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Filinvest Credit vs. CA [G.R. No. 82508. September 29, 1989.

Second Division, Sarmiento (J): 3 concur, 1 on leave
Facts: The spouses Jose Sy Bang and Iluminada Tan were engaged in the sale of gr
avel produced from crushed rocks and used for construction purposes. In order to
increase their production, they engaged the services of Mr. Ruben Mercurio, the
proprietor of Gemini Motor Sales in Lucena City, to look for a rock crusher whi
ch they could buy. Mr. Mercurio referred the spouses to the Rizal Consolidated C
orporation which then had for sale one such machinery (Lippman portable crushing
plant, reconditioned; Jaw crusher, 10 x 16, Double roll crusher, 16 x 16; 3 uni
ts product conveyor, 75 HP electric motor, 8 pcs. Brand new tires; Chassis 19696
, Good running condition). Oscar Sy Bang, a brother of Jose Sy Bang, went to ins
pect the machine at the Rizal Consolidated s plant site. Apparently satisfied with
the machine, Sy Bang signified their intent to purchase the same. They were con
fronted with a problem, the rock crusher carried a cash price tag of P550,000.00
. Bent on acquiring the machinery, the spouses applied for financial assistance
from Filinvest Credit Corporation. Filinvest agreed to extend to the spouses fin
ancial aid on the following conditions: that the machinery be purchased in Filin
vest s name; that it be leased (with option to purchase upon the termination of th
e lease period) to the spouses; and that the spouses execute a real estate mortg
age in favor of Filinvest as security for the amount advanced by the latter. Acc
ordingly, on 18 May 1981, a contract of lease of machinery (with option to purch
ase) was entered into by the parties whereby the spouses agreed to lease from th
e petitioner the rock crusher for two years starting from 5 July 1981 payable at
P10,000.00 for first 3 months, P23,000.00 for the next 6 months, and P24,800.00
for the next 15 months. The contract likewise stipulated that at the end of the
two-year period, the machine would be owned by the spouses. Thus, the spouses i
ssued in favor of Filinvest a check for P150,550.00, as initial rental (or guara
nty deposit), and 24 postdated checks corresponding to the 24 monthly rentals. I
n addition, to guarantee their compliance with the lease contract, the spouses e
xecuted a real estate mortgage over two parcels of land in favor of Filinvest. T
he rock crusher was delivered to the spouses on 9 June 1981. Three months from t
he date of delivery, or on 7 September 1981, however, the spouses, claiming that
they had only tested the machine that month, sent a letter-complaint to Filinve
st, alleging that contrary to the 20 to 40 tons per hour capacity of the machine
as stated in the lease contract, the machine could only process 5 tons of rocks
and stones per hour. They then demanded that Filinvest make good the stipulatio
n in the lease contract. They followed that up with similar written complaints t
o Filinvest, but the latter did not, however, act on them. Subsequently, the spo
uses stopped payment on the remaining checks they had issued to Filinvest. As a
consequence of the non-payment by the spouses of the rentals on the rock crusher
as they fell due despite the repeated written demands, Filinvest extrajudiciall
y foreclosed the real estate mortgage. On 18 April 1983, the spouses received a
Sheriff a Notice of Auction Sale informing them that their mortgaged properties
were going to be sold at a public auction on 25 May 1983, 10:00 a.m., at the Off
ice of the Provincial Sheriff in Lucena City to satisfy their indebtedness to Fi
To thwart the impending auction of their properties, the spouses filed before th
e RTC Quezon (Branch LIX, Lucena City), on 4 May 1983, a complaint against Filin
vest for the rescission of the contract of lease, annullment of the real estate
mortgage, and for injunction and damages, with prayer for the issuance of a writ
of preliminary injunction. On 23 May 1983, 3 days before the scheduled auction
sale, the trial court issued a temporary restraining order commanding the Provin
cial Sheriff of Quezon, and Filinvest, to refrain and desist from proceeding wit
h the public auction. Two years later, on 4 September 1985, the trial court rend
ered a decision in favor of the spouses, making the injunction permanent, rescin
ding the contract of lease of the machinery and equipment and ordering the spous
es to return to the Filinvest the machinery subject of the lease contract, and F
ilinvest to return to the spouses the sum of P470,950.00 it received from the la
tter as guaranty deposit and rentals with legal interest thereon until the amoun
t is fully restituted; annulling the real estate mortgage constituted over the p
roperties of the spouses covered by TCTs T-32480 and T-5779 of the Registry of D
eeds of Lucena City; and ordering the Filinvest to pay the spouses P30,000.00 as
attorney s fees and the costs of the suit.
