THIRD DIVISION

[G.R. No. 148173. December 10, 2004.]

SUPERCARS MANAGEMENT & DEVELOPMENT CORPORATION,

represented by its President BENIGNO CHAN , petitioner, vs . THE
LATE FILEMON FLORES, substituted by his surviving spouse, NORA
C. FLORES , 1 respondent.

DECISION

SANDOVAL-GUTIERREZ , J : p

Before us is a petition for review on certiorari assailing the Decision 2 dated

November 29, 2000 and Resolution 3 dated April 26, 2001, both issued by the Court of
Appeals in CA-G.R. CV No. 40419, entitled "Filemon Flores vs. Supercars Management &
Development Corporation, Mamerto Catley, Pablito Marquez, and Rizal Commercial
Banking Corporation."
In the second week of December 1988, Filemon Flores, respondent, purchased from
Supercars Management and Development Corporation, petitioner, an Isuzu Carter Crew
Cab for P212,000.00 payable monthly with a down payment equivalent to 30% of the price
or P63,600.00. The balance was to be nanced by the Rizal Commercial Banking
Corporation (RCBC). The sale was coursed through Pablito Marquez, petitioner's
salesman.
Upon delivery of the vehicle on December 27, 1988, respondent paid petitioner the
30% down payment, plus premium for the vehicle's comprehensive insurance policy
amounting to P7,374.80. The RCBC nanced the balance of the purchase price. Its
payment was secured by a chattel mortgage of the same vehicle.
A day after the vehicle was delivered, respondent used it for his family's trip to
Bauang, La Union. While traversing the national highway in Tarlac, Tarlac, the fan belt of the
vehicle snapped. Then its brakes hardened after several stops and did not function
properly; the heater plug did not also function; the engine could not start; and the fuel
consumption increased. 4
Upon their return to Manila in the rst week of January 1989, respondent
complained to petitioner about the defects of the vehicle. Marquez then had the vehicle
repaired and returned it to respondent that same day, assuring the latter that it was
already in good condition.
But after driving the vehicle for a few days, the same defects resurfaced, prompting
respondent to send petitioner a letter dated January 30, 1989 rescinding the contract of
sale and returning the vehicle due to breach of warranty against hidden defects. A copy of
the letter was furnished RCBC.
In response to respondent's letter, petitioner directed Marquez to have the vehicle
xed. Thereafter, he returned the vehicle to respondent with the assurance that it has no
more defects. However, when respondent drove it for a few days, he found that the vehicle
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 was still defective.
Hence, on February 7, 1989, respondent sent petitioner another letter restating that
he is rescinding the contract of sale, a copy of which was furnished RCBC. On February 9,
1989, he returned the vehicle to petitioner. Later, Marquez and Mamerto Catley, petitioner's
salesman, tried to convince respondent to accept the vehicle as it had been completely
repaired. But respondent refused.
On March 1, 1989, respondent sent petitioner a letter demanding the refund of his
down payment, plus the premium he paid for the vehicle's insurance.
Petitioner failed to comply with petitioner's demand. Consequently, respondent
stopped paying the monthly amortization for the vehicle.
On March 21, 1989, RCBC sent respondent a letter demanding that he settle his past
overdue accounts for February 15 and March 15, 1989. In reply, respondent, through a
letter dated March 31, 1989, informed RCBC that he had rescinded the contract of sale and
had returned the vehicle to petitioner. This prompted RCBC to le with the O ce of the
Clerk of Court and Ex-Officio Sheriff, Regional Trial Court, Quezon City, a Petition for Extra-
judicial Foreclosure of Chattel Mortgage.
On June 2, 1989, a Notice of Sheriff's Sale of the vehicle was set.
On June 1, 1989, respondent led with the same O ce a Manifestation/Motion
asking for the postponement of the scheduled auction sale until such time that petitioner
and/or RCBC shall have reimbursed him of the amount he paid for the vehicle; and that
should the auction sale be conducted, the proceeds thereof equivalent to the amount he
spent be withheld and turned over to him.
The auction sale proceeded as scheduled. RCBC, being the highest bidder,
purchased the vehicle. Subsequently, RCBC sold the vehicle to a third party.
On November 3, 1989, respondent led with the Regional Trial Court (RTC), Branch
150, Makati City a complaint 5 for rescission of contract with damages against petitioner,
Marquez, Catley and RCBC, docketed as Civil Case No. 89-5566.
In their separate answers, petitioner, Marquez and Catley denied having committed
any breach of warranty against hidden defects, claiming that the vehicle had only "minor
and inconsequential defects" which "were promptly and satisfactorily repaired by
petitioner Supercars pursuant to its warranty as the seller." 6 For its part, RCBC claimed
that it has no liability whatsoever against respondent because it merely enforced its right
under the chattel mortgage law. All the defendants prayed for the dismissal of the
complaint. EScaIT

On April 13, 1992, the RTC rendered its Decision in favor of respondent and against
the defendants, thus:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendants, ordering the latter to jointly and severally pay the plaintiff
as follows:

1. the amount of P70,974.80 representing the 30% down payment and

premium paid for one year comprehensive motor vehicle insurance
plus interests at the rate of 14% per annum from date of ling of
this complaint on October 30, 1989 until fully paid;
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 2. the sum of P50,000.00 as moral damages;

3. the sum of P25,000.00 as exemplary damages;

4. the sum of P20,000.00 as attorney's fees; and

5. the costs of suit.

SO ORDERED." 7

Upon motion for reconsideration by RCBC, the RTC, in an Order dated December 21,
1992, modi ed its Decision by absolving RCBC from any liability and dismissing the
complaint against it, thus:
xxx xxx xxx

"Going into the merits of defendant bank's contention that it has valid and
meritorious defense which should ultimately exculpate it from any liability, jointly
and severally, with the other defendants, the Court, after a careful review of the
evidence on hand, reconsiders its Decision insofar as the said bank is concerned.
The valid exercise by the plaintiff of its right to rescind the contract of sale for the
purchase of the motor vehicle in question does not apply to defendant bank. Said
contract is effective only as against defendant Supercars Management and
Development Corporation, which must principally suffer the consequence of its
breach of the contract.

This Court likewise takes notice of the fact that since the motor vehicle
was voluntarily surrendered by the plaintiff and that defendant bank merely
exercised its right under the chattel mortgage law, no fault can be attributed to the
latter. The fact that the plaintiff sent a letter to the O ce of the City Sheriff of
Quezon City, copy furnished the bank, seeking the postponement of the auction
sale of the subject motor vehicle, will not and cannot be considered as a valid
ground to hold said bank liable for only exercising its rights under the law. At
most, the liability must really be imputed only against defendants Supercars
Management and Development Corporation, Mamerto Catley and Pablito
Marquez.

"WHEREFORE, considering the foregoing premises, the Decision of this

Court dated April 13, 1992, insofar as it holds defendant Rizal Commercial
Banking Corporation jointly and severally liable to the plaintiff, is hereby
MODIFIED and the case against said bank DISMISSED. Similarly, the compulsory
counterclaim against the plaintiff is likewise dismissed.
The dispositive portion of the same Decision insofar as the rest of the
defendants are concerned is hereby maintained and affirmed in toto.

SO ORDERED." 8

From the above Decision and Order, petitioner, Marquez and Catley interposed an
appeal to the Court of Appeals, docketed as CA-G.R. CV No. 40419. In a Decision dated
November 29, 2000, the Appellate Court a rmed the RTC Decision with modi cation in
the sense that the complaint against Marquez and Catley was dismissed, thus:
xxx xxx xxx

"It is with respect to appellants Catley and Marquez' liability that we are
minded to modify the (appealed) Decision. The two being mere employees (of
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 appellant Supercars Management and Development Corporation), they cannot be
held liable to refund the amount claimed by Flores. Nor can they be made liable
for damages and attorney's fees, there being no clear evidence that they had a
hand in giving rise thereto.

