ETRIII
Civil Law Review Lecture Series
OUTLINE/ LECTURE ON
WARRANTIES AND REMEDIES
IN CASE OF BREACH
IN SALES CONTRACTS
By: Atty. Eduardo T.
Reyes, III
(Prepared for Law
4-C,
Univ. of San Agustin
Law School,
Civil Law Review II,
SY 2016-2017)
I.
WARRANTIES. Warranties may be express or implied. Implied warranties
are natural elements of a contract of sale.
1.1. General Rule: Express Warranties of seller. An express
warranty is any affirmation of fact or any promise by the seller relating to the
thing if the natural tendency of such affirmation or promise is to INDUCE the
buyer to purchase the same, and if the buyer purchase the thing relying
thereon.[1]
Exception:
No
affirmation of the value of the thing, nor any statement purporting to be a statement
of the seller’s OPINION only shall be construed as a warranty.
Exception
to exception: When the seller made such affirmation or statement as an
expert and it was relied upon by the buyer.
1.2. Implied Warranties of Seller. Unless a
contrary intention appears, the following are deemed included in a contract of
sale even without an express stipulation:
a) Warranty against eviction. That the
seller has the right to sell the thing at the time when the ownership is to
pass and the buyer shall from that time have and enjoy the legal and peaceful
possession of the thing.[2]
b) Warranty against Hidden Defects. An
implied warranty that the thing shall be free from any hidden faults or
defects, or any charge or encumbrance not declared or known to the buyer[3].
c) In sale of Goods, Warranty of Quality or
Fitness.
c.1. Where
the buyer, expressly or by implication, makes known to the seller the
particular purpose for which the goods are acquired, and it appears that the
buyer relies on the seller’s skill or judgment (whether he be the grower or
manufacturer or not), there is an implied warranty that the goods shall be
reasonably fit for such purpose[4].
c.2. Where
the goods are brought by description from a seller who deals in goods of that
description (whether he be the grower or manufacturer or not), there is an
implied warranty that the goods shall be of merchantable quality[5].
1.3. Warranty in Case of Eviction. This
warranty is a natural element of a contract of sale. The warranty may be
eliminated by stipulation so long as the stipulation was agreed upon in good
faith. Any stipulation exempting the vendor from the obligation to answer for
eviction shall be void, if he acted in bad faith[6].
1.3.1. Requisites for enforcement of
warranty in case of eviction.[7]
See Arts. 1548 &
1558.
a. Vendee is deprived of the whole
or of part of the thing purchased;
b. Eviction was by virtue of final
judgment
c. Based on ground on a right prior
to the sale or an act imputable to the vendor
d. The vendor must be summoned in
the suit for eviction at the instance of the vendee.
1.3.2. Waiver
of warranty in case of eviction. May be Conciente
or Intentionada.
-
Conciente-
when
the vendee made the waiver WITHOUT knowledge of the risks of eviction – the
vendor shall only PAY THE VALUE which the thing sold had AT THE TIME OF
EVICTION
-
Intentionada- when the
vendee made the waiver WITH KNOWLEDGE of the risks of eviction and assumed its
consequences – Vendor is NOT LIABLE.
1.3.3. Liabilities of Vendor in case of Breach.
a) RETURN the
value which the thing sold had at the time of the eviction, be it greater or
less than the price of the sale.
b) The income
or fruits, if he has been ordered to deliver them to the party who won the suit
against him.
c) The costs
of the suit which caused the eviction, and, in a proper case, those of the suit
brought against the vendor for the warranty.
d) The
expenses of the contract, if the vendee has paid them.
e) The
damages and interests, and ornamental expenses, if the sale was made in bad
faith.
Alternative Remedy. Should the
vendee lose, by reason of the eviction, a part of the thing sold of such
importance, in relation to the whole, that HE WOULD NOT HAVE BOUGHT IT WITHOUT
SAID PART, he may:
(1) Within
1 year, to be computed from the execution of the deed, (i) bring an action for
rescission, or, (ii) sue for damages. In case of rescission, there is an
obligation to return the thing without other encumbrances than those which it
had when he acquired it.[8]
(2) After
1 year, - The vendee may only bring an action for damages within an equal
period, to be counted from the date on which he discovered the burden or
servitude.
1.3.4. Warranty against HIDDEN
DEFECTS of or Encumbrance Upon the Things Sold. (Article 1561, New Civil Code).
The vendor shall be responsible for warranty against hidden defects which the
thing sold may have, should they render it unfit for the use for which it is
intended, or should they diminish its fitness for such use to such an extent
that, had the vendee been aware thereof, he would not have acquired it or would
have given a lower price for it.
