 Dacion En Pago (Arts.

1245 and 1934)

19. Philippine Lawin Bus Co. v. CA, 374 SCRA 332 (2002)

FACTS: On 7 August 1990 plaintiff Advance Capital Corporation, a licensed lending investor,
extended a loan to defendant Philippine Lawin Bus Company in the amount of P8,000,000.00
payable within a period of one (1) year. The defendant, through Marciano Tan, its Executive Vice
President, executed Promissory Note No. 003, for the amount of P8,000,000.00. To guarantee
payment of the loan, defendant Lawin executed in favor of plaintiff the following documents: (1) A
Deed of Chattel Mortgage wherein 9 units of buses were constituted as collaterals. (2) A joint and
several UNDERTAKING of defendant Master Tours and Travel Corporation dated 07 August 1990,
signed by Isidro Tan and Marciano Tan, and (3) A joint and several UNDERTAKING executed and
signed by Esteban, Isidro, Marciano and Henry, all surnamed Tan.

Despite repeated demands, the defendants failed to pay their indebtedness which totaled of
P16,484,992.42 as of 31 July 1992. Thus, the suit for sum of money, wherein the plaintiff prays that
defendants solidarily pay plaintiff as of July 31, 1992 the sum of (a) P16,484,994.12 as principal
obligation under the two promissory notes Nos. 003 and 00037, plus interests and penalties, and
other damages. On 04 September 1993, a writ of preliminary injunction was issued with respect to
movable and immovable properties of the defendants.

In answer to the complaint, defendants-appellees assert by way of special and affirmative defense,
that there was already an arrangement as to the full settlement of the loan obligation by way of:
A. Sale of the nine (9) units passenger buses the proceeds of which will be credited against the loan
amount as full payment thereof; or in the alternative.
B. Plaintiff will shoulder and bear the cost of rehabilitating the buses, with the amount thereof to be
included in the total obligation of defendant Lawin and the bus operated, with the earnings thereof to
be applied to the loan obligation of defendant Lawin."

Defendants further assert that the foreclosure sale was in violation of the aforequoted arrangement
and prayed for the nullification of the same and the dismissal of the complaint.

On 28 June 1995, the trial court rendered a decision dismissing the complaint for lack of merit;
Declaring the foreclosure and auction sale null and void, and Declaring the obligation or
indebtedness of defendants EXTINGUISHED. On 30 September 1997, the Court of Appeals
promulgated a decision reversing that of the trial court.

ISSUE: Whether there was dacion en pago between the parties upon the surrender or transfer of the
mortgaged buses to the respondent.

RULING: No, there was no dacion en pago that took place between the parties.

In dacion en pago, property is alienated to the creditor in satisfaction of a debt in money. 16 It is "the
delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation." 17 It "extinguishes the obligation to the extent of the
value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the
parties by agreement, express or implied, or by their silence, consider the thing as equivalent to the
obligation, in which case the obligation is totally extinguished.

Article 1245 of the Civil Code provides that the law on sales shall govern an agreement of dacion en
pago. A contract of sale is perfected at the moment there is a meeting of the minds of the parties
thereto upon the thing which is the object of the contract and upon the price.

In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who
accepts it as equivalent of payment of an outstanding obligation. The undertaking really partakes in
one sense of the nature of sale, that is, the creditor is really buying the thing or property of the
debtor, payment for which is to be charged against the debtor’s debt.1âwphi1 As such, the essential
elements of a contract of sale, namely, consent, object certain, and cause or consideration must be
present.

What actually takes place in dacion en pago is an objective novation of the obligation where the
thing offered as an accepted equivalent is considered as the object of the contract of sale, while the
debt is considered as the purchase price. In any case, common consent is an essential prerequisite,
be it sale or novation, to have the effect of totally extinguishing the debt or obligation.

