Short answer. If you acted in good faith, you are liable to repay the sale price and the expenses of the transaction. If you acted in bad faith — knowing the credit did not exist — you are liable for all expenses and all damages the buyer suffered.
What the law says
The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale, unless it should have been sold as doubtful
Civil Code, Article 1628 — Assignor's Warranty (Existence, Not Solvency). Read the full provision →
The warranty every credit seller gives
When you sell a credit, you make an implied warranty to the buyer under Article 1628 of the Civil Code: you represent that the credit exists and is legally valid at the time of the sale. This warranty holds even if you did not say so expressly. The exception is if the credit was sold as doubtful — that is, you and the buyer understood it was uncertain or contested. In that case, the buyer assumed the risk. But if you represented the credit as a valid receivable and it turns out it never existed in law, you are in breach of the warranty.
What you owe if you were in good faith
A good-faith vendor — one who genuinely believed the credit was valid — still cannot walk away without liability. You owe the buyer the price received and the expenses of the transaction, which include the costs of the contract itself and other legitimate payments made by reason of the sale. You are not liable beyond those amounts, and you are generally not responsible for the debtor's insolvency (unless that was expressly stipulated or the insolvency was already a matter of common knowledge at the time of sale). The good-faith rule is designed to compensate the buyer without punishing an honest mistake.
The sharply higher exposure if you were in bad faith
If you knew the credit did not legally exist when you sold it, you are a vendor in bad faith. The Code's response to this is unsparing: the vendor in bad faith is always answerable for the payment of all expenses and for damages. There is no cap at the sale price. The buyer may recover every expense he incurred — in the transaction and in attempting to enforce the nonexistent credit — plus full compensatory damages for the loss. Bad faith transforms a contract warranty claim into a much broader liability.
Practical considerations
If the credit you sold turns out to be legally invalid, the first thing to examine is what you knew at the time. Did you review the basis for the credit before selling it? Was there any documentation establishing that the debt was owed? If you had reasonable grounds to believe the credit existed, your exposure is limited to refunding the price and transaction expenses. If it comes out that you were aware of facts that showed the credit was invalid or already extinguished — yet you proceeded with the sale — your exposure is fundamentally different and significantly larger. The facts will be decisive.
Cases citing this provision
These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.
- Fort Bonifacio Development Corporation vs. Manuel M. Domingo, G.R. No. 218341, December 7, 2022 — read the decision on LawPhil →
- Luis Juan L. Virata and UEM-Mara Philippines Corporation vs. Alejandro Ng Wee Westmont Investment Corp., et al./Westmont Investment, Corporation vs. Alejandro Ng Wee/Manuel Estrella vs. Alejandro Ng Wee/Simeon Cua, et al. vs. Alejandro Ng Wee/Anthony T. Reyes vs. Alejandro Ng Wee, et al, G.R. No. 220926 / G.R. No. 221058 / G.R. No. 221109 / G.R. No. 221135 / G.R. No. 221218, July 5, 2017 — read the decision on LawPhil →
- Fort Bonifacio Development Corporation vs Valentin Fong, G.R. No. 209370, March 25, 2015 — read the decision on LawPhil →
- Sonny Lo vs. KJS ECO-Formwork System Phil., Inc, G.R. No. 149420, October 8, 2003 — read the decision on LawPhil →