computer for 311/24 and 307/25 Nov.‟ Carmen sought to recover his luggage but found only 2 which were placed at the end of the passengers line. Realizing that his new Samsonite luggage was missing, which contained cosmetics worth HK$14,128.80, Chiok complained to Carmen. Thereafter, Chiok proceeded to PAL‟s Hong Kong office and confronted PAL‟s reservation officer, Carie Chao (hereafter referred to as Chao), who previously confirmed his flight back to Manila. Chao told Chiok that his name was on the list and pointed to the latter his computer number listed on the PAL confirmation sticker attached to his plane ticket, which number was „R/MN62‟.

58. Chiok then decided to use another CAL ticket and asked Chao if this ticket could be used to book him for the said flight. The latter, once again, booked and confirmed Chiok‟s trip, this time on board PAL Flight No. PR 311 scheduled to depart that evening. Later, Chiok went to the PAL check-in counter and it was Carmen who attended to him. As this juncture, Chiok had already placed his travel documents, including his clutch bag, on top of the PAL check-in counter. Thereafter, Carmen directed PAL personnel to transfer counters. In the ensuing commotion, Chiok lost his clutch bag containing the following, to wit: (a) $2,000.00; (b) HK$2,000.00; (c) Taipei $8,000.00; (d) 52,000.00; (e) a three-piece set of gold (18 karats) Cross pens valued at 53,500; (f) a Cartier watch worth about 57,500.00; (g) a tie clip with a garnet birthstone and diamond worth 51,800.00; and (h) a [pair of] Christian Dior reading glasses. Subsequently, he was placed on stand-by and at around 7:30 p.m., PAL personnel informed him that he could now check-in.

59. Consequently, Chiok filed a Complaint on November 9, 1982 for damages against PAL and CAL. In its defense, CAL does not admit liability because it merely acted as an issuing agent for the ticket covering the Hong Kong-Manila leg of Chiok‟s journey. What is the nature of liability of China Airlines (CAL)

60. Legal Opinion: A common carrier has a peculiar relationship with and an exacting responsibility to its passengers. For reasons of public interest and policy, the ticket-issuing airline (CAL) acts as principal in a contract of carriage and is thus liable for the acts and the omissions of any errant carrier (i.e. PAL) to which it may have endorsed any sector of the entire continuous trip. It is significant to note that the contract of air transportation was between CAL and Chiok , with the former endorsing to PAL the Hong Kong-to-Manila segment of the journey. Such contract of carriage has always been treated in this jurisdiction as a single operation. This jurisprudential rule is supported by the Warsaw Convention, to which the Philippines is a party, and by the existing practices of the International Air Transport Association (IATA). In American Airlines vs. Court of Appeals, [384 Phil. 227, March 9, 2000] it was ruled that under a general pool partnership agreement, the ticket-issuing airline is the principal in a contract of carriage, while the endorsee- airline is the agent.

61. It was further ruled that “Members of the IATA are under a general pool partnership agreement wherein they act as agent of each other in the issuance of tickets to contracted passengers to boost ticket sales worldwide and at the same time provide passengers easy access to airlines which are otherwise inaccessible in some parts of the world.”Likewise , as the principal in the contract of carriage, the petitioner in British Airways vs. Court of Appeals [285 SCRA 450, January 29, 1998] was held liable, even when the breach of contract had occurred, not on its own flight, but on that of another airline. The decision followed the ruling in Lufthansa German Airlines vs . Court of Appeals, [238 SCRA 290, November 24, 1994] in which it was held that the obligation of the ticket-issuing airline remained and did not cease, regardless of the fact that another airline had undertaken to carry the passengers to one of their destinations.

62. The Concept of an Independent Contractor It has been a practice that the hotel and hospitality industry would enter into contracts with cooperatives and associations engaged in the business of providing messengerial /janitorial services and/or security services to augment expenses for the payment of wages to employees. The principle of independent contracting with these cooperatives and associations is worthy of study, since an independent contractor shall be primarily and directly liable for the wages and other labor benefits of its own employees.

63. An association or cooperative qualifies to be an independent contractor if it has been contracted to do the work according to its own methods and without being subject to the control of the employer, except only as to the results of the work and provided the following requisites concur: The contractor has substantial capital or investment which relates to the job, work or service to be performed and the employees recruited, supplied or placed by such contractor are performing activities which are not directly related to the main business of the principal, or The contractor exercises the right to control over the performance of the work of the contractual employees.

