Case Summary (G.R. No. 203335)
Nature of the Transactions and Unpaid Debt
In mid-1989, petitioners and respondent engaged in contracts where petitioners would supply raw materials from abroad and respondent would manufacture finished garments for shipment to petitioners’ foreign buyers. The orders from Sears Roebuck were fully paid through letters of credit. However, the JC Penney orders for 8,000 pieces of cotton woven pants totaling US$29,200 were not covered by letters of credit and remained unpaid despite delivery and receipt.
Trial Court Proceedings and Judgment
Respondent filed a complaint for collection of US$29,200 plus damages before the Regional Trial Court (RTC) of Makati City. Petitioners, with co-defendants MAVEST International Co., Ltd. and Patrick Wang, filed an answer asserting legal compensation for alleged damages/losses amounting to US$34,999.57 due to prior breaches by respondent involving shipments to Sears Roebuck. The RTC ruled in favor of respondent, ordering petitioners to pay the principal amount with interest, attorney’s fees, and costs of suit.
Court of Appeals Decision and Modifications
On appeal, the Court of Appeals (CA) dismissed the complaint against co-defendants MAVEST International Co., Ltd. and Patrick Wang, and deleted the award of attorney’s fees and costs of suit. It affirmed the judgment against petitioners for US$29,200 plus statutory interest, but no attorney’s fees or costs. The CA found petitioners solidarily liable with MAVEST Manila Liaison Office.
Petitioners' Arguments on Appeal to the Supreme Court
Petitioners contended that:
- Legal compensation extinguished the respondent’s claim because respondent owed petitioners damages from prior transactions.
- Article 1719 of the Civil Code supported their acceptance of finished garments without protest as an exercise to mitigate damages.
- Their evidence on damages was probative and should have been accepted.
- MAVEST Manila Liaison Office, being an agent, should not be solidarily liable.
- The award of actual damages and interest was improper without holding respondent liable for damages.
Legal Compensation under Philippine Law
The Supreme Court explained that legal compensation under Articles 1277 and 1278 of the Civil Code requires that two parties be mutually indebted to each other with demandable, liquidated obligations, free from controversy or timely objections. It reiterated that legal compensation operates ipso jure when these requisites concur, unlike conventional compensation which arises by agreement.
Application of Legal Compensation to the Case
The Court ruled that legal compensation did not apply because petitioners failed to establish that respondent was indebted to them. While petitioners admitted owing the US$29,200 to respondent, they did not prove respondent’s debt to them arising from alleged contractual breaches. Respondent’s orders to Sears Roebuck were fully paid and accepted without protest or complaint, as evidenced by inspections and payments. Therefore, the conditions for legal compensation were absent.
Acknowledgment of Debt by Petitioners
The Court emphasized that petitioners acknowledged their obligation to pay respondent the US$29,200. For instance, a letter from Patrick Wang, general manager of MLO, expressed a promise to issue a corresponding check. The parties’ stipulation confirmed the order, delivery, and non-payment subject only to the compensation defense, further confirming petitioners’ recognition of indebtedness to respondent.
On Petitioners’ Claim of Damages and Burden of Proof
The Court underlined that the burden of proof rests upon petitioners as the party alleging affirmative defenses and damages. Despite submitting extensive evidence on alleged breaches and losses, they failed to prove by preponderance of evidence that respondent was liable for such damages. The Court of Appeals’ finding—that petitioners’ evidence was insufficient to establish respondent’s liability—was supported by the record and thus binding on the Supreme Court in the absence of compelling reasons to overturn.
Acceptance of Goods and Article 1719, Civil Code
The Court recognized th
...continue readingCase Syllabus (G.R. No. 203335)
Background and Parties Involved
- Petitioners MAVEST (U.S.A.), Inc. ("MAVEST U.S.A.") is a corporation organized under U.S. laws but registered with the Philippine Board of Investments.
- Co-petitioner MAVEST Manila Liaison Office ("MