Case Summary (G.R. No. 72593)
Key Dates and Documents
April 5, 1978 — sales invoice; execution of deed of sale with chattel mortgage and promissory note; deed of assignment of rights in the chattel mortgage to respondent.
Delivery of tractors and stationing of seller’s mechanics occurred immediately after execution. Notices of breakdown and repair documents, Exhibit series (Exhs. 5, 6, 6-A to 6-E); letter dated April 7, 1979 requesting reconditioning (Exh. 7). Trial court decision rendered April 20, 1981; Intermediate Appellate Court decision dated July 17, 1985 with denial of motion for reconsideration October 17, 1985; Supreme Court disposition annulling and setting aside the appellate decision (text of decision provided).
Facts of Sale, Warranty and Early Performance
IPM inspected the buyer’s jobsite, represented that the used tractors were fit for the intended heavy logging and road-building work, and gave an express 90-day performance warranty and assurance as to parts availability. Consolidated Plywood Industries paid a P210,000.00 down payment and executed a promissory note payable in 24 monthly installments. IPM delivered the two tractors and assigned its rights under the chattel mortgage and promissory note to IFC.
Mechanical Failures, Notices and Repair Attempts
Within fourteen days after delivery the first tractor broke down; nine days later the second tractor became inoperable. The buyer (through Vergara) formally notified the seller-assignor on April 25, 1978 and requested warranty performance (Exh. 5). IPM sent mechanics and documents of repair attempts (Exhs. 6 series) but the units remained unserviceable. The buyer notified IPM that installment payments would be delayed pending fulfillment of the warranty. On April 7, 1979 Wee requested that IPM pull out and recondition the units and then offer them for sale, proposing division of proceeds and shared reconditioning costs (Exh. 7); no substantive response followed.
Procedural Posture and Trial Court Disposition
IFC filed suit against Consolidated Plywood Industries, Wee and Vergara for recovery of the unpaid principal of P1,093,789.71, accrued interest, attorney’s fees and costs. Petitioners counterclaimed for dismissal and damages. The trial court on April 20, 1981 rendered judgment ordering defendants (petitioners) to pay jointly and severally the principal, accrued interest and attorney’s fees equivalent to ten percent of the principal; petitioners’ counterclaim was disallowed. A motion for reconsideration was denied June 8, 1981.
Issues on Appeal to the Intermediate Appellate Court
Appellants assigned errors primarily: (1) the lower court’s treatment of the warranty defense and (2) the trial court’s conclusion that the promissory note was a negotiable instrument and that IFC was a holder in due course. The Intermediate Appellate Court affirmed the trial court in toto, concluding that the promissory note satisfied the requisites of negotiability and that IFC, having acquired the note for value and without notice of infirmity, was a holder in due course immune from defenses available against the assignor.
Grounds of the Petition for Certiorari to the Supreme Court
Petitioners raised that: (i) the promissory note was not negotiable because it was not payable to order or bearer; (ii) respondent was not a holder in due course but at best a mere assignee; (iii) as to a non-negotiable instrument, petitioners could assert all defenses available against the seller-assignor; (iv) petitioners were not liable because IPM breached its express warranty and, if respondent could recover, it should do so only from IPM; (v) assignment of the chattel mortgage did not change the sale into a loan; and (vi) the promissory note was inadmissible for lack of documentary stamps (arguments reformulated as in the petition).
Supreme Court’s Preliminary Determinations and Standard of Review
The Supreme Court found the petition timely, noting new issues raised in the motion for reconsideration. The Court accepted the trial court’s factual findings — that the tractors failed within days, IPM’s repair attempts failed, and the buyer’s operations and payments were disrupted — and proceeded to assess legal consequences, particularly whether the promissory note was negotiable and whether IFC was a holder in due course.
Breach of Warranty and Right to Rescind
The Court held that IPM breached its express 90-day warranty; the factual findings support that the tractors were unfit for the intended use within the warranty period. The Court cited Civil Code provisions (Arts. 1561, 1562, 1564 and 1566) establishing vendor liability for hidden defects and an implied warranty of fitness when the buyer relies on the seller’s skill. The buyer’s extrajudicial rescission of the contract was held to be within its rights under Arts. 1191 and 1567 (injured party may elect rescission or fulfillment and may rescind extrajudicially at its own risk). The Court emphasized that rescission, once effected extrajudicially, precludes the buyer from suing the seller on the contract except by counterclaim if sued by the seller.
