FIRSTDIVISION

PCILEASINGANDFINANCE,INC.,
Petitioner,

versus

G.R.No.142618

Present:

PUNO,C.J.,Chairperson,
*SANDOVALGUTIERREZ,

CORONA,
AZCUNA,and

GARCIA,JJ.

GIRAFFEX CREATIVE IMAGING,

Promulgated:
INC.,

Respondent.
July12,2007

xx

DECISION

GARCIA,J.:

OnapurequestionoflawinvolvingtheapplicationofRepublicAct(R.A.)No.5980,asamended
byR.A.No.8556inrelationtoArticles1484and1485oftheCivilCode,petitionerPCILeasing
andFinance,Inc.(PCILEASING,forshort)hasdirectlycometothisCourtviathis petition for
reviewunderRule45oftheRulesofCourttonullifyandsetasidetheDecisionandResolution
datedDecember28,1998andFebruary15,2000,respectively,oftheRegionalTrialCourt(RTC)
ofQuezonCity,Branch227,initsCivilCaseNo.Q9834266,asuitforasumofmoneyand/or
personalpropertywithprayerforawritofreplevin,thereatinstitutedbythepetitioneragainstthe
hereinrespondent,GiraffeXCreativeImaging,Inc.(GIRAFFE,forbrevity).

Thefacts:

OnDecember4,1996,petitionerPCILEASINGandrespondentGIRAFFEenteredintoa
[1]
LeaseAgreement, wherebytheformerleasedouttothelatterone(1)setofSiliconHighImpact
Graphics and accessories worth P3,900,00.00 and one (1) unit of Oxberry Cinescan 640010
worthP6,500,000.00.Inconnectionwiththisagreement,thepartiessubsequentlysignedtwo(2)

[2]
separatedocuments,eachdenominatedasLeaseSchedule. Likewiseformingpartsofthebasic
lease agreement were two (2) separate documents denominated Disclosure Statements of
[3]
Loan/CreditTransaction(SinglePaymentorInstallmentPlan) thatGIRAFFEalsoexecutedfor
eachoftheleasedequipment.ThesedisclosurestatementsinteraliadescribedGIRAFFE,visvis
the two aforementioned equipment, as the borrower who acknowledged the net proceeds of the
loan,thenetamounttobefinanced,thefinancial charges, the total installment payments that it
must pay monthly for thirtysix (36) months, exclusive of the 36% per annum late payment
charges. Thus, for the Silicon High Impact Graphics, GIRAFFE agreed to pay P116,878.21
monthly,andforOxberryCinescan,P181.362.00monthly.Hence,thetotalamountGIRAFFEhas
topayPCILEASINGfor36monthsofthelease,exclusiveofmonetarypenalties imposable, if
proper,isasindicatedbelow:

P116,878.21@month(fortheSiliconHigh
ImpactGraphics)x36months=P4,207,615.56

PLUS

P181,362.00@month(fortheOxberry
Cinescan)x36months=P6,529,032.00
TotalAmounttobepaidbyGIRAFFE
(ortheNETCONTRACTAMOUNT)P10,736,647.56

By the terms, too, of the LeaseAgreement, GIRAFFE undertook to remit the amount of
P3,120,000.00bywayofguarantydeposit,asortofperformanceandcompliancebondforthetwo
equipment.Furthermore,thesameagreementembodiedastandardaccelerationclause,operative
intheeventGIRAFFEfailstopayanyrentaland/orotheraccountsdue.

A year into the life of the Lease Agreement, GIRAFFE defaulted in its monthly rental
payment obligations. And following a threemonth default, PCI LEASING, through one Atty.
[4]
Florecita R. Gonzales, addressed a formal payorsurrenderequipment type of demand letter
datedFebruary24,1998toGIRAFFE.

Thedemandwentunheeded.

