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September 29, 1989
G.R. No. 82508 September 29, 1989


Spouses Sy Bang were engaged in the sale of gravel produced from crushed
rocks and used for construction purposes. In order to increase their production,
they looked for a rock crusher which Rizal Consolidated Corporation then had for
sale. A brother of Sy Bang, went to inspect the machine at the Rizal
Consolidateds plant site. Apparently satisfied with the machine, the private
respondents signified their intent to purchase the same.

Since he does not have the financing capability, Sy Bang applied for financial
assistance from Filinvest Credit Corporation. Filinvest agreed to extend financial
aid on the following conditions: (1) that the machinery be purchased in the
petitioners name; (2) that it be leased with option to purchase upon the
termination of the lease period; and (3) that Sy Bang execute a real estate
mortgage as security for the amount advanced by Filinvest. A contract of lease of
machinery (with option to purchase) was entered into by the parties whereby they
to lease from the petitioner the rock crusher for two years. The contract likewise
stipulated that at the end of the two-year period, the machine would be owned by
Sy Bang.

3 months from the date of delivery, Sy Bang claiming that they had only tested
the machine that month, sent a letter-complaint to the petitioner, 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 the petitioner make good the stipulation in the
lease contract. Sy Bang stopped payment on the remaining checks they had
issued to the petitioner.

As a consequence of the non-payment, Filinvest extrajudicially foreclosed the

real estate mortgage.


WON the real transaction was lease or sale? SALE ON INSTALLMENTS.


The real intention of the parties should prevail. 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.

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.

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 installments. There arises therefore no need to
constitute a chattel mortgage over the movable sold. 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.

Even if there was a contract of sale, Filinvest is still not liable because Sy Bang is
presumed to be more knowledgeable, if not experts, on the machinery subject of
the contract, they should not therefore be heard now to complain of any alleged
deficiency of the said machinery. It was Sy Bang who was negligent, not
Filinvest. Further, Sy Bang is precluded to complain because he signed a Waiver
of Warranty.