Case Summary (G.R. No. 164985)
Trial Court Decision
The Regional Trial Court held that petitioners were liable for the ₱735,000 balance plus 12% legal interest from February 11, 1993, and 10% attorney’s fees. It denied recoupment, finding petitioners’ counterclaim unliquidated and not demandable, but awarded petitioners ₱71,350 for repair expenses incurred under warranty.
Court of Appeals Ruling
The Court of Appeals affirmed the RTC. It construed Article 1599(1) as limiting recoupment to the same sales transaction; petitioners’ repair expenses related to a separate dump-truck sale, not to the Prime Mover and Transit Mixer. It also held compensation unavailable because petitioners’ claims were not liquidated and demandable at the time of set-off.
Issues on Supreme Court Review
- Whether petitioners validly exercised recoupment under Article 1599(1) for breach of warranty.
- Whether petitioners could set off repair expenses by legal compensation under Articles 1278–1279.
- Proper interest rate and award of exemplary damages.
Recoupment Requires Identity of Transaction
Article 1599 allows a buyer to recoup the price of goods suffering from breach of warranty, but only “in diminution or extinction of the price” of the same goods sold. Petitioners’ counterclaim concerned a dump truck sold earlier and under a distinct contract. Series of purchases did not merge into one continuous transaction. Recoupment against the balance on the Prime Mover and Mixer was therefore improper.
Legal Compensation Meets All Requirements
Compensation under Articles 1278–1279 requires that each party be creditor and debtor in principal, obligations be in money, both debts be due, liquidated, and demandable, and free of third-party claims. The RTC and CA had already determined and quantified petitioners’ repair expenses at ₱71,350. That finding, affirmed on appeal, rendered the counterclaim liquidated and ripe for set-off. By operation of law under Article 1290, compensation extinguishes both debts to the extent of ₱71,350.
Modification of Interest Rate
In the absence of a written stipulation, Article 2209 fix
Case Syllabus (G.R. No. 164985)
Facts
- First United Constructors Corporation (FUCC) and Blue Star Construction Corporation (Blue Star) are associate construction firms sharing resources, equipment, and personnel.
- Between May 27 and July 8, 1992, they purchased six Isuzu dump trucks (five delivered to FUCC, one to Blue Star) and one Isuzu cargo truck from Bayanihan Automotive Corporation (respondent).
- The respondent extended repair and service work under a three-month warranty and later agreed to liberal payment terms for subsequent purchases.
- On September 19 and 29, 1992, FUCC ordered and received one Hino Prime Mover and one Isuzu Transit Mixer, paying part in cash and the balance by two post-dated checks (P360,000 on November 23, 1992; P375,000 on December 1, 1992).
- Upon presentment, FUCC stopped payment of both checks, alleging the respondent’s refusal to honor the warranty on the second dump truck delivered May 27, 1992, which had broken down.
- The respondent demanded full settlement; when refused, it filed an action for collection on April 29, 1993, seeking P735,000 plus interest and attorney’s fees.
Antecedents of the Dispute
- The parties had a history of successful transactions and mutual trust, with the respondent performing maintenance and repairs under warranty.
- FUCC’s second dump truck developed defects within the warranty period; FUCC notified the respondent in August 1992 and eventually arranged and paid for repairs and spare parts itself.
- FUCC claimed P830,000 as the truck’s price, sought reimbursement of P247,950 repair expenses, and invoked breach of warranty as grounds to withhold the P735,000 balance.
Procedural History
- Regional Trial Court (Branch 107, Quezon City) Decision (May 14, 1996):
• Ordered petitioners to pay the P735,000 balance with 12% legal interest from February 11, 1993, and 10% attorney’s fees.
• Granted petitioners’ counterclaim: respondent to pay P71,350 for repair costs with 12% interest and 10% attorney’s fees. - Court of Appeals Decision (July 26, 2004):
• Affirmed the RTC on all counts.
• Held recoupment impermissible because the dump-truck claim arose from a different contract than the prime m