RECTO LAW:

SALES OF MOVABLES ON
INSTALLMENTS
COVERAGE OF LAW

• ARTICLE 1484 OF THE CIVIL CODE PROVIDES FOR THE REMEDIES OF

A SELLER
IN CONTRACTS OF SALE OF PERSONAL PROPERTY BY INSTALLMENTS, AND
INCORPORATES THE PROVISIONS OF ACT NO. 4122 PASSED BY THE PHILIPPINE
LEGISLATURE ON 9 DECEMBER 1939, KNOWN AS THE “INSTALLMENT SALES
LAW,” BUT MORE POPULARLY REFERRED TO AS THE “RECTO LAW,” WHICH THEN
AMENDED ARTICLE 1454 OF THE CIVIL CODE OF 1889”
• UNDER ARTICLE 1484 OF THE NEW CIVIL CODE, IN A SALE OF PERSONAL
PROPERTY THE PRICE OF WHICH IS PAYABLE IN INSTALLMENTS, THE SELLER
MAY EXERCISE ANY OF THE FOLLOWING REMEDIES:
(A) EXACT FULFILLMENT OF THE OBLIGATION, SHOULD THE BUYER FAIL TO PAY
ANY INSTALLMENT;
(B) RESCIND THE SALE, SHOULD THE BUYER’S FAILURE TO PAY COVER TWO OR
MORE INSTALLMENTS;
(C) FORECLOSE THE CHATTEL MORTGAGE ON THE THING SOLD, IF ONE HAS
BEEN CONSTITUTED, SHOULD THE BUYER’S FAILURE TO PAY COVER TWO OR
MORE INSTALLMENTS.
A. RATIONALE OF RECTO LAW

• TO REMEDY THE ABUSES COMMITTED IN CONNECTION WITH THE FORECLOSURE

OF CHATTEL MORTGAGES AND TO PREVENT MORTGAGEES FROM SEIZING THE
MORTGAGED PROPERTY, BUYING IT AT FORECLOSURE SALE FOR A LOW PRICE
AND THEN BRINGING SUIT AGAINST THE MORTGAGOR FOR A DEFICIENCY
JUDGMENT. THE INVARIABLE RESULT OF SUCH A PROCEDURE WAS THAT THE
MORTGAGOR FOUND HIMSELF MINUS THE PROPERTY AND STILL OWING
PRACTICALLY THE FULL AMOUNT OF HIS ORIGINAL INDEBTEDNESS.
B. WHEN IS SALE “ON INSTALLMENTS?”
• “IS AIMED AT THOSE SALES WHERE THE PRICE IS PAYABLE IN SEVERAL
INSTALLMENTS, FOR, GENERALLY, IT IS IN THESE CASES THAT PARTIAL PAYMENTS
CONSISTS IN RELATIVELY SMALL AMOUNTS, CONSTITUTING THUS A GREAT
TEMPTATION FOR IMPROVIDENT PURCHASERS TO BUY BEYOND THEIR MEANS.
THERE IS NO SUCH TEMPTATION WHERE THE PRICE IS TO BE PAID IN CASH, OR, AS
IN THE INSTANT CASE, PARTLY IN CASH AND PARTLY IN ONE TERM, FOR, IN THE
LATTER CASE, THE PARTIAL PAYMENTS ARE NOT SO SMALL AS TO PLACE
PURCHASERS OFF THEIR GUARD AND DELUDE THEM TO A MISCALCULATION OF
THEIR ABILITY TO PAY.”
C. LOANS AND FINANCING TRANSACTIONS
• THE RECTO LAW ARE APPLICABLE TO FINANCING TRANSACTIONS DERIVED OR
ARISING FROM SALES OF MOVABLES ON INSTALLMENTS.
• IN ALL OTHER CASES, WHERE THE FINANCING TRANSACTION IS NOT DERIVED
FROM A SALE, THE RECTO LAW DOES NOT APPLY. PAMECA WOOD TREATMENT
PLANT, INC. V. C.A., HELD THAT A MORTGAGEE-BANK IS NOT PREVENTED FROM
RECOVERING ON A DEFICIENCY CAUSED BY THE FORECLOSURE AND SALE AT THE
PUBLIC AUCTION OF THE MORTGAGE MOVABLE WHICH SECURITY AROSE FROM A
LOAN GIVEN TO THE MORTGAGOR. THE PROVISIONS OF ARTICLE 1484 CANNOT BE
APPLIED BY ANALOGY OR BY EQUITY SINCE THE PROVISIONS APPLY TO A SALE ON
INSTALLMENTS.
D. CONTRACTS TO SELL MOVABLES NOT COVERED
• WHEN THE CONTRACT GOVERNING THE SALE OF MOVABLES IS A CONTRACT
TO SELL, THEN THE RULES ON RESCISSION AND SUBSTANTIAL BREACH ARE
NOT APPLICABLE, SINCE WHEN THE SUSPENSIVE CONDITION UPON WHICH
THE CONTRACT IS BASED FAILS TO MATERIALIZE, IT WOULD EXTINGUISH THE
CONTRACT, AND CONSEQUENTLY THERE IS NO CONTRACT TO RESCIND.64
NEVERTHELESS, THE PROVISIONS OF ARTICLE 1597 WOULD APPLY WHICH
WOULD GRANT THE SELLER THE RIGHT TO “RESCIND” THE CONTRACT “BY
GIVING NOTICE OF HIS ELECTION SO TO DO TO THE BUYER.”
2. REMEDIES PROVIDED UNDER ARTICLE 1484
A. NATURE OF REMEDIES UNDER ARTICLE 1484
• SHOULD THE BUYER OF A PERSONAL PROPERTY DEFAULT IN THE PAYMENT
OF TWO OR MORE OF THE AGREED INSTALLMENTS, THE VENDOR OR SELLER
HAS THE OPTION TO AVAIL OF ANY OF THESE THREE REMEDIES:
(A) EXACT FULFILLMENT BY THE PURCHASER OF THE OBLIGATION;
(B) RESCIND OR CANCEL THE SALE; OR
(C) FORECLOSE THE MORTGAGE ON THE PURCHASED PERSONAL
PROPERTY, IF ONE WAS CONSTITUTED.
B. TWO GROUPS OF BARRING EFFECTS OF REMEDIES