64. “Substantial capital or investment” refers to capital stocks and subscribed capitalization in the case of corporations, tools, equipment, implements, machineries and work premises, actually and directly used by the contractor in the performance or completion of the job, work or service contracted out. The “right to control” shall refer to the right reserved to the person for whom the services of the contractual workers are performed, to determine not only the end to be achieved, but also the manner and means to be used in reaching that end.

65. Failure to qualify as an independent contractor makes the association or cooperative merely a labor-only contractor. In such a case, the association/cooperative or intermediary shall be considered merely as an agent of the employer who shall be responsible to the workers in the same manner and extent as if the latter were directly employed by him. In legitimate labor contracting, the law creates an employer-employee relationship for a limited purpose, i.e., to ensure that the employees are paid their wages. The principal employer becomes jointly and severally liable with the job contractor, only for the payment of the employees‟ wages whenever the contractor fails to pay the same. Other than that, the principal employer is not responsible for any claim made by the employees.

66. Liability of the Principal and the Agent The Law Article 1883. If an agent acts in his own name, the principal has no right of action against the persons with whom the agent has contracted; neither have such persons against the principal. In such case the agent is the one directly bound in favor of the person with whom he has contracted, as if the transaction were his own, except when the contract involved things belonging to the principal.

67. Discussion of the Law When an agent transacts business in his own name, it shall not be necessary for him to state the name of the principal, and he shall be directly liable, as if the business were for his own account to the persons with whom he transacts the same. Moreover, an agent is personally liable for acts beyond the scope of his authority, and for acts in violation of the terms of the written authority. When it is clear that the agent is acting only in behalf of a disclosed principal, the agent cannot be held personally liable on the contract entered into in such manner. Law on Credit Transactions Companies in the tourism industry are likely to face debts. That is why it is important to know the

68. The Law Article 1933. By a contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum ; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous or with a stipulation to pay interest. Discussion of the Law Commodatum is a loan for use wherein the property lent must be returned. Commodatum is essentially gratuitous. For example, when Mr. Smith, a visiting tourist borrowed the house of Dr. Magno , and Mr. Smith was allowed its free use, Dr. Magno became a bailor in commodatum and Mr. Smith, the bailee.

69. Simple loan or mutuum is simply the delivery of sum of money to another under a contract to return at some future time an equivalent amount with or without an additional sum agreed upon for its use.39 It is a transaction wherein the owner of the property, called the lender, allows another party, the borrower, to use the property. The borrower customarily promises to return the property after a specified period with payment for its use, called interest. The documentation of the promise is called a promissory note when the property is cash.40The credit of an individual means his ability to borrow money by virtue of the confidence and trust reposed by a lender that he will pay what he may promise. The concession of a “credit” necessarily involves the granting of “loans” up to the limit of the amount fixed in the credit.

70. Simple Loan or Mutuum The Law Article 1956. No interest shall be due unless it has been expressly stipulated in writing.   Discussion of the Law In a contract of loan, if a particular rate of interest has been expressly stipulated by the parties, such stipulated interest shall be applied. If the exact rate of interest is not mentioned, the legal rate shall be payable (which is 12% per annum under Sec. 1 of the Usury Law). It is only in contracts of loan, with or without security, that interest may be stipulated and demanded. The debtor in delay is also liable to pay legal interest by way of indemnity for damages, which legal interest may be agreed upon, and in the absence of any stipulation, the legal interest shall be 12% per annum.

71. In all cases, interest due shall earn legal interest from the time it is judicially demanded although the obligation may be silent upon this point. By virtue of Central Bank Circular No. 416 dated July 29, 1974 and No. 905 dated December 10, 1982, the legal rate has been increased from 6% to 12% per annum. Application of the Law Case: Under a written contract of loan, Mr. Danny Congo obliged himself to pay Bank of the Philippine Islands the sum of 510,000.00 at 18% interest per year.42 If Mr. Congo incurs delay in payment, will he be obliged to pay interest?

72. Legal Opinion: In case Mr. Congo incurs in delay, he is liable to pay the interest agreed upon by way of indemnity for damages (if any) aside from the use of the money (which is 18%).43 If nothing was mentioned about the payment of interest for the use of money, no interest is due. In case Mr. Congo incurs delay, he is liable to pay interest at the legal rate of 12% per annum from the date of delay.44 If the interest was judicially demanded (by way of fi ling a complaint in court), the interest due as mentioned in the above shall earn legal interest (12% per annum) from the time interest has been due until payment is made.

