Breaking a warranty

This is a case of assignment of credit. It is an agreement in which a creditor or owner of a credit (assignor) transfers his credit and accessory rights to another (assignee) who acquires the power to enforce it to the same extent as the creditor could enforce it against the debtor even without the consent of the latter. The assignment of credit is in the nature of a sale of personal property and may extinguish the obligation of the assignor to the assignee. But to extinguish said obligation, the assignor must comply with certain warranties. This is illustrated in this case of Luis, a building contractor, and KJS, a supplier of steel scaffoldings.

Luis purchased steel scaffoldings from KJS worth P540,425.80. After making the down-payment of P150,000.00 and paying the first two monthly installments, Luis was unable to settle his obligations to KJS anymore due to business difficulties. But he offered to pay KJS with his receivables from JR Corporation (JRC) whose residential house he was constructing and who supposedly still owed him P335,462.14. KJS accepted the offer.

So on October 11, 1990, Luis and KJS executed a deed of assignment whereby Luis assigned to KJS his abovementioned receivables from JRC. Pursuant to the deed, Luis granted KJS, its successors and assigns full power and authority to demand, collect, receive, compound, compromise and release the receivables or any part thereof in his name and stead. Luis also agreed and stipulated that the said debt of JRC to him is justly owing and due and he has not done or cause to be done anything to diminish or discharge said debt. Luis further agreed to do all other acts and deeds as shall reasonably be necessary to effectually enable KJS to recover whatever collectibles he has from JRC.

However, when KJS tried to collect said credit from JRC, the latter refused to honor the deed of assignment because it claimed that Luis was also indebted to it.

In view of this unfortunate development, KJS sued Luis after the latter refused to pay his obligations to it despite demands. According to Luis his obligations to KJS were already extinguished with the execution of the deed of assignment of his collectibles from JRC.

Was Luis correct?

No.

As in any contract of sale, the vendor or assignor, like Luis, is bound by certain warranties, particularly the existence and legality of the credit (or collectibles) at the time of the sale or assignment (Art. 1628, Civil Code). When indebted to it, KJS was telling Luis that the credit he assigned was no longer existing and that therefore it was asserting its claim to Luis’ warranty under the deed of assignment. Therefore, it behooved Luis to make good his warranty by paying his obligation.

Furthermore, Luis also breached his obligation under the deed of assignment requiring him to execute and do all further acts and deeds as shall be reasonably necessary to effectually enable KJS to recover whatever collectibles he had against JRC. Indeed, by warranting the existence of the credit, Luis is deemed to have ensured the performance thereof in case the same is later found to be non-existent. He should be held liable to pay KJS the sum of P335,462.14 with legal interest of six percent per annum from the filing of the action until fully paid. Upon the finality of the decision, the rate of legal interest shall be 12 percent per annum inasmuch as the obligation shall thereafter become equivalent to forbearance of credit (Lo vs. KJS ECO – Formwork System Phils. Inc. G.R. 149420, October 8, 2003).

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