TWO (2) LEVELS OF BARRING EFFECTS:

• THE FIRST LEVEL ON THE CHOICE OF REMEDIES (VERTICAL);
• AND THE SECOND LEVEL, ON THE NON-RECOVERY OF ANY UNPAID BALANCE
WHEN IT COMES TO THE REMEDIES OF RESCISSION AND FORECLOSURE
(HORIZONTAL).
• IF THE SELLER SHOULD FORECLOSE ON THE MORTGAGE CONSTITUTED ON THE
THING SOLD, 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. THE PROVISIONS OF RECTO LAW ARE APPLICABLE
TO FINANCING TRANSACTIONS DERIVED OR ARISING FROM SALES OF
MOVABLES ON INSTALLMENTS, EVEN IF THE UNDERLYING CONTRACT AT ISSUE
IS A LOAN BECAUSE THE PROMISSORY NOTE HAS BEEN ASSIGNED OR
NEGOTIATED BY THE ORIGINAL SELLER.
• THE REMEDIES UNDER ARTICLE 1484 HAVE BEEN RECOGNIZED AS
ALTERNATIVE, NOT CUMULATIVE, IN THAT THE EXERCISE OF ONE WOULD BAR
THE EXERCISE OF THE OTHERS. THE REMEDIES CANNOT BE PURSUED
SIMULTANEOUSLY, AS WHEN A COMPLAINT IS FILED TO THE EXACT
FULFILLMENT OF THE OBLIGATION, TO SEIZE THE PROPERTY PURCHASED
AND TO FORECLOSE THE MORTGAGE EXECUTED THEREOF. – (LUNETA MOTOR
CO. V. DIMAGIBA). THE SELLER CAN ALSO ASSIGN HIS CREDIT TO ANOTHER
PERSON, MAKING THAT PERSON THE NEW CREDITOR.
• IF THE BUYER REFUSES TO SURRENDER THE ITEMS TO THE SELLER, HE
BECOMES A PERVERSE BUYER-MORTGAGOR. WHEN THAT HAPPENS, THE
SELLER CAN RECOVER EXPENSES AND ATTORNEY’S FEES.
3. REMEDY OF SPECIFIC PERFORMANCE
SPECIFIC PERFORMANCE:
EXACT FULFILLMENT SHOULD THE BUYER FAIL TO PAY.