In this case, there was no meeting of the minds between the parties on whether the loan of the
petitioners would be extinguished by dacion en pago. The receipts executed by respondent’s
representative as proof of an agreement of the parties that delivery of the buses to private
respondent would result in extinguishing petitioner’s obligation do not in any way reflect the intention
of the parties that ownership thereof by respondent would be complete and absolute. The receipts
show that the two buses were delivered to respondent in order that it would take custody for the
purpose of selling the same. The receipts themselves in fact show that petitioners deemed
respondent as their agent in the sale of the two vehicles whereby the proceeds thereof would be
applied in payment of petitioners’ indebtedness to respondent. Such an agreement negates transfer
of absolute ownership over the property to respondent, as in a sale. Where machinery and
equipment were repossessed to secure the payment of a loan obligation and not for the purpose of
transferring ownership thereof to the creditor in satisfaction of said loan, no dacion en pago was ever
accomplished.

Lease (Arts. 1484 and 1485)

20. Filinvest Credit Corp. v. CA, 178 SCRA 188 (1989)

FACTS: The spouses Jose Sy Bang and Iluminada Tan were engaged in the sale of gravel
produced from crushed rocks and used for construction purposes. In order to increase their
production, they engaged the services of Mr. Ruben Mercurio, the proprietor of Gemini Motor Sales
in Lucena City, to look for a rock crusher which they could buy. Mr. Mercurio referred the spouses to
the Rizal Consolidated Corporation which then had for sale one such machinery.Apparently satisfied
with the machine, Sy Bang signified their intent to purchase the same.
They were confronted with a problem, the rock crusher carried a cash price tag of P550,000.00. Bent
on acquiring the machinery, the spouses applied for financial assistance from Filinvest Credit
Corporation. Filinvest agreed to extend to the spouses financial aid on the following conditions: that
the machinery be purchased in Filinvest’s name; that it be leased (with option to purchase upon the
termination of the lease period) to the spouses; and that the spouses execute a real estate mortgage
in favor of Filinvest as security for the amount advanced by the latter.

Accordingly, on 18 May 1981, a contract of lease of machinery (with option to purchase) was
entered into by the parties whereby the spouses agreed to lease from the petitioner the rock crusher
for two years starting from 5 July 1981 payable at P10,000.00 for first 3 months, P23,000.00 for the
next 6 months, and P24,800.00 for the next 15 months. The contract likewise stipulated that at the
end of the two-year period, the machine would be owned by the spouses.

Thus, the spouses issued in favor of Filinvest a check for P150,550.00, as initial rental (or guaranty
deposit), and 24 postdated checks corresponding to the 24 monthly rentals. In addition, to guarantee
their compliance with the lease contract, the spouses executed a real estate mortgage over two
parcels of land in favor of Filinvest. The rock crusher was delivered to the spouses on 9 June 1981.

Three months from the date of delivery, or on 7 September 1981, however, the spouses, claiming
that they had only tested the machine that month, sent a letter-complaint to Filinvest, alleging that
contrary to the 20 to 40 tons per hour capacity of the machine as stated in the lease contract, the
machine could only process 5 tons of rocks and stones per hour. They then demanded that Filinvest
make good the stipulation in the lease contract. They followed that up with similar written complaints
to Filinvest, but the latter did not, however, act on them.

Subsequently, the spouses stopped payment on the remaining checks they had issued to Filinvest.
As a consequence of the non-payment by the spouses of the rentals on the rock crusher as they fell
due despite the repeated written demands, Filinvest extrajudicially foreclosed the real estate
mortgage. On 18 April 1983, the spouses received a Sheriff a Notice of Auction Sale informing them
that their mortgaged properties were going to be sold at a public auction on 25 May 1983, 10:00
a.m., at the Office of the Provincial Sheriff in Lucena City to satisfy their indebtedness to Filinvest.

ISSUES:
1. Whether or not the parties entered into a contract of lease.

