DELTA MOTOR SALES CORPORATION, PLAINTIFF-APPELLEE, VS. NIU KIM DUAN AND CHAN FUE ENG, DEFENDANTS-APPELLANTS.

Delta Motor Sales versus Niu Kim Duan

The Case

This is a case about a buyer who fell behind on installment payments for three air-conditioners, and a seller who tried to keep both the machines and the unpaid price. Delta Motor Sales Corporation sued Niu Kim Duan and Chan Fue Eng to enforce a Deed of Conditional Sale and to have it declared rescinded, after the buyers defaulted. The buyers resisted, arguing that the contract's forfeiture clauses were iniquitous and would unjustly enrich the seller. The case matters because it fixes, in plain terms, the rule that a vendor of personal property sold on installments must choose one remedy and cannot cumulate them. That rule is examined in nearly every sales question on the bar.

Procedural History

Delta Motor Sales filed a verified complaint in the Court of First Instance of Rizal, sitting in Makati, and obtained a writ of replevin by which it recovered the three air-conditioners. The trial court ruled for the seller. It declared the Deed of Conditional Sale rescinded and ordered the buyers to pay the balance of six thousand one hundred eighty-eight pesos and twenty-nine centavos, with interest at fourteen percent per annum, plus one thousand pesos in attorney's fees. The buyers appealed to the Court of Appeals, which elevated the case to the Supreme Court on a pure question of law. The Supreme Court decided the appeal in September 1992.

Facts

On July 5, 1975, the buyers purchased three Daikin air-conditioners from Delta Motor Sales for nineteen thousand three hundred fifty pesos under a Deed of Conditional Sale. They paid a down payment of seven hundred seventy-four pesos, and the balance of eighteen thousand five hundred seventy-six pesos was to be paid in twenty-four monthly installments. Title remained with the seller until full payment. The contract provided that if two installments were not paid on their due dates, the whole unpaid principal would become due with interest at fourteen percent per annum. It also provided for damages, penalty, and attorney's fees equivalent to twenty-five percent of the remaining unpaid obligation. To secure the balance, the buyers executed a promissory note in favor of the seller.

The air-conditioners were delivered and received. The buyers paid a total of six thousand nine hundred sixty-six pesos, then stopped paying. As of January 6, 1977, their unpaid obligation stood at twelve thousand nine hundred twenty pesos and eight centavos. Statements of account were sent and collectors called, but the buyers refused to pay. The seller tried to recover the units extra-judicially and failed, so it referred the matter to counsel.

In its complaint dated January 28, 1977, the seller prayed for a writ of replevin, which the court granted after the required bond was posted. On April 11, 1977, the seller retrieved the three units by virtue of that writ. As of October 3, 1977, after deducting interest in arrears, cover charges, replevin bond premiums, and the value of the units repossessed, the outstanding account was six thousand one hundred eighty-eight pesos and twenty-nine centavos. The six thousand nine hundred sixty-six pesos already paid were treated as rentals for the two years of use, pursuant to paragraph 5 of the Deed of Conditional Sale.

Issues

• Whether or not the stipulation treating installments already paid as rentals is unconscionable and contrary to law, morals, good custom, public order, or public policy.
• Whether or not the seller, having repossessed the air-conditioners, may still recover from the buyers the unpaid balance of the purchase price.

Applicable Provisions

Article 1486 of the New Civil Code provides:

In the cases referred to in two preceding articles, a stipulation that the installments or rents paid shall not be returned to the vendee or lessee shall be valid insofar as the same may not be unconscionable under the circumstances.

This provision governs the buyers' complaint that their payments were forfeited as rentals, and it makes the validity of that stipulation depend on whether it is unconscionable under the circumstances.

Article 1484 of the New Civil Code provides:

In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise 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 cover two or more installments; (3) Foreclose the chattel mortgage on the thing sold, 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 purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.

This provision supplies the three alternative remedies from which the seller had to choose, and it bars the seller from recovering the unpaid balance once it has chosen to cancel the sale and repossess the property.

Ruling

On the first issue, the Court held that the buyers could not complain that their down payment and installment payments were treated as rentals. The stipulation that installments paid shall not be returned is valid under Article 1486 insofar as it is not unconscionable. The monthly installment was seven hundred seventy-four pesos, and the installment payments of five thousand six hundred fifty-five pesos and ninety-two centavos corresponded to only seven monthly installments. Since the buyers admitted using the air-conditioners for twenty-two months, they did not pay fifteen monthly installments and were using the units free of charge during that period, to the prejudice of the seller. Under those circumstances, the treatment of the payments as rentals was not unconscionable.

On the second issue, the Court held that the vendor in an installment sale of personal property may exercise one of three remedies: exact fulfillment of the obligation, cancel the sale upon failure to pay two or more installments, or foreclose a chattel mortgage if one has been constituted. These remedies are alternative and not cumulative. If the creditor chooses one, he cannot avail himself of the other two. The Court found that the seller had clearly chosen the second remedy, cancellation, because it took possession of the units through a writ of replevin and its computation of the outstanding account took into account the value of the units repossessed. Having done so, the seller was barred from exacting payment of the balance of the price of the units it had already repossessed. As the Court put it, the seller cannot have its cake and eat it too.

Doctrine

A vendor of personal property sold on installments has three remedies under Article 1484: exact fulfillment, cancel the sale, or foreclose a chattel mortgage. These remedies are alternative and not cumulative. Once the vendor chooses one, the other two are closed to him. Where the vendor cancels the sale and repossesses the property, he may no longer recover the unpaid balance of the price, and any agreement to the contrary is void. A stipulation that installments already paid shall be treated as rentals is valid under Article 1486, provided it is not unconscionable under the circumstances. Whether it is unconscionable is measured against the actual use the buyer obtained and the payments he made.

Disposition

The Supreme Court set aside the judgment of the trial court and dismissed the complaint of Delta Motor Sales Corporation, with no costs. The buyers won.

Remember This

The single line to memorize is that the three remedies under Article 1484 are alternative and not cumulative, so a vendor who cancels the sale and repossesses the property cannot also collect the unpaid balance. Examiners use this case in sales questions testing whether a seller may both repossess the goods and sue for the price, and in questions on the validity of forfeiture and rental clauses under Article 1486.