G.R. No. 164985, January 15, 2014 FIRST UNITED CONSTRUCTORS CORPOR TION an!

"#UE ST R CONSTRUCTION CORPOR TION, Petitioners, v. " $ NI% N UTO&OTI'E CORPOR TION, Respondent. DECISION "ERS &IN, J.( This case concerns the applicability of the legal principles of recoupment and compensation. The Case Under review is the decision promulgated on July 26, 200 , ! whereby the Court of "ppeals C"# affirmed the $udgment rendered on %ay ! !&&6 by the 'egional Trial Court, (ranch !0), in *ue+on City ad$udging the petitioners defendants# liable to pay to the respondent plaintiff# various sums of money and damages.2 "ntecedents ,etitioner -irst United Constructors Corporation .-UCC# and petitioner (lue /tar Construction Corporation .(lue /tar# were associate construction firms sharing financial resources, e0uipment and technical personnel on a case1to1case basis. -rom %ay 2), !&&2 to July 2, !&&2, they ordered si3 units of dump truc4s from the respondent, a domestic corporation engaged in the business of importing and reconditioning used Japan1made truc4s, and of selling the truc4s to interested buyers who were mostly engaged in the construction business, to wit5 T8 9:8% ;<=7><'? -UCC -UCC -UCC -UCC (lue /tar -UCC

U67T 7su+u ;ump Truc4 7su+u ;ump Truc4 7su+u ;ump Truc4 7su+u ;ump Truc4 7su+u ;ump Truc4 7su+u ;ump Truc4

;"T< 8- ;<=7><'? 2) %ay !&&2 2) %ay !&&2 !0 June !&&2 !2 June !&&2 July !&&2 2 July !&&2

The parties established a good business relationship, with the respondent e3tending service and repair wor4 to the units purchased by the petitioners. The respondent also practiced liberality towards the petitioners in the latter@s manner of payment by later on agreeing to payment on terms for subse0uent purchases. 8n /eptember !&, !&&2, -UCC ordered from the respondent one unit of :ino ,rime %over that the respondent delivered on the same date. 8n /eptember 2&, !&&2, -UCC again ordered from the respondent one unit of 7su+u Transit %i3er that was also delivered to the petitioners. -or the two purchases, -UCC partially paid in cash, and the balance through post1dated chec4s, as follows5 ("6ABC:<CA 68. ,ilipinas (an4 !202)C)& ;"T< 2C 6ovember !&&2 "%8U6T ,C60,000.00

,ilipinas (an4 !202)C2

! ;ecember !&&2

,C)D,000.00

Upon presentment of the chec4s for payment, the respondent learned that -UCC had ordered the payment stopped. The respondent immediately demanded the full settlement of their obligation from the petitioners, but to no avail. 7nstead, the petitioners informed the respondent that they were withholding payment of the chec4s due to the brea4down of one of the dump truc4s they had earlier purchased from respondent, specifically the second dump truc4 delivered on %ay 2), !&&2. ;ue to the refusal to pay, the respondent commenced this action for collection on "pril 2&, !&&C, see4ing payment of the unpaid balance in the amount of ,)CD,000.00 represented by the two chec4s. 7n their answer, the petitioners averred that they had stopped the payment on the two chec4s worth,)CD,000.00 because of the respondent@s refusal to repair the second dump truc4E and that they had informed the respondent of the defects in that unit but the respondent had refused to comply with its warranty, compelling them to incur e3penses for the repair and spare parts. They prayed that the respondent return the price of the defective dump truc4 worth ,2C0,000.00 minus the amounts of their two chec4s worth ,)CD,000.00, with !2F per annum interest on the difference of ,&0,000.00 from %ay !&&C until the same is fully paidE that the respondent should also reimburse them the sum of,2 ),&D0.00 as their e3penses for the repair of the dump truc4, with !2F per annum interest from ;ecember !6, !&&2, the date of demand, until fully paidE and that the respondent pay e3emplary damages as determined to be $ust and reasonable but not less than ,D00,000, and attorney@s fees of,D0,000 plus ,!,000.00 per court appearance and other litigation e3penses. 7t was the position of the respondent that the petitioners were not legally $ustified in withholding payment of the unpaid balance of the purchase price of the :ino ,rime %over and the 7su+u Transit %i3er due the alleged defects in second dump truc4 because the purchase of the two units was an entirely different transaction from the sale of the dump truc4s, the warranties for which having long e3pired. Judgment of the 'TC 8n %ay ! , !&&6, the 'TC rendered its $udgment,C finding the petitioners liable to pay for the unpaid balance of the purchase price of the :ino ,rime %over and the 7su+u Transit %i3er totaling,)CD,000.00 with legal interest and attorney@s feesE and declaring the respondent liable to pay to the petitioners the sum of ,)!,CD0.00 as costs of the repairs incurred by the petitioners. The 'TC held that the petitioners could not avail themselves of legal compensation because the claims they had set up in the counterclaim were not li0uidated and demandable. The fallo of the $udgment states5 9:<'<-8'<, $udgment is hereby rendered5 !. 8rdering defendants, $ointly and severally to pay plaintiff the sum of ,C60,000.00 and,C)D,000.00 with interest at the legal rate of !2F per annum computed from -ebruary !!, !&&C, which is the date of the first e3tra$udicial demand, until fully paidE 2. 8rdering the defendants, $ointly and severally, to pay plaintiff the sum e0uivalent to !0F of the principal amount due, for attorney@s feesE C. 8n the counterclaim, ordering plaintiff to pay defendants the sum of ,)!,CD0.00 with interest at the legal rate of !2F per annum computed from the date of this decision until fully paidE . 8rdering plaintiff to pay the defendants attorney@s fees e0uivalent to !0F of the amount dueE D. 6o pronouncement as to costs.

