RAFAEL S. BELTRAN AND MA. VIOLETA BELTRAN, PETITIONER, VS. PAIC FINANCE CORPORATION, SERVICE EQUIPMENT SPECIALISTS CO., INC., RODRIGO REYES AND IRAIDA REYES, RESPONDENTS.

The consolidated petitions
here before the Court compel us to consider the nature and at least some
of the legal effects of a “financing lease” or “financial
lease.” Such an instrument must seem an exotic creation in the eyes of
many civil law jurists; for a financial lease does not fit neatly into the
tight and orderly categories of the Civil Code. But financial leases are quite commonplace in today’s commercial
and financial world and the law must take account of developments and practice
in that world.

On 15 July 1980, the Beltran spouses purchased from Service
Equipment Specialists Co. (“SESCO”) one unit of Infra-Red Performance Analyzer with
Serial No. 19B2870, SUN 1115, for P137,000.00. Upon delivery of the unit
on the same day, the Beltrans returned to SESCO a Performance Analyzer SUN 1011
previously purchased from SESCO, and the payments made thereon, plus two (2)
other checks made out by the Beltrans in the name of SESCO, were applied as
down-payment on the new Performance Analyzer SUN 1115. Further, SESCO agreed with the Beltrans that
the balance of the purchase price of the new SUN 1115 would be placed under a
financing arrangement which SESCO was to enter into with PAIC.^[1]

On 3 September 1980, the Beltrans issued another check in favor
of SESCO in the amount of P3,780.00 On the same date, SESCO assigned the
sales invoice it issued to the Beltran spouses to PAIC; the documentation dated
3 September 1980 stated that the Performance Analyzer SUN 1115 with Serial No.
19B2870 was delivered to PAIC. At the
same time, PAIC executed a contract of lease over the SUN 1115 with the spouses
Beltran as lessees for a term of 36 months at a monthly rental of P3,903.52
commencing on 2 September 1980 and ending on 2, October 1983. On 19 September 1980, SESCO executed in
favor of PAIC a surety undertaking under which SESCO guaranteed solidarily the
faithful performance of all obligations of the Beltran lessees to PAIC.

Sometime in October 1980, the SUN 1115 malfunctioned. The Beltrans sought the assistance of SESCO
which in turn promised to repair the equipment. The repairs made on the SUN 1115 were, however, found to be
unsatisfactory by the Beltrans who thereupon decided to return the unit and
discontinued the monthly rental payments to PAIC.

When the spouses Beltran failed to pay four (4) succeeding
monthly payments, PAIC sent them a letter demanding payment of the rentals in
arrears. When the spouses Beltran
failed to pay the arrearages, PAIC, on 23 February 1981, filed a complaint for
a sum of money against the spouses. On
31 March 1981, the spouses Beltran filed an answer with counterclaim and a
third-party complaint against SESCO. SESCO eventually filed an answer to the
third-party complaint as required by the trial court.

On 16 October 1985, the trial court rendered a decision in favor
of the spouses Beltran. The trial court
held that the transaction between PAIC and the spouses Beltran was one of lease
and dismissed the complaint of PAIC, as well as the Beltrans’ counterclaim
against PAIC and their third party complaint against SESCO. The trial court held:

“Under the terms of the lease, in case of fault of the
lessee (defendant Beltran), the plaintiff may declare any and all sums due and
to become due and payable and in addition the lessor shall be entitled to take
possession of the leased equipment and to recover as damages an amount equal to
the difference of the rent for the unexpired term of the lease and aggregate
rental value of the leased equipment.

Categorizing the transaction had between plaintiff and defendant
Rafael S. Beltran as one of lease, which binds the plaintiff, we are
constrained to dismiss the plaintiff’s case.

Under Article 1654 f the Civil Code, the lessor is obliged to
deliver the object of the lease in such condition as to render it fit for the
use intended; to make on the same during the lease all the necessary repairs in
order to keep it suitable for the use to which it has been devoted and to
maintain the lessee in the peaceful enjoyment of the lease during the contract.

Defendants Beltran’s evidence, without contradiction is that the
performance analyzer became unfit for the use intended soon after delivery. Plaintiff
[PAIC] has not repaired such defect in order to keep the equipment suitable for
the use to which it is devoted.

Consequently, the lease must be deemed extinguished because the
thing leased was totally unfit for the purposes of the lease.”^[2]
(Underscoring and brackets supplied)

The Beltran spouses filed a notice of appeal dated 12 April 1986
with the trial court in view of the failure of the trial court to rule on the
liability of SESCO on its contract of sale. The notice of appeal was, however, denied due course by the trial court
for having been filed late. The motion
for reconsideration filed by the spouses Beltran was denied on the ground that
the period for appeal is jurisdictional. A second motion for reconsideration was filed with, but was not acted
upon by, the trial court. Instead, the
trial court transmitted the records of the case to the Court of Appeals since
PAIC had filed its own appeal in a timely manner. Upon such transmittal, the Court of Appeals assumed jurisdiction
of the appealed case.

The judgment of the trial court was affirmed by the Court of
Appeals in a decision dated 30 June 1987. In that decision, however, the Court of Appeals held the transaction
between the Beltrans and PAIC to be one of sale rather than a lease:

“We agree with the contention of the
defendants-appellees. An examination of
the records shows that indeed the Contract of lease ‘is but a scheme to simulate
the real agreement between the parties which is a financing arrangement for the
defendants Beltran to pay the unpaid price of the performance analyzer with
Serial No. SUN 1115 to the plaintiff’. (p. 251, Record). The equipment
in question was sold to defendant-appellee Rafael S. Beltran on July 15, 1980 by Service Equipment
Specialist Co., Inc. (SESCO) as evidenced by Sales Invoice No. 050 (p. 10,
Folder of Exhibits), by Warranty Certificate dated July 15, 1980 (p. 11, Folder
of Exhibits), and by a letter of
SESCO addressed to defendant appellee dated October 21, 1980 (p. 13, Folder of
Exhibits).

Plaintiff-appellant’s evidence shows some glaring
inconsistencies. The contract of lease
covers the equipment in question which was already sold and delivered to
defendant-appellee. The date of the
contract of lease is July 31, 1980 but the subject of the lease was ‘sold’ to
plaintiff-appellant only on September 3, 1980 (p. 4, Folder of Exhibits). The original of Sales Invoice No. 050
reflect both plaintiff-appellant and defendant-appellee Rafael S. Beltran as
vendees of the equipment in question but the contract of lease shows that
defendant-appellee is the lessee and the plaintiff-appellant is the
lessor. The delivery receipts show that
the equipment in question was delivered to defendant-appellee on July 15, 1980
(p.10, Folder of Exhibits) by SESCO, on September 2, 1980 by
plaintiff-appellant, and on September 3, 1980 by SESCO (pp. 5-6, Folder of
Exhibits). Exhibit D shows that the equipment in question was delivered to both
plaintiff-appellant and defendant-appellee on September 3, 1980 by SESCO (p. 6,
Folder of Exhibits). These inconsistencies belie plaintiff-appellant’s
contention that the contract of lease is not a ‘scheme to simulate the real
agreement between the parties which is a financing arrangement.’

Defendants-appellees [Beltrans] cannot be held liable for the
breakdown of the equipment in question pursuant to the Warranty Certificate of
SESCO dated July 15, 1980 (p. 11, Folder of Exhibits). It is admitted that the cause of the
breakdown was when one of SESCO’s technicians ‘accidentally damaged the PCB of
the equipment’ (p. 13 Folder of Exhibits). When the equipment was not repaired despite SESCO’s
assurance, defendants-appellees decided to return the equipment and
discontinued amortization payments (pp. 12-13, Folder of Exhibits). As found by the trial court:

‘Defendant Beltran’s evidence, without contradiction is that the
performance analyzer became unfit for the use intended soon after delivery. Plaintiff has not repaired such defect in
order to keep the equipment suitable for the use it is devoted.’ (p. 252,
Record).

