Heacock vs. Buntal Manufacturing Company

A contract denominated as a lease with option to purchase is in reality a contract of sale on installments where the so-called hirer makes an initial payment on account of a fixed purchase price and the monthly "rentals" correspond exactly to the balance divided by the term; upon the vendor's acceptance of the return of the thing sold, the contract is deemed rescinded, precluding further recovery of the unpaid balance.

H. E. Heacock Company was the owner and vendor of a Dalton adding, calculating, and posting machine. Buntal Manufacturing Company, together with Gregorio Nieva and Maria A. de Nieva, were the parties who obtained possession of the machine under a written contract denominated Exhibit A. The dispute centered on the legal nature of that contract — whether it created a lessor-lessee relationship or a vendor-vendee relationship on installments — a characterization that determined whether the plaintiff could recover both the machine and unpaid monthly sums, or only one or the other.

On May 12, 1931, H. E. Heacock Company and the first two defendants — Buntal Manufacturing Company and Gregorio Nieva — executed a written instrument denominated Exhibit A, covering one Dalton adding, calculating, and posting machine, Multiplex Model 490-180, Serial No. 4-103493. The contract fixed the value of the machine at P860, against which a credit of P110 was allowed for an older Dalton machine traded in and P50 was paid in cash, yielding an initial payment of P160. The balance due was stated as P700, which the defendants undertook to pay in twenty monthly installments of P35 each, commencing on the 12th day of every month. Although the contract repeatedly used the language of lease — referring to the parties as "owner" and "hirer" and to the monthly sums as "rentals" — clause 6 granted the "hirer" an option to purchase the machine at the price of P860, with credit for all rentals actually paid and the P160 initial payment, while expressly providing that title would remain with the owner until full payment of the purchase price and exercise of the option.

Defendants ceased making the monthly payments after July 1931, giving rise to accumulated arrears in the amount of P555. Plaintiff filed its original complaint praying, in the alternative, for "the delivery of said personal property, and if delivery cannot be effected then judgment for the rents in arrears." Upon plaintiff's application for a writ of preliminary attachment, defendants voluntarily returned the machine to plaintiff, which accepted it to its satisfaction without need of the writ. Thereafter, plaintiff sought and obtained leave from the lower court to amend its complaint by eliminating the conditional phrase "if delivery cannot be effected then," thereby praying for both the return of the machine and the payment of rental arrears simultaneously. A first hearing had been held in the absence and default of defendants; after the amendment, a second hearing was conducted with defendants' answer on file.

The lower court treated Exhibit A as a contract of lease and rendered judgment ordering defendants to pay plaintiff P555, representing the unpaid rentals from August 1931, with costs. The court granted this relief notwithstanding that plaintiff had already recovered possession of the machine through the defendants' voluntary return. Defendants appealed, contending that the contract was one of sale on installments and that plaintiff's acceptance of the machine's return constituted rescission, extinguishing any further right to recover the unpaid balance.

• Amendment of Complaint: Whether the lower court erred in granting plaintiff leave to amend its complaint after defendants had been declared in default with respect to the original complaint.
• Alternative Remedies: Whether the lower court erred in granting plaintiff both alternative remedies — return of the machine and payment of rental arrears — when the original complaint sought them in the alternative.
• Nature of the Contract: Whether Exhibit A was a contract of lease with option to purchase, or a contract of sale on installments, and whether plaintiff's acceptance of the machine's return constituted rescission barring further recovery.

• Amendment of Complaint: No. The amendment was limited to the prayer for relief, which is not part of the cause of action; it was made substantially in accordance with sections 109 and 110 of Act No. 190.
• Alternative Remedies: No error arose once the contract was properly characterized as sale on installments; plaintiff's acceptance of the machine constituted rescission, precluding simultaneous recovery of the unpaid balance.
• Nature of the Contract: The contract was one of sale on installments, not lease; plaintiff's acceptance of the machine's return constituted rescission, barring further recovery of the unpaid balance.

• Amendment of Complaint: The amendment effected by plaintiff consisted solely in eliminating the conditional phrase "if delivery cannot be effected then" from the prayer for relief. The prayer for relief is not the complaint itself nor part of the allegations stating the cause of action; it merely indicates the relief sought. Citing Aguilar vs. Rubiato and Gonzalez Vila, 40 Phil. 570; Campomanes vs. Bartolome and German and Co., 38 Phil. 808; and Rosales vs. Reyes and Ordoveza, 25 Phil. 495, the Court affirmed that amendment of the prayer does not alter the cause of action and is permissible under sections 109 and 110 of Act No. 190. The first assigned error was therefore without merit.

• Alternative Remedies: The resolution of this error depended on the nature of the contract. If the contract were truly a lease, the lower court's grant of both remedies might have been defensible. However, because the contract was in fact one of sale on installments, plaintiff's acceptance of the machine's return upon demand constituted an election to rescind. Having recovered the machine and retained the P305 previously paid by defendants, plaintiff could not also recover the unpaid balance. Its right was limited to either demanding compliance with the contract of sale or rescinding it — and it chose the latter.

