SHARP (PHILS.) CORPORATION, PLAINTIFF- APPELLEE, VS. CECILIO M. MAALA, DOING BUSINESS UNDER THE NAME AND STYLE “UNIVERSAL APPLIANCE”, DEFENDANT-APPELLANT.

Sharp versus Maala

The Case

This is a collection suit brought by Sharp (Phils.) Corporation against Cecilio M. Maala, who does business under the name and style Universal Appliance. Sharp sold home appliances to Maala on credit, and Maala paid with postdated checks drawn on Dagupan City Rural Bank. The checks were cleared through the Central Bank, but the value of nearly all of them was never credited to Sharp's account because the drawee bank was in an unhealthy financial condition. Maala insists he has fully paid, since his own account was debited and the cancelled checks were returned to him. The case matters because it fixes a rule every reviewee must carry: payment is not complete until the creditor actually receives the value, and the debtor cannot hide behind the failure of his own bank, a stranger to the contract of sale.

Procedural History

Sharp filed the complaint on the tenth of August 1999 before the Regional Trial Court of Muntinlupa City, Branch 256. On the twelfth of April 2005, the trial court rendered judgment in favor of Sharp, ordering Maala to pay the value of the checks less the two that had been cleared and credited, with interest at twelve percent per annum, plus attorney's fees of 2,000 pesos and the costs of suit. Maala appealed directly to the Supreme Court, assigning as errors that the trial court held his checks dishonored and that it failed to hold that he had fully paid his purchases. The appeal was resolved by the Court's Third Division, with Justices Guarina and Tagle concurring.

Facts

Maala purchased various home appliances from Sharp on credit, in two batches. The first batch, delivered from the thirtieth of November 1993 to the thirty-first of May 1994, was worth 841,826 pesos. The second batch, from the thirtieth of October to the thirty-first of December 1994, was worth 359,100 pesos. The parties agreed that the credits would be paid within thirty days from the date of invoice or actual delivery. For the first batch, Maala issued twenty-eight postdated checks drawn on Dagupan City Rural Bank in favor of Sharp. For the second batch, he issued sixteen postdated China Bank checks.

The China Bank checks were cleared and credited to Sharp's account. The Dagupan City Rural Bank checks were deposited by Sharp with its depositary bank, Far East Bank and Trust Company. They were cleared by the Central Bank but were not credited to Sharp's account, because Dagupan City Rural Bank was in an unhealthy financial condition. Sharp demanded payment from Maala, and Maala in turn demanded that the drawee bank remit the value of the checks to Far East Bank. The drawee bank's manager communicated that the amount would be raised very soon through the sale of unissued shares of stock. A series of correspondence followed among Sharp, Maala, Far East Bank, and the drawee bank, but in the end the checks were never credited to Sharp's account, except for two.

In his letters to the drawee bank, Maala himself admitted the situation. He wrote that he was alarmed that his payments for April and May 1994, covered by the twenty-eight checks, had not been credited to Sharp's account with its depositary bank, and he pleaded with the bank to remit the amount immediately. In a later letter he warned that the bank's continued failure had caused Sharp to freeze his credit lines, and that returning the checks properly processed while never remitting the amounts was deception bordering on estafa. Sharp then filed suit.

Issues

• Whether or not the twenty-eight checks drawn on Dagupan City Rural Bank were dishonored, such that Maala remained liable to Sharp.
• Whether or not Maala had fully paid his purchases on credit, given that the checks cleared through the Central Bank, his account was debited, and the cancelled checks were returned to him.
• Whether or not the absence of an allegation and notice of dishonor defeated Sharp's cause of action.

Applicable Provisions

Article 1233 of the New Civil Code provides:

A debt shall not be understood to have been paid unless the thing or service which the obligation consists has been completely delivered as the case may be.

This is the decisive provision: Maala's debt is not extinguished because Sharp never received the value of the goods delivered.

Ruling

On the first issue, the Court held that there was no merit in the appeal. Out of the twenty-eight checks, only two were credited to Sharp's account. The clearing of the checks through the Central Bank did not prove that Sharp received their value, in the face of admissions to the contrary. The Court applied Article 1233 and ruled that Maala cannot claim he is freed from liability to pay for the goods delivered to him, because his obligation subsists despite the drawee bank's non-remittance.

On the second issue, the Court held that the clearing and Maala's possession of the cancelled checks did not create an indisputable presumption of payment. Maala knew all along that the amounts had not been credited to Sharp, as shown by his own letters demanding that the drawee bank remit the value. The Court stressed privity of contract: the contract of deposit between Maala and the drawee bank has nothing to do with the contract of sale between Sharp and Maala, and the bank is not privy to the sale. The performance of their reciprocal obligations cannot depend on a third person's fulfillment of an obligation under another contract to which the other party is a stranger. Maala's remedy was to pursue his claim against his depositary bank through positive acts, such as filing a lawsuit.

On the third issue, the Court held that a notice of dishonor was not necessary and was even irrelevant, because it remained uncontroverted that the amounts of the twenty-six checks were never credited to Sharp's account. The Court also affirmed the trial court's findings, which are accorded the highest respect and finality absent weighty circumstances, and found no such exception here.

Doctrine

A debt is not understood to have been paid unless the thing or service has been completely delivered, as Article 1233 commands. The mere clearing of a check through the Central Bank, the debiting of the debtor's account, and the return of the cancelled check do not by themselves establish payment to the creditor, where the value was never credited to the creditor's account. Privity of contract takes effect only between the parties, their successors-in-interest, heirs, and assigns; the debtor's contract with his own drawee bank cannot excuse or suspend his obligation under the contract of sale, to which that bank is a stranger. The debtor's remedy lies against his own bank, not against the unpaid seller.

Disposition

The appeal was denied and the decision of the trial court was affirmed, so Sharp won and Maala was ordered to pay the value of the checks less the two already credited, with interest, attorney's fees, and costs.

Remember This

Memorize the line that a debt is not paid unless the thing is completely delivered, and that clearing is not collection. Examiners use this case to test payment under Article 1233, the presumption arising from cancelled checks, and the doctrine of privity of contract against a debtor who blames his own bank.