Hence,onMay4,1998, in the RTC of Quezon City, PCI LEASING instituted the instant
[5]
caseagainstGIRAFFE.Initscomplaint, docketedinsaidcourtasCivilCaseNo.9834266and

[6]
raffledtoBranch227 thereof,PCILEASINGprayedfortheissuanceofawritofreplevinfor
therecoveryoftheleasedproperty,inadditiontothefollowingrelief:

2. After trial, judgment be rendered in favor of plaintiff [PCI LEASING] and against the
defendant[GIRAFFE],asfollows:

a.Declaringtheplaintiffentitledtothepossessionofthesubjectproperties

b.Orderingthedefendanttopaythebalanceofrental/obligationinthetotalamount
ofP8,248,657.47inclusiveofinterestandchargesthereon

c. Ordering defendant to pay plaintiff the expenses of litigation and cost of suit.
(Wordsinbracketadded.)

UponPCILEASINGspostingofareplevinbond,thetrialcourtissuedawritofreplevin,
pavingthewayforPCILEASINGtosecuretheseizureanddeliveryoftheequipmentcoveredby
thebasicleaseagreement.

Instead of an answer, GIRAFFE, as defendant a quo, filed a Motion to Dismiss, therein

arguing that the seizure of the two (2) leased equipment stripped PCI LEASING of its cause of
action.Expoundingonthepoint,GIRAFFEarguesthat,pursuanttoArticle1484oftheCivilCode
oninstallmentsalesofpersonalproperty,PCILEASINGisbarredfromfurtherpursuinganyclaim
arising from the lease agreement and the companion contract documents, adding that the
agreement between the parties is in reality a lease of movables with option to buy. The given
situation,GIRAFFEcontinues,squarelybringsintoapplicableplayArticles1484and1485ofthe
CivilCode,commonlyreferredtoastheRectoLaw.Thecitedarticlesrespectivelyprovide:

ART. 1484. In a contract of sale of personal property the price of which is payable in
installments,thevendormayexerciseanyofthefollowingremedies:

(1)Exactfulfillmentoftheobligation,shouldthevendeefailtopay

(2)Cancelthesale,shouldthevendee'sfailuretopaycovertwoormoreinstallments

(3)Foreclosethechattelmortgageonthethingsold,ifonehasbeenconstituted,should
thevendee'sfailuretopaycovertwoormoreinstallments.In this case,he shallhavenofurther
actionagainstthepurchasertorecoveranyunpaidbalanceoftheprice.Anyagreementtothe
contraryshallbevoid.(Emphasisadded.)

ART. 1485. The preceding article shall be applied to contracts purporting to be leases of
personalpropertywithoptiontobuy,whenthelessorhasdeprivedthelesseeofthepossessionor
enjoymentofthething.


ItisthusGIRAFFEsposturethattheaforequotedArticle1484oftheCivilCodeappliesto
its contractual relation with PCI LEASING because the lease agreement in question, as
supplemented by the schedules documents, is really a lease with option to buy under the
companion article, Article 1485. Consequently, so GIRAFFE argues, upon the seizure of the
leasedequipmentpursuanttothewritofreplevin,whichseizureisequivalenttoforeclosure,PCI
LEASINGhasnofurtherrecourseagainstit.Inbrief,GIRAFFEassertsinitsMotiontoDismiss
that the civil complaint filed by PCI LEASING is proscribed by the application to the case of
Articles1484and1485,supra,oftheCivilCode.

InitsOppositiontothemotiontodismiss,PCILEASINGmaintainsthatitscontractwith
GIRAFFE is a straight lease without an option to buy. Prescinding therefrom, PCI LEASING
rejectstheapplicabilitytothesuitofArticle1484 in relation to Article 1485 of the Civil Code,
claimingthat,underthetermsandconditionsofthebasicagreement,therelationshipbetweenthe
partiesisonebetweenanordinarylessorandanordinarylessee.

