Elisco Tool Manufacturing Corporation vs. Court of Appeals

A car-plan agreement styled as a lease with option to purchase, under which monthly rentals are applied to the full purchase price and title passes upon payment, is a sale of personal property on installment; Articles 1484 and 1485 of the Civil Code apply, and the vendor's remedies are alternative, not cumulative. A promissory note not shown to have consideration and not part of the principal contract has no binding effect, including its penalty clause.

Rolando Lantan was employed by Elisco Tool Manufacturing Corporation as head of its cash department. The company maintained a car plan for top employees of the Elizalde group of companies, under which an employee could acquire a vehicle through salary-deducted payments. The dispute concerns the legal characterization of that arrangement under the Civil Code's installment-sale provisions.

Rolando Lantan was employed at Elisco Tool Manufacturing Corporation as head of its cash department. On January 9, 1980, he entered into an agreement with the company covering a 1979 model 2-door Colt Lancer, Serial No. 3403, under LTC Registration Certificate No. 0526558. The agreement recited that the employer owned the car; fixed a monthly rental of P1,010.65; provided for a five-year lease; required payment through salary deduction; made the employee responsible for registration, insurance, repair, maintenance, gasoline, oil, and part replacements; and stated that at the end of five years or upon payment of the 60th monthly rental, the employee could exercise an option to purchase, with all monthly rentals applied to the full purchase price. The option could be exercised earlier upon payment of the remaining balance, was limited to the employee, and was subject to the employer's right to lease the vehicle to another employee upon failure to pay three accumulated monthly rentals; resignation or dismissal required return of the vehicle. On the same day, Rolando executed a promissory note for P60,639.00, promising to pay P1,010.65 beginning January 9, 1980, under an attached schedule. The note provided for liquidated damages of 2% of the amount due and unpaid for every 30 days of default or fraction thereof, acceleration of the entire unpaid balance upon default covering two successive installments, attorney's fees of 20% of the total amount due but not less than P1,000, venue in Makati or Rizal, and an inflation clause. After taking possession, Rolando installed accessories worth P15,000.

In 1981, Elisco Tool ceased operations, and Rolando was laid off. As of December 4, 1984, he had made payments totaling P61,070.94. On June 6, 1986, petitioner filed a complaint for "replevin plus sum of money" against Rolando, his wife Rina, and two persons identified only as John and Susan Doe before the Regional Trial Court of Pasig, Metro Manila. Petitioner alleged that private respondents had failed to pay monthly rentals which, as of May 1986, totaled P39,054.86; that despite demands they failed to settle; that petitioner was entitled to possession of the car; that petitioner was ready to post a bond double the car's value of P60,000; and that if the car could not be returned, private respondents should be liable for P60,000 plus accrued monthly rentals with 14% interest per annum. The complaint prayed for P39,054.86 plus legal interest, a writ of replevin, and alternatively P60,000 plus accrued rentals with 14% interest, as well as 25% attorney's fees and costs. Upon petitioner's posting of a P120,000 bond, the sheriff took possession of the car and after five days turned it over to petitioner.

Private respondents filed their answer. They claimed that the agreement had not been signed by petitioner's representative, Jose Ma. S. del Gallego, although Rolando had signed it; that their true agreement was "to buy and sell and not lease with option to buy" the car at a monthly amortization of P1,000; and that petitioner accepted installment payments and, in January 1986, agreed that the balance of the purchase price would be paid on or before December 31, 1986. They cited the provision making Rolando liable for registration, insurance, repair, maintenance, gasoline, oil, and part replacements as evidence that the transaction was a sale. They further alleged that petitioner had waived its rights under the agreement because it accepted payments in cash or checks despite the salary-deduction arrangement; did not require return of the car when Rolando resigned in September 1982; did not lease the vehicle to another employee after he allegedly failed to pay three monthly rentals; and failed to enforce the manner of payment by accepting payments in various amounts and on different dates. In its reply, petitioner maintained that the contract was one of lease with option to purchase, that the promissory note was merely a "nominal security," that mere acceptance of payments for indefinite periods did not prove a sale, and that it was not guilty of laches because an action based on a written contract could be brought within ten years.

