Important distinction

The distinction between a contract to sell and a contract of sale is important in case there are conflicting claims of ownership to the thing sold. The kind of contract determines when ownership is transferred to the buyer. This is illustrated in this case of a company (SMP) engaged in manufacturing of general purpose polystyrene products (GPS) and a commercial bank (FEBTC).

The case involved 4,000 bags or sacks of GPS delivered by SMP to another manufacturing company (CMP) pursuant to the latter’s purchase order for a total price of $118,500 or P3,096,105. Upon completion of delivery covered by delivery receipts with a stipulation that loss or destruction of the goods while in transit is already for the account of the buyer, CMP paid SMP with postdated checks given to the latter’s Sales Executive Maritess who issued provisional receipts in triplicate and wrote thereon the words “materials belong to SMP Inc until your checks clear”. When the checks were deposited by SMP on their maturity dates however, they were dishonored and returned for the reason “account closed”.

In the meantime CMP was also sued by FEBTC for recovery of a sum of money with a prayer for issuance of a writ of preliminary attachment. The Court granted and issued said writ. Hence real and personal properties of CMP were levied and attached. Included however in the attachment were the 4,000 bags of GPS delivered by SMP. Thus SMP filed an Affidavit of Third Party Claim alleging ownership of the bags. But the goods were not released to SMP because FEBTC filed an indemnity bond. Instead the court directed SMP to pursue its claim of ownership in a vindicatory action under Section 17, Rule 39 of the Rules of Court.

Eventually, FEBTC obtained a favorable judgment against CMP. When said judgment became final and executory, it was implemented and enforced against CMP’s properties including the 4,000 bags of GPS earlier attached. Hence SMP sued FEBTC for recovery of the value of said bags plus damages. SMP alleged that there was wrongful attachment of the goods because ownership of the same was never transferred to CMP. 

FEBTC however asserted that CMP as buyer of said goods had already acquired ownership over them at the time of attachment because the delivery receipts contains a “free on board” (F.O.B.) stipulation providing that the loss or damage to the goods in transit was for the buyer’s account. Under the terms and conditions of the sales therefore ownership of the thing is acquired by the buyer from the moment of delivery, the bank contended. Was the bank correct?

No. To determine the intention of the parties, a distinction should be made between a contract of sale and a contract to sell. In a contract of sale, title to the property passes to the buyer upon delivery of the thing sold; while in a contract to sell, ownership is, by agreement, reserved for the seller and is not passed to the buyer until full payment of the purchase price.

In this case, ownership of the GPS products was retained by SMP until after the checks given as payment by CMP are cleared. This was evidenced by the triplicate copy of the provisional receipts issued by SMP to CMP which are also regarded as originals as the other two copies executed at the same time (Section 4, Rule 130, Rules of Court). The agreement between SMP and CMP therefore involved a contract to sell defined under Article 1478 of the Civil Code.

The F.O.B. stipulation in the delivery receipts — that the loss or destruction of the product while in transit is for the account of CMP — does not alter the nature of the contract as contract to sell. This stipulation can co-exist with the stipulation in a contract to sell that the ownership of the thing sold remains with the seller until full payment of the purchase price (BPI etc. vs. SMP Inc. G.R. 175466, December 23, 2009).

Note: Books containing compilation of my articles on Labor Law and Criminal Law (Vols. I and II) are now available. Call tel. 7249445.

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