Case Summary (G.R. No. 171660)
Key Dates and Contractual Terms
Delivery of motor to respondents for repair: July 11, 1990 (PO Nos. 17136–17137). Down payment: July 18, 1990. Delivery date stipulated: August 29, 1990 (six weeks). Penalty clause: 0.5% of total cost per day (P987.25/day). Tests and failures: October 3–4, 1990 (first test failed), November 14–19, 1990 (second), March 13–15, 1991 (third). Motor actually delivered to petitioner: January 7, 1991. Complaint filed: October 23, 1991.
Factual Background
CCC contracted ABB (and BBC, with ABB as surviving entity) to repair a 160 KW Kiln DC Drive Motor. Repeated repair attempts allegedly failed, causing several operational interruptions and claimed production losses. CCC sued the corporations and Eriksson personally, seeking declared production and opportunity losses (P10,600,000), labor and crane rental (P26,965.78), contractual penalties (P331,716 claimed), interest, and attorney’s fees.
Contractual Clause in Dispute (Clause 7)
ABB relied on Clause 7 of its General Conditions appended to its letter of offer, which limited liability to defects within the guarantee period and expressly excluded consequential loss, expenses for repairs made without written authority, and other indirect damages. ABB asserted that CCC accepted these General Conditions by issuing the purchase orders.
Procedural History and Lower Court Rulings
RTC (Branch 101, Quezon City) rendered judgment for CCC, awarding production loss (P10,600,000), labor/crane rental (P26,965.78), and attorney’s fees (P100,000). The CA reversed and dismissed the complaint, giving effect to Clause 7 and reasoning that no implied warranty arises on repair work; thus, respondents could not be held for consequential production losses. CCC sought Supreme Court review by petition for certiorari.
Issues Presented to the Supreme Court
Primary issues: (1) whether the CA erred in applying the General Conditions (Clause 7) to exculpate respondents from liability; (2) whether the CA erred in applying doctrines of implied warranty and warranty against hidden defects to absolve respondents from contractual obligations; and (3) the proper measure of recovery, including penalties, consequential damages, attorney’s fees, and possible personal liability of Eriksson.
Standard for Incorporation of Contractual Terms
The Supreme Court held that Clause 7 is not binding on CCC because respondents failed to prove that CCC was furnished a copy of the General Conditions. A contractual term that limits liability must be shown to have been communicated and accepted; absent proof of such notice or incorporation, the limiting clause cannot be invoked against the party who never received it.
Liability under the Civil Code for Failure to Perform
The Court applied Articles 1167 and 1170 of the Civil Code: obligation unperformed must be executed at the obligor’s cost, and those guilty of negligence or delay are liable for damages. Article 2201 governs foreseeability of consequential damages in contracts and quasi-contracts. The Court concluded a repairman who fails to perform is liable for execution cost and damages that are natural and probable consequences of breach.
Application to Penalty Clause (Article 1226)
Article 1226 was held applicable: in obligations with a penal clause, the penalty substitutes indemnity for damages and interest unless otherwise stipulated. Where the penalty is demandable, it covers other damages claimed (production loss, labor, crane rental) unless the obligor refuses to pay the penalty or is guilty of fraud. The Court found CCC entitled to enforce the penalty provision at P987.25 per day for delay.
Computation and Temporal Scope of Penalties
Although testing occurred on March 13, 1991, the motor had been delivered to CCC on January 7, 1991; installation and testing were postponed at CCC’s request due to kiln repairs. Consequently, the Court computed the penalty from August 30, 1990 (start of delay) up to January 7, 1991 (delivery date) — a period of 131 days — resulting in P129,329.75 as the proper penalty award.
Denial of Additional Damages for Production Loss, Labor, and Crane Rental
The Court denied CCC’s claims for production loss and for labor/crane rental beyond the penalty award. Reasons: (1) lack of competent proof — CCC failed to present production reports covering August 1990 to March 1991 (only April–June 1990 reports were offered), so alleged production losses could not be established with reasonable certainty; (2) consequential damages require that such losses be reasonably foreseen or within the parties’ contemplation when contracting; given the repair involved a spare motor, ABB could
...continue readingCase Syllabus (G.R. No. 171660)
Nature and Procedural Posture
- Petition for Review on Certiorari under Rule 45 of the Rules of Court challenging the Court of Appeals (CA) Decision dated August 25, 2005 and Resolution dated February 16, 2006 in CA-G.R. CV No. 58551.
- Case arises from a civil action filed by Continental Cement Corporation (petitioner) against Asea Brown Boveri, Inc. (ABB), BBC Brown Boveri, Corp., and Tord B. Eriksson (respondents) for sum of money and damages in the Regional Trial Court (RTC), Quezon City, Branch 101 (Civil Case No. Q-91-10419).