[7]
In a decision dated December 28, 1998, the trial court granted GIRAFFEs motion to
dismiss mainly on the interplay of the following premises: 1) the lease agreement package, as
memorializedinthecontractdocuments,isakintothecontractcontemplatedinArticle1485of
theCivilCode,and2)GIRAFFEslossofpossessionoftheleasedequipmentconsequenttothe
enforcementofthewritofreplevinisakintoforeclosure,theconditionprecedentforapplication
ofArticles1484and1485[oftheCivilCode].Accordingly,thetrialcourtdismissedCivilCase
No.Q9834266,disposingasfollows:

WHEREFORE, premises considered, the defendant [GIRAFFE] having relinquished any

claimtothepersonalpropertiessubjectofreplevinwhicharenowinthepossessionoftheplaintiff
[PCI LEASING], plaintiff is DEEMED fully satisfied pursuant to the provisions of Articles 1484
and1485oftheNewCivilCode.Byvirtueofsaidprovisions,plaintiffisDEEMEDestoppedfrom
further action against the defendant, the plaintiff having recovered thru (replevin) the personal
property sought to be payable/leased on installments, defendants being under protection of said
RECTOLAW.Inviewthereof,thiscaseisherebyDISMISSED.

Withitsmotionforreconsiderationhavingbeendeniedbythetrialcourtinitsresolutionof
[8]
February15,2000, petitionerhasdirectlycometothisCourtviathispetitionforreviewraising
thesolelegalissueofwhetherornottheunderlyingLeaseAgreement,LeaseSchedulesandthe
Disclosure Statements that embody the financial leasing arrangement between the parties are
coveredbyandsubjecttotheconsequencesofArticles1484and1485oftheNewCivilCode.


As in the court below, petitioner contends that the financial leasing arrangement it
concludedwiththerespondentrepresentsastraightleasecoveredbyR.A.No.5980,theFinancing
CompanyAct,aslastamendedbyR.A.No.8556,otherwiseknownasFinancingCompanyActof
1998, and is outside the application and coverage of the Recto Law. To the petitioner, R.A. No.
5980definesandauthorizesitsexistenceandbusiness.

Therecourseiswithoutmerit.

R.A.No.5980,initsoriginalshapeandasamended,partakesofasupervisoryorregulatory
legislation, merely providing a regulatory framework for the organization, registration, and
regulationoftheoperationsoffinancingcompanies.Ascouched,itdoesnotspecificallydefinethe
rightsandobligationsofpartiestoafinancialleasingarrangement.Infact,itdoesnotgobeyond
definingcommercialortransactionalfinancialleasingandotherfinancialleasingconcepts.Thus,
therelevancyofArticle18oftheCivilCodewhichreads:

Article 18. In matters which are governed by special laws, their deficiency shall be
suppliedbytheprovisionsofthis[Civil]Code.

Petitioner foists the argument that the Recto Law, i.e., the Civil Code provisions on
installment sales of movable property, does not apply to a financial leasing agreement because
suchagreement,bydefinition,doesnotconferonthelesseetheoptiontobuythepropertysubject
ofthefinanciallease.Tothepetitioner,theabsenceofanoptiontobuystipulationinafinancial
leasingagreement,asunderstoodunderR.A.No.8556,preventstheapplicationtheretoofArticles
1484and1485oftheCivilCode.
Wearenotpersuaded.

The Court can allow that the underlying lease agreement has the earmarks or made to
[9]
appearasafinancialleasing, atermdefinedinSection3(d)ofR.A.No.8556as

amodeofextendingcreditthroughanoncancelableleasecontractunderwhichthelessor
purchases or acquires, at the instance of the lessee, machinery, equipment, office machines, and
othermovableorimmovablepropertyinconsiderationoftheperiodicpaymentbythelesseeofa
fixed amount of money sufficient to amortize at least seventy (70%) of the purchase price or
acquisitioncost,includinganyincidentalexpensesandamarginofprofitoveranobligatoryperiod
of not less than two (2) years during which the lessee has the right to hold and use the leased

property but with no obligation or option on his part to purchase the leased property from the
ownerlessorattheendoftheleasecontract.