ü The vendor
shall not be answerable for PATENT DEFECTS or those which may be VISIBLE, or
those which are not visible if the vendee is an expert who, by reason of his
trade or profession, should have known them.
ü There is
no warranty as to the thing’s FITNESS for any PARTICULAR PURPOSE, unless there
is a stipulation to the contrary.
ü Merchantability-
In the case of a contract of sale by SAMPLE, if the seller is a dealer in goods
of that kind, there is an implied warranty that the goods shall be free from
any defect rendering them unmerchantable which would not be apparent on
reasonable examination of the sample[9].
ü Unless the
contrary is stipulated, knowledge of the vendor is not essential for the
enforcement of this warranty[10].
1.3.5.
Remedies in case of Breach of Warranty against HIDDEN DEFECTS, within the
PRESCRIPTIVE PERIOD of SIX (6) MONTHS from delivery of the thing, the vendee :
ü ACCION REDHIBITORIA- withdrawing from the
contract with damages
ü RECOUPMENT- Demanding PROPORTIONATE REDUCTION
with damages.
ü Article 1599, NCC. “Where there is a breach
of warranty by the seller, the buyer may, at his election:
1) Accept or
keep the goods and set up against the seller, the breach of warranty by way of
recoupment in diminution or extinction of the price;
2) Accept or
keep the goods and maintain an action against the seller for damages for the
breach of warranty;
3) Refuse to
accept the goods, and maintain an action against the seller for damages for the
breach fo warranty;
4) Rescind
the contract of sale and refuse to receive the goods or if the goods have
already been received, return them or offer to return them to the seller and
recover the price or any apart thereof which has been paid.
X x x”
1.3.6. REDHIBITORY DEFECT OF
ANIMALS- If
the hidden defect of animals, even in case a professional inspection has been
made, should be of such a nature that expert knowledge IS NOT SUFFICIENT TO
DISCOVER IT[11].
ü Sale of
animals suffering from contagious disease shall be void.
ü Also void
if the use or service for which they are acquired has been stated in the
contract and they are found UNFIT therefor.
ü If a
VETERINARIAN, through ignorance or bad faith should fail to discover or
disclose it, the veterinarian shall be liable for damages.
-Prescriptive
period- 40 days from date of delivery to vendee.
II.
REMEDIES IN CASE OF BREACH OF OBLIGATIONS.
a.
Specific Performance; b. Rescission; c. Damages.
A. Specific
Performance. Action to recover the price by the seller of
goods is available to the seller. This action is available to the seller under
three different scenarios, viz:
A.1. The
ownership of the goods has passed to the buyer and he wrongfully neglects or
refuses to pay for the goods according to the terms of the contract of sale; or
A.2. The price is payable on a
certain day, irrespective of delivery or transfer of title and the buyer
wrongfully neglects or refuses to pay such price
A.3. When the buyer refused to
receive the goods upon the seller’s offer to deliver (where the goods cannot
readily be resold for a reasonable price); the seller may notify the buyer that
the goods thereafter held by the seller as bailee for the buyer and thereafter
treat the goods as the buyer’s and may maintain an action for the price.
B. DAMAGES. Apart from
the 3 scenarios above mentioned, the remedy is an action for damages where the
buyer wrongfully neglects or refuses to accept and pay for the goods. The
measure of damages is the estimated loss directly and naturally resulting in
the ordinary course of events from the buyer’s breach of contract.[12]
C. RESCISSION BY
SELLER. (Article 1597, NCC). The seller can give notice of
rescission where the goods have not
been delivered to the buyer, and the buyer has:
1) Repudiated
the contract of sale;
2) Manifested
his inability to perform his obligations
3) Has
committed a breach thereof, the seller may totally rescind the contract of sale
C.1. RECTO
LAW. (Article 1484, NCC). In a contract of sale of personal
property on installment basis, the vendor may exercise any of the following
ALTERNATIVE REMEDIES:
a) Exact
fulfillment of the obligation, should the vendee fail to pay
b) Cancel the
sale, should the vendee’s failure to pay cover two or more installments; or,
c) Foreclose
the mortgage.
c.1.1.
Applicable only to sale of personal property on installment. Not to a straight
sale (one-time payment) or a sale that is partly cash and partly term meaning
there will be an initial payment with
the balance all payable once in the future.[13]
c.1.2. Alternative Remedies v. Alternative
Obligations. In Borbon II v.
Servicewide Specialists, Inc.[14],
it was ruled that:
“The
remedies under Article 1484 of the Civil Code are not cumulative but
alternative and exclusive. In an ordinary alternative obligation, a mere choice
categorically and unequivocally made and then communicated by the person
entitled to exercise the option concludes the parties. The creditor may not
thereafter exercise any other option, unless the chosen alternative proves to
be ineffectual or unavailing due to no fault on his part. This rule, in essence, is the difference between alternative
obligations, on the one hand, and alternative remedies, upon the other hand,
where in the latter case, the choice generally becomes conclusive upon the
exercise of the remedy. For instance, in one of the remedies expressed in
Article 1484 of the Civil Code, it is only when there has been a foreclosure of the chattel mortgage that the
vendee-mortgagor would be permitted to escape from a deficiency liability.