- The RTC rendered judgment for petitioner; the CA reversed and dismissed the complaint; petitioner elevated the matter to the Supreme Court.
Factual Background
- In July 1990 petitioner engaged respondent corporations to repair its 160 KW Kiln DC Drive Motor under Purchase Orders (PO) Nos. 17136-17137.
- Respondent Tord B. Eriksson was alleged to have personally directed the repair and to have direction and control over respondent ABB’s Service Division.
- Chronology of testing and failures:
- First repair installed for testing October 3, 1990; test failed October 4, 1990; old motor reinstalled; operations resumed October 9, 1990. Petitioner alleged loss of 1,040 MT per day from October 5–9, 1990.
- Second repair tested after November 14, 1990; test failed; old motor reinstalled; operations resumed November 19, 1990; alleged five days’ production losses at 1,040 MT daily.
- Third repair installed and tested March 13, 1991; test failed; operations resumed March 15, 1991; alleged two days’ production losses at 1,040 MT daily.
- Purchase Order terms included: total price P197,450.00; delivery date August 29, 1990 (or six weeks from receipt of order and down payment); penalty for delay one-half of one percent of total cost (P987.25) per day.
- Petitioner alleged total damages of P10,983,017.42 composed of:
- Production and opportunity losses: P10,600,000.00 (representing about 25% of production losses at P72.00 per bag)
- Labor cost and rental of crane: P26,965.78
- Penalties for failure to deliver (P987.25/day) Aug. 29, 1990–July 31, 1991: P331,716.00
- Cost of money interest (P987.25/day at 34% for 261 days): P24,335.59
- Petitioner alleged repeated demands for payment were refused and agreed to pay counsel 20% of amount sought as attorney's fees.
Claims and Relief Sought by Petitioner
- Recovery of alleged production and opportunity losses, labor cost and crane rental, penalties, interest and attorney’s fees arising from respondents’ failure to properly repair and timely deliver the Kiln Drive Motor.
- Assertion that respondents breached contractual obligations embodied in POs 17136-17137 and are liable under Articles 1167, 1170, and 2201 of the Civil Code.
Defenses Advanced by Respondents
- Reliance on Clause 7 of the General Conditions attached to ABB’s letter of offer (dated July 4, 1990) which limits liability and excludes consequential damages, arguing petitioner is bound by those terms.
- Denial of personal liability of respondent Eriksson, asserting no lawful tenable reason to sue him in his personal capacity and that he did not personally direct the repair.
- Argument that there is no implied warranty on repair work and any warranty as to fitness should be enforced against the manufacturer of the Kiln Drive Motor.
- Assertion they performed obligations in good faith and are not liable for claimed consequential losses.
Clause 7 — General Conditions (Text and Significance)
- Clause 7 guarantees machinery to be of high-grade material and workmanship and undertakes to correct defects within guarantee period, but expressly states: “All liability on our part ceases at the termination of the guarantee period. Our liability is in all cases limited as provided in these conditions and does not extend to consequential loss either direct or indirect, nor to expenses for repair or replacements or otherwise paid or incurred without our written authority.”
- Respondents relied on Clause 7 to exclude liability for consequential damages such as production loss.
RTC Decision
- RTC (Branch 101, Judge Pedro T. Santiago) rendered judgment in favor of petitioner on August 30, 1995.
- RTC rejected respondents’ defense of limited liability because respondents failed to prove that petitioner received a copy of the General Conditions; therefore the exculpatory clause was held not binding.
- RTC awarded petitioner:
- P10,600,000.00 for loss of production;
- P26,965.78 for labor cost and rental of crane;
- P100,000.00 for attorney’s fees and costs.
- RTC found the complaint substantiated and held respondents jointly and severally liable.
Court of Appeals Decision
- CA reversed the RTC and dismissed the complaint.
- CA applied the exculpatory clause in the General Conditions and held there is no implied warranty on repair work; repairman cannot be made to pay for loss of production resulting from unsuccessful repair.
- The dispositive fallo of the CA: the August 30, 1995 RTC Decision is REVERSED and SET ASIDE; the complaint is DISMISSED.
- CA denied petitioner’s motion for reconsideration in Resolution dated February 16, 2006.
Issues Presented to the Supreme Court
- Whether the CA gravely erred in applying the terms of the General Conditions of Purchase Orders Nos. 17136 and 17137 to exculpate respondents from liability.
- Whether the CA seriously erred in applying concepts of implied warranty and warranty against hidden defects of the New Civil Code to exculpate respondents from contractual obligation.
- Whether Articles 1167 and 2201 (and related Civil Code provisions) rather than implied warranty doctrines apply to the contractual repair dispute.
Petitioner’s Arguments on Review
- The General Conditions cannot exculpate respondents because petitioner n