Live now, pay later

Much interest has been generated by our recent discussions on monetary interest on loan transactions and the rights of buyers of realty property on installment basis. It seems, indeed, that payment by installment is the most practical and convenient way of settling debts and paying for purchases. Installment on smaller commercial transactions are so much more common — particularly in purchasing vehicles, electronic gadgets and other fast-selling consumer items. Hence, in this article, we discuss the Installment Sales Law, more commonly known as the Recto Law.

The Recto Law forms part of the Civil Code by way of incorporation into Article 1484, which provides that in a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: Exact fulfillment of the obligation, should the vendee fail to pay; cancel the sale, should the vendee’s failure to pay cover two or more installments; or foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.

Note that straight sales wherein a down payment is given and the remaining balance is agreed to be fulfilled through a single payment is excluded from the Recto Law.

If an installment transaction is covered by Article 1484 and the buyer defaults, the unpaid seller may collect payment from the buyer. All other remedies stated above are exclusive and not cumulative in nature. The principal object of the law, after all, is to remedy the abuses committed in connection with the foreclosure of chattel mortgages by seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment.

Article 1484 similarly applies to contracts which appear to be leases or rental of personal property with option to buy, in case the lessor has deprived the lessee of the possession or enjoyment of the thing leased.

As illustrated in the case of PCI Leasing and Finance

Inc. vs. Giraffe-X Creative Imaging Inc. (GR 142618, 12 July 2007), although the option to buy is not clearly indicated in the agreement, the Recto Law will still apply if the option to buy can be gleaned from the parties’ acts and declarations. In that case, the parties entered into a lease agreement for heavy duty equipment. Upon the lessee’s default in its monthly rental-payment obligations, the lessor sent a demand letter for the lessee to pay or surrender the equipment. When the demand went unheeded, the lessor filed a case praying for the recovery of the balance of the agreed rental/obligation and for the issuance of a writ of replevin for the recovery of the leased property.

The Supreme Court ruled that the agreement between the parties is in reality a lease with an option to purchase the equipment. This can be gleaned from the demand letter made by the lessor, wherein it stated that if the lessee paid the balance, then it could keep the equipment for its own; if not, then it should return them. This is clearly an option to purchase given to the lessee. Being so, Article 1485 of the Civil Code should apply.

While on its face the agreement does not contain a “purchase option” clause, the same does not mean that the agreement is a straight lease. The Court noted its awareness of the practice of vendors of personal property of denominating a contract of sale on installment as one of lease to prevent the ownership of the object of the sale from passing to the vendee until and unless the price is fully paid, to prevent the Recto Law from being applicable.

Hence, in choosing, through replevin, to deprive the lessee of possession of the leased equipment, the lessor waived its right to bring an action to recover unpaid rentals on the said leased items. Otherwise, what obtains is a most inequitable situation where even if the lessee parts with the leased personal property voluntarily, the lessor can still sue for its monetary claim.

At the end of the day, the law aims to bring equity into the equation, whereby the lessor is sufficiently compensated by way of recovery of amounts due or recovery of the thing leased. But he cannot unjustly enrich himself and make an instant killing out of the transaction at the expense of its client due to considerations of equity, public policy and justice.

“In choosing, through replevin, to deprive the lessee of possession of the leased equipment, the lessor waived its right to bring an action to recover unpaid rentals on the said leased items.

“Straight sales wherein a down payment is given and the remaining balance is agreed to be fulfilled through a single payment is excluded from the Recto Law.