1) Overview and policy

In Philippine civil law, the “Recto Law” refers to Articles 1484 and 1485 of the Civil Code, which regulate sales of personal property on installment—most commonly motor vehicles, appliances, gadgets, furniture, and similar movables sold through installment plans. The law is strongly protective of buyers. Its core policy is to prevent double recovery by sellers (e.g., taking back the item and still collecting the full price) and to require sellers to choose among limited, mutually exclusive remedies once the buyer defaults.

Recto Law is not a separate statute; it is a set of Civil Code provisions. Despite that, it is treated as a major buyer-protection doctrine in installment sales litigation, collections, and repossessions.

2) Where the Recto Law applies

2.1 Covered transactions

Recto Law applies when all of these elements are present:

Sale of personal property (movable or “chattel”)
Price payable in installments (not a single lump sum payable at once)
Buyer defaults (fails to pay one or more installments as due)

Common examples:

Car or motorcycle purchased on installments
Appliances purchased via installment plan
Equipment (e.g., office machines) sold on installments
Installment “hire-purchase” arrangements that are in substance a sale on installments

2.2 Not covered (or treated differently)

Real property sales (land, condominium units): these are governed by other rules (e.g., Maceda Law for certain residential real estate installment sales), not Recto Law.
Pure loans (no sale of personal property): Recto Law is about sales, not borrowing.
Services paid by installments: generally not within Recto Law’s scope.
Single-payment sales with later restructuring: restructuring may be relevant, but Recto analysis depends on whether the obligation is truly “payable in installments” as part of the sale arrangement.

3) The seller’s exclusive remedies under Article 1484

When a buyer defaults in an installment sale of personal property, the seller has only three remedies, and the seller must generally elect one. These are often called the “three remedies”:

Remedy 1: Exact fulfillment (collection/specific performance)

The seller may demand payment of the overdue installment(s) (and, depending on the contract, other due amounts), essentially insisting on continued performance by the buyer.

Key points:

This treats the contract as continuing.
The seller cannot later “have it both ways” in a manner that violates the ban on double recovery.
If the seller sues for collection and obtains judgment, the seller must still respect Recto’s limitations, especially if the seller later tries to repossess.

Remedy 2: Cancel the sale

The seller may cancel/rescind the sale if the buyer’s failure to pay is substantial enough under general contract rules on rescission (typically requiring material breach).

Key points:

“Cancellation” here is the seller’s choice to terminate the sale.
In practice, sellers often rely on cancellation clauses, but cancellation must still be consistent with Civil Code standards and due process-type fairness under contract law.
Cancellation interacts heavily with repossession: sellers sometimes repossess as an incident of cancellation, but their ability to still collect after cancellation is limited by Recto principles.

Remedy 3: Foreclose the chattel mortgage (if one exists)

If the installment sale is secured by a chattel mortgage over the item (very common in vehicle installment purchases), the seller may foreclose that mortgage.

This is the most important Recto scenario, because it triggers the harshest buyer protection:

If the seller forecloses the chattel mortgage, the seller has no further action against the buyer to recover any unpaid balance of the price.

That means:

After foreclosure, the seller cannot sue for deficiency (the remaining balance if the foreclosure sale proceeds are less than the debt).
The seller must absorb the loss if the sale proceeds are insufficient.

4) The “no double recovery” rule and election of remedies

Recto Law forces a seller to choose among inconsistent remedies.

4.1 Why remedies are inconsistent

Specific performance affirms the sale and seeks to enforce payment.
Cancellation terminates the sale.
Foreclosure enforces the security interest and typically results in the seller recovering the property and selling it.

Allowing sellers to switch remedies freely after pursuing one can enable abuse, such as:

repossessing the item,
selling it,
and still suing the buyer for the remaining balance.

Recto Law aims to prevent that outcome.

4.2 Practical effect

Once a seller’s acts clearly show the choice of a remedy—especially foreclosure—Recto Law restricts further recovery attempts.

5) Article 1485: applying Recto Law to leases with option to buy (disguised installment sales)

Article 1485 extends the protections of Article 1484 to certain arrangements that look like leases but are effectively installment sales, such as:

“Lease” of a vehicle/appliance with an option to buy where payments are in substance installments toward ownership
“Rent-to-own” structures that function like a sale on installments

If the arrangement is essentially an installment sale, the seller/lessor cannot evade Recto Law by labeling it a lease.

6) Repossession: what sellers can and can’t do

6.1 Repossession depends on the remedy chosen

Repossession is not a standalone remedy in Recto Law; it usually occurs as part of:

cancellation (seller takes back the item as the sale is terminated), or
foreclosure (seller enforces the chattel mortgage, often leading to taking possession and then auction/sale)

The legal consequences differ:

If the seller’s repossession is tied to foreclosure, the bar on deficiency generally applies.
If repossession is tied to cancellation, the seller must still avoid double recovery and must account for fairness, contractual stipulations, and general rules on rescission and obligations.

6.2 Deficiency after repossession

A common dispute is whether a seller can repossess the item and still collect a “deficiency.”

If the seller forecloses the chattel mortgage: deficiency collection is barred.
If there is no foreclosure but seller cancels: the seller’s ability to claim additional amounts is constrained by Recto’s anti-double recovery policy and the nature of rescission/cancellation. Courts examine substance over form, and sellers cannot structure repossession to mimic foreclosure while still suing for the balance.

6.3 “Voluntary surrender” by the buyer

Buyers sometimes “voluntarily surrender” the item due to default. Whether this is treated like foreclosure or cancellation depends on the contract and the seller’s subsequent actions.