In its previous holdings, however, the Court, taking into account the following mix: the
imperativesofequity,thecontractualstipulationsinquestionandtheactuationsofpartiesvisvis
their contract, treated disguised transactions technically tagged as financing lease, like here, as
creating a different contractual relationship. Notable among the Courts decisions because of its
[10]
parallelism with this case is BA Finance Corporation v. Court of Appeals
which involved a
motor vehicle. Thereat, the Court has treated a purported financial lease as actually a sale of a
movablepropertyoninstallmentsandpreventedrecoverybeyondthebuyersarrearages.Wrotethe
CourtinBAFinance:

The transaction involved is one of a "financial lease" or "financial leasing," where a

financingcompanywould,ineffect,initiallypurchaseamobileequipmentandturnaroundto
leaseittoaclientwhogets,inaddition,anoptiontopurchasethepropertyattheexpiryofthe
leaseperiod.xxx.

xxxxxxxxx

Thepertinentprovisionsof[RA]5980,thusimplemented,read:

"'Financingcompanies,'areprimarilyorganizedforthepurposeofextending
creditfacilitiestoconsumerseitherbyleasingofmotorvehicles,andofficemachines
andequipment,andothermovableproperty."

"'Credit'shallmeananyloan,anycontracttosell,orsaleorcontractofsale
ofpropertyorservice,underwhichpartorallofthepriceispayablesubsequentto
themakingofsuchsaleorcontractanyrentalpurchasecontract."

The foregoing provisions indicate no less than a mere financing scheme extended by a
financing company to a client in acquiring a motor vehicle and allowing the latter to obtain the
immediatepossessionandusethereofpendingfullpaymentofthefinancialaccommodationthatis
given.

Inthecaseatbench,xxx.[T]hetermofthecontract[overamotorvehicle]wasforthirty
six(36)monthsata"monthlyrental"(P1,689.40),orforatotalamountofP60,821.28.Thecontract
also contained [a] clause [requiring the Lessee to give a guaranty deposit in the amount of
P20,800.00]xxx

AftertheprivaterespondenthadpaidthesumofP41,670.59,excludingtheguarantydeposit
ofP20,800.00,hestoppedfurtherpayments.Puttingthetwosumstogether,thefinancingcompany
hadinitshandstheamountofP62,470.59asagainstthetotalagreed"rentals"ofP60,821.28oran
excessofP1,649.31.

Therespondentappellatecourtconsidereditonlyjustandequitablefortheguarantydeposit
made by the private respondent to be applied to his arrearages and thereafter to hold the contract
terminated.Adoptingtheratiocinationofthecourtaquo,theappellatecourtsaid:

xxx In view thereof, the guaranty deposit of P20,800.00 made by the

defendantshouldandmustbecreditedinhisfavor,intheinterestoffairness,justice
and equity. The plaintiff should not be allowed to unduly enrich itself at the
expenseofthedefendant.xxxThisisevenmorecompellinginthiscasewhere
althoughthetransaction,onitsface,appearostensibly,tobeacontractoflease,
itisactuallyafinancingagreement,withtheplaintifffinancingthepurchaseof
defendant's automobile . The Court is constrained, in the interest of truth and
justice, to go into this aspect of the transaction between the plaintiff and the
defendantwithallthefactsandcircumstancesexistinginthiscase,andwhichthe
courtmustconsiderindecidingthecase,ifitistodecidethecaseaccordingtoallthe
facts.xxx.

xxxxxxxxx

Considering the factual findings of both the court aquo and the appellate court, the only
logical conclusion is that the private respondent did opt, as he has claimed, to acquire the
motorvehicle,justifyingthentheapplicationoftheguaranteedeposittothebalancestilldue
and obligating the petitioner to recognize it as an exercise of the option by the private
respondent.Theresultwouldtherebyentitlesaidrespondenttotheownershipandpossession
ofthevehicleasthebuyerthereof.We,therefore,seenoreversibleerrorintheultimatejudgment
[11]
of the appellate court.
(Italics in the original underscoring supplied and words in bracket
added.)

[12]
In Cebu Contractors Consortium Co. v. Court of Appeals,
the Court viewed and thus
declared a financial lease agreement as having been simulated to disguise a simple loan with
security,itappearingthatthefinancingcompanypurchasedequipmentalreadyownedbyacapital
strappedclient,withtheintentionofleasingitbacktothelatter.