2. Whether or not Filinvest is liable for the machine’s failure to produce in accordance with its
described capacity.

HELD:
1.No, the parties into a contract of sale, and not a contract of lease.

Primarily what the parties entered into is not contract of lease but a lease only in name. As the court
describe, the nomenclature of the agreement cannot change its true essence, i.e., a sale on
installments. It is basic that a contract is what the law defines it and the parties intend it to be, not
what it is called by the parties. It is apparent here that the intent of the parties to the subject contract
is for the so-called rentals to be the installment payments. Upon the completion of the payments,
then the rock crusher, subject matter of the contract, would become the property of the private
respondents. This form of agreement has been criticized as a lease only in name.

Thus in Vda. de Jose v. Barrueco, SC stated:

Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a
bargain in that form, for one reason or another, have frequently resorted to the device of making
contracts in the form of leases either with options to the buyer to purchase for a small consideration
at the end of term, provided the so-called rent has been duly paid, or with stipulations that if the rent
throughout the term is paid, title shall thereupon vest in the lessee. It is obvious that such
transactions are leases only in name. The so-called rent must necessarily be regarded as payment
of the price in installments since the due payment of the agreed amount results, by the terms of
bargain, in the transfer of title to the lessee.

Under the Art. 1484 of the New Civil Code, the seller of movables in installments, in case the
buyer fails to pay two or more installments may elect to pursue either of the following
remedies: (1) exact fulfillment by the purchaser of the obligation; (2) cancel the sale; or (3)
foreclose the mortgage on the purchased property if one was constituted thereon. It is now
settled that the said remedies are alternative and not cumulative and therefore, the exercise
of one bars the exercise of the others.

Indubitably, the device contract of lease with option to buy is at times resorted to as a means to
circumvent Article 1484, particularly paragraph (3) thereof. Through the set-up, the vendor, by
retaining ownership over the property in the guise of being the lessor, retains, likewise, the right to
repossess the same, without going through the process of foreclosure, in the event the vendee-
lessee defaults in the payment of the instalments. More important, the vendor, after repossessing
the property and, in effect, canceling the contract of sale, gets to keep all the installments-cum-
rentals already paid. It is thus for these reasons that Article 1485 of the new Civil Code provides that:

Article 1485. The preceding article shall be applied to contracts purporting to be leases of
personal property with option to buy, when the lessor has deprived the lessee of possession
or enjoyment of the thing.

2.  NO. Filinvest is not liable for the rock crusher’s failure to produce in accordance with its described
capacity.

The spouses Bang and Tan were the one who chose, inspected and tested the subject machinery.
In fact , this was stipulated in the contract they signed:

LESSEE’S SELECTION, INSPECTION AND VERIFICATION.-TheLESSEE hereby confirms and

acknowledges that he has independently inspected and verified the leased property and has
selected and received the same from the Dealer of his own choosing in good order and excellent
running and operating condition and on the basis of such verification, etc. the LESSEE has agreed
to enter into this Contract.”

It is their failure or neglect to exercise the caution and prudence of an expert, or, at least, of a
prudent man, in the selection, testing, and inspection of the rock crusher that gave rise to their
difficulty and to this conflict. A well-established principle in law is that between two parties, he,
who by his negligence caused the loss, shall bear the same.

The spouses also released Filinvest from any liability arising from any defect or deficiency of the
machinery they bought with the stipulation on express waiver of warranties in favor of Filinvest in the
agreement.

Certainly, the waiver in question could not be considered a mere surplusage in the contract between
the parties. Moreover, nowhere is it shown in the records of the case that the private respondent has
argued for its nullity or illegality. In any event, we find no ambiguity in the language of the waiver or
the release of warranty. There is therefore no room for any interpretation as to its effect or
applicability vis-a- vis the deficient output of the rock crusher. Suffice it to say that the private
respondents have validly excused the petitioner from any warranty on the rock crusher. Hence, they
should bear the loss for any defect found therein.