1) Overview: What “Recto Law” is and why it matters

“Recto Law” is the common name for Articles 1484 to 1486 of the Civil Code of the Philippines. It governs sales of personal property on installment—the classic “hulugan” setup—where the buyer receives the item now and pays the price over time.

Its core purpose is to protect buyers against oppressive remedies and to stop sellers from collecting more than what fairness allows after a buyer defaults. It does this by limiting what remedies a seller can pursue once the buyer fails to pay installments.

This matters most in everyday transactions involving personal property like motor vehicles, appliances, gadgets, furniture, machinery, and equipment—especially when financed through dealers, in-house financing, or finance companies.

2) Scope and coverage: When Recto Law applies

Recto Law applies when all these are present:

A. A sale

There must be a contract of sale (ownership is to be transferred), not merely a lease.

B. Personal property

It covers movable property (e.g., car, motorcycle, phone, TV, generator, industrial equipment). It does not apply to real property (land, buildings). Real estate installment sales are governed by other rules and special laws.

C. Payable in installments

This is the key trigger. Payment is split into two or more installments. If payment is not “installment,” the Recto Law limitations generally won’t apply.

Installment vs. straight credit

Installment sale: Several scheduled partial payments (monthly, quarterly, etc.).
Straight credit / lump-sum deferred payment: One payment due at a later date (even if deferred). That is typically not covered by Recto Law’s installment-remedy limitations.

D. Common structures covered

Conditional sale (ownership reserved until full payment)
Sale on installment with promissory notes
Chattel mortgage-backed installment sale (very common with vehicles and equipment)

3) The three remedies of the seller—and the “one remedy only” rule

When the buyer defaults in an installment sale of personal property, the seller has three remedies under Article 1484. The seller may choose only one, and choosing one bars the others in key ways.

Remedy 1: Exact fulfillment (collection of unpaid installments)

The seller may sue for the buyer to pay the overdue installments (and possibly accelerate the balance if the contract allows and the acceleration is enforceable).

Effect: The seller keeps the sale alive and seeks payment.

Remedy 2: Cancel the sale (rescission)

The seller may cancel/rescind the sale if the buyer’s failure to pay meets the contractual or legal conditions.

Effect: The parties are supposed to be restored to their pre-sale positions as far as practicable, subject to what the law and contract allow and to fairness limitations.

Remedy 3: Foreclose the chattel mortgage (if there is one)

If the sale is secured by a chattel mortgage on the item sold, the seller (or financing entity) may foreclose the mortgage.

Effect: The item is repossessed and sold through foreclosure.

4) The central buyer protection: No double recovery after foreclosure

The signature protection is in Article 1484(3):

If the seller forecloses the chattel mortgage, the seller cannot recover any deficiency from the buyer.

Meaning: No deficiency judgment after foreclosure.

Practical meaning

If a motorcycle is sold on installment secured by a chattel mortgage, and the buyer defaults:

If the seller forecloses and the foreclosure sale price does not cover the unpaid balance, the seller cannot sue the buyer for the remaining balance (“deficiency”).

This prevents a harsh scenario where the buyer:

loses the item through repossession/foreclosure, and
still gets chased for a large remaining debt.

What counts as “deficiency”

Any remaining amount the seller claims is still unpaid after the proceeds of foreclosure are applied.

Why it exists

Because in an installment sale secured by chattel mortgage, foreclosure already allows the seller to take the item back and realize value from it. Recto Law prevents a seller from using foreclosure plus deficiency collection as a “both ways” remedy that can become oppressive.

5) Election of remedies: choosing one closes doors to the others

Recto Law is often described as forcing the seller to elect among remedies.

General idea

Sue for collection → you are generally affirming the sale and seeking payment, not repossession.
Cancel the sale → you are undoing the sale, not collecting as if it remains valid.
Foreclose the chattel mortgage → you are enforcing the security; if you do, no deficiency.

How election happens

Election can happen by:

Filing the appropriate case (collection, rescission, foreclosure),
Taking clear, decisive steps consistent with a remedy (e.g., initiating foreclosure procedures),
Pursuing acts that indicate the seller’s chosen route.

Risk areas

Sellers sometimes try to:

repossess the item (as if foreclosing/cancelling),
then still sue for balance (as if exact fulfillment),
or foreclose and still collect deficiency.

Recto Law is designed to prevent these combinations when they amount to double recovery or oppressive outcomes.

6) Cancellation vs. foreclosure: not the same thing

It’s common to mix up cancellation and foreclosure because both can involve repossession.

Cancellation (rescission)

Focus: termination of the sale.
Consequence: sale is undone; seller retakes the item (or demands its return).
Recovery: depends on the terms and applicable rules, but must be consistent with the cancellation framework and fairness.

Foreclosure

Focus: enforcement of the chattel mortgage security.
Key limitation: no deficiency recovery after foreclosure.

Important: A seller cannot label an act as “cancellation” if in substance it is foreclosure of a chattel mortgage. Courts look at substance over labels.

7) Article 1485: When Recto Law applies to “leases” that are really installment sales

Article 1485 extends Recto Law protections to transactions in the form of a lease of personal property with an option to buy, when the arrangement is essentially an installment purchase.

This targets “disguised sales,” for example:

“Lease-to-own” agreements where the “rent” payments are really installment payments toward ownership, and the “option to buy” is nominal or inevitable.

Key point

If the transaction is effectively a sale on installment (even if called a lease), the seller cannot avoid Recto Law by clever drafting.

8) Article 1486: Stipulations on forfeiture and “rentals” upon cancellation

Article 1486 addresses contractual clauses that say:

“All installments paid are forfeited as rentals” if the buyer defaults and the seller cancels.

The law allows parties to stipulate certain forfeitures, but the treatment is not unlimited. Courts may examine such provisions for fairness and whether they operate as a penalty or unjust enrichment, particularly when the seller retakes the property.

In practice: The more a forfeiture clause looks like it lets the seller keep large sums and get the property back with little justification, the more it invites challenge.

9) Common scenarios and how Recto Law plays out

A. Vehicle financing with chattel mortgage

Buyer defaults.
Seller/financing company forecloses and sells the vehicle.
If proceeds are lower than the remaining loan balance: no deficiency can be collected if Article 1484(3) applies.

B. Appliance installment sale without chattel mortgage

Buyer defaults.
Seller may:
1. sue to collect unpaid installments, or
2. cancel/rescind the sale and recover the appliance (if contract permits and circumstances justify).
Since there is no chattel mortgage, foreclosure is not in play; the “no deficiency” rule specifically ties to foreclosure of the chattel mortgage.

C. “Lease-to-own” gadget plan

Contract calls payments “rent.”
Buyer pays monthly and has an “option” to own after completing payments.
If the structure is essentially installment purchase, Recto Law protections may apply via Article 1485.

10) Critical distinctions that determine outcomes

A. Personal property vs. real property

Recto Law: personal property installment sales only.

B. Installments vs. deferred lump sum

If it’s one deferred payment, Recto Law installment protections may not apply.

C. Presence of chattel mortgage

With chattel mortgage: foreclosure remedy exists, but triggers no deficiency if elected.
Without chattel mortgage: foreclosure isn’t the route; remedies are typically collection or cancellation.

D. True sale vs. disguised lease

Article 1485 can pull disguised sales back under Recto Law.

11) Down payments and installment payments: are they refundable?

Recto Law itself is chiefly about limiting seller remedies, not creating a simple “refund rule.”

When a sale is cancelled/rescinded, the question becomes:

what the contract provides,
what the law allows,
and what equity requires given the buyer’s use of the property, depreciation, and the seller’s conduct.

Practical considerations courts often weigh

Was there a clear, fair forfeiture clause?
How much has the buyer paid relative to the price?
How long did the buyer use the property?
Was repossession peaceful or coercive?
Did the seller act in a way that amounts to double recovery?

Because outcomes can vary by facts, buyers typically challenge:

unconscionable forfeitures, and
attempts to collect more than what the Recto Law allows after repossession/foreclosure.

12) Interaction with other consumer and credit rules

Recto Law operates alongside other legal frameworks that may apply depending on the case, such as:

general obligations and contracts rules (default, rescission, damages),
laws and regulations governing chattel mortgage foreclosure procedures,
consumer protection principles (fair dealing, deceptive practices, abusive collection).

Even when Recto Law limits remedies, the seller must still comply with procedural and substantive requirements under applicable laws and regulations.

13) Practical buyer protections and red flags

Buyer protections you can assert (depending on facts)

If foreclosure of chattel mortgage happened: resist deficiency collection.
If the contract is a disguised installment sale: invoke Article 1485.
If the seller’s actions amount to double recovery: challenge the chosen remedy and its consequences.
If forfeiture is oppressive: scrutinize it under Article 1486 and general fairness doctrines.

Red flags in practice

Repossession plus continued collection of the full balance.
Foreclosure followed by demand letters for “deficiency.”
Contracts labeled “lease” but structured like installment sale.
Forfeiture clauses that keep almost everything paid with minimal justification.

14) Basic checklist for analyzing a Recto Law problem

Is it personal property?
Is it a sale (or a lease that is effectively a sale)?
Is the price payable in installments?
Is there a chattel mortgage?
What remedy did the seller actually pursue (collection, cancellation, foreclosure)?
If foreclosure occurred: was a deficiency still demanded? (If yes, Recto Law issue.)
Do the contract terms on forfeiture, cancellation, and repossession operate fairly and consistently with the chosen remedy?

15) Key takeaways

Recto Law governs installment sales of personal property and limits seller remedies.
The seller may choose among (1) exact fulfillment, (2) cancellation, (3) foreclosure of chattel mortgage, but must avoid double recovery.
Foreclosure of chattel mortgage bars deficiency claims—a major buyer protection.
Disguised leases that are essentially installment sales can fall under the same protections.
Forfeiture clauses and repossession practices are scrutinized for consistency with Recto Law and fairness principles.