GENERAL RULE : WHEN THE SELLER HAS CHOSEN SPECIFIC PERFORMANCE, HE CAN
NO LONGER SEEK FOR RESCISSION NOR FORECLOSURE OF THE CHATTEL MORTGAGE
CONSTITUTED ON THE THING SOLD. ALTHOUGH IT CAN BE REASONED THAT EVEN THE
SELLER HAD CHOSEN SPECIFIC PERFORMANCE BUT THE SAME HAS BECOME
IMPOSSIBLE, HE MAY STILL CHOOSE RESCISSION PURSUANT TO THE PROVISION OF
ARTICLE 1191 OF THE CIVIL CODE, WHICH PROVIDES THAT NON-DEFAULTING PARTY TO
A RECIPROCAL OBLIGATION MAY ALSO SEEK RESCISSION, EVEN AFTER HE HAS
CHOSEN FULFILLMENT, IF THE LATTER SHOULD BECOME IMPOSSIBLE.
• THE SELLER IS DEEMED TO HAVE CHOSEN SPECIFIC PERFORMANCE TO
FORECLOSE THE RESORT TO THE OTHER TWO REMEDIES UNDER ARTICLE
1484, WHEN HE FI LES AN ACTION IN COURT FOR RECOVERY. GENERALLY, THE
MERE SENDING OF DEMAND LETTERS TO THE BUYER TO PAY THE BALANCE OF
THE PURCHASE PRICE SHOULD NOT BE CONSIDERED AS HAVING BARRED THE
RESORT TO EITHER THE REMEDIES OF RESCISSION OR FORECLOSURE.
4. REMEDY OF RESCISSION
• WHEN A SELLER CHOOSES THE REMEDY OF RESCISSION, THEN GENERALLY
HE IS UNDER OBLIGATION TO MAKE RESTITUTION, WHICH WOULD INCLUDE
THE RETURN OF ANY AMOUNT OF THE PURCHASE PRICE THAT THE BUYER
MAY HAVE PAID. HOWEVER, UNDER THE TERMS OF ARTICLE 1486 OF THE CIVIL
CODE WHICH PROVIDES THAT “A STIPULATION THAT THE INSTALLMENTS OR
RENTS PAID SHALL NOT BE RETURNED TO THE VENDEE OR LESSEE SHALL BE
VALID INSOFAR AS THE SAME MAY NOT BE UNCONSCIONABLE UNDER THE
CIRCUMSTANCES.”
• WHEN THE REMEDY OF RESCISSION IS CHOSEN, THE RESCINDING PARTY MAY
RECOVER DAMAGES AGAINST THE PARTY IN DEFAULT, SINCE THE RECOVERY
OF DAMAGES IS SUPPOSED TO MAKE THE RESCINDING PARTY “WHOLE” AGAIN
TO BRING HIM BACK TO THE POSITION HE WAS PRIOR TO THE ENTERING INTO
THE CONTRACT.
• IN DELTA MOTOR SALES CORP. V. NIU KIM DUAN, THE COURT RECOGNIZED
THAT “[A] STIPULATION IN A CONTRACT THAT THE INSTALLMENTS PAID SHALL
NOT BE RETURNED TO THE VENDEE IS VALID INSOFAR AS THE SAME MAY NOT
BE UNCONSCIONABLE UNDER THE CIRCUMSTANCES,” THE COURT TOOK PAINS
TO SHOW THAT THE TREATMENT OF THE FORFEITED INSTALLMENTS AS
RENTAL IS MORE THAN JUSTIFIED BY THE RETENTION AND USE OF THE AIR-
CONDITIONING UNITS BY THE BUYER FOR 22 MONTHS.
A. WHEN RESCISSION DEEMED CHOSEN
GENERAL RULE: DEEMED TO HAVE CHOSEN THE REMEDY OF RESCISSION, AND CAN
NO LONGER AVAIL OF THE OTHER TWO (2) REMEDIES UNDER ARTICLE 1484, WHEN:
A. CLEARLY INDICATED TO END THE CONTRACT
B. SENDS A NOTICE OF RESCISSION, OR TAKES POSSESSION OF THE
SUBJECT MATTER OF THE SALE
C. FILES AN ACTION FOR RESCISSION
NONATO V. INTERMEDIATE APPELLATE COURT, HELD THAT WHEN THE SELLER’S
ASSIGNEE, A FINANCING COMPANY, IS ABLE TO TAKE BACK POSSESSION OF THE
MOTOR VEHICLE WITH A CONDITION THAT THE VEHICLE COULD BE REDEEMED BY
THE BUYERS WITHIN FIFTEEN (15) DAYS, THEN SUCH TAKING OF POSSESSION IS
CLEARLY WITH THE INTENT TO CANCEL THE CONTRACT.
B. BARRING EFFECT OF RESCISSION
• THE PRESENT VERSION OF THE RECTO LAW UNDER ARTICLE 1484 ONLY
PROVIDES FOR A BARRING ON RECOVERY OF BALANCE ONLY WHEN IT COMES
TO THE REMEDY OF FORECLOSURE.
DELTA MOTOR SALES CORP. V. NIU KIM DUAN, WOULD ASSERT THAT “[T]HE
THIRD OPTION OR REMEDY, HOWEVER, IS SUBJECT TO THE LIMITATION THAT
THE VENDOR CANNOT RECOVER ANY UNPAID BALANCE OF THE PRICE AND ANY
AGREEMENT TO THE CONTRARY IS VOID,” IMPLYING NO SUCH BARRING EFFECT
TO THE REMEDY OF RESCISSION. NEVERTHELESS, IT RECOGNIZED THAT WHEN
THE SELLER TAKES POSSESSION OF THE SUBJECT PROPERTY IN RESCISSION
OF THE SALE, THE SELLER IS BARRED FROM RECOVERING THE BALANCE OF THE
PRICE.
FORECLOSURE OF CHATTEL MORTGAGE CONSTITUTED
ON SUBJECT PROPERTY
• WHEN THE SELLER SHALL HAVE CHOSEN TO FORECLOSE ON THE MORTGAGE
CONSTITUTED ON THE SUBJECT MATTER OF THE SALE, HE CAN SEEK NEITHER THE
REMEDIES OF SPECIFIC PERFORMANCE NOR RESCISSION.
• THE FI LING OF AN ACTION FOR FORECLOSURE SHOULD BE THE POINT IN WHICH
THE SELLER IS DEEMED TO HAVE CHOSEN SUCH REMEDY, AND AT WHICH TIME HE
CAN NO LONGER RESORT TO EITHER THE REMEDIES OF SPECIFIC PERFORMANCE
OR RESCISSION, YET THE COURT LAW ON SALES HELD THAT THE POINT BY WHICH
THE SELLER IS DEEMED TO HAVE CHOSEN THE REMEDY OF FORECLOSURE IS
ONLY AT THE TIME OF ACTUAL SALE OF THE SUBJECT PROPERTY AT PUBLIC
AUCTION PURSUANT TO THE FORECLOSURE PROCEEDINGS COMMENCED
B. BARRING EFFECT OF FORECLOSURE
• IT IS THE FORECLOSURE AND ACTUAL SALE AT PUBLIC ACTION OF THE
MORTGAGED CHATTEL THAT SHALL BAR FURTHER RECOVERY BY THE SELLER
OF ANY BALANCE ON THE PURCHASER’S OUTSTANDING OBLIGATION NOT
SATISFIED BY THE SALE; PRIOR TO THAT POINT IN TIME, THE SELLER HAS
EVERY RIGHT TO RECEIVE PAYMENTS ON THE UNPAID BALANCE OF THE PRICE
FROM THE BUYER.
C. BARRING EFFECT ON OTHER SECURITIES GIVEN
FOR PAYMENT OF PRICE
• IN CRUZ V. FILIPINAS INVESTMENT & FINANCE CORP., WHERE THE SELLER HAD
ALREADY FORECLOSED ON THE CHATTEL MORTGAGE CONSTITUTED ON THE
SUBJECT PROPERTY OF THE SALE, IT SOUGHT TO RECOVER THE DEFICIENCY
JUDGMENT BY FORECLOSING ON THE REAL ESTATE MORTGAGE CONSTITUTED BY
THIRD-PARTY MORTGAGORS, ON THE GROUND THAT ARTICLE 1484 PROHIBITED
FURTHER ACTION “AGAINST THE PURCHASER” ONLY.
• CRUZ ALSO HELD THAT THE FURTHER “ACTION” BEING BARRED UNDER ARTICLE
1484 IS NOT LIMITED TO JUDICIAL PROCEEDINGS, BUT SHOULD INCLUDE
EXTRAJUDICIAL PROCEEDINGS BY VIRTUE OF WHICH THE SELLER MAY BE
ENABLED TO EXACT RECOVERY OF THE SUPPOSED UNSATISFIED BALANCE OF THE
PURCHASE PRICE FROM THE PURCHASER OR HIS PRIVY.
D. EXTENT OF BARRING EFFECT