The trial court found that the agreement was one of sale and that private respondents had fully paid the price, having paid P61,070.94 aside from installing accessories worth P15,000. It found that the P61,070.94 included a 2% penalty for late payments for which there was no stipulation in the agreement; that neither the agreement nor the promissory note provided for interest on the remaining balance; and that all payments should be applied to the principal account. Since the principal was only P60,639.00, the trial court found an overpayment of P431.94. It also found that the car had been repossessed and that private respondents were deprived of its use.

• Admission in Pleadings: Petitioner contended that the Court of Appeals erred in disregarding the admission in the pleadings as to what documents contained the terms of the parties' agreement.
• Interest Stipulation: Petitioner argued that the Court of Appeals erred in holding that the interest stipulation in respondents' promissory note was not valid and binding.
• Full Payment: Petitioner argued that the Court of Appeals erred in holding that respondents had fully paid their obligations.
• Remedies for Default: On the assumption that the lease agreement with option to buy could be treated as a sale on installments, petitioner argued that the Court of Appeals erred in not finding that the parties had validly agreed that petitioner, as seller, could cancel the contract upon respondents' default on three or more installments, retake possession of the personality, and keep the rents already paid.
• Nature of Contract and Waiver: Petitioner maintained that the contract was one of lease with option to purchase and that the promissory note was merely a "nominal security"; that mere acceptance of the amounts paid by private respondents and for indefinite periods was not evidence that the agreement was one of purchase and sale; and that it was not guilty of laches because an action based on a written contract can be brought within ten years from accrual.

• Nature of Contract: Private respondents claimed that their true agreement was "to buy and sell and not lease with option to buy" the car at a monthly amortization of P1,000, and they cited the provision making Rolando liable for registration, insurance, repair, maintenance, gasoline, oil, and part replacements as evidence that the transaction was one of sale.
• Defective Agreement: Private respondents claimed that the agreement on which the complaint was based had not been signed by petitioner's representative, Jose Ma. S. del Gallego, although it had been signed by Rolando Lantan.
• Waiver: Private respondents alleged that petitioner had waived its rights under the agreement because (a) it accepted payments in cash or checks despite the salary-deduction stipulation; (b) it did not require Rolando to return the car when he resigned in September 1982; (c) it did not lease the vehicle to another employee after he allegedly failed to pay three monthly rentals; and (d) it failed to enforce the manner of payment by accepting payments in various amounts and on different dates.
• Extension of Payment: Private respondents claimed that petitioner accepted the installment payments made by them and, in January 1986, agreed that the balance of the purchase price would be paid on or before December 31, 1986.

• Nature of the Contract: Whether the agreement between petitioner and Rolando Lantan was a lease of personal property with option to purchase or a sale of personal property on installment.
• Applicability of Articles 1484 and 1485: Whether, the transaction being a sale on installment, petitioner's repossession of the vehicle and claim for unpaid installments were governed by the alternative remedies under Articles 1484 and 1485 of the Civil Code.
• Validity of Promissory Note's Interest and Penalty: Whether the interest and penalty stipulations in the promissory note were valid and binding on private respondents.
• Full Payment: Whether private respondents had fully paid the purchase price of the car.
• Damages and Attorney's Fees: Whether the awards of moral damages, exemplary damages, and attorney's fees were proper.

• Nature of the Contract: Sale on installment. Although styled as a lease with option to purchase, the agreement provided that all monthly rentals would be applied to the full purchase price and that title would pass upon payment; the monthly rentals were therefore amortizations, and the transaction was a lease in name only.
• Applicability of Articles 1484 and 1485: Yes. Article 1485 applies to purported leases with option to buy when the lessor deprives the lessee of possession; petitioner's replevin suit and seizure did so. The remedies under Article 1484 are alternative, not cumulative, and petitioner's simultaneous claim for unpaid installments and repossession could not be granted. The case was treated as one for specific performance under Article 1484(1), with replevin only to secure performance.
• Validity of Promissory Note's Interest and Penalty: No. The promissory note was not part of the contract and lacked consideration; no showing existed that petitioner advanced the purchase price or that respondents received P60,639.00. Its penalty clause had no binding effect.
• Full Payment: Yes. Respondents paid P61,070.94, which should be applied to the full purchase price; the agreement did not provide for interest or the 2% surcharge, and petitioner waived interest by accepting late payments. No unpaid balance remained.
• Damages and Attorney's Fees: Yes. Evidence supported moral damages for worry, embarrassment, and mental torture; petitioner acted in a wanton, fraudulent, reckless, and oppressive manner, justifying exemplary damages; attorney's fees were proper because respondents incurred expenses to protect their rights.