• Nature of the Contract: Several features of Exhibit A demonstrated that it was a sale on installments rather than a lease. First, the contract fixed the purchase price of the machine at P860 — a provision that is redundant in a true lease, where fixing a purchase price is unnecessary (Articles 1445 and 1543, Civil Code). Second, defendants paid P160 as an "initial payment" on account of the price, leaving a balance of P700. This balance, divided by twenty months, yielded exactly P35 per month — the precise amount denominated as "rental." The P160 could not be construed as advance rental, since the contract required monthly payments of P35 and nothing indicated advance payment; treating it as such would mean defendants paid rent for four months and twenty days in advance, in violation of the contract's own terms. Third, clause 6's characterization of the P160 as consideration for the option was contradicted by the contract's own description of it as an "initial payment" on the price. When contract terms conflict, effect must be given to the intention of the parties (Article 1281, Civil Code), and the intention gathered from all the clauses was that the parties intended a sale on installments. Plaintiff's act of demanding and accepting the machine's return, coupled with its original complaint praying for only one of two alternative remedies, showed it elected rescission. Having rescinded and retained P305 already paid, plaintiff had no further right to recover (Articles 1506 and 1124, Civil Code).

• Substance over Form in Contract Classification — The denomination given to a contract by the parties does not control its legal nature; courts look to the intention of the parties as gathered from all the terms and clauses of the instrument. Where a contract styled as a lease contains features characteristic of sale — such as a fixed purchase price, an initial payment on account of that price, and monthly payments that correspond exactly to the balance divided by the term — it is deemed a contract of sale on installments. The Court applied Articles 1281, 1445, and 1543 of the Civil Code to ascertain the parties' true intention.

• Election of Remedies upon Rescission — A vendor in a contract of sale on installments may either demand compliance (payment of the unpaid balance) or rescind the contract (recover the thing sold), but cannot do both simultaneously. By demanding and accepting the return of the machine, the vendor performed a positive act indicating its intention to rescind, and having retained the amounts already paid, it forfeited any further right to recover the unpaid balance. The Court relied on Articles 1506 and 1124 of the Civil Code.

• Prayer for Relief Is Not Part of the Cause of Action — The prayer for relief in a complaint is not the complaint itself nor part of the allegations stating the cause of action; amendment of the prayer alone does not alter or enlarge the cause of action and is permissible under the rules of procedure.

• "This payment shows that the real contract between the parties was that of purchase and sale on installments and not a lease. In spite of any effort to prove the contrary, the aforesaid amount of P160 can not be understood to constitute payment in advance of the rents agreed upon for there is nothing in the contract to indicate that it was and because, according to the contract itself, the rents could not be more nor less than P35 a month, payable monthly." — This passage articulates the ratio decidendi for classifying the contract as sale on installments: the initial payment of P160 was on account of the purchase price, not advance rent, because the contract fixed monthly rentals at exactly P35 with no provision for advance payment.

• "When the terms of a contract are not clear or conflict with each other, as those appearing in Exhibit A, effect must be given to the intention of the parties (article 1281, Civil Code); and the intention of plaintiff and defendants in this case as we gather it from Exhibit A, considered in connection with all its terms and clauses, is that the contract entered into between them is one of purchase and sale on installments and not a lease." — This states the controlling rule for resolving conflicting contract terms by ascertaining the parties' intention from the instrument as a whole, applying Article 1281 of the Civil Code.

• "Upon taking the machine under such circumstances plaintiff performed a positive act indicating its intention to rescind the contract, and having done so and retained what defendants had up to then paid to it, amounting to P305 without any objection on their part, it can not and must not have any right to anything more." — This defines the doctrine of election upon rescission: by accepting the machine's return, the vendor elected rescission and could not simultaneously recover the unpaid balance.

• Aguilar vs. Rubiato and Gonzalez Vila, 40 Phil. 570 — Cited for the proposition that the prayer for relief is not part of the complaint's allegations stating the cause of action, supporting the propriety of amending only the prayer.
• Campomanes vs. Bartolome and German and Co., 38 Phil. 808 — Cited alongside Aguilar for the same proposition regarding the prayer for relief.
• Rosales vs. Reyes and Ordoveza, 25 Phil. 495 — Cited alongside Aguilar and Campomanes for the same proposition regarding the prayer for relief.

• Article 1281, Civil Code — Provides that when the terms of a contract are unclear or conflict with each other, effect must be given to the intention of the parties. Applied to resolve the conflicting characterization of the P160 payment (initial payment on price vs. consideration for option) and the overall nature of the contract.
• Articles 1445 and 1543, Civil Code — Distinguish lease from sale: in a lease, fixing or mentioning the purchase price of the thing leased is plain redundancy, whereas in a sale the price is essential. The presence of a fixed purchase price (P860) in Exhibit A supported the classification as sale.
• Articles 1506 and 1124, Civil Code — Govern the vendor's right to either demand compliance or rescind a sale on installments. Applied to hold that plaintiff, having elected rescission by accepting the machine's return, could not also recover the unpaid balance.
• Sections 109 and 110, Act No. 190 — Govern amendment of pleadings. Applied to uphold the lower court's grant of leave to amend the complaint's prayer for relief.

Avanceña, C.J., Villa-Real, Abad Santos, Imperial, Laurel, and Concepcion, JJ., concurred.