In an ideal world, people honor their obligations. A simple handshake would be enough and there’s no need for a written contract. Pinoy Entrepreneurs would not be too concerned with seemingly trivial matters, perhaps like a distinction between a contract of sale and a contract to sell. Unfortunately, this is a world full of flaws and imperfections.

So the Pinoy Entrepreneur would have to deal with the fact that there’s a distinction between a contract to sell and contract of sale. We bump into these terms in, well, sales. For instance, if you purchase a house and lot, you have to check what’s the nature of the contract you’re signing. But why would that matter?

In a contract of sale, the title passes to the buyer upon the delivery of the thing sold. The vendor has lost and cannot recover the ownership of the property until and unless the contract of sale is itself resolved and set aside. On the other hand, in a contract to sell, the seller retains ownership over the subject matter of the sale. Ownership doesn’t pass to the buyer until the full payment of the purchase price is made. “Full payment” are the magic words. The title remains in the vendor if the vendee does not comply with the condition of making payment at the time specified in the contract. You can’t sell what you don’t yet own.

There’s a technical distinction (i.e., non-payment of the price is a negative resolutory condition in contract of sale, while full payment is a positive suspensive condition in a contract to sell), but that’s not crucial for ordinary purposes. Suffice it to say that the non-payment of the purchase price renders a contract to sell ineffective and without force and effect.

Much ado over nothing? It depends. If the seller and the buyer dutifully complies with each other’s obligation, the end result would be the same. But, again, that’s in the ideal world. Problems do arise down here. In a contract of sale, the buyer’s failure to pay the full price or the seller’s failure to deliver the thing sold is most likely a breach of contract. Should the buyer fail to pay in a contract of sale, the seller has the option of either compelling the payment or terminating the contract.

In a contract to sell, the buyer’s failure to pay the full price, the contract becomes ineffective and is set aside. In other words, if you buy a parcel of land and enters into a contract to sell, the seller can’t force you to pay the full price in the event that you can’t pay it. Maybe a portion of the installment will be forfeited in favor of the seller, which is a standard provision in such kind of contracts. Incidentally, the discussion on option money, earnest money and down payment would most likely come into play.

As always, there will be exceptions and each transaction will be decided based on the facts present. This discussion is for information only and should not be construed as an advice. (Source: Ayala Life Assurance, Inc. vs. Ray Burton Development Corporation, G.R. No. 163075, 23 January 2006)

• Contract Series: Title of a Contract
• Basics on Earnest Money, Option Money and Downpayment
• Equitable Mortgage and Sales
• Contract Series: The Preamble or Whereas Clause
• Entrepreneur Guide: The Parties (Contract Series)
• Dacion en Pago (Dation in Payment)
• Entrepreneur Guide: The Term or Period (Contract Series)