Inthepresentcase,petitioneracquiredtheofficeequipmentinquestionfortheirsubsequent
lease to the respondent, with the latter undertaking to pay a monthly fixed rental therefor in the
totalamountofP292,531.00,oratotalofP10,531,116.00forthewhole36months.Asameasure
ofgoodfaith,respondentmadeanupfrontguaranteedepositintheamountofP3,120,000.00.The
basic agreement provides that in the event the respondent fails to pay any rental due or is in a
defaultsituation,thenthepetitionershallhavecumulativeremedies,suchas,butnotlimitedto,the
[13]
following:

1.Obtainpossessionoftheproperty/equipment

2.Retainallamountspaidtoit.Inaddition,theguarantydepositmaybeappliedtowardsthe
paymentofliquidateddamages

3.Recoverallaccruedandunpaidrentals

4. Recoverallrentalsfortheremainingtermoftheleasehaditnotbeencancelled,as
additionalpenalty


5.RecoveryofanyandallamountsadvancedbyPCILEASINGforGIRAFFEsaccount
xxx

6.Recoverallexpensesincurredinrepossessing,removing,repairingandstoringtheproperty
and,

7.RecoveralldamagessufferedbyPCILEASINGbyreasonofthedefault.

In addition, Sec. 6.1 of the Lease Agreement states that the guaranty deposit shall be
forfeitedintheeventtherespondent,foranyreason,returnstheequipmentbeforetheexpirationof
thelease.

Atbottom,respondenthadpaidtheequivalentofaboutayearsleaserentals,oratotalof
P3,510,372.00,moreorless.Throwintheguarantydeposit(P3,120,000.00) and the respondent
had made a total cash outlay of P6,630,372.00 in favor of the petitioner. The replevinseized
leasedequipmenthad,asallegedinthecomplaint,anestimatedresidualvalueofP6,900.000.00
atthetimeCivilCaseNo.Q9834266wasinstitutedonMay4,1998.Addingallcashadvances
thusmadetotheresidualvalueoftheequipment,thetotalvaluewhichthepetitionerhadactually
obtained by virtue of its lease agreement with the respondent amounts to P13,530,372.00
(P3,510,372.00+P3,120,000.00+P6,900.000.00=P13,530,372.00).

TheacquisitioncostforboththeSiliconHighImpactGraphicsequipmentandtheOxberry
Cinescanwas,asstatedinnolessthanthepetitionerslettertotherespondentdatedNovember11,
[14]
1996
approving in the latters favor a lease facility, was P8,100,000.00. Subtracting the
acquisition cost of P8,100,000.00 from the total amount, i.e., P13,530,372.00, creditable to the
respondent,itwouldclearlyappearthatpetitionerrealizedagrossincomeofP5,430,372.00from
itsleasetransactionwiththerespondent.TheamountofP5,430,372.00isnotyetafinalfigureas
it does not include the rentals in arrears, penalties thereon, and interest earned by the guaranty
deposit.

[15]
As may be noted, petitioners demand letter
fixed the amount of P8,248,657.47 as
representingtherespondentsrentalbalancewhichbecamedueanddemandableconsequenttothe
applicationoftheaccelerationandotherclausesoftheleaseagreement.Assuming,then,thatthe
respondent may be compelled to pay P8,248,657.47, then it would end up paying a total of
P21,779,029.47(P13,530,372.00+P8,248,657.47=P21,779,029.47) for its use for a year and
two months at the most of the equipment. All in all, for an investment of P8,100,000.00, the

petitionerstandstomakeinayearstime,outofthetransaction,atotalofP21,779,029.47,oranet
of P13,679,029.47, if we are to believe its outlandish legal submission that the PCI LEASING
GIRAFFELeaseAgreementwasanhonesttogoodnessstraightlease.

A financing arrangement has a purpose which is at once practical and salutary. R.A. No.
8556 was, in fact, precisely enacted to regulate financing companies operations with the end in
view of strengthening their critical role in providing credit and services to small and medium
enterprises and to curtail acts and practices prejudicial to the public interest, in general, and to
[16]
theirclienteles,inparticular.
Asaregulatedactivity,financingarrangementsarenotmeantto
quenchonlythethirstforprofit.Theyserveahigherpurpose,andR.A.No.8556hasmadethat
abundantlyclear.

