G.R. No. 148173 , December 10, 2004
Supercars Management & Development Corporation, represented by Benigno Chan, petitioner, vs. The Late Filemon Flores, substituted by Nora C. Flores, respondent.

FACTS

Respondent Filemon Flores purchased an Isuzu vehicle from petitioner Supercars Management & Development Corporation. Upon delivery, he paid the 30% down payment and a comprehensive insurance premium. The balance was financed by Rizal Commercial Banking Corporation (RCBC), secured by a chattel mortgage on the vehicle. Immediately after delivery, the vehicle manifested serious defects including a snapped fan belt, malfunctioning brakes, a non-functional heater plug, and excessive fuel consumption during a family trip. Respondent complained, and petitioner attempted repairs multiple times, but the defects persistently recurred.
Consequently, respondent sent letters to petitioner rescinding the contract of sale due to breach of warranty against hidden defects and returned the vehicle. He also informed RCBC of the rescission and stopped his amortization payments. RCBC extrajudicially foreclosed the chattel mortgage, purchased the vehicle at auction, and later sold it to a third party. Respondent filed a complaint for rescission and damages against petitioner and RCBC.

ISSUE

Whether respondent validly rescinded the contract of sale based on a breach of the implied warranty against hidden defects.

RULING

Yes, the rescission was valid. The Supreme Court affirmed the Court of Appeals’ decision, holding that petitioner breached the implied warranty against hidden defects under Articles 1547, 1561, and 1566 of the Civil Code. The defects were hidden, not apparent at the time of sale, and rendered the vehicle unfit for its intended use. Petitioner’s repeated but unsuccessful attempts to repair the vehicle proved the defects were substantial and constituted a fundamental breach. The law implies a warranty that the thing sold is free from hidden faults, and the seller is responsible even if unaware of them, unless otherwise stipulated.
The Court clarified that the rescission was effective only against the seller, petitioner Supercars. RCBC, as the financing institution and mortgagee, was correctly absolved from liability. The bank’s foreclosure was a valid exercise of its rights under the chattel mortgage, independent of the sales contract between respondent and petitioner. However, the Court deleted the awards for moral damages, exemplary damages, and attorney’s fees, finding no sufficient basis for bad faith or wanton conduct on petitioner’s part. The core legal obligation to refund the down payment and insurance premium, with interest, was upheld.