Thus, if the case is one for specific performance, even when this action
selected after the vendee has refused to surrender the mortgaged property to
permit an extrajudicial foreclosure sale, the property may still be levied on
execution and an alias writ may be issued if the proceeds thereof are
insufficient to satisfy the judgment credit. So, also, a mere demand to
surrender the object which is not heeded by the mortgagor will not amount to a
foreclosure, but the repossession thereof by the vendor-mortgagee would have the
effect of foreclsore”.
C.1.3. Foreclosure
of mortgage. Unpaid Balance. “In this cae, he shall have no further action
against the purchase to recover any unpaid balance of the price. Any agreement
to the contrary shall be void”.
Hypotheticals:
a. In a
sale of personal property on installments, a promissory note was executed and
secured by a chattel mortgage. When the note matured but remained unpaid, the
creditor chose to collect on the note and prayed for a preliminary attachment.
When judgment was rendered, the same became final and executory and levy on
execution was made on the very property previously attached via preliminary
attachment. It is also the very same property subject of chattel mortgage. If
it turns out that the value of the property is insufficient to cover the entire
“unpaid balance”, can the creditor recover the difference through a “deficiency judgment”?
a.1. If
allowed, would this not allow indirectly the evil sought to be prevented by the
Recto Law?
b. If
seller avails of rescission, generally, “unpaid balance” is recoverable. Is
there an exception? – Read Delta Motor
Sales Corp., v. Niu Kim Duan[17]
on effect of recovery of chattel as a result of mutual rescission.
-“Rescission”
is deemed availed of when: possession of chattel is retaken, filing of judicial
rescission, and mere sending of notice of rescission.
c. Scope
of “Unpaid Balance” which cannot be recovered. – Macondray & Co., Inc. v. Eustaquio[18]-
“deficiency judgment to which the mortgagee may be entitled where, after the
mortgaged chattel is sold at public auction, the proceeds obtained therefrom
are insufficient to cover the full amount of the secured obligation which in
the case at bar as shown by the note and by the mortgaged deed, include interest on the principal,
attorney’s fees, expenses of collection, and the costs”.
-Exception. Read- Filipinas Investment &
Finance Corp. v. Ridad[19],
“Where
the mortgagor plainly refuses to deliver the chattel subject of the mortgage
upon his failure to pay two or more installments, or if he conceals the chattel
to place it beyond the reach of the mortgagee, what then is the mortgagee
expected to do? It is past of conventional wisdom and the rule of law that no
man can take the law into his own hands; so it is not supposed that the
Legislature intended that the mortgagee should wrest or seize the chattel
forcibly from the control and possession of the mortgagor, even to the extent
of using violence which is unwarranted in law. Since the mortgagee would
enforce his rights through the means and within the limits delineated by law,
the next step in such situations being the filing of an action for replevin to
the end that he may recover immediate possession of the chattel and thereafter,
enforce his rights in accordance with the contractual relationship between him
and the mortgagor as embodied in their agreement, then it logically follows as
a matter of common sense, that the necessary expenses incurred in the
prosecution by the mortgagee of the action for replevin so that he can regain
possession of the chattel, should be borne by the mortgagor. Recoverable expenses would, in our view,
include expenses properly incurred in effecting seizure of the chattel and
reasonable attorney’s fees in prosecuting the action for replevin x x x”.
d. Other Securities apart from Chattel
Mortgage
-
Chattel mortgage must be on the very thing
subject of the sale on installments in order for Recto Law to apply
-
In Cruz
v. Filipinas Investment & Finance Corp.[20] , it was held that allowing the foreclosure on
the real estate mortgage, after the
chattel mortgage was foreclosed, in order to recover deficiency, is to “overlook the fact that if the
guarantor should be compelled to pay the balance of the purchase price, the
guarantor will in turn be entitled to recover what she has paid from the debtor
vendee (Article 2066, Civil Code); so that ultimately, it will be the buyer who
will be made to bear the payment of the balance of the price, despite the
earlier foreclosure of the chattel mortgage given to him. Thus, the protection
given by Art. 1484 would be indirectly subverted, and public policy
overturned”.
-
What if, the seller (creditor/ mortgagee)
instead of running after the chattel mortgage, decides to foreclose on the real
estate mortgage first and then when
there is a deficiency, it is only then that he decides to foreclose the chattel
mortgage?
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