We stress, however, that there is nothing in R.A. No. 8556 which defines the rights and
obligations, as between each other, of the financial lessor and the lessee. In determining the
respectiveresponsibilitiesofthepartiestotheagreement,courts,therefore,musttrainakeeneye
on the attendant facts and circumstances of the case in order to ascertain the intention of the
parties,inrelationtothelawandthewrittenagreement.Likewise,thepublicinterestandpolicy
involved should be considered. It may not be amiss to state that, normally, financing contracts
comeinastandardpreparedform,unilaterallythoughtupandwrittenbythefinancingcompanies
requiring only the personal circumstances and signature of the borrower or lessee the rates and
other important covenants in these agreements are still largely imposed unilaterally by the
financing companies. In other words, these agreements are usually onesided in favor of such
companies.Aperusaloftheleaseagreementinquestionexposesthemanyremediesavailableto
the petitioner, while there are only the standard contractual prohibitions against the respondent.
Thisischaracteristicofstandardprintedformcontracts.

[17]
Thereismore.IntheadvertedFebruary24,1998demandletter
senttotherespondent,
petitioner fashioned its claim in the alternative: payment of the full amount of P8,248,657.47,
representing the unpaid balance for the entire 36month lease period or the surrender of the
financedassetunderpainoflegalaction.Toquotetheletter:

Demandisherebymadeuponyoutopayinfullyouroutstandingbalanceintheamountof
P8,248,657.47 on or before March 04, 1998 OR to surrender to us the one (1) set Silicon High
ImpactGraphicsandone(1)unitOxberryCinescan640010

Wetrustyouwillgivethismatteryourseriousandpreferentialattention.(Emphasisadded).

Evidently,theletterdidnotmakeademandforthepaymentoftheP8,248,657.47ANDthe
returnoftheequipmentonlyeitheroneofthetwowasrequired.Thedemandletterwasprepared
andsignedbyAtty.FlorecitaR.Gonzales,presumablypetitionerscounsel.Assuch,theuseofor
insteadofandinthelettercouldhardlybetreatedasasimpletypographicalerror,bearinginmind
the nature of the demand, the amount involved, and the fact that it was made by a lawyer.
CertainlyAtty.Gonzaleswouldhaveknownthataworldofdifferenceexistsbetweenandandor
inthemannerthatthewordwasemployedintheletter.

A rule in statutory construction is that the word "or" is a disjunctive term signifying
dissociation and independence of one thing from other things enumerated unless the context
[18]
requiresadifferentinterpretation.

In its elementary sense, "or", as used in a statute, is a disjunctive article indicating an

alternative.Itoftenconnectsaseriesofwordsorpropositionsindicatingachoiceofeither.When
[19]
"or"isused,thevariousmembersoftheenumerationaretobetakenseparately.

Theword"or"isadisjunctivetermsignifyingdisassociationandindependenceofonething
[20]
fromeachoftheotherthingsenumerated.

Thedemandcouldonlybethattherespondentneednotreturntheequipmentifitpaidthe
P8,248,657.47 outstanding balance, ineluctably suggesting that the respondent can keep
possession of the equipment if it exercises its option to acquire the same by paying the unpaid
balanceofthepurchaseprice.Statedotherwise,iftherespondentwasnotmindedtoexerciseits
optionofacquiringtheequipmentbyreturningthem,thenitneednotpaytheoutstandingbalance.
Thisisthelogicalimportoftheletter:thatthetransactioninthiscaseisaleaseinnameonly.The
socalled monthly rentals are in truth monthly amortizations of the price of the leased office
equipment.

Onthewhole,then,werule,asdidthetrialcourt,thatthePCILEASINGGIRAFFElease
agreement is in reality a lease with an option to purchase the equipment. This has been made
manifestbytheactionsofthepetitioneritself,foremostofwhichisthedeclarationsmadeinits
demandlettertotherespondent.Therecouldbenootherexplanationthanthatiftherespondent
paidthebalance,thenitcouldkeeptheequipmentforitsownifnot,thenitshouldreturnthem.
Thisisclearlyanoptiontopurchasegiventotherespondent.Beingso,Article1485oftheCivil
Codeshouldapply.