Dissatisfied with the trial court s decision, Filinvest elevated the case to the C
ourt of Appeals. On 17 March 1988, the appellate court, finding no error in the
appealed judgment, affirmed the same in toto. Hence, the petition for review on
certiorari by Filinvest.
The Supreme Court granted the petition, reversed and set aside the 17 March 1988
Decision of the Court of Appeals, and rendered another one dismissing the compl
aint; with costs against the spouses.
1. Financial institution not immune from recourse of the spouses; Filinvest o
wns crusher
While it is accepted that Filinvest Credit Corporation is a financing institutio
n, it is not, however, immune from any recourse by the private respondents. Notw
ithstanding the testimony of Jose Sy Bang that he did not purchase the rock crus
her from Filinvest, the fact that the rock crusher was purchased from Rizal Cons
olidated Corporation in the name and with the funds of Filinvest proves beyond d
oubt that the ownership thereof was effectively transferred to it. It is precise
ly this ownership which enabled Filinvest to enter into the Contract of Lease of
Machinery and Equipment with the spouses
2. Nomenclature of agreement cannot change its true essence; sale on installm
The real intention of the parties should prevail. The nomenclature of the agreem
ent cannot change its true essence, i.e., a sale on installments. It is basic th
at a contract is what the law defines it and the parties intend it to be, not wh
at it is called by the parties. It is apparent that the intent of the parties to
the subject contract is for the so-called rentals to be the installment payment
s. Upon the completion of the payments, then the rock crusher, subject matter of
the contract, would become the property of the spouses. This form of agreement
has been criticized as a lease only in name.
3. Payment in contract of lease with option to buy are installment payments
In Vda. de Jose v. Barrueco, it was stated that Sellers desirous of making condi
tional sales of their goods, but who do not wish openly to make a bargain in tha
t form, for one reason or another, have frequently resorted to the device of mak
ing contracts in the form of leases either with options to the buyer to purchase
for a small consideration at the end of term, provided the so-called rent has b
een duly paid, or with stipulations that if the rent throughout the term is paid
, title shall thereupon vest in the lessee. It is obvious that such transactions
are leases only in name. The so-called rent must necessarily be regarded as pay
ment of the price in installments since the due payment of the agreed amount res
ults, by the terms of bargain, in the transfer of title to the lessee.
4. Article 1484
Article 1484 of the new Civil Code, which provides for the remedies of an unpaid
seller of movables in installment basis, states In a contract of sale of persona
l property the price of which is payable in installments, the vendor may exercis
e any of the following remedies: (1) Exact fulfillment of the obligation, should
the vendee fail to pay; (2) Cancel the sale, should the vendee s failure to pay c
over two or more installments; (3) Foreclose the chattel mortgage or the thing s
old, if one has been constituted, should the vendee s failure to pay cover two or
more installments. In this case, he shall have no further action against the pur
chaser to recover any unpaid balance of the price. Any agreement to the contrary
shall be void.
5. Remedies under Article 1484 alternative and not cumulative
Under Article 1484, the seller of movables in installments, in case the buyer fa
ils to pay two or more installments, may elect to pursue either of the following
remedies: (1) exact fulfillment by the purchaser of the obligation; (2) cancel
the sale; or (3) foreclose the mortgage on the purchased property if one was con
stituted thereon. It is now settled that the said remedies are alternative and n
ot cumulative and therefore, the exercise of one bars the exercise of the others
6. Contract of lease with option to buy a device to circumvent Article 1484
The device contract of lease with option to buy is at times resorted to as a mea
ns to circumvent Article 1484, particularly paragraph (3) thereof. Through the s
et-up, the vendor, by retaining ownership over the property in the guise of bein
g the lessor, retains, likewise, the right to repossess the same, without going
through the process of foreclosure, in the event the vendee-lessee defaults in t
he payment of the installments. There arises therefore no need to constitute a c
hattel mortgage over the movable sold. More important, the vendor, after reposse
ssing the property and, in effect, canceling the contract of sale, gets to keep
all the installments-cum-rentals already paid.
