Oftentimes lower prices of properties sold in an “as is, where is” basis attract buyers. Unfortunately, after acquisition, some issues start may arise such as hidden property defects, and even an undisclosed potential legal issue. What if the property sold is encumbered with a legal dispute or liability to which you are held liable after the sale? Can you recover from the seller? This question has been answered by the Supreme Court in the case of National Development Company versus Madrigal Wan Hai Lines Corporation (G.R. No. 148332, September 30, 2003).

On March 1, 1993, Petitioner National Development Company (NDC), a state-owned enterprise is engaged in investment to certain industries, privatized its subsidiary, the National Shipping Corporation of the Philippines (NSCP) and sold its 100% stock ownership and its 3 ocean-going vessels to Respondent Madrigal Wan Hai Line Corporation (MWHLC), a domestic private corporation for US$18.5.

Almost over a year after the sale, or on September 22, 1994, suddenly, MWHLC was surprised to receive a Notice of Final Assessment from the US Department of Treasury Internal Revenue Service for deficiency taxes on gross transportation income prior to the sale, derived from US sources from 1990 to 1992.

Quite worried, NSCP, through MWHLC assumed and paid a huge amount of US$671,653.00, taxes incurred by prior to its NSCP take-over. Additionally, MWHLC had to pay US$16533.10 penalties on account of NDC’s delay in payment.

Aggrieved, MWHLC demanded reimbursement from NDC for the amount it paid to US IRC but the latter refused claiming that the sale was made in an “AS IS, WHERE IS” basis. In turn, MWHLC filed a complaint for reimbursement with damages before the Regional Trian Court Branch 62 in Makati City. After trial on merits, the RTC ruled in favor of MWHLC on the ground that even before the sale, NDC already knew about the US IRS tax liabilities but it never informed MWHLC about it. On appeal, the Court of Appeals affirmed trial court’s decision.

The issue that was brought to the Supreme Court is whether a buyer can recover liabilities it assumed incurred prior to the sale in an “as is, where is” basis.

The court ruled in the affirmative.

When seller deliberately withheld an information as to a potential liability attaching to the property he sells, he is considered to be in bad faith.

The Supreme Court held that there is no dispute that NDC was aware of its tax liabilities considering its numerous communications with the agents of the US IRS prior to the sale of NSCP to MWHLC but failed to ‘convey’ such information despite inquiries. This is an obvious indication of bad faith on the part of NDC, the seller.

Importantly, the Negotiated Sale Guidelines likewise provides that the seller, NDC warranted its “ownership of the object of sale and against any liens or encumbrances”. Since the tax liability is a potential lien on the seller’s vessel, the failure to make the necessary disclosure if a beach of its warranty, and therefore, MWHLC can be reimbursed from what it paid to US IRS.

What is the effect of “as is, where is” in a contract of sale? Does it relieve a seller of a liability that attached to the properties sold prior to the sale?

In evading its liability, the seller, NDC contended that by accepting the terms of the sale on an “as is, where is” basis, the buyer, MWHLC, had accepted the arrangement. Under the principle of caveat emptor, or buyer’s beware, MWHLC assumed the risks and should have apprised itself of the financial status and liabilities of the NSCP and its marine vessels.

First, the Supreme Court held that the contract of sale is a contract of adhesion, such that one party (NDC) imposes upon MWHLC a ready-made form of contract, which the latter Is free to accept or reject entirely, but which the latter can modify. Hence, such inequality of bargaining positions and the resulting impairment of the other party’s freedom to contract justified the exercise of justice and equity.

Interpreting the phrase "as is, where is" sale, it pertains solely to the physical condition of the thing sold, not to its legal situation. In this case, the US tax liabilities constitute a potential lien which applies to NSCP’s legal situation, not to its physical aspect. Thus, MWHLC, as a buyer, has no obligation to shoulder the same.