Defendants-appellees seek a
rescission of the contract of sale pursuant to Article 1599 of the Civil
Code which provides for such a remedy when there is breach of warranty by the seller. Since the records show that the equipment in question became unfit for the use it is intended, defendants-appellees
are entitled to rescission of the contract of sale with SESCO or its (SESCO’s)
assigns.

                  xxx                                                                     xxx                                                                    xxx”^[3]
(Underscoring supplied)

Both PAIC and the Beltrans moved for reconsideration of the Court
of Appeals’ decision. In a resolution
dated 28 April 1988, the Court of Appeals rejected both motions and ruled that the
Beltrans, not having perfected any appeal from the decision of the trial court,
could not seek modification of that decision.

A Petition for Review on Certiorari was then filed by the
Beltran spouses with this Court and docketed as G.R. No. 83113, assailing the
Court of Appeals’s refusal to entertain their appeal. In a Resolution dated 4 January 1989, the Court dismissed the
petition of the Beltran spouses for “insufficiency in form and substance
and for lack of merit.” The Beltrans moved for reconsideration, without
success. A second motion for
reconsideration was filed by the Beltrans.

Meantime, PAIC also filed a Petition for Review on certiorari
before this Court, docketed as G.R. No. 83256. On 25 January 1989, the Court
issued a Resolution in G.R. No. 83256, granting the motion of the spouses
Beltran for consolidation of G.R. No. 83256 with G.R. No. 83113, in effect
reconsidering the previous dismissal of the petition in G.R. No. 83113.

PAIC, in its petition, mainly alleges that the Court of Appeals
erred in applying the provisions of the Civil Code in the construction of its
contract with the Beltran spouses. PAIC maintains that the Court of Appeals
should have applied instead the provisions of R.A. No 5980 entitled “An
Act Regulating the Organization and Operation of Financing Companies,” in
characterizing the relationship between PAIC and the spouses Beltran. It is argued that the contract of lease is
actually a financial lease governed by Section 3 (a) of R.A. No. 5980;
that under such scheme, PAIC undertook no warranty as to the fitness design or
condition of or as to the quality or capacity of the equipment.

The threshold problem relates to characterization of the
relationships between the three (3) parties: PAIC, the Beltrans and SESCO. Characterization of these relationships
requires us to examine the real nature of the commercial transactions entered
into by these parties inter se, and in doing so, we need to look
through the forms of the agreements and related documents and to examine the
effective intent of the parties as well as the economic facts and circumstances
which existed at the time of establishment of such agreements.^[4]

We begin by summarizing
the claims asserted by each of the parties against the others.

The Beltrans asserted against PAIC and against SESCO two (2)
principal claims. The first claim was
for rescission of the lease agreement with PAIC, which had obligated the
Beltrans to make monthly payments to PAIC, for failure of PAIC to render the
SUN 1115 fit for the purpose for which the Beltrans wanted it in the first
place. The second was a claim to
recover the downpayment that the Beltrans had made to SESCO on the purchase price
of the SUN 1115.

The principal claim of PAIC was asserted against the Beltrans
under the lease agreement. That claim
was for specific performance of the Beltrans’ obligations under the lease
agreement, i.e., payment of the specified monthly payments all of which had
become due and payable in view of the default on the part of the Beltrans. The aggregate of those monthly payments in effect represented the
payment which PAIC had previously made to SESCO for the balance of the purchase
price (remaining after the Beltrans’ downpayment) of the SUN 1115, plus
financing charges which included PAIC’s profit. PAIC also had a cause of action against SESCO under the
suretyship agreement which SESCO had signed guaranteeing solidarily with the
Beltrans payment of the amounts due from the Beltrans under the lease
agreement. PAIC did not originally
implead SESCO as a defendant in the complaint against the Beltrans. SESCO
was originally brought in as a party-litigant through the medium of the
third-party complaint filed by the Beltrans against SESCO before the trial
court. Later, PAIC amended its complaint, this time bringing in SESCO as a defendant; the amended
complaint was admitted and SESCO in due time filed an answer.

SESCO sought to
defend itself against PAIC’s claims by asserting that PAIC’s remedies were
against the Beltrans under their lease contract; that by entering into the
lease with the Beltrans, PAIC had waived any rights it had as a buyer from
SESCO; that SESCO’s solidary guarantee in
favor of PAIC had been extinguished or prescribed; that the Beltrans had
prevented SESCO from complying with its warranty on the SUN 1115; and that any
defect of the SUN 1115 was due to the acts and negligence of the users, i.e.,
the Beltrans. SESCO did not appeal from the trial court’s decision but was, of
course, a party to the proceedings before the Court of Appeals and is a party
to the two (2) Petitions for Review. In
each of the Petitions for Review (G.R. Nos. 83113 and 83256) now consolidated
before our Court, SESCO was served with a copy of the Petition. Clearly, therefore, the Supreme Court has
jurisdiction over the person of SESCO.

We turn to the
important circumstances constituting and attending the transactions between
SESCO, PAIC and the Beltrans:

1. Initially, SESCO sold the Performance Analyzer SUN 1115 to the Beltran spouses as evidenced by
SESCO’s Sales Invoice No. 050 dated 15 July 1980.^[5]
Accompanying this Sales Invoices was a Certificate of Warranty issued by SESCO
in favor of the Beltrans, also dated 15 July 1980.^[6]
Thereupon, delivery of the Performance Analyzer was made to the Beltrans, as
indicated in the Sales Invoice and in the delivery receipt dated 15 July 1980.^[7]
As downpayment for this purchase, the Beltrans paid SESCO the total amount of P29,672.11.

2. Next, SESCO sold to PAIC the same equipment it had earlier
sold to the Beltran spouses. The sale
to PAIC is evidenced by SESCO’s Sales Invoice No. 050 dated 3 September 1980
and issued in the name of both PAIC and the Beltrans as vendees. For this transaction, PAIC paid SESCO the
amount of P91,751.60. A delivery receipt covering the SUN 1115 and dated
3 September 1980 was issued in the name of both
PAIC and the Beltrans. A close
examination of the records will, however, show that PAIC never took physical
possession of the SUN 1115, since on the stated date of delivery to PAIC, the
SUN 1115 was already physically in the hands of the Beltrans.

3. Shortly after the transaction between SESCO and PAIC, a lease
contract dated 19 September 1990 was entered into between PAIC and the
Beltrans. The lease agreement provided
for a fixed monthly rental payment for a period of thirty-six (36) months. It is important to note that under this
lease contract, the lessor PAIC undertook no warranty of the fitness, design
and condition of, or of the quality or capacity of the leased Performance
Analyzer SUN 1115. The relevant
provision of the lease agreement reads as follows:

“2.1. – Warranties;
Negation — Lessor not being the manufacturer of the Equipment, nor
manufacturer’s agent, makes no warranty or representation, either expressed or
implied, as to the fitness, design or condition of, or as to the quality or
capacity of the material, equipment or workmanship in the Equipment, nor
any warranty that the equipment will satisfy the requirements of any law, rule, specification or
contract which provides for specific machinery or operation, or special
methods, it being agreed that all such risks as between the Lessor and the
Lessee are to be borne by the Lessee at its sole risk and expense. No oral
agreement, guaranty, promise condition, representation or warranty shall be
binding; all prior conversations, agreements, or representations related hereto
and/or to the Equipment are integrated herein, and no modification hereof shall
be binding unless in writing signed by Lessor. All repairs, parts, supplies, accessories, equipment and device,
furnished or added to any Equipment under lease shall become the property of
the Lessor. The Lessee also agrees
that each Equipment under lease is of a design, capacity and size selected and
approved by the Lessee, and the Lessee is satisfied that the same is suitable
for its purposes. The Lessor shall
not be liable to the Lessee for any loss, damage or expense of any kind or
nature, caused directly or indirectly, by any Equipment under lease, or the use
or maintenance thereof, or the repairs, servicing or adjustments thereto, or by
any delay or failure to provide the same, or by any interruption of service or
loss of use thereof or for any loss of business or damage whatever and however
the same may have been caused.” (Underscoring supplied)

The lease contract also provided that
“the lessee shall have no option to purchase or otherwise acquire title or
ownership of any of the leased equipment and shall have only the right to use
the same under and subject to the terms and conditions of [the] lease.”

4. Pursuant to the lease agreement, another delivery receipt was
issued, this time in the name of the Beltrans by PAIC, and dated 2
September 1980. It may be noted that this delivery
receipt dated 2 September 1980 was in fact dated a day earlier than the date when SESCO, per its own
document­ation, delivered the equipment to PAIC.

5. Since the Beltrans were
in possession of the SUN 1115 before PAIC, per SESCO’s documentation,
purchased the same from SESCO, it necessarily follows that the Beltrans, rather
than PAIC, had selected and inspected the equipment.

6. The amount paid by PAIC to SESCO represented the discounted
value f the total amount receivable by SESCO from the Beltrans.^[8]
At the time of the sale by SESCO to PAIC, the amount receivable by SESCO from
the Beltrans (i.e., the balance
of the purchase price of the equipment remaining
after application of the downpayment) was P107,327.89 (P137,000.00
– P29,672.11 = P107,327.89).

7. The rental payments stipulated in the lease contract between
PAIC and the Beltrans were so computed as to cover the amount paid by PAIC
to SESCO plus the financing charges.^[9]

8. Although the lease contract gave no option to the Beltrans to
purchase or to acquire the SUN 1115, the declarations of the parties in their
different pleadings^[10]
afford clear indication that the parties had contemplated that the ownership of
the SUN 1115 would pass to the Beltrans after the end of the lease period. It was not, therefore, anticipated by the
parties that the SUN 1115 would be returned to the lessor PAIC. PAIC was not in the business of leasing out
machinery or equipment and did not maintain a warehouse or workshop nor service and maintenance personnel for
the repair and servicing of machinery or equipment.

It will be recalled that the trial court concluded that the
contract between PAIC and the Beltrans was a real lease or a “civil law
lease” and held that the lease was extinguished because the thing leased
was or had become totally unfit for the purposes of the lease, in accordance
with the provisions of Article 1654 of the Civil Code. It will also be recalled that the Court of
Appeals had concluded after examination of the above circumstances that the
contract of lease was “a scheme to simulate the real agreement between the
parties” which “real agreement” was a composite of a contract of
sale between the Beltrans as vendees and SESCO (or SESCO’s assigns [PAIC]) as
vendor, and a “financing arrangement.”

We believe that the Court of Appeals was substantially correct in
holding that the principal transactions were two-fold: firstly, a sale of the SUN No. 1115 from SESCO
to PAIC/ the Beltrans and secondly, a financing arrangement that would
permit the ultimate users of the SUN 1115 the Beltrans — to use that equipment
and pay for it by installments, spread out over thirty-six (36) months. The
inconsistencies in the details
of the documentation of the transactions may be seen to be due, not so much to
“simulation” of the “real agreement of the parties” but
rather to the fact that the financing company was chosen and the financing
arrangement concluded sometime after the original sale transaction
between SESCO and the Beltrans’. That
original transaction was in effect remodelled or restructured to conform with
the financing arrangement, which took the form of a financial lease. A financial lessor, like all lessors, is
legal owner of the thing leased. Accordingly, SESCO documented a sale
to PAIC; because the SUN 1115 had earlier been sold to the Beltrans, the SESCO
invoice was modified and made out to both PAIC and the Beltrans. The possession originally held by the
Beltrans in concept of owner, was transmuted into possession by the
Beltrans in concept of lessee.