Buyer-protection principle: a seller should not be allowed to treat surrender as repossession-for-resale (functionally foreclosure) and then still sue for deficiency as if nothing happened. Courts tend to look at:

Was the surrender intended as settlement?
Did the seller dispose of the item and apply proceeds?
Did the seller treat the mortgage as foreclosed or act in a manner equivalent to foreclosure?

7) How the law treats installment sales with chattel mortgage (most vehicle cases)

7.1 Chattel mortgage basics

A chattel mortgage is a security arrangement where the buyer (mortgagor) gives the seller or financing entity (mortgagee) a security interest over the movable sold, to secure payment.

7.2 Foreclosure and the “no deficiency” bar

If foreclosure occurs, the seller generally cannot collect deficiency. This is one of the strongest buyer protections in Philippine obligations and contracts.

7.3 Why this matters in practice

Vehicle repossessions often lead to resale at prices below the unpaid balance. Recto Law shifts that market risk largely to the seller/financier once foreclosure is chosen.

8) What counts as “installments” and “default”

8.1 Installments

Installments are multiple partial payments due at agreed intervals. The essence is that the price is not meant to be paid all at once.

8.2 Default

Default occurs upon nonpayment when due, subject to any:

grace periods,
acceleration clauses,
requirements of demand (depending on contract and applicable rules)

Even if a contract provides “automatic default,” enforceability can still be measured against general rules on obligations, fairness, and the seller’s conduct.

9) Contract clauses commonly seen—and how Recto Law limits them

Recto Law is mandatory in effect for covered transactions. Contract stipulations inconsistent with it are generally unenforceable to the extent of the inconsistency.

9.1 Acceleration clauses

Clauses that make the entire remaining balance due upon one missed payment are common. They can be enforceable, but the seller must still remain within Recto’s remedy framework. An acceleration clause does not authorize double recovery.

9.2 Liquidated damages, penalties, and attorney’s fees

Contracts often add:

penalty charges,
interest,
liquidated damages,
attorney’s fees

These may be enforceable if not unconscionable, but they cannot be used to circumvent Recto Law’s limitations—particularly the deficiency bar after foreclosure and the prohibition on double recovery.

9.3 “No refund” / forfeiture provisions

Installment contracts may provide forfeiture of payments upon cancellation. Courts evaluate forfeiture under:

Recto policy,
general rules on rescission,
unjust enrichment considerations especially when the seller both keeps substantial payments and retakes the item.

10) Relationship with other Philippine laws and doctrines

10.1 Consumer protection and fair dealing

Recto Law is civil-law protection that operates alongside broader consumer-protection concepts. While Recto is not a general consumer statute, it often complements the policy against oppressive contract outcomes.

10.2 The difference from Maceda Law

Maceda Law protects buyers of certain real estate on installment; Recto Law protects buyers of personal property on installment. They address similar abuses in different markets.

10.3 Unjust enrichment and equity

Even when parties argue purely on contract language, courts may apply equitable principles to prevent unjust enrichment—particularly when the seller repossesses and sells the item but still seeks further payment.

11) Typical disputes and how Recto Law resolves them

Dispute A: Seller repossessed the vehicle and still sued for the balance

If repossession occurred as part of foreclosure, the deficiency suit should be barred. If the seller tries to characterize the repossession as something else, courts look at the substance and the seller’s actions.

Dispute B: Buyer surrendered the item; seller sold it; seller now demands deficiency

If the surrender and subsequent sale functionally resemble foreclosure or its equivalent, Recto policy against deficiency after such recovery becomes central.

Dispute C: Seller cancelled and kept all prior payments plus repossessed

Courts assess whether the result is effectively double recovery or unconscionable, especially when the buyer’s prior payments are substantial relative to the item’s use and depreciation.

Dispute D: Seller sues for specific performance, then later forecloses

The key question is whether the seller’s conduct constitutes an election of remedies and whether a later switch produces prohibited double recovery. Foreclosure triggers the strongest restriction (no deficiency), and sellers typically cannot treat remedies as cumulative if it defeats Recto’s policy.

12) Buyer-focused practical guide

12.1 Know what the seller can legally do

Upon default in an installment sale of personal property, the seller must generally choose among:

collect (exact fulfillment),
cancel,
foreclose (if there is a chattel mortgage)

12.2 Red flags for buyers

“Repossession + deficiency” demands without clear legal basis
Threats to take the item and still require full payment regardless
Paperwork that labels the deal a “lease” but behaves like a sale on installments
Unclear accounting of how proceeds from resale were applied

12.3 Documents buyers should keep

Official receipts and statements of account
Contract to sell / deed of sale / installment agreement
Chattel mortgage documents (if any)
Demand letters, repossession notices, inventory of seized items
Records of surrender or turnover (if any), including any agreement on settlement

13) Seller/financier compliance guide (why it matters)

Even though the law is buyer-protective, compliance reduces litigation risk:

Choose the remedy deliberately; document the election.
If foreclosing, follow proper foreclosure steps and accept that deficiency cannot be collected.
Avoid contract practices that resemble double recovery.
Provide transparent accounting where property is repossessed and disposed.

14) Key takeaways

Recto Law governs installment sales of personal property and protects buyers by limiting seller remedies.
The seller has three exclusive remedies: exact fulfillment, cancellation, or foreclosure of chattel mortgage (if any).
Foreclosure bars any deficiency action—the seller cannot pursue the buyer for the remaining unpaid balance after foreclosure.
Article 1485 prevents evasion by extending the same rules to lease-with-option-to-buy arrangements that are in substance installment sales.
Courts look at substance over form and apply Recto’s anti-double recovery policy to prevent oppressive outcomes.