G.R. No. 61043 - Delta Motor Sales Corp. vs. Niu Kim Duan

Case Summary (G.R. No. 61043)

Transaction and Contractual Terms

On July 5, 1975, the defendants purchased three (3) units of Daikin air-conditioners with a total price of P19,350.00, evidenced by the Deed of Conditional Sale (Exhibit A). The deed required a down payment of P774.00, with the balance of P18,576.00 to be paid through twenty four (24) installments. Title to the air-conditioners was to remain with the seller until the purchase price was fully paid. The deed also provided that if the buyer failed to pay at least two (2) monthly installments on their due dates, the unpaid principal sum would become due with interest at fourteen percent (14%) per annum. In addition, the deed stipulated that in the event of a suit, the defendants would pay an amount equivalent to twenty five percent (25%) of the remaining unpaid obligation as damages, penalty, and attorney’s fees.

To secure payment of the P18,576.00 balance, the defendants jointly and severally executed a promissory note (Exhibit C). Delivery of the air-conditioners was made and received, as shown by the delivery receipt (Exhibit B). The defendants later paid P6,966.00, but they failed to pay at least two (2) monthly installments thereafter.

Default, Attempts at Collection, and Resort to Replevin

By January 6, 1977, the unpaid obligation amounted to P12,920.08, inclusive of applicable interest. The plaintiff sent statements of account, and its collectors personally went to the defendants to attempt collection, but these efforts were unsuccessful. The plaintiff then attempted to recover the air-conditioners extra-judicially, but it failed. The plaintiff referred the matter to its legal counsel and filed a verified complaint dated January 28, 1977, praying for the issuance of a writ of replevin, which the trial court granted on February 28, 1977 after the plaintiff posted the required bond.

Using the writ, the plaintiff successfully retrieved the air-conditioners on April 11, 1977. By October 3, 1977, the plaintiff computed the outstanding account at P6,188.29, after deductions that included interests in arrears, cover charges, replevin bond premiums, and the value of the units repossessed. The plaintiff also treated the amount of P6,966.00 already paid as “rentals” for two (2) years, consistent with paragraph 5 of the deed.

Trial Court Decision and Relief Granted

The trial court ruled for the plaintiff-appellee. It ordered the defendants-appellants to pay P6,188.29 with interest at fourteen percent (14%) per annum, representing the amount due after rescission and repossession. It likewise ordered payment of P1,000.00 for attorney’s fees.

Issues Raised on Appeal

On appeal, the defendants-appellants challenged the validity and enforceability of the Deed of Conditional Sale, contending that it was contrary to law, morals, good custom, public order, and public policy. Their attack focused on paragraphs 5 and 7 of the contract. Paragraph 5 provided for automatic nullity of the contract upon failure to pay any monthly installment or comply with terms, and it declared that all sums paid would be treated as rentals, with the seller being free to take possession without liability. Paragraph 7 obligated the buyer to peacefully deliver the property upon rescission and, if the seller brought suit for judicial declaration of rescission and to take possession, to pay the expenses of the suit plus an amount equivalent to twenty five percent (25%) of the remaining unpaid obligation as damages, penalty, and attorney’s fees.

The defendants further argued that, for the period from July 5, 1975 to April 11, 1977 (about 22 months), they effectively paid rental amounts of P6,429.92, which they characterized as roughly one-third of the total price of P19,350.00. They also complained that, despite repossession and the “rental” treatment, the trial court ordered them to pay P6,188.29 as the remaining balance for the air-conditioners. They additionally objected to the P1,000.00 attorney’s fees award, noting that the plaintiff allegedly did not seek attorney’s fees in its complaint. They maintained that enforcement of the deed would allow the plaintiff to be unjustly enriched by effectively recovering value through both retained “rents” and the repossessed units.

The Defendants’ Arguments Rejected on the Treatment of Installments as Rentals

The Court addressed the contention that the down payment and installment payments had been improperly treated as rentals. The Court held that the defendants could not complain about the treatment of amounts paid as rentals, even if the total payment of P6,429.92 approximated one-third of the price. It reasoned that the contractual stipulation that installments or rentals paid would not be returned to the vendee is valid, provided it is not unconscionable under the circumstances, as recognized by Art. 1486 of the New Civil Code.

The Court further explained that the monthly installment was P774.00, and the defendants’ paid installment payments of P5,655.92 corresponded only to seven (7) monthly installments. Since the defendants admitted using the air-conditioners for twenty-two (22) months, the Court concluded that they did not pay fifteen (15) monthly installments during that time. Under those circumstances, the Court found that treating the installments as rentals could not be deemed unconscionable to the prejudice of the plaintiff.

Statutory Remedies Under Article 1484 and the Alternative, Non-cumulative Character of Remedies

The Court then addressed the legal consequences of the plaintiff’s choice of remedy under Art. 1484. It stated that in a sale of personal property payable in installments, the vendor may: (1) exact fulfillment; (2) cancel the sale upon failure to pay two or more installments; or (3) foreclose the chattel mortgage if one is constituted. It emphasized that the remedies are alternative and not cumulative. Once the creditor chooses one remedy, it cannot avail itself of the other two.

