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Sales 2

1) Courts are generally inclined to construe ambiguous transactions as equitable mortgages rather than sales to involve lesser property rights. 2) The intention of parties in an agreement is shown by surrounding circumstances like their situation and acts, not just terminology. 3) Pactum commissorium, where a creditor can automatically take collateral property due to default, is null and void under the Civil Code. An instrument was neither a sale with repurchase right nor equitable mortgage and so could not involve a pactum commissorium.

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90 views1 page

Sales 2

1) Courts are generally inclined to construe ambiguous transactions as equitable mortgages rather than sales to involve lesser property rights. 2) The intention of parties in an agreement is shown by surrounding circumstances like their situation and acts, not just terminology. 3) Pactum commissorium, where a creditor can automatically take collateral property due to default, is null and void under the Civil Code. An instrument was neither a sale with repurchase right nor equitable mortgage and so could not involve a pactum commissorium.

Uploaded by

Boy Kakak Toki
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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San Pedro v.

Lee, held that when the two above enumerated conditions are not proven, the existence of
any of the circumstances enumerated in Article 1602 cannot become the basis to treat the transaction as
an equitable mortgage. When in doubt, courts are generally inclined to construe a transaction
purporting it to be a sale as an equitable mortgage, which involves a lesser transmission of rights and
interest over property in controversy.78 Lapat v. Rosario,79 held that “[a] contract should be construed
as a mortgage or a loan instead of a pacto de retro sale when its terms are ambiguous or the
circumstances surrounding its execution or its performance are incompatible or inconsistent with a sale.”

In Molina v. Court of Appeals,80 the Court held that the intention of the parties to an agreement is
shown not necessarily by the terminology used therein but by all the surrounding circumstances, such as
the relative situation of the parties at the time, the attitude, acts, conduct, declaration of the parties at
the time, leading to the deed, and generally, all pertinent facts having a tendency to fix and determine
the real nature of their design and understanding.

Pactum Commissorium
Under Article 2088 of the Civil Code, a 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. In Vda. de Zulueta v.
Octaviano,83 an instrument was executed between the parties where it was provided inter alia that
upon the redemption of the land by the buyer from a third party, then the instrument shall be
considered a deed of absolute and definite sale by the seller to the buyer and the Register of Deeds was
authorized to cancel title and to issue a new title in favor of the buyer. Subsequently, another instrument
was executed entitled an “option to repurchase,” between the same parties over the same parcel of
land.

The Court could not consider the transactions to be one of sale a retro since the option to purchase was
executed subsequently and in a separate document citing the Villarica doctrine. The Court could not also
consider the transactions to be an equitable mortgage since nothing in the main document tended to
show that the property sold was meant to be a security for the payment of a loan, and none of the
circumstances under Article 1602 showing an equitable mortgage were shown to be present. The Court
held that “[i]nasmuch as the contract was neither a sale with right of repurchase, nor an equitable
mortgage, neither can it be successfully alleged that it partook of a ‘pactum commissorium’ and was,
therefore, void. ‘Pactum commissorium’ is a stipulation for automatic vesting of title over the security in
the creditor in case of the debtor’s default.”84 In that case it found that the seller was not a debtor and
owed nothing to the buyer and nothing was offered as security for the payment of any indebtedness.
Octaviano emphasized that the public policy on pactum commissorium applies only when the covering
transaction is a mortgage or other security contracts and has no application to a true sale or transfer
transaction.

In Guerrero v. Yñigo,85 it was stipulated in an instrument entitled “Mortgage with Conditional Sale” that
the mortgagor reserved for himself the right to redeem the said property after the period of five years
from the date of the instrument by paying back and returning the amount loaned and the right of
possession and use within said period; and that on failure of the mortgagor to exercise the said right to
redeem the said property according to the terms thereof, title thereto shall pass to and become vested,
absolutely, in the mortgagee. The Court held that the stipulation cannot be construed as giving the
mortgagee the right to own the property upon failure of the mortgagor to pay the loan on the stipulated
time, since that would amount to pactum commissorium which is unlawful and void. Therefore, it
dismissed the contention of the mortgagee that the instrument was actually a sale a retro.

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