In this jurisdiction, financial leases as a species of secured
financing are of fairly recent vintage. Financial leases, while they are complex arrangements, cannot be
casually dismissed as “simulated contracts.” To the contrary, they
are genuine or legitimate contracts which have been accorded statutory and
administrative recognition. Section 3
(a) Republic Act No. 5980, as amended by Presidential Decrees Nos. 1454
and 1793; known as the “Financing Company Act,” defines
financing companies in the following manner:

“Financing companies, hereinafter called companies, are corporations,
or partnerships, except those regulated by the Central Bank of the Philippines,
the Insurance Commissioner and the Cooperatives Administration Office, which
are primarily organized for the purpose of extending credit facilities to
consumers and to industrial, commercial, or agricultural enterprises,
either by discounting or factoring commercial papers or accounts receivables,
or by buying and selling contracts, leases, chattel mortgages, or other
evidences of indebtedness, or by leasing motor vehicles, heavy
equipment and industrial machinery, business and office machines
and equipment, appliances and other movable property.”^[11]
(Underscoring supplied)

Section 1, paragraph 1 of the Revised Rules and Regulations
Implementing the Provisions of the Financing Company Act, as amended, adopted
jointly by the Securities and Exchange Commission and the Monetary Board of the
Central Bank of the Philippines, defines leasing in the following terms:

“1. ‘LEASING‘ shall refer to financial leasing which
is a mode of extending credit through a non-cancellable contract under which
the lessor purchases or acquires at the instance of the lessee heavy equipment,
motor vehicles, industrial machinery, appliances, business and office
machines, and other movable property in consideration of the periodic
payment by the lessee of a fixed
amount of money sufficient to amortize at least 70% of the purchase
price or acquisition cost, including any incidental expenses and a margin of profit, over the lease
period. The contract shall extend
over an obligatory period during which the lessee has the right to hold and use
the leased property and shall bear the cost of repairs, maintenance, insurance and
preservation thereof, but with no obligation or option on the part of the
lessee to purchase the leased property at the end of the lease contract.”
(Underscoring supplied)

The tax treatment of lease agreements, as distinguished from conditional sales contracts, is governed
by Revenue Regulations No. 19-86,
promulgated by the Department of Finance
on 1 January 1987. These Revenue
Regulations recognize two (2) types of leases. The first type, denominated an
“operating lease”, is defined
as

“x x x a contract under which the asset is not wholly
amortized during the primary period of the lease, and where the lessor does
not rely solely on the rentals during the primary period for his profits,
but looks for the recovery of the balance of his costs and for the rest
of his profits from the sale or re-lease of the returned asset at the end
of the primary lease period.” (Underscoring supplied)

The second type of recognized lease is
designated as a “finance
lease” and defined in the Revenue Regulations in the following manner:

“x x x ‘Finance lease,’ or ‘full payout lease‘
is a contract involving payment over an obligatory period (also called
primary or basic period) of specified rental amounts for the use of a
lessor’s property, sufficient in total to amortize the capital outlay of
lessor and to provide for the lessor’s borrowing costs and profits. The obligatory period refers to the primary
or basic non-cancellable period of the lease which in no case shall be less
than 730 days. The lessee, not the
lessor, exercises the choice of the asset and is normally responsible for
maintenance, insurance and such other expenses pertinent to the use,
preservation and operation of the asset. Finance leases may be extended, after the expiration of the primary
period, by non-cancellable secondary or subsequent periods with the rentals
significantly reduced. The residual
value shall in no instance be less than five per cent (5%) of the lessor’s
acquisition cost of the leased asset.” (Underscoring supplied).

