Sale: Loss & Deterioration, Fruits & Accessions

CHAPTER 9

LOSS & DETERIORATION, FRUITS & ACCESSIONS


BEFORE PERFECTION


AT THE TIME OF PERFECTION


AFTER PERFECTION BUT BEFORE DELIVERY

Loss of the Subject Matter

Deterioration, Fruits, and Improvements


AFTER DELIVERY


STRUCTURING A CLEARER DOCTRINE ON LOSS, DETERIORATION, FRUITS, AND IMPROVEMENTS


Stages of a Contract of Sale

  1. Perfection - The contract is concluded upon agreement on the object and price.

  2. Delivery - Ownership is transferred from the seller to the buyer.

  3. Performance - Both parties fulfill their respective obligations (delivery and payment).

Principle of Res Perit Domino

  • The owner bears the risk of loss.

  • Before delivery, the seller bears the risk.

  • After delivery, the buyer assumes the risk.


I. BEFORE PERFECTION

Ownership and Risk

  • Prior to the perfection of a sale, the purported seller retains ownership of the subject matter.

  • Any loss, deterioration, fruits, or improvements remain with the seller.

  • No legal or equitable relationship exists between the purported buyer and the subject matter.

  • The purported buyer does not assume any risk of loss or deterioration.

  • Roman v. Grimalt, 6 Phil. 96 (1906):

    • Negotiation for the sale of a schooner for P51,500, subject to the seller clearing his title.

    • Before delivery, the schooner sank in a storm.

    • Seller demanded payment from the buyer.

  • Ruling:

    • A sale is perfected when there is an agreement on the object and price.

    • In this case, no sale was perfected as the title was not cleared and the agreement was conditional.

    • Since the sale was not perfected, the loss was borne by the seller as the owner.

  • Important Principle:

    • Ownership is not transferred until actual delivery and payment.

    • The risk of loss only transfers after perfection and delivery.


II. AT THE TIME OF PERFECTION

Legal Provisions (Article 1493, New Civil Code)

  • If at the time of perfection, the subject matter is entirely lost, the contract has “no effect.”

  • If the subject matter is partially lost, the buyer may:

  • Withdraw from the contract; or

  • Accept the remaining portion, paying a proportionate price.


Not Void but Without Effect

  • The law does not explicitly declare the sale void but instead states that it shall have no effect.

  • The reason is that while a contract of sale can be perfected even without physical existence of the object, it would be futile to proceed since delivery is no longer possible.

Scholarly Views

  • Tolentino: 

    • The contract never comes into existence; there can be no sale without an object to sell. 

    • No annulment action is necessary since a void contract does not exist.

  • Paras: 

    • The contract is void if the subject matter is lost at perfection.


Sale of Specific Goods (Article 1494, New Civil Code)

  • If the object perishes in part or deteriorates materially to change its character, the buyer has the option to:

    • Avoid the sale entirely.

    • Accept the remaining goods and pay their proportionate price (if the sale is divisible).

  • Unlike Article 1493, Article 1494 does not limit its legal effects to the time of perfection.



III. AFTER PERFECTION BUT BEFORE DELIVERY

Risk of Loss and Deterioration (Article 1480, New Civil Code)

  • Once a sale is perfected, the risk of loss or deterioration shifts to the buyer.

  • This principle aligns with the common law rule on risk of loss.

  • This applies even if the seller still retains possession of the subject matter.

Risk of Loss Before Delivery

The principle derived from Articles 1493 and 1494:

  • At the time of perfection → The seller bears the loss. The seller retains ownership and risk.

  • After perfection → The buyer bears the risk of loss, even without prior delivery.

    • If the object is lost, the contract is without effect.

    • If partially lost, the buyer has options.

  • After perfection but before delivery → The risk of loss shifts to the buyer. Seller should preserve goods before delivery.

Loss of the Subject Matter

  • Ownership Transfer Rule (Article 1477)

    • Ownership is transferred upon delivery, not upon perfection.

  • Risk of Loss (Article 1504)

    • Unless otherwise agreed, the goods remain at the seller’s risk until ownership is transferred.

    • If ownership has transferred, the goods are at the buyer’s risk.

  • Article 1480

  • From perfection to delivery, any injury to or benefit from the thing sold is governed by Articles 1163-1165 and 1262.

  • The buyer may compel delivery if the thing is determinate (Article 1165).

  • If the thing is lost due to a fortuitous event before delivery, the seller’s obligation is extinguished (Article 1262).

  • Article 1538

    • The rules in Article 1189 shall apply, treating the vendor as the debtor.

  • General Contractual Rule (Article 1189, NCC)

    • If lost through the seller’s fault, the seller pays damages.

    • If lost without fault, the obligation is extinguished.

Conflicting Doctrines on Risk of Loss

  • Paras and Padilla

    • Even if the seller is excused from delivery, the buyer must still pay the price.

    • The buyer bears the risk of loss from perfection despite not yet owning the object.

  • Tolentino (Adopted by Jurado)

    • The obligation is reciprocal; if one obligation is extinguished, the other is also extinguished.

    • The seller bears the risk until delivery.

    • If lost through a fortuitous event, neither party is liable.

  • Effect of Articles 1480 and 1538

    • If following Paras, the buyer bears the risk before ownership transfer.