Determination That the Promissory Note Is Non-Negotiable
The Court analyzed the promissory note’s language and concluded it lacked the requisite “words of negotiability” — specifically, it was not made payable “to order” or to bearer as required by paragraph (d), Section 1 of the Negotiable Instruments Law and as explained in Section 8 regarding “payable to order” instruments. Because the instrument does not contain “or order” language and names a specified person, it is non-negotiable; a subsequent acquirer merely steps into the transferor’s shoes and is subject to defenses available against the transferor. Accordingly, IFC was at most a mere assignee and not a holder in due course, so pet
...continue readingCase Syllabus (G.R. No. 72593)
Case Caption, Court, and Basic Information
- Supreme Court decision authored by Justice Gutierrez, Jr.; judgment dated April 30, 1987.
- Case came as a petition for certiorari under Rule 45 of the Rules of Court.
- Case number and citation: 233 Phil. 462; Second Division; G.R. No. 72593.
- Petitioners: Consolidated Plywood Industries, Inc. (a logging company), and its officers Henry Wee (president) and Rodolfo T. Vergara (vice-president).
- Respondent: IFC Leasing and Acceptance Corporation (a financing company).
- Relief sought in Supreme Court: annul and set aside the Intermediate Appellate Court decision in AC-G.R. CV No. 68609 dated July 17, 1985, and its resolution dated October 17, 1985, which denied the petitioners’ motion for reconsideration.
Factual Background — Subject Matter, Purpose and Need
- Petitioner-corporation engaged in logging; program for 1978 included opening additional roads and simultaneous logging operations in its concession area at Baganga, Manay, and Caraga, Davao Oriental.
- For the logging program, petitioner-corporation needed two additional tractor units.
- Atlantic Gulf & Pacific Company of Manila (AG & P), through its sister company and marketing arm Industrial Products Marketing (referred to as the "seller-assignor"), offered to sell two "Used" Allis Crawler Tractors (one HD-21-B and one HD-16-B) to petitioner-corporation.
- Petitioner-corporation requested that the seller-assignor inspect the jobsite to determine the capability and fitness of the used tractors for the intended logging work.
- After inspection, the seller-assignor assured petitioner-corporation that the used tractors were fit for the job and warranted their performance for ninety (90) days and availability of parts.
- Relying on seller-assignor's skill, judgment, assurances and express 90-day warranty, petitioner-corporation (through Wee and Vergara) agreed to buy the two used tractors on installment and paid a down payment of P210,000.00.
Contract Execution, Assignment and Delivery
- On April 5, 1978:
- The seller-assignor issued the sales invoice for the two tractors (Exh. "3-A").
- A deed of sale with chattel mortgage and a promissory note was executed (Exh. "2").
- The seller-assignor executed a deed of assignment (Exh. "1") assigning its rights and interest in the chattel mortgage in favor of the respondent (IFC Leasing and Acceptance Corporation).
- Immediately after execution, the seller-assignor delivered the two used tractors to petitioner-corporation’s jobsite.
- The seller-assignor stationed its own mechanics to supervise the tractors’ operations upon delivery.
Breakdowns, Notices, Repair Attempts, and Subsequent Communications
- Within 14 days after delivery, one tractor broke down; nine days later the other tractor likewise became inoperable (trial court findings adopted by appellate court).
- On April 25, 1978, petitioner Vergara formally advised the seller-assignor of the breakdowns and requested prompt attention under the 90-day warranty (Exh. "5").
- The seller-assignor sent its mechanics to the jobsite and undertook repairs (Exhs. "6", "6-A", "6-B", "6-C", "6-C-1", "6-D", and "6-E"), but the tractors remained unserviceable and "no longer serviceable" after repairs.
- Due to the breakdowns, petitioner-corporation’s roadbuilding and logging operations were delayed; petitioner Vergara advised seller-assignor that installment payments under the promissory note would be delayed until warranty obligations were fulfilled.