WHEREFORE, the appealed Amended Decision is AFFIRMED, with the

MODIFICATION that the complaint insofar as defendants-appellants Mamerto
Catley and Pablito Marquez is hereby DISMISSED.
SO ORDERED. 9

Petitioner led a motion for reconsideration but denied in a Resolution dated April
26, 2001. 1 0
Hence, the instant petition.
Petitioner contends that respondent has "no right to rescind the contract of sale" 1 1
because "the motor vehicle in question, as found by the RTC and the Court of Appeals, is
already in the hands of a third party, one Mr. Lim — an innocent purchaser for value." 1 2
Thus, both courts erred in ordering petitioner to refund respondent of the amounts he paid
for the vehicle.
The issue here is whether respondent has the right to rescind the contract of sale
and to claim damages as a result thereof.
We rule for respondent.
Respondent's complaint led with the RTC seeks to recover from petitioner the
money he paid for the vehicle due to the latter's breach of his warranty against hidden
defects under Articles 1547, 1 3 1561, 1 4 and 1566 1 5 of the Civil Code. The vehicle, after it
was delivered to respondent, malfunctioned despite repeated repairs by petitioner.
Obviously, the vehicle has hidden defects. A hidden defect is one which is unknown or
could not have been known to the vendee. 1 6

The ndings of both the RTC and Court of Appeals that petitioner committed a
breach of warranty against hidden defects are fully supported by the records. The
Appellate Court correctly ruled:
"The evidence clearly shows that Flores [now respondent] was justi ed in
opting to rescind the sale given the hidden defects of the vehicle, allowance for
the repair of which he patiently extended, but which repair did not turn out to be
satisfactory.
xxx xxx xxx
For when by letters of January 30, 1989 and February 7, 1989, which were
followed up by another dated March 1, 1989, Flores declared his rescission of the
sale, which rescission was not impugned or opposed by appellants as in fact they
accepted the return of the vehicle on February 9, 1989, such extra-judicial
rescission . . . produced legal effect (UP vs. de los Angeles, 35 SCRA 102 [1970];
Tolentino Commentaries and Jurisprudence on the Civil Code , citing Magdalena
Estate v. Myrick, 71 Phil. 344 [1940–1941]).THEcAS

xxx xxx xxx" 1 7

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 It is well within respondent's right to recover damages from petitioner who
committed a breach of warranty against hidden defects. Article 1599 of the Civil Code
partly provides:
"Article 1599. Where there is a breach of warranty by the seller, the
buyer may, at his election:
xxx xxx xxx
(4) Rescind 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.
When the buyer has claimed and been granted a remedy in anyone of
these ways, no other remedy can thereafter be granted, without prejudice to the
provisions of the second paragraph of Article 1191.
xxx xxx xxx." (Emphasis supplied)

Petitioner's contention that under Article 1191 of the Civil Code, rescission can no
longer be availed of as the vehicle was already in the hands of an innocent purchaser for
value lacks merit. Rescission is proper if one of the parties to a contract commits a
substantial breach of its provisions. It creates an obligation to return the object of the
contract. It can be carried out only when the one who demands rescission can return
whatever he may be obliged to restore. Rescission abrogates the contract from its
inception and requires a mutual restitution of the bene ts received. 1 8 Petitioner is thus
mandated by law to give back to respondent the purchase price upon his return of the
vehicle. Records show that at the time respondent opted to rescind the contract, the
vehicle was still in his possession. He returned it to petitioner who, without objection,
accepted it. Accordingly, the 30% down payment equivalent to P63,600.00, plus the
premium for the comprehensive insurance amounting to P7,374.80 paid by respondent
should be returned by petitioner.
As further stated by the Court of Appeals:
"Appellant's invocation of Article 1191 of the Civil Code in support of his
argument that as the vehicle had been sold to a third party, rescission can no
longer ensue is misplaced.
For, Flores is asking for the refund of the downpayment and payment for
insurance premiums. This brings us to appellant's final argument.

Appellant's professed excuse from their inability to give refund — that

refund would necessitate the return of the subject motor vehicle which is
impossible because it is now in the hands of an innocent purchaser for value —
miserably fails.

