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FIRST UNITED CONSTRUCTORS CORPORATION v. BAYANIHAN AUTOMOTIVE CORPORATION

FACTS:

Petitioner First United Constructors Corporation (FUCC) and petitioner Blue Star Construction Corporation (Blue Star) were associate construction firms who ordered six units of dump trucks from the respondent, a domestic corporation engaged in the business of importing and reconditioning used Japan-made trucks. They established a good business relationship, with the respondent extending service and repair work to the units purchased by the petitioners. In September 1992, FUCC ordered one unit of Hino Prime Mover and one unit of Isuzu Transit Mixer from the respondent. Upon presentment of the checks for payment, the respondent learned that FUCC had ordered the payment stopped, claiming that they were withholding payment due to the breakdown of one of the dump trucks they had earlier purchased. The respondent filed an action for collection seeking payment of the unpaid balance. The trial court rendered judgment in favor of the respondent, ordering the petitioners to pay the balance of the purchase price, with legal interest and attorney's fees, and declaring the respondent liable to pay for the repair costs incurred by the petitioners. The Court of Appeals affirmed the judgment of the trial court. The petitioners appealed to the Supreme Court, asserting that they were justified in stopping the payment of the checks due to the respondent's breach of warranty, and they should be allowed to exercise their right of recoupment or compensation.

ISSUES:

  1. Whether the petitioners validly exercised the right of recoupment through the withholding of payment of the unpaid balance of the purchase price of the Hino Prime Mover and the Isuzu Transit Mixer.

  2. Whether the costs of the repairs and spare parts for the second dump truck delivered to FUCC could be offset for the petitioners' obligations to the respondent.

  3. Whether petitioners could avail themselves of compensation.

RULING:

  1. The petitioners could not validly resort to recoupment against the respondent.

    • Recoupment must arise out of the contract or transaction upon which the plaintiff's claim is founded. The claim for repair expenses and spare parts of the dump truck does not arise from the same transaction as the purchase of the prime mover and the transit mixer. Therefore, the petitioners cannot set up their claim for repair expenses against their remaining balance on the price of the prime mover and the transit mixer.

  3. Legal compensation was permissible.

    • Legal compensation is allowed when the requirements set forth in Article 1278 and Article 1279 of the Civil Code are present. As long as both parties have liquidated and demandable claims, the costs of the repairs and spare parts for the second dump truck could be offset for the petitioners' obligations to the respondent.

  5. The Court ruled that petitioners could avail themselves of compensation. The lower courts erred in ruling that petitioners' claims against respondent were not liquidated and demandable. The RTC already found that petitioners were entitled to the amount of P71,350.00 stated in their counterclaim, and the CA concurred in the finding. With the expenses for the repair of the dump truck already established and determined by the lower courts, legal compensation could take place because all the requirements for compensation under Article 1279 of the Civil Code were present. Hence, the amount of P71,350.00 should be set off against petitioners' unpaid obligation of P735,000.00, leaving a balance of P663,650.00, the amount petitioners still owed to respondent.

PRINCIPLES:

  • Compensation takes place when two persons are creditors and debtors of each other.

  • For compensation to be proper, certain requisites must be present, including that the debts be liquidated and demandable.

  • A debt is liquidated when its existence and amount are determined.

  • An unliquidated claim set up as a counterclaim can be set off against the plaintiff's claim once it is liquidated by judgment.

  • Article 1290 of the Civil Code provides that when all the requisites for compensation are present, it takes effect by operation of law and extinguishes both debts to the concurrent amount.

  • The legal interest rate in the absence of any stipulation in writing is 6% per annum.