- On April 7, 1979, petitioner Wee asked the seller-assignor to pull out the units, have them reconditioned and offered for sale with proceeds to be given to respondent and any excess divided between seller-assignor and petitioner-corporation (petitioner offered to bear one-half of reconditioning cost) (Exh. "7").
- No substantive response to Exh. "7" was received; despite several follow-up calls, seller-assignor did not act upon the request.
Procedural History — Complaints, Counterclaims and Trial Court Decision
- Respondent filed a complaint against petitioners (the corporation, Wee and Vergara) for recovery of:
- Principal: One Million Ninety Three Thousand Seven Hundred Eighty Nine Pesos & 71/100 (P1,093,789.71) — (the complaint’s amount as stated earlier in the source).
- Accrued interest: One Hundred Fifty One Thousand Six Hundred Eighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979.
- Interest thereafter at 12% per annum; attorney’s fees of P249,081.71; and costs of suit.
- Petitioners filed amended answer seeking dismissal, damages, attorney’s fees (P20,000.00), litigation expenses (P5,000.00) and other just relief.
- Trial court decision dated April 20, 1981, adjudicated:
- Ordered defendants to pay jointly and severally the principal sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED NINETY EIGHT PESOS & 71/100 (P1,093,798.71) with accrued interest of ONE HUNDRED FIFTY ONE THOUSAND SIX HUNDRED EIGHTEEN PESOS & 86/100 (P151,618.86) as of August 15, 1979 and accruing interest thereafter at 12% per annum;
- Ordered defendants to pay jointly and severally attorney's fees equivalent to ten percent (10%) of the principal and costs of suit;
- Defendants' counterclaim was disallowed.
- Petitioners’ motion for reconsideration to trial court was denied on June 8, 1981.
Intermediate Appellate Court (IAC) Proceedings and Holdings
- Petitioners appealed to the Intermediate Appellate Court (IAC), assigning as errors:
- I. That the lower court erred in finding that the seller (AG & P/Industrial Products Marketing) did not approve defendants-appellants’ claim of warranty.
- II. That the lower court erred in finding that plaintiff-appellee (IFC) is a holder in due course of the promissory note and sued as such.
- IAC decision dated July 17, 1985:
- Affirmed trial court in toto.
- Key reasoning on warranty: Even if an implied warranty exists, breach of warranty defenses lie only between Industrial Products Marketing (seller-assignor) and Consolidated Plywood Industries, Inc. The assignee/financer (IFC) was not subject to those defenses if it were a holder in due course.
- Key reasoning on negotiability and holder in due course status:
- Characterized the questioned promissory note as a negotiable instrument.
- Found IFC discounted or purchased the promissory note for P800,000.00 and held the instrument as a holder in due course under relevant provisions of the Negotiable Instruments Law (citing Secs. 1, 30, 52, 57, 60 NIL).
- Concluded the promissory note was legally and conclusively enforceable against defendants-appellants.
- Denied petitioners’ appeal as without merit; ordered costs against appellants.
- IAC denied petitioners’ motion for reconsideration by resolution dated October 17, 1985.
Grounds Raised in the Supreme Court Petition (Summary of Petitioners’ Contentions)
- Petitioners asserted, among others, the following grounds in their Rule 45 petition:
- I. On its face, the promissory note is not a negotiable instrument because it is neither payable to order nor to bearer.
- II. Respondent is not a holder in due course; at best a mere assignee of the promissory note.
- III. Because the instrument is non-negotiable and transferred as a mere assignment, petitioners may raise against respondent all defenses available against the seller-assignor.
- IV. Petitioners are not liable on the promissory note because:
- A) Seller-assignor breached the express 90-day warranty.
- B) If any recovery is allowed, respondent may only recover from the seller-assignor.
- V. Assignment of the chattel mortgage to respondent does not change the nature of the transaction from sale on installments to a pure loan.
- VI. The promissory note is inadmissible in evidence because the requisite documentary stamps were not affixed or cancelled.
- Respondent’s answer in Supreme Court (comment dated February 20, 1986) argued:
- Petition was filed out of time;
- The promissory note is a negotiable instrument and respondent is a holder in due course;
- Respondent is not liable for breach of warranty;
- Promissory note is admissible in evidence.