The Court noted that it was undisputed that the plaintiff-appellee took possession of the air-conditioners through a writ of replevin after the defendants refused to surrender the property extra-judicially. It held that the taking of possession was done pursuant to paragraphs 5 and 7 of the deed once the defendants defaulted in paying at least two monthly installments, and that by January 6, 1977, the amount owed inclusive of interest was P12,920.08.

Court’s View of the Plaintiff’s Choice of Remedy and its Effect on Recovery of the Balance

The Court considered that the plaintiff filed the case to seek a judicial declaration that it had validly rescinded the deed of conditional sale. It therefore characterized the action as the exercise of the second remedy under Art. 1484, namely cancellation of the sale. This conclusion was supported by the plaintiff’s computation in Exhibit F, which showed the outstand

Case Syllabus (G.R. No. 61043)

Parties and Procedural Posture

Delta Motor Sales Corporation sued Niu Kim Duan and Chan Fue Eng in the Regional Trial Court (then Court of First Instance) of Rizal at Makati, Branch XXXVI, in Civil Case No. 25578.
The trial court promulgated its decision on October 11, 1977, ordering defendants to pay the principal balance and related charges, after declaring the Deed of Conditional Sale rescinded.
Defendants elevated the appeal to the Court of Appeals, which resolved on a pure question of law, and elevated the matter to the Supreme Court.
The appellate elevation was pursuant to a Court of Appeals Resolution dated May 20, 1982.
The Supreme Court reviewed the trial court’s ruling and, on the issues of contract enforceability and available remedies, overturned the judgment.

Key Factual Allegations

On July 5, 1975, defendants purchased three (3) units of DAIKIN air-conditioners from plaintiff for a total value of P19,350.00 under a Deed of Conditional Sale (Exhibit A).
The deed required a down payment of P774.00, with a balance of P18,576.00 payable in twenty four (24) installments.
The deed provided that title to the air-conditioners would remain with plaintiff until full payment.
The deed stipulated that if defendants failed to pay any two monthly installments, the entire unpaid principal would become due, with interest at 14% per annum.
The deed further provided that upon suit, defendants would pay expenses and a sum equivalent to twenty five percent (25%) of the remaining unpaid obligation as damages, penalty, and attorney’s fees.
To secure the balance, defendants jointly and severally executed a promissory note (Exhibit C**).
The air-conditioners were delivered and received, as shown by a delivery receipt (Exhibit B).
Defendants paid P6,966.00, but failed to pay at least two (2) monthly installments.
As of January 6, 1977, the remaining unpaid obligation was P12,920.08.
Plaintiff sent statements of account and sent collectors to effect collections, but defendants refused to pay.
Plaintiff attempted extra-judicial recovery of the air-conditioners but failed, and referred the matter to counsel for legal action.
Plaintiff filed a verified complaint dated January 28, 1977, praying for writ of replevin, which the court granted on February 28, 1977 after plaintiff posted the required bond.
On April 11, 1977, plaintiff retrieved the properties through the writ of replevin.
By October 3, 1977, plaintiff computed the outstanding account as P6,188.29 after deducting interests in arrears, cover charges, replevin bond premiums, the value of the repossessed units, and similar items.
Plaintiff treated the amounts defendants had already paid, particularly P6,966.00, as rentals for two years pursuant to paragraph 5 of the Deed of Conditional Sale.

Contract Provisions Challenged

Defendants assailed the Deed of Conditional Sale as contrary to law, morals, good custom, public order, or public policy.
Defendants specifically challenged paragraph 5, which stated that upon default in paying installments or complying with conditions, the contract would automatically become null and void, and sums paid would be considered rental, enabling plaintiff to take possession without liability for trespass.
Defendants also challenged paragraph 7, which required peaceful delivery upon rescission and imposed liability for suit-related expenses and a sum equivalent to 25% of the remaining unpaid obligation as damages, penalty, and attorney’s fees when suit was brought to declare rescission and take possession.
Defendants argued that the combined effect of these provisions operated unfairly and produced a disproportionate result upon repossession and rescission.

Defendants’ Arguments on Unconscionability

Defendants argued that for the period from July 5, 1975 to April 11, 1977 (about twenty-two (22) months), they effectively paid rentals approximating P6,429.92, or roughly one-third (1/3) of the total price of P19,350.00.
Defendants contended that the trial court nevertheless ordered them to pay P6,188.29 as the balance due for the air-conditioners that were repossessed.
Defendants asserted that the trial court’s computation yielded an unjust enrichment for plaintiff, because plaintiff could repossess the units and sell them again.
Defendants further criticized the award of P1,000.00 attorney’s fees on the ground that plaintiff did not seek attorney’s fees in its complaint.
Defendants implied that the enforcement of the contract provisions, especially the rental and penalty