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 financed 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 financed 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 first 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 fixed. 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 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 file with the Office 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 filed with the same Office 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 filed 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.

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 filing of this complaint on October 30, 1989 until fully paid;
   
   
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, modified its Decision by absolving RCBC from any liability and dismissing the complaint against it, thus:

x x x

"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 Office 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 affirmed the RTC Decision with modification in the sense that the complaint against Marquez and Catley was dismissed, thus:

x x x

"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 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 filed a motion for reconsideration but denied in a Resolution dated April 26, 2001.^[10]

Hence, the instant petition.

Petitioner contends that respondent has "no right to rescind the contract of sale"^[11] 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."^[12] 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 filed 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,^[13] 1561,^[14] and 1566^[15] 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.^[16]

The findings 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 justified 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.

x x x

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 x x x 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]).

x x x"^[17]

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:

x x x

(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.

x x x." (Underscoring 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 benefits received.^[18] 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.

x x x 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."^[19]

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 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.^[20] 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.^[21] Moreover, the trial court did not give any justification 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.^[22]

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.

SO ORDERED.

Panganiban, (Chairman), and Garcia, JJ., concur.
Corona, J., on leave.
Carpio-Morales, J., No part. Ponente of assailed decision.

---

^[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.

^[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.