/8 8';<'<;. ;ecision of the C" The petitioners appealed, stating that they could $ustifiably stop the payment of the chec4s in the e3ercise of their right of recoupment because of the respondent@s refusal to settle their claim for breach of warranty as to the purchase of the second dump truc4. 7n its decision promulgated on July 26, 200 ,D however, the C" affirmed the $udgment of the 'TC. 7t held that the remedy of recoupment could not be properly invo4ed by the petitioners because the transactions were differentE that the e3penses incurred for the repair and spare parts of the second dump truc4 were not a proper sub$ect of recoupment because they did not arise out of the purchase of the :ino ,rime %over and the 7su+u Transit %i3erE and that the petitioners@ claim could not also be the sub$ect of legal compensation or set1off, because the debts in a set1off should be li0uidated and demandable. 7ssues The petitioners are now before the Court asserting in their petition for review on certiorari that the C" erred in5 7 3 3 3 68T U,:8=;76G T:< '7G:T 8- ,<T7T786<'H/I T8 '<C8U,%<6T U6;<' ,"'. .!# 8- "'T. !D&& 8- T:< C7>7= C8;<, 9:7C: ,'8>7;</ H-8'I T:< '7G:T/ "6; '<%<;7</ ">"7="(=< T8 " (U?<' "G"76/T " /<==<'@/ ('<"C: 8- 9"''"6T?. 77 3 3 3 'U=76G T:"T ,<T7T786<'/ C"668T ">"7= 8- C8%,<6/"T786 "==<G<;=? (<C"U/< T:<7' C="7%/ "G"76/T '</,86;<6T "'< 68T =7*U7;"T<; "6; ;<%"6;"(=<. 777 3 3 3 68T :8=;76G '</,86;<6T =7"(=< T8 ,<T7T786<'/ -8' =<G"= 76T<'</T C8%,UT<; -'8% T:< -7'/T <JT'"JU;7C7"= ;<%"6;, "6; -8' "CTU"= <J<%,="'? ;"%"G</. 6 The petitioners submit that they were $ustified in stopping the payment of the two chec4s due to the respondent@s breach of warranty by refusing to repair or replace the defective second dump truc4 earlier purchasedE that the withholding of payments was an effective e3ercise of their right of recoupment as allowed by "rticle !D&&.!# of the Civil CodeE due to the seller@s breach of warranty that the C"@s interpretation .that recoupment in diminution or e3tinction of price in case of breach of warranty by the seller should refer to the reduction or e3tinction of the price of the same item or unit sold and not to a different transaction or contract of sale# was not supported by $urisprudenceE that recoupment should not be restrictively interpreted but should include the concept of compensation or set1off between two parties who had claims arising from different transactionsE and that the series of purchases and the obligations arising therefrom, being inter1related, could be considered as a single and ongoing transaction for all intents and purposes. The respondent counters that the petitioners could not refuse to pay the balance of the purchase price of the :ino ,rime %over and the 7su+u Transit %i3er on the basis of the right of recoupment under "rticle !D&& of the Civil CodeE that the buyer@s remedy of recoupment related only to the same transactionE and that compensation was not proper because the claims of the petitioners as alleged in their counterclaim were not li0uidated and demandable.