7. Article 1485 places contract of lease with option to buy within the applic
ability of Article 1484
Article 1485 of the new Civil Code provides that The preceding article shall be a
pplied to contracts purporting to be leases of personal property with option to
buy, when the lessor has deprived the lessee of possession or enjoyment of the t
8. No reason to hold Filinvest liable for failure of rock crusher to produce
in accordance with its capacity
The Court failed to find any reason to hold the petitioner liable for the rock c
rusher s failure to produce in accordance with its described capacity. It was the
spouses who chose, inspected, and tested the subject machinery. It was only afte
r they had inspected and tested the machine, and found it to their satisfaction,
that the spouses sought financial aid from Filinvest. These allegations of the
petitioner had never been rebutted by the spouses, but in fact, even been admit
ted in the contract they signed ( LESSEE S SELECTION, INSPECTION AND VERIFICATION. T
he LESSEE hereby confirms and acknowledges that he has independently inspected a
nd verified the leased property and has selected and received the same from the
Dealer of his own choosing in good order and excellent running and operating con
dition and on the basis of such verification, etc. the LESSEE has agreed to ente
r into this Contract. )
9. Spouses presumed knowledgeable on machinery subject of the contract; Spous
es negligent
Considering that between the parties, it is the spouses, by reason of their busi
ness, who are presumed to be more knowledgeable, if not experts, on the machiner
y subject of the contract, they should not therefore be heard now to complain of
any alleged deficiency of the said machinery. It is their failure or neglect to
exercise the caution and prudence of an expert, or, at least, of a prudent man,
in the selection, testing, and inspection of the rock crusher that gave rise to
their difficulty and to this conflict. A well-established principle in law is t
hat between two parties, he, who by his negligence caused the loss, shall bear t
he same.
10. Spouses precluded from imputing liability on Filinvest; Express waiver of
Even if the spouses could not be adjudged as negligent, they still are precluded
from imputing any liability on Filinvest. One of the stipulations in the contra
ct they entered into with Filinvest is an express waiver of warranties in favor
of the latter. By so signing the agreement, the spouses absolved Filinvest from
any liability arising from any defect or deficiency of the machinery they bought
. The stipulation on the machine s production capacity being typewritten and that of
the waiver being printed does not militate against the latter s effectivity. As suc
h, whether a capacity of 20 to 40 tons per hour is a condition or a description is
of no moment. What stands is that the spouses had expressly exemptd Filinvest f
rom any warranty whatsoever. Their Contract of Lease Of Machinery And Equipment
states WARRANTY LESSEE absolutely releases the lessor from any liability whatsoev
er as to any and all matters in relation to warranty in accordance with the prov
isions hereinafter stipulated.
11. Common sense dictates buyer inspects product before purchasing it; Caveat
Common sense dictates that a buyer inspects a product before purchasing it (unde
r the principle of caveat emptor or buyer beware ) and does not return it for defec
ts discovered later on, particularly if the return of the product is not covered
by or stipulated in a contract or warranty.
12. Declaration of waiver as non-effective would impair obligations of contra
Taking into account that due to the nature of its business and its mode of provi
ding financial assistance to clients, Filinvest deals in goods over which it has
no sufficient know-how or expertise, and the selection of a particular item is
left to the client concerned, the latter, therefore, shoulders the responsibilit
y of protecting himself against product defects. This is where the waiver of war
ranties is of paramount importance. In the present case, to declare the waiver a
s non-effective would impair the obligation of contracts. Certainly, the waiver
in question could not be considered a mere surplusage in the contract between th
e parties. Moreover, nowhere is it shown in the records of the case that the spo
uses has argued for its nullity or illegality.
13. No ambiguity in the language of the waiver
In any event, there is no ambiguity in the language of the waiver or the release
of warranty. There is therefore no room for any interpretation as to its effect
or applicability vis-a-vis the deficient output of the rock crusher. Suffice it
to say that the spouses have validly excused Filinvest from any warranty on the
rock crusher. Hence, they should bear the loss for any defect found therein.