73. Nature of Bank Deposits It is clear from Article 1980 of the Civil Code of the Philippines that fixed, savings and current deposits of money in banks and similar institutions shall be governed by the provisions of the Civil Code concerning simple loan (mutuum). Hence, a debtor-creditor relationship exists between a bank and a depositor. That is why compensation may take place where a bank may validly debit the account of its depositors who are indebted to the bank by way of loan. Real Estate Mortgage and Chattel Mortgage Valuable properties in the form of movable and immovable properties may be used as collaterals in order to obtain a contract of loan. Hence, it is important to understand basic principles on Real Estate Mortgage and Chattel Mortgage, the usual contracts being utilized in order to obtain loans, especially from banking and other financial institutions.

74. A real estate mortgage is an accessory contract whereby the debtor guarantees the performance of the principal obligation by subjecting real property or real rights as security in case of nonperformance of such obligations within the period agreed upon. The essential requisites of a contract of real estate mortgage are as follows: It must be constituted to secure the performance of the principal obligation; The mortgagor must be the absolute owner of the property mortgaged. The mortgagor should have the free disposal of the property mortgaged, and in the absence thereof, he should be legally authorized for the purpose. When the principal obligation becomes due, the property mortgaged may be alienated for the payment of such obligation. The subject matter of the contract must be immovable property or alienable real rights upon immovables.

75. By a chattel mortgage, personal property is recorded in the Chattel Mortgage Register as a security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor or a third person, the contract is a pledge, not a chattel mortgage.47 In case there is a deficiency in such a way that the proceeds of the sale are not enough to pay the principal obligation during foreclosure proceedings, the creditor may fi le a separate case for the recovery of the deficiency. However, this will not apply in case the principal contract that was entered is a sale of personal property payable in installments (Recto law) not a contract of loan.

76. A chattel mortgage and a real estate mortgage may be distinguished in the following ways: In a chattel mortgage, the subject matter is personal property, whereas in a real estate mortgage, the subject matter is real property. In a chattel mortgage, the requirement of registration is essential for the validity of the contract; in a real estate mortgage, the requirement of registration is merely for the purpose of binding third persons. The procedure for foreclosure of a chattel mortgage is different from the procedure for foreclosure of a real estate mortgage.

77. Pactum Commissorium The Law 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) Discussion of the Law Pactum Commisorium is defined as a stipulation giving power to the creditor to automatically appropriate the thing given as security, if the principal obligation is not fulfi lled without any formality, such as foreclosure proceeding and public sale.

78. Pactum Commissorium The Law 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) Discussion of the Law Pactum Commisorium is defined as a stipulation giving power to the creditor to automatically appropriate the thing given as security, if the principal obligation is not fulfi lled without any formality, such as foreclosure proceeding and public sale.

79. Application of the Law Case: Don Juan borrowed 51,500,000 from the Bank of the Philippine Islands in order to start his restaurant business. Don Juan executed a chattel mortgage with his BMW car valued at 52.5M as the security for the debt. It was expressly stipulated in the contract that if Don Juan cannot pay his debt when it matures, “the debt of 51,500,000 shall be considered as full payment of the BMW car without further action.” In case Don Juan was unable to pay the loan, can the Bank of the Philippine Islands appropriate the car based on the stipulation? Legal Opinion: No, the Bank of the Philippine Islands cannot appropriate the thing. Such stipulation constitutes pactum commissorium which is expressly prohibited under the law.

80. Case: Don Juan borrowed 51,500,000 from Bank of the Philippine Islands to start his restaurant business. Don Juan executed a chattel mortgage with his BMW car valued at 52.5M as the security for the debt. It was expressly stipulated in the contract that if Don Juan cannot pay his debt when it matures, “Don Juan shall execute a deed of absolute sale of the car in favor of Bank of the Philippine Islands.” In case Don Juan was unable to pay the loan, can the Bank of the Philippine Islands appropriate the thing based on the stipulation? Legal Opinion: Yes, such stipulation is valid. There is no automatic transmission of the right of ownership over the thing which is given by way of chattel mortgage, but merely a promise to constitute an assignment of property. What is prohibited by law is the automatic transmission of the right of ownership over the thing which is given by way of mortgage.

81. THANK YOU