There is no longer any 0uestion that the petitioners were liable to the respondent for the unpaid balance of the purchase price of the :ino ,rime %over and the 7su+u Transit %i3er. 9hat remain to be resolved are strictly legal, namely5 one, whether or not the petitioners validly e3ercised the right of recoupment through the withholding of payment of the unpaid balance of the purchase price of the :ino ,rime %over and the 7su+u Transit %i3erE and, two, whether or not the costs of the repairs and spare parts for the second dump truc4 delivered to -UCC on %ay 2), !&&2 could be offset for the petitioners@ obligations to the respondent. 'uling 9e affirm the decision of the C" with modification. !. ,etitioners could not validly resort to recoupment against respondent 'ecoupment .reconvencion# is the act of rebating or recouping a part of a claim upon which one is sued by means of a legal or e0uitable right resulting from a counterclaim arising out of the same transaction.) 7t is the setting up of a demand arising from the same transaction as the plaintiff@s claim, to abate or reduce that claim. The legal basis for recoupment by the buyer is the first paragraph of "rticle !D&& of the Civil Code, vi+5 "rticle !D&&. 9here there is a breach of warranty by the seller, the buyer may, at his election5 .!# "ccept or 4eep the goods and set up against the seller, the breach of warranty by way of recoupment in diminution or e3tinction of the priceE .2# "ccept or 4eep the goods and maintain an action against the seller for damages for the breach of warrantyE .C# 'efuse to accept the goods, and maintain an action against the seller for damages for the breach of warrantyE . # 'escind the contract of sale and refuse to receive the goods or if the goods have already been received, return them or offer to return them to the seller and recover the price or any part thereof which has been paid. 9hen the buyer has claimed and been granted a remedy in anyone of these ways, no other remedy can thereafter be granted, without pre$udice to the provisions of the second paragraph of article !!&!. .Emphasis supplied# 333 7n its decision, the C" applied the first paragraph of "rticle !D&& of the Civil Code to this case, e3plaining thusly5 ,aragraph .!# of "rticle !D&& of the Civil Code which provides for the remedy of recoupment in diminution or e3tinction of price in case of breach of warranty by the seller should therefore be interpreted as referring to the reduction or e3tinction of the price of the same item or unit sold and not to a different transaction or contract of sale. This is more logical interpretation of the said article considering that it tal4s of breach of warranty with respect to a particular item sold by the seller. 6ecessarily, therefore, the buyer@s remedy should relate to the same transaction and not to another.

;efendants1appellants@ act of ordering the payment on the prime mover and transit mi3er stopped was improper considering that the said sale was a different contract from that of the dump truc4s earlier purchased by defendants1appellants. The claim of defendants1appellants for breach of warranty, i.e. the e3penses paid for the repair and spare parts of dump truc4 no. 2 is therefore not a proper sub$ect of recoupment since it does not arise out of the contract or transaction sued on or the claim of plaintiff1appellee for unpaid balances on the last two .2# purchases, i. e. the prime mover and the transit mi3er. 2 The C" was correct. 7t was improper for petitioners to set up their claim for repair e3penses and other spare parts of the dump truc4 against their remaining balance on the price of the prime mover and the transit mi3er they owed to respondent. 'ecoupment must arise out of the contract or transaction upon which the plaintiff@s claim is founded.& To be entitled to recoupment, therefore, the claim must arise from the same transaction, i.e., the purchase of the prime mover and the transit mi3er and not to a previous contract involving the purchase of the dump truc4. That there was a series of purchases made by petitioners could not be considered as a single transaction, for the records show that the earlier purchase of the si3 dump truc4s was a separate and distinct transaction from the subse0uent purchase of the :ino ,rime %over and the 7su+u Transit %i3er. Conse0uently, the brea4down of one of the dump truc4s did not grant to petitioners the right to stop and withhold payment of their remaining balance on the last two purchases. 2. =egal compensation was permissible =egal compensation ta4es place when the re0uirements set forth in "rticle !2)2 and "rticle !2)& of the Civil Code are present, to wit5 "rticle !2)2. Compensation shall ta4e place when two persons, in their own right, are creditors and debtors of each other.K "rticle !2)&. 7n order that compensation may be proper, it is necessary5 .!# That each of the obligors be bound principally, and that he be at the same time a principal creditor of the otherE .2# That both debts consists in a sum of money, or if the things due are consumable, they be of the same 4ind, and also of the same 0uality if the latter has been statedE .C# That the two debts be dueE . # That they be li0uidated and demandableE .D# That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. "s to whether petitioners could avail themselves of compensation, both the 'TC and C" ruled that they could not because the claims of petitioners against respondent were not li0uidated and demandable. The Court cannot uphold the C" and the 'TC. The 'TC already found that petitioners were entitled to the amount of ,)!,CD0.00 stated in their counterclaim, and the C" concurred in the finding, stating thusly5