. . . appellant Supercars was paid the balance of the purchase price by

RCBC and, therefore, in addition to the downpayment given by Flores, it had been
fully paid for the vehicle.
Ergo, Supercars had nothing more to do with the vehicle." 1 9
However, the lower court's award of P50,000.00 as moral damages and P25,000.00
as exemplary damages to respondent is erroneous. While no proof of pecuniary loss is
necessary in order that moral damages may be awarded, the amount of indemnity being
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 left to the discretion of the court, it is nevertheless essential that the claimant
satisfactorily prove the existence of the factual basis of the damage and its causal relation
to defendant's acts. Moral damages are in the category of an award designed to
compensate the claimant for actual injury suffered and not to impose a penalty to the
wrongdoer. This has not been proved by respondent.
In contracts and quasi-contracts, the court may award exemplary damages if the
defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. 2 0
Likewise, respondent failed to establish that petitioner acted in such manner.
As to the award of attorney's fees, the same must be deleted since the award of
moral and exemplary damages are eliminated. 2 1 Moreover, the trial court did not give any
justi cation for granting it in its decision. It is now settled that awards of attorney's fees
must be based on findings of fact and law, stated in the decision of the trial court. 2 2
WHEREFORE, the petition is DENIED. The assailed Decision dated September 20,
1999 and Resolution dated February 1, 2000 of the Court of Appeals in CA-G.R. CV No.
52177 are AFFIRMED with MODIFICATION. The award of moral and exemplary damages
and attorney's fees are DELETED. Costs against petitioner. TcHDIA

SO ORDERED.
Panganiban and Garcia, JJ ., concur.
Corona, J ., is on leave.
Carpio-Morales, J ., took no part. Ponente of assailed decision.

Footnotes
1. Per Resolution of this Court dated March 11, 2002 (Rollo at 174) and Resolution dated
July 29, 2002 (Rollo at 180).
2. Penned by Justice Conchita Carpio-Morales (now a member of this Court) and concurred
in by Justice Candido V. Rivera (ret.) and Justice Josefina Guevara-Salonga, Rollo at
30–41.

3. Rollo at 43–44.
4. Complaint, Annex "F", Rollo at 48, 50–51.
5. Annex "F", Rollo at 48–58.
6. Petition, Rollo at 12.
7. Rollo at 122.
8. Id. at 123–125, 2–3.
9. Id. at 40.
10. Id. at 43.
11. Petition, id. at 23.
12. Id. at 2.

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 13. "Article 1547. In a contract of sale, unless a contrary intention appears, there is:

(1) An implied warranty on the part of the seller that he has the right to sell the
thing at the time when the ownership is to pass, and that the buyer shall from that time
have and enjoy the legal and peaceful possession of the thing;
(2) An implied warranty that the thing shall be free from any hidden faults or
defects, or any charge or encumbrance not declared or known to the buyer.
This article shall not, however, be held to render liable a sheriff, auctioneer,
mortgagee, pledgee, or other person professing to sell by virtue of authority in fact or
law, for the sale of a thing in which a third person has a legal or equitable interest."
14. "Article 1561. The vendor shall be responsible for warranty against the hidden defects
which the thing sold may have, should they render it unfit for the use for which it is
intended, or should they diminish its fitness for such use to such an extent that, had the
vendee been aware thereof, he would not have acquired it or would have given a lower
price for it; but said vendor shall not be answerable for patent defects or those which
may be visible, or for those which are not visible if the vendee is an expert who, by
reason of his trade or profession, should have known them."
15. "Article 1566. The vendor is responsible to the vendee for any hidden faults or defects
in the thing sold, even though he was not aware thereof .
This provision shall not apply if the contrary has been stipulated, and the vendor was
not aware of the hidden faults or defects in the thing sold."
16. Knecht vs. Court of Appeals, No. L-65114, February 23, 1988, 158 SCRA 80.
17. Rollo at 39.
18. Velarde vs. Court of Appeals, G.R. No. 108346, July 11, 2001, 361 SCRA 56.
19. Id. at 39–40.
20. Art. 2232, New Civil Code.
21. Estanislao, Jr. vs. Court of Appeals, G.R. No. 143687, July 31, 2001, 362 SCRA 229.
22. Sanitary Steam Laundry, Inc. vs. Court of Appeals, G.R. No. 119092, December 10,
1998, 300 SCRA 20; Salao vs. Court of Appeals, G.R. No. 107725, January 22, 1998, 284
SCRA 493.

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