• UNDER THE ORIGINAL VERSION OF THE RECTO LAW, IT EXPLICITLY STATED

THAT “IF THE VENDOR HAS CHOSEN TO FORECLOSE THE MORTGAGE HE
SHALL HAVE NO FURTHER ACTION AGAINST THE PURCHASER FOR THE
RECOVERY OF ANY UNPAID BALANCE OWING BY THE SAME, ANY AGREEMENT
TO THE CONTRARY SHALL BE NULL AND VOID.” THE EXTENT OF THE BARRING
EFFECT OF FORECLOSURE WAS THEN ALL-ENCOMPASSING AND DID NOT LIMIT
ITSELF TO THE BALANCE OF THE PURCHASE PRICE.
E. PERVERSE BUYER-MORTGAGOR
• BY WAY OF EXCEPTION TO THE COMPLETE BARRING EFFECT ON THE REMEDY
OF FORECLOSURE, FILIPINAS INVESTMENT & FINANCE CORP. V.RIDAD,105
HELD THAT WHEN A DEFAULTING BUYER-MORTGAGOR REFUSES TO
SURRENDER THE CHATTEL TO THE SELLER TO ALLOW THE LATTER TO BE
ABLE TO PROCEED WITH FORECLOSURE, THEN THE SELLER, EVEN AFTER
ACTUAL FORECLOSURE, SHOULD BE ALLOWED TO RECOVER EXPENSES AND
ATTORNEY’S FEES INCURRED IN TRYING TO OBTAIN POSSESSION OF THE
CHATTEL.