7t is noteworthy that in the letter of ;ecember !6, !&&2 .<3h. K!K# defendants were charging plaintiff only for the following items of repair5

!. Cost of repair and spare parts 1 , 6,200.00 2. Cost of repair and spare parts 1 2 ,DD0.00 ,)!,CD0.00
/aid amounts may be considered to have been spent for repairs covered by the warranty period of three .C# months. 9hile the invoices .<3hs. K21(K and KC1"K# dated /eptember 26, !&&2 and /eptember !2, !&&2, this delay in repairs is attributable to the fact that when defects were brought to the attention of the plaintiff in the letter of "ugust ! , !&&2 .<3h. K2K# which was within the warranty period, the plaintiff did not respond with the re0uired repairs and actual repairs were underta4en by defendants. Thereafter, the spare parts covered by <3hibits K21(K and KC1"K pertain to the engine, which was covered by the warranty. 3 3 3. ;efendants in their letter of "ugust ! , !&&2 .<3hb. K2K# demanded correction of defects. 7n their letter of "ugust 22, !&&2 .<3h. K&K# they demanded replacement. 7n their letter of "ugust 2), !&&2 .<3h. K!0K#, they demanded replacementBrepair . 7n /eptember, !&&2, they undertoo4 repairs themselves .<3hs. K21(K and KC1"K# and demanded payment for the e3penses in their letter of ;ecember !6, !&&2 .<3h. K!K#. "ll other items of e3penses connected with subse0uent brea4downs are no longer chargeable to plaintiff which granted only a C1month warranty. 3 3 3 !0 Considering that preponderant evidence showing that petitioners had spent the amount of ,)!,CD0.00 for the repairs and spare parts of the second dump truc4 within the warranty period of three months supported the finding of the two lower courts, the Court accepts their finding. >erily, factual findings of the trial court, when affirmed by the C", are conclusive on the Court when supported by the evidence on record.!! " debt is li0uidated when its e3istence and amount are determined. !2 "ccordingly, an unli0uidated claim set up as a counterclaim by a defendant can be set off against the plaintiff@s claim from the moment it is li0uidated by $udgment. !C "rticle !2&0 of the Civil Code provides that when all the re0uisites mentioned in "rticle !2)& of the Civil Code are present, compensation ta4es effect by operation of law, and e3tinguishes both debts to the concurrent amount. 9ith petitioners@ e3penses for the repair of the dump truc4 being already established and determined with certainty by the lower courts, it follows that legal compensation could ta4e place because all the re0uirements were present. :ence, the amount of ,)!,CD0.00 should be set off against petitioners@ unpaid obligation of,)CD,000.00, leaving a balance of ,66C,6D0.00, the amount petitioners still owed to respondent. 9e deem it necessary to modify the interest rate imposed by the trial and appellate courts. The legal interest rate to be imposed from -ebruary !!, !&&C, the time of the e3tra$udicial demand by respondent, should be 6F per annum in the absence of any stipulation in writing in accordance with "rticle 220& of the Civil Code, which provides5 "rticle 220&. 7f the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is si3 per cent per annum. 9:<'<-8'<, the Court "--7'%/ the decision promulgated on July 26, 200 in all respects sub$ect to the %8;7-7C"T786 that petitioners are ordered, $ointly and severally, to pay to respondent the sum of ! 66C,6D0.00, plus interest of 6F per annum computed from -ebruary

!!, !&&C, the date of the first e3tra$udicial demand, until fully paidE and 8';<'/ the petitioners to pay the costs of suit. SO ORDERED. #UC S P. "ERS &IN Associate Justice )E CONCUR( & RI #OURDES P. . SERENO Chief Justice & RTIN S. 'I## R & , JR. Associate Justice

TERESIT

J. #EON RDO*DE C STRO Associate Justice ESTE#

&. PER# S*"ERN "EL Associate Justice TION

CERTIFIC

,ursuant to /ection !C, "rticle >777 of the Constitution, 7 certify that the conclusions in the above ;ecision had been reached in consultation before the case was assigned to the writer of the opinion of the CourtMs ;ivision. & RI #OURDES P. . SERENO Chief Justice