Thepresentcasereflectsasituationwherethefinancingcompanycanwithholdandconceal
uptothelastmomentitsintentiontosellthepropertysubjectofthefinancelease,inorderthat
theprovisionsoftheRectoLawmaybecircumvented.Itmaybe,aspetitionerpointedout,thatthe
basicleaseagreementdoesnotcontainapurchaseoptionclause.Theabsence,however,doesnot
necessarilyargueagainsttheideathatwhatthepartiesareintoisnotastraightlease,butalease
withoptiontopurchase.ThisCourthas,tobesure,longbeenawareofthepracticeofvendorsof
personalpropertyofdenominatingacontractofsaleoninstallmentasoneofleasetopreventthe
ownershipoftheobjectofthesalefrompassingtothevendeeuntilandunlessthepriceisfully
[21]
paid.AsthisCourtnotedinVda.deJosev.Barrueco:
Sellersdesirousofmakingconditionalsalesoftheirgoods,butwhodonotwishopenlyto
makeabargaininthatform,foronereasonoranother,havefrequentlyresortedtothedevice 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 socalled rent has been duly paid, or
withstipulationsthatiftherentthroughoutthetermispaid,titleshallthereuponvestinthe
lessee. It is obvious that such transactions are leases only in name. The socalled rent must
necessarilyberegardedaspaymentofthepriceininstallmentssincetheduepaymentoftheagreed
amountresults,bythetermsofthebargain,inthetransferoftitletothelessee.

[22]
In another old but still relevant case of U.S. Commercial v. Halili,
a lease agreement
wasdeclaredtobeinfactasaleofpersonalpropertybyinstallments.SaidtheCourt:

. . . There can hardly be any question that the socalled contracts of lease on which the
presentactionisbased were veritable leases of personal property with optiontopurchase,andas
such come within the purview of the above article [Art. 1454A of the old Civil Code on sale of
personalpropertybyinstallment].xxx

Being leases of personal property with option to purchase as contemplated in the above
article,thecontractsinquestionaresubjecttotheprovisionthatwhenthelessorinsuchcasehas
chosen to deprive the lessee of the enjoyment of such personal property, he shall have no further
actionagainstthelesseefortherecoveryofanyunpaidbalanceowingbythelatter,agreementto
thecontrarybeingnullandvoid.

In choosing, through replevin, to deprive the respondent of possession of the leased

equipment,thepetitionerwaiveditsrighttobringanactiontorecoverunpaidrentalsonthesaid
leaseditems.Paragraph(3),Article1484inrelationtoArticle1485oftheCivilCode,whichwe
arehereunderrereproducing,cannotbeanyclearer.

ART. 1484. In a contract of sale of personal property the price of which is payable in
installments,thevendormayexerciseanyofthefollowingremedies:
xxxxxxxxx

(3)Foreclosethechattelmortgageonthethingsold,ifonehasbeenconstituted,shouldthe
vendee'sfailuretopaycovertwoormoreinstallments.Inthiscase,heshallhavenofurtheraction
against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary
shallbevoid.

ART.1485.Theprecedingarticleshallbeappliedtocontractspurportingtobeleasesofpersonalproperty
withoptiontobuy,whenthelessorhasdeprivedthelesseeofthepossessionorenjoymentofthe
thing.

[23]
AswearticulatedinEliscoToolManufacturingCorp.v.CourtofAppeals,
theremedies
providedforinArticle1484oftheCivilCodearealternative,notcumulative.Theexerciseofone
bars the exercise of the others. This limitation applies to contracts purporting to be leases of
personal property with option to buy by virtue of the same Article 1485. The condition that the
lessorhasdeprivedthelesseeofpossessionorenjoymentofthethingforthepurposeofapplying
Article 1485 was fulfilled in this case by the filing by petitioner of the complaint for a sum of
moneywithprayerforreplevintorecoverpossessionoftheofficeequipment.

[24]
Byvirtueofthe

writofseizureissuedbythetrialcourt,thepetitionerhaseffectivelydeprivedrespondentoftheir
use,asituationwhich,byforceoftheRectoLaw,inturnprecludestheformerfrommaintainingan
action for recovery of accrued rentals or the recovery of the balance of the purchase price plus
[25]
interest.

TheimperativesofhonestdealingsgivenprominenceintheCivilCodeundertheheading:
HumanRelations,provideanotherreasonwhywemustholdthepetitionertoitswordasembodied
initsdemandletter.Else,wewouldwitnessasituationwhereeveniftherespondentsurrendered
theequipmentvoluntarily,thepetitionercanstillsueuponitsclaim.Thiswouldbemostunfairfor
therespondent.Wecannotallowthepetitionertorenegeonitsword.Yetmorethanthat,thevery
wordorasusedintheletterconveysdistinctlyitsintentionnottoclaimboththeunpaidbalance
and the equipment. It is not difficult to discern why: if we add up the amounts paid by the
respondent,theresidualvalueofthepropertyrecovered,andtheamountclaimedbythepetitioner
assueduponherein(foratotalofP21,779,029.47),thenitwouldendupmakinganinstantkilling
out of the transaction at the expense of its client, the respondent. The Recto Law was precisely
enactedtopreventthiskindofaberration.Moreover,duetoconsiderationsofequity,publicpolicy
andjustice,wecannotallowthisto
happen. Not only to the respondent, but those similarly situated who may fall prey to a similar
scheme.

WHEREFORE, the instant petition is DENIED and the trial courts decision is
AFFIRMED.

Costsagainstpetitioner.

SOORDERED.

WECONCUR:

CANCIOC.GARCIA
AssociateJustice

REYNATOS.PUNO
ChiefJustice
Chairperson

(Onleave)
ANGELINASANDOVALGUTIERREZ
AssociateJustice

RENATOC.CORONA
AssociateJustice

ADOLFOS.AZCUNA
AssociateJustice

CERTIFICATION

PursuanttoSection13,ArticleVIIIoftheConstitution,Icertifythattheconclusionsintheabove
decisionhadbeenreachedinconsultationbeforethecasewasassignedtothewriteroftheopinion
oftheCourtsDivision.

REYNATOS.PUNO
ChiefJustice

*Onleave.
[1]
AnnexC,Petitionrollo,pp.3031.
[2]
AnnexesDandE,Petitionid.at3233.
[3]
AnnexesFandG,Petitionid.at3536.
[4]
RTCRecords,p.14.
[5]
Rollo,pp.3741.
[6]
ThenpresidedbyJudge(nowCourtofAppealsAssociateJustice)VicenteRoxas.
[7]
Rollo,pp.2427.
[8]
Id.at29.

[9]
Usedinterchangeablywiththetermsfinancingleaseandfinanciallease.
[10]
G.R.No.105190,December16,1993,228SCRA530.

[11]
BAFinanceCorporationv.CourtofAppeals,G.R.No.105190,December16,1993,228SCRA530.
[12]
G.R.No.107199,July22,2003,407SCRA154.
[13]
Secs.19.2and20.1oftheLeaseAgreement.

[14]
Rollo,p.82.
[15]
Supranote4.
[16]
Sec.2,R.A.No.8556.
[17]
Supranote4.
[18]
Pimentelv.COMELEC,G.R.No.126394,April24,1998,289SCRA586,597.
[19]
Centenov.VillalonPornillos,G.R.No.113092,September1,1994,236SCRA197,206.
[20]
CastilloCov.Barbers,G.R.No.129952,June16,1998,290SCRA717,723.
[21]
67Phil.191(1939)citedinEliscoToolManufacturingCorp.v.CA,G.R.No.109966,May31,1999,307SCRA731.
[22]
93Phil.271(1953).
[23]
G.R.No.109966,May31,1999,307SCRA731.
[24]
Ibid.
[25]
Ibid.