Hidden promises

When I was still in law school, I bought a green leather travel bag from a now very successful franchise brand. I used the bag for a teambuilding activity of the firm. After that weekend, I noticed the pretty green leather began to peel off from the bag.

I brought the deteriorated bag to a large store of that brand’s retail chain, and asked for the manager. I said I paid P900 for the bag (quite a fortune for me in 1994), and had I known that the leather would peel off after one use, I would not have bought it. I did not have my invoice, but the bag was distinctly their product. Without the invoice, I could not ask for a refund but the manager was kind enough to give me brand-new stock. I was happy with the exchange.

More recently, a car I bought from a local dealer suffered a problem with the transmission a little over a year after I purchased it. The mileage was still low so I told the dealer that had I known that I would have to spend a substantial sum for a transmission spare part before the car reaches 25,000 kilometers, I would not have bought it. The dealer let me off the hook on the basis of maintaining goodwill. Actually it was indeed out of goodwill, because I was outside the warranty period of one year.

In both cases, the principle I used, with effective results was “warranty against hidden defects”. It is a warranty that the seller makes even without an express warranty (such as those contained in warranty cards and warranty contracts).

In our Civil Code, because of implied warranty, every seller promises that the item sold to you is free from defects that could prevent you from using it the way it is intended to be used. The seller also says that it is being sold to you at that price because it has no defects.

Note that the legal principle “buyer beware” is still sound and existing. What you see is what you get, so don’t complain. But warranty against hidden defects begins where whatever is obvious ends. It is simply based on the principle of fairness. The Civil Code, as well as the Consumer Act, mandates the seller of products with hidden defects to exchange the item, repair it or refund the cash paid.

The Civil Code allows you to bring an action for hidden defects of the goods within six months from purchase. The Consumer Act further improved such period for consumer goods to be from 60 days to one year.

The popularized rule of thumb in retail stores of seven days’ grace period for return and exchange should be taken as a goodwill gesture. Stores sometimes allow exchange just because the buyer changes his mind. This seven-day period, however, does not overcome rules on express and implied warranties, such as warranty against hidden defect.

An interesting question is, if you have already used the product, and therefore it is already depreciated, can you still return it and ask for a refund?

This was answered in a case decided by the Supreme Court in Supercars vs Flores (December 10, 2004). A day after buying the vehicle, the buyer drove the vehicle out of town for a family trip. The vehicle suffered engine trouble when the fan belt snapped and the brakes hardened. The vehicle was repaired but suffered the same problems when the buyer drove it. A second repair was done but the buyer experienced the same problems shortly after getting the vehicle. The court finally ordered the dealer to refund the buyer the actual costs, including cost of insurance on the vehicle, for breach of warranty against hidden defects. In this case, the product was already used and depreciated, but that did not hamper the ability to return and get a refund. For good reason: how else can you discover a hidden defect without actually using the product?

The issue of hidden defects becomes even more complex in the corporate world, such as when one is buying a company. Because of the expertise of the buyer, and his experience in business, he is expected to make a due diligence (make extensive examination) of the company he is buying. Only when the defect is not caught after due diligence can he invoke on the warranty against hidden defect.

Back to consumer goods. Remember that retailers cannot say that they do not know of any defects that might have been caused by the manufacturer. It is precisely the retailers’ lack of knowledge that buyers are protected from through the implied warranty. In fact, if the retailer knows of the defect, and yet makes the sale without informing the buyer of such defect, the retailer may have committed the criminal act of estafa.

Since it is Sunday, may I pose a parting question on the light side? Can wives also return their husbands to their mothers for hidden defects? Or vice versa? I’ll tell you what, that’s an issue we can discuss on another Sunday.

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Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He also chairs the tax committee of the Management Association of the Philippines (MAP). Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.