The basic purpose of a financial leasing transaction is to enable the prospective buyer of
equipment, who is unable to pay for such equipment in cash in one lump sum, to
lease such equipment in the meantime for his
use, at a fixed rental sufficient
to amortize at least 70% of the acquisition cost (including the expenses and a margin of profit for the financial lessor) with the expectation that at
the end of the lease period, the buyer/financial lessee will be able to pay any
remaining balance of the purchase price.^[12]
Generally speaking, a financing company is not a buyer or seller of goods; it
is not a trading company. Neither is it
an ordinary leasing company; it does not make its profit by buying equipment
and repeatedly leasing out such equipment to different users thereof. But a financial lease must be preceded by a
purchase and sale contract covering the equipment which becomes the subject
matter of the financial lease. The
financial lessor takes the role of the buyer of the equipment leased. And so the formal or documentary tie between
the seller and the real buyer of the equipment, i.e., the financial lessee, is
apparently severed. In economic
reality, however, that relationship remains. The sale of the equipment by the supplier thereof to the financial
lessor and the latter’s legal ownership thereof are intended to secure the
repayment over time of the purchase price of the equipment, plus financing
charges, through the payment of lease rentals; that legal title is the upfront
security held by the financial lessor, a security probably superior in some
instances to a chattel mortgagee’s lien.

A financing lease may be seen to be a contract sui generis, possessing some but not necessarily all of the
elements of an ordinary or civil law lease. Thus, legal title to the equipment leased is lodged in the financial
lessor. The financial lessee is
entitled to the possession and use of the leased equipment. At the same time, the financial lessee is
obligated to make periodic payments denominated as lease rentals, which enable the financial lessor to recover
the purchase price f the equipment which had been paid to the supplier
thereof. However, the financial lessor,
being a financing company, i.e.,
an extender of credit rather than an ordinary equipment rental company, does
not extend a warranty of the
fitness of the equipment for any particular use. In the instant case, the
contract of lease between PAIC and the Beltrans, in addition to expressly
disclaiming any obligation on the part of PAIC to warrant the fitness of the
SUN 1115 for any particular use, had specified that the equipment warranty,
issued by SESCO the supplier of the equipment, “shall be passed on by
[PAIC] to the lessee.” In fact, as noted, SESCO issued a Certificate of
Warranty to the Beltrans. Thus, the
financial lessee was precisely in a position to enforce such warranty directly
against the supplier of the equipment and not against the financial lessor. We find nothing contra legem
or contrary to public policy in such a contractual arrangement.

Considering all the circumstances listed earlier, and bearing in
mind the economic and legal nature and objectives of a financing lease, we
conclude and so hold that the financial lease between PAIC and the Beltrans was
a valid and enforceable contract
as between the two (2) contracting parties. The Beltrans are therefore bound to pay to PAIC all the rental payments which accrued and are due and payable
under that contract.

At the same time, PAIC is entitled to require SESCO to respond
under its solidary guarantee of the obligations of the Beltrans under the lease
contract. PAIC may thus opt to recover
from either the Beltrans or SESCO alone, or from both the Beltrans and SESCO
solidarily at the same time.

Should PAIC recover fully or partially the amounts due from the
Beltrans, we believe and so hold that the Beltrans are entitled to
reimbursement from SESCO of such amounts as they shall have been compelled to
pay PAIC. In addition, the Beltrans are
entitled to recover from SESCO the downpayment they had previously made to
SESCO on the SUN 1115, and as well to require SESCO to take back that
equipment. These rights of the Beltrans
flow from their rescission of the contract of sale covering the SUN 1115 for
failure of SESCO to make good on its warranty against defects in materials and
workmanship set out in its “Warranty Certificate,” and on its
warranty against hidden defects which render the thing sold “unfit for the
use of which it is intended” under the general law on sales.^[13]

It is clear to the Court that it is SESCO who must bear the legal consequences of its failure
to make good on the warranty it had given as vendor of the SUN 1115. SESCO received the full value of the SUN
1115: (a) the downpayment from the Beltrans; and (b) the balance of the
purchase price from PAIC. The record
shows that PAIC had not breached any of its undertakings to the Beltrans under
the financial lease. Upon the other hand,
the Beltrans, because of failure
of the equipment warranty given by SESCO, could not benefit either from the
purchase of the equipment or from the financial lease. Clearly, it would be inequitable aid
unconscionable to permit SESCO to hold on to the purchase price and to shift
the burden of its own failure either to the ultimate buyers or to the company
which financed the bulk of the purchase price.