• Nature of the Contract: Petitioner did not deny that Rolando Lantan acquired the vehicle under a car plan for executives of the Elizalde group. Under a typical car plan, the company advances the purchase price to be paid back through salary deductions, retaining ownership until full payment; retention of registration is only a lien. The Court recognized the practice of vendors denominating installment sales as leases to prevent ownership from passing until full payment. Citing Vda. de Jose vs. Barrueco, Manila Gas Corporation vs. Calupitan, and U.S. Commercial vs. Halili, the Court held that where the alleged rent is applied to the purchase price and payment of the agreed amount results in transfer of title, the transaction is a sale on installment, not a lease. In this case, although the agreement used "monthly rentals," its fifth paragraph gave Rolando the option to purchase at the end of five years or upon payment of the 60th monthly rental, with all monthly rentals applied to the full purchase price. The monthly rentals were thus amortizations, and the transaction was a lease in name only.
• Applicability of Articles 1484 and 1485: Because the contract was a sale on installment, the Court of Appeals correctly applied Civil Code Articles 1484 and 1485. Article 1484 gives the vendor the remedies of exact fulfillment, cancellation of the sale, or foreclosure of a chattel mortgage; if foreclosure is chosen, no further action for the unpaid balance may be brought, and any contrary agreement is void. Article 1485 applies these provisions to contracts purporting to be leases of personal property with option to buy when the lessor deprives the lessee of possession or enjoyment. The remedies are alternative, not cumulative; the exercise of one bars the others. The condition for Article 1485 was fulfilled when petitioner filed the replevin complaint and the sheriff seized the vehicle on August 6, 1986, depriving private respondents of its use until April 16, 1989. Petitioner prayed for both unpaid installments and replevin or delivery, which could not be granted. Nonetheless, the Court considered the case as one for specific performance under Article 1484(1), consistent with the prayer for unpaid installments as of May 1986, with replevin only to insure specific performance. Liability for P39,054.86 or P60,000 still failed because private respondents had fulfilled their obligation.
• Validity of Promissory Note's Interest and Penalty: The agreement did not provide for interest on unpaid monthly rentals or installments because it was entered into pursuant to a car plan for deserving employees. Petitioner contended that the promissory note provided for interest, but the Court of Appeals held that the note did not form part of the contract and had no consideration. Nothing showed that petitioner advanced the purchase price for Lantan so as to make him indebted for P60,639.00; the complaint itself described a lease with option to purchase. No indebtedness secured by the promissory note existed. Without consideration, the promissory note and its penalty clause had no binding effect. There was also no evidence that private respondents received P60,639.00; what was proven was that they received the car valued at P60,000 and paid monthly amortizations of P1,010.65 through salary deductions.
• Full Payment: Private respondents' default was due to the cessation of operations of Elizalde Steel Corporation, petitioner's sister company. Petitioner accepted payments through cash and checks, possibly because it could not deduct from salary after employment was terminated in September 1982. Its acceptance of payments more than two years after termination constituted waiver of the right to collect interest on delayed payments. The 2% surcharge was not provided in the agreement and would run counter to the car plan's purpose of providing added emoluments. Consequently, the total P61,070.94 paid should be considered payment of the full purchase price or total installments. Since the principal was P60,639.00, there was an overpayment of P431.94, as the trial court found.
• Damages and Attorney's Fees: Private respondents presented evidence that they felt bad, were worried, embarrassed, and mentally tortured by the repossession; petitioner did not rebut this. This provided a factual basis for moral damages. Petitioner acted in a wanton, fraudulent, reckless, and oppressive manner in filing the case, justifying exemplary damages under Civil Code Articles 2232 and 2234. Attorney's fees were proper because private respondents were compelled to incur expenses to protect their rights, citing Summa Insurance Corporation vs. Court of Appeals.

• Lease with option to buy as sale on installment — A contract purporting to lease personal property with an option to purchase is a sale on installment where the so-called rent is applied to the purchase price and payment of the agreed amount results in transfer of title to the lessee. The Court applied this to the car-plan agreement because the fifth paragraph allowed Rolando Lantan to purchase the car at the end of five years or upon payment of the 60th monthly rental, with all monthly rentals applied to the full purchase price; the monthly rentals were thus amortizations.
• Recto law and alternative remedies — Under Civil Code Article 1484, a vendor of personal property sold on installment may choose exact fulfillment, cancel the sale, or foreclose a chattel mortgage; the remedies are alternative, not cumulative, and the exercise of one bars the others. Article 1485 extends these rules to contracts purporting to be leases of personal property with option to buy when the lessor deprives the lessee of possession or enjoyment. The Court applied Article 1485 because petitioner filed replevin and the sheriff seized the car on August 6, 1986, depriving respondents of its use until April 16, 1989.
• Consideration of a promissory note — A promissory note not shown to have consideration and not part of the principal contract has no binding effect, including its penalty clause. The Court applied this to the P60,639.00 promissory note because nothing showed petitioner advanced the purchase price or that respondents received that amount; the complaint itself described a lease with option to purchase.
• Waiver of interest by accepting late payments — A creditor's acceptance of late payments may constitute waiver of the right to collect interest on delayed payments. The Court applied this because petitioner accepted payments more than two years after Rolando Lantan's employment was terminated and the 2% surcharge was not provided in the agreement.
• Moral and exemplary damages — Moral damages may be awarded for worry, embarrassment, and mental torture, and exemplary damages where the defendant acted in a wanton, fraudulent, reckless, and oppressive manner. The Court applied these to the repossession and petitioner's filing of the case.

• "It is clear that the transaction in this case is a lease in name only. The so-called monthly rentals are in truth monthly amortizations on the price of the car." — This is the Court's core characterization of the car-plan agreement, holding that the lease form did not control its true nature as an installment sale.
• "The remedies provided for in Art. 1484 are alternative, not cumulative. The exercise of one bars the exercise of the others." — This states the controlling rule on the vendor's remedies in an installment sale, which the Court applied through Article 1485 to the purported lease.
• "There being no consideration for the promissory note, the same, including the penalty clause contained thereon, has no binding effect." — Quoted by the Court from the Court of Appeals, this passage supports the invalidation of the promissory note's interest and penalty stipulations.
• "Consequently, the total amount of P61,070.94 already paid to petitioner should be considered payment of the full purchase price of the car or the total installments paid." — This is the Court's conclusion on full payment, disposing of petitioner's claim for unpaid installments.

• Vda. de Jose vs. Barrueco, 67 Phil. 191, 195 (1939) — Cited for the rule that contracts in the form of leases with options to purchase are leases only in name where the rent is payment of the price in installments and payment of the agreed amount results in transfer of title.
• Manila Gas Corporation vs. Calupitan, 66 Phil. 747, 752 (1938) — Cited for the rule that a so-called lease of personal property with an option to buy, where payments are on account of the price, is a sale on installment and not a lease.
• U.S. Commercial vs. Halili, 93 Phil. 271, 273-274 (1953) — Cited for holding that lease agreements with option to purchase fall within the installment-sale law and that a lessor who deprives the lessee of possession waives the right to recover unpaid rentals.
• Delta Motor Sales Corporation vs. Niu Kum Duan, G.R. No. 61043, September 2, 1992, 213 SCRA 259, 264 (1992) — Cited for the rule that the remedies under Article 1484 are alternative, not cumulative.
• Filinvest Credit Corporation vs. Court of Appeals, 178 SCRA 188 (1989) — Cited, through Tolentino, for the application of Article 1485 to contracts purporting to be leases of personal property with option to buy.
• Summa Insurance Corporation vs. Court of Appeals, 323 Phil. 214 (1996) — Cited to support the award of attorney's fees because private respondents were compelled to incur expenses to protect their rights.

• Civil Code, Article 1484 — Provides that in a sale of personal property payable in installments, the vendor may exact fulfillment, cancel the sale, or foreclose a chattel mortgage; the remedies are alternative, and foreclosure bars further action for the unpaid balance, with contrary agreements void. The Court applied it because the car-plan agreement was an installment sale and petitioner sought unpaid installments and repossession.
• Civil Code, Article 1485 — Extends Article 1484 to contracts purporting to be leases of personal property with option to buy when the lessor deprives the lessee of possession or enjoyment. The Court applied it because petitioner filed a replevin complaint and the sheriff seized the car, depriving private respondents of its use.
• Civil Code, Articles 2232 and 2234 — Provide the bases for exemplary damages where the defendant acted in a wanton, fraudulent, reckless, or oppressive manner. The Court applied them to justify the award of exemplary damages against petitioner.

Justices Bellosillo, Puno, Quisumbing, and Buena concurred.