3. Effects of Loss of Thing Sold

E. Effects of Loss of Thing Sold (Civil Code, arts. 1493-1494)

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Effects of the Contract When the Thing Sold Has Been Lost

Article 1493. If at the time the contract of sale is perfected, the thing which is the object of the contract has been entirely lost, the contract shall be without any effect.

But if the thing should have been lost in part only, the vendee may choose between withdrawing from the contract and demanding the remaining part, paying its price in proportion to the total sum agreed upon. (1460a)

Article 1494. Where the parties purport a sale of specific goods, and the goods without the knowledge of the seller have perished in part or have wholly or in a material part so deteriorated in quality as to be substantially changed in character, the buyer may at his option treat the sale:

(1) As avoided; or

(2) As valid in all of the existing goods or in so much thereof as have not deteriorated, and as binding the buyer to pay the agreed price for the goods in which the ownership will pass, if the sale was divisible. (n)

Effect when the loss occurred before perfection

GR: Unless otherwise agreed, the goods remain at the seller’s risk until ownership is transferred to the buyer; thereafter, the goods are at the buyer’s risk whether actual delivery has been made or not, subject to the exceptions in Article 1504 (NCC, Art. 1504)

XPNs:

• Where the delivery has been made either to the buyer or to the bailee for the buyer, but ownership in the goods has been retained by the seller merely to secure performance by the buyer of his obligations under the contract [NCC, Art. 1504 (1)];)
• Where actual delivery has been delayed through the fault of either the buyer or seller, the goods are at the risk of the party at fault [NCC, Art. 1504 (2)]; and
• Where goods are sent by the seller to the buyer under circumstances in which the seller knows or ought to know that it is usual to insure, the seller must give such notice to the buyer as may enable him to insure them during their transit, and, if the seller fails to do so, the goods shall be deemed to be at his risk during such transit. [NCC, Art. 1523(3)])

NOTE: Unless otherwise agreed, the goods remain at the seller's risk until ownership passes to the buyer. However, if ownership is retained merely as security, the buyer bears the risk upon delivery to the buyer or the buyer's bailee; if actual delivery is delayed through either party's fault, that party bears the risk. [NCC, Art. 1504 (1)–(2)]

Effect when the loss occurred at the time of perfection of the contract of sale

General rule: If the thing sold had been entirely lost when the sale was made, the contract has no effect because its object no longer existed.

If only part of the thing was lost, the buyer may withdraw from the contract or demand the part that remains. If the buyer demands the remaining part, the buyer must pay the price corresponding to it in proportion to the total price agreed upon. (NCC, Art. 1493)

When specific goods have, without the seller’s knowledge, perished in part or deteriorated wholly or in a material part so as to be substantially changed in character, the buyer may:

• Treat the sale as avoided or cancelled; or
• Treat the sale as valid as to all existing goods or so much of them as have not deteriorated; if the sale was divisible, the buyer must pay the agreed price for the goods whose ownership will pass. (NCC, Art. 1494)

Effect when the loss occurred after perfection but before delivery

GR: Who bears the risk of loss is governed by the stipulations in the contract.

In the absence of stipulation: there are two conflicting views:

First view: Res perit creditori or buyer bears the risk of loss. (Paras, Vitug, Padilla, and De Leon)

Article 1504 of the Civil Code, which embodies res perit domino, only covers goods. The obligation to pay on the part of the buyer is not extinguished. (Villanueva, 2009)

NOTE: Article 1537 of the Civil Code requires the vendor to deliver the thing in its condition upon perfection and assigns its fruits to the vendee from perfection. For loss, deterioration, or improvement before delivery, Article 1538 applies Article 1189, the vendor being considered the debtor, subject to the applicable risk-of-loss provisions of Articles 1480 and 1504. This theory is an exception to the rule of res perit domino. On the other hand, pursuant to Article 1262 of the Civil Code, if the thing is lost or destroyed without the fault of the seller, the obligation to deliver is extinguished but the obligation to pay subsist.

Second view: Res perit domino or seller bears the risk of loss. (Tolentino, Jurado, Baviera, and Villanueva)

In reciprocal obligations, the extinguishment of the obligation due to loss of the thing affects both debtor and creditor; the entire juridical relation is extinguished. Under this view, the rule on loss under Article 1189 of the Civil Code would be different from the rule on deterioration – the loss would be for the account of the seller, while deterioration would be for the account of the buyer.

This view would make Articles 1480 and 1538 of the Civil Code consistent with the provisions of Article 1504 of the Civil Code

Ownership is transferred only after delivery, further, the contract is reciprocal. If the vendee cannot have the thing, it is illogical and unjust to make him pay the price.

Effect when loss occurred after delivery

GR: Res perit domino applies – the buyer is now the owner; hence, the buyer bears the risk of loss. (NCC, Art. 1504)

Person who bears the risk of loss or deterioration

Effect of registration as to better right of third parties

A registered mortgage right over property previously sold is inferior to the buyer’s unregistered right.

Reason: If the original owner had sold the thing, then he no longer had ownership and free disposal of it so as to be able to mortgage it. (State Investment House, Inc. v. CA, G.R. No. 115548, March 5, 1996)

Failure of Cause

If the buyer fails to pay the price or the seller fails to deliver the thing to the buyer, the injured party may seek fulfillment or rescission of the reciprocal obligation, with damages in either case when warranted.