The Court is aware that the Beltrans were unable to file a timely
appeal from the ruling of the trial court which had dismissed their claim
against SESCO. However, guided by the
principle that technicality should not be allowed to stand in the way of
equitably and completely resolving the rights and obligations of the parties^[14],
this Court now resolves to treat
the Beltrans’ appeal as having been seasonably filed so as to permit complete resolution of this
trilateral controversy on the merits.

IN VIEW OF THE ALL THE FOREGOING, the Decision of the
Court of Appeals dated 30 June 1987 in C.A.-G.R. CV No. 10078 and the decision
of the Regional Trial Court of Manila dated 16 October 1985 in Civil Case No.
138233, are hereby SET ASIDE,
and a new judgment is hereby ENTERED providing as follows:

1. The spouses Beltran and SESCO are hereby ORDERED to pay
jointly, and severally, to PAIC the rental payments accrued and remaining
unpaid under the lease agreement, with interest at six percent (6%) per
annum starting from 16 October 1985 and until full payment thereof.

2. SESCO is also hereby ORDERED
to reimburse the spouses Beltran any amount that they are actually
compelled to pay to PAIC under paragraph 1 of the dispositive portion of this
Decision, with interest thereon at six percent (6%) per annum counting
from the date of payment by the Beltran spouses and until full reimbursement
thereof.

3. The spouses Beltran are hereby REQUIRED to return the Infra-Red Performance Analyzer SUN 1115 to
SESCO, at the expense of SESCO. SESCO
is in turn hereby ORDERED to
accept that equipment.

4. SESCO is, finally, hereby ORDERED to return to the spouses Beltran the downpayment of P29,672.11
made on the SUN 1115, with interest thereon at six percent (6%) per annum
counting from 16 October 1985 and until full payment thereof.

No pronouncement as to costs. This Decision is immediately executory.

SO ORDERED.

Gutierrez, Jr., (Chairman), Bidin, Davide, Jr., and Romero, JJ., concur.

^[1]
Decision, CA-G.R. CV. No.10078, p. 3; Rollo of G.R. 83256, p. 48.

^[2]
Decision in Civil Case No. 138233, pp. 3-4; Rollo, pp. 25-26.

^[3]
Decision; C.A.-G.R. No. 10078, pp. 5-6; Rollo (G.R. No. 83113), pp.
29-30.

^[4]
In Re Sherwood Diversified Services, Inc.,
382 F. Supp. 1359 (1944).

^[5]
See Folder of Exhibits, p. 10.

^[6]
Id., p. 11.

^[7]
Id., p. 6. Although the receipt is dated 3 September 1980, a close
examination of the same shows that said date was altered; that originally, it
was dated 15 July 1980.

^[8]
Disclosure Statement of Loan/Credit Transactions, Exhibits “E,”
Folder of Exhibits, p. 7.

^[9]
Exhibit “E” supra.

^[10]
Petition in G.R. No. 83256 p. 8.; Rollo, p. 5; Comment of Respondent in
G.R. No. 83256, pp. 3-6; Rollo, pp. 58-61.

^[11]
Republic Act No. 5980, as amended by
Presidential Decree Nos. 1454 and 1793.

^[12]
Inverstors Finance Corporation v. Court of Appeals, 193 SCRA 701 (1991).

^[13]
Article 1561, Civil Code.

^[14]
Atlas Lithographic Service, Inc. vs. Ledesma et al., G.R. No. 96566 (6 January
1992); Rapid Manpower Consultants, Inc. v. National Labor Relations
Commission, 190 SCRA 747 (1990).