    • If following Tolentino, the seller bears the risk before delivery, except for damages in fortuitous events.


Deterioration, Fruits, and Improvements

  • Rule on Deterioration (Article 1189)

    • If the thing deteriorates without fault, the buyer bears the impairment.

    • If through the seller’s fault:

      • the buyer may rescind or 

      • demand fulfillment with damages.

  • Rule on Fruits and Improvements (Article 1189)

    • If the thing improves naturally or over time, the improvement benefits the buyer.

    • If improved at the seller’s expense, the seller retains usufructuary rights.

  • Contradiction Between Articles 1504 and 1538

    • Article 1504 - Res perit domino applies strictly to loss of goods.

    • Articles 1480 and 1538 - Apply to loss, deterioration, and improvements, treating the seller as the debtor.


  • The risk of loss is determined by delivery (Article 1504) but deterioration and improvements are governed by perfection (Articles 1480 and 1538).


IV. STRUCTURING A CLEARER DOCTRINE ON LOSS, DETERIORATION, FRUITS, AND IMPROVEMENTS


General Rule on Risk of Loss After Delivery

  • Under Article 1504 of the Civil Code, once ownership of the goods has been transferred to the buyer, the goods are at the buyer’s risk.

  • The principle of res perit domino applies, meaning the risk follows ownership.

  • However, there are two exceptions:

    1. Ownership retained by the seller as security: 

      • If delivery has been made but ownership is retained by the seller merely to secure performance, the risk passes to the buyer upon delivery. 

      • This means that despite the seller holding title as a security measure, the buyer assumes the risk from the moment of delivery.

    2. Delayed delivery due to fault: 

      • If actual delivery is delayed through the fault of either party, the risk is on the party at fault.

  • Song Fo & Co. v. Oria

    • After delivery of a vessel, the buyer was still obligated to pay the balance even though the vessel was lost.

    • Illustrates the rule that after delivery, risk of loss passes to the buyer.

  • Lawyer's Cooperative v. Tabora

    • Books were purchased on installment, with ownership retained by the seller until full payment.

    • Despite loss due to fire, the risk was still with the buyer, as:

      • The retention of ownership was merely for security.

      • The contract expressly provided that loss after delivery was the buyer’s responsibility.

    • The buyer’s defense of force majeure was rejected because:

      • The obligation of the buyer was to pay, not to deliver.

      • Fortuitous events do not extinguish monetary obligations.

Doctrine on Risk of Loss, Deterioration, Fruits, and Improvements

  • The prevailing doctrine depends on who holds title and beneficial interest:

  1. Before Perfection of Sale:

    • Title & Beneficial Interest: Seller

    • Who bears risk of loss/deterioration? Seller

    • Who benefits from fruits/improvements? Seller

    • No legal relationship yet exists between the parties regarding the subject matter of the sale.

  2. After Delivery (Title & Beneficial Interest with Buyer):

    • Title & Beneficial Interest: Buyer

    • Who bears risk of loss/deterioration? Buyer

    • Who benefits from fruits/improvements? Buyer

    • The seller ceases to have legal relations with the goods.

  3. After Perfection but Before Delivery (Split Title & Beneficial Interest):

    • Title: Seller

    • Beneficial Interest: Buyer

    • Who bears risk of loss/deterioration? Buyer (since the goods are held for the buyer’s benefit)

    • Who benefits from fruits/improvements? Buyer

    • Supported by provisions of the Civil Code:

      • Article 1163: Obligation to take care of goods with diligence.

      • Article 1164: Buyer has right to fruits once obligation to deliver arises.

      • Article 1169: Delay or negligence of the obligor makes them liable for damages.

      • Article 1537: Includes accessories in the obligation to deliver.


  • Under American Law:

    • Ownership transfers upon perfection in unconditional sales, meaning both title and beneficial interest are in the buyer from the start.

    • Thus, risk of loss is always on the buyer post-perfection.

  • Under Philippine Law:

    • Perfection does not transfer ownership; delivery is necessary.

    • During the period between perfection and delivery, title remains with the seller, but beneficial interest is with the buyer.

    • Risk of loss follows beneficial interest rather than mere title.

When Risk of Loss Rests on the Seller

  • If ownership is retained not just as security but for control over goods, the seller bears the risk.

    • Examples:

      • Cash on Delivery (C.O.D.) sales

      • Sale on approval or trial

  • In such cases, ownership is dominical (for control) rather than nominal (for security only).

Unifying Doctrine on Risk of Loss, Deterioration, and Improvement

  • General Rule: Risk follows the party with both title and beneficial interest.

  • If title and beneficial interest do not merge:

    • The risk is on the party with the greater stake in the goods at the time of loss.

    • The law (e.g., Article 1189 and Article 1504) supports the principle that risk follows beneficial ownership rather than legal ownership alone.


  • Risk of loss generally follows ownership (res perit domino).

  • If seller retains ownership only as security, risk is still on the buyer.

  • If delivery is delayed due to fault, the party at fault bears the risk.

  • Between perfection and delivery, risk follows beneficial interest, not legal title.

  • If ownership is retained for control (e.g., C.O.D.), risk remains with the seller.

  • Monetary obligations are not extinguished by fortuitous events.

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