Case Summary (G.R. No. 225438)
Background of the Sales and Purchase Agreement
On October 16, 2007, CONFED signified its intent to purchase urea fertilizer from VHB Biopro. VHB Biopro’s willingness to supply was confirmed on October 29, 2007. The parties executed a Sales and Purchase Agreement on December 11, 2007.
Key Contractual Terms
– VHB Biopro to deliver 250,000 bags of urea agricultural grade fertilizer ex-pier at Bredco Port, Bacolod City.
– VHB to procure a P5,000,000 performance bond through PGAI within seven days of signing.
– CONFED to open an irrevocable transferrable domestic letter of credit (LC) within ten days after accepting the bond.
– Payment: 50% of shipment value upon presentation of specified documents; balance of 50% upon completion of delivery and final acceptance.
Performance Bond and Letter of Credit Procured
On December 26, 2007, VHB, through Prado, obtained the P5 million performance bond from PGAI, secured by a real estate mortgage. On January 14, 2008, CONFED opened LC No. BCD2008-01D for ₱177.5 million with Land Bank of the Philippines.
Breach and Claim on the Performance Bond
VHB Biopro failed to deliver the agreed fertilizer. CONFED, through its chairman, demanded bond payment. PGAI promptly paid CONFED ₱5 million, as evidenced by a release and quitclaim and official receipt dated April 2, 2008.
RTC Proceedings and Temporary Restraining Order
On March 17, 2008, VHB and Prado filed a complaint with TRO application before the Regional Trial Court (RTC), seeking nullification of the Sales and Purchase Agreement for alleged ambiguity and an injunction against PGAI’s bond foreclosure. The RTC granted a TRO on April 10, 2008, later dissolved on August 1, 2012.
RTC Decision
On March 11, 2014, the RTC ruled in favor of VHB Biopro and Prado, ordering CONFED to return ₱5 million to PGAI and PGAI to release the mortgaged security to Prado. The RTC dismissed all counterclaims.
Court of Appeals’ Reversal
On January 19, 2016, the Court of Appeals (CA) reversed the RTC: it dismissed the plaintiffs’ complaint for lack of merit, set aside orders for return of bond proceeds and security, granted CONFED’s claim for ₱30 million lost profits, and denied moral damages and attorney’s fees. PGAI’s counterclaims were also dismissed.
Issues Before the Supreme Court
Petitioners argued that the CA erred as a matter of law in reversing the RTC and, even assuming default, that awarding compensatory damages was unjust.
Contract Interpretation Principles
Under Rule 45, the Supreme Court’s review is limited to legal questions, except when factual findings of RTC and CA conflict. Clear and unambiguous contractual stipulations control; ambiguity is resolved by intrinsic evidence.
Clarity of the Sales and Purchase Agreement
The Court found the Agreement’s provisions on bond procurement, LC opening, delivery within 45 days post-LC, documentation, and payment terms unequivocal. No extrinsic assurances altered these obligations.
Default and Justification for Bond Claim
VHB Biopro failed to perform delivery despite receipt of the LC. In reciprocal contracts, performance obligations are simultaneous; VHB’s failure justified CONFED’s bond claim.
Nature and Function of the Letter of Credit
A letter of credit substitutes the issuing bank’s promise to pay for the buyer’s, assuring the seller-beneficiary payment upon strict compliance with documentary terms. Here, the LC assured VHB Biopro payment, yet no delivery was made.
Performance Bond as Surety
The performance bond functioned as a surety under Civil Code Article 2047. VHB’s default triggered PGAI’s liability, entitling it to pay and foreclose the mortgaged security and to reimbursement under the indemnity agreement.
Compensatory Dama
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Procedural History
- Petition for Review on Certiorari under Rule 45 assails:
- RTC Decision dated March 11, 2014 (Branch 133, RTC Makati, Civil Case No. 08-222)
- CA Decision dated January 19, 2016 and Resolution dated June 28, 2016 (CA-G.R. CV No. 102712)
- Petitioners raised two principal grounds:
- CA’s reversal of RTC was erroneous as a matter of law
- Grant of compensatory damages by CA was unjust even if default existed
Facts
- October 16, 2007: CONFED, through Jison, issues Letter of Intent to VHB Biopro for purchase of 250,000 bags of urea fertilizer
- October 29, 2007: Attorney-in-fact Prado accepts engagement to supply
- December 11, 2007: Parties execute Sales and Purchase Agreement (SPA)
- December 26, 2007: VHB Biopro secures P5,000,000 Performance Bond from PGAI, secured by real estate mortgage
- January 14, 2008: CONFED opens Irrevocable Transferrable Documentary Credit No. BCD2008-01D (LC) for ₱177,500,000
- VHB Biopro fails to deliver fertilizer as stipulated
- CONFED demands payment under bond; PGAI pays ₱5,000,000 on April 2, 2008
- March 17, 2008: VHB Biopro and Prado file complaint with TRO against PGAI and CONFED
- April 10, 2008: RTC issues TRO against PGAI; injunction dissolved August 1, 2012
Sales and Purchase Agreement Terms
- Article 05: Delivery of 250,000 bags at Bredco Port within 45 days after LC opening
- Article 09: Payment—50% upon submission of documents, 50% upon completion of delivery and final acceptance
- Article 11: Performance Bond of ₱5,000,000 to be submitted within 7 days of SPA; LC to be opened within 10 days of bond acceptance
- Article 12: Required documents—bank draft, commercial invoice, delivery receipt, buyer’s acceptance certificate
Contentions of Parties
- Petitioners (VHB Biopro, Prado):
- SPA ambiguous regarding acceptance and payment periods
- Contract void for lack of mutuality
- Seek nullification of SPA and injunction against PGAI’s bond foreclosure
- CONFED and Jison:
- Deny any verbal assurance beyond SPA terms
- SPA unambiguous; acceptance certificate follows inspection under Article 07
- Right to claim bond upon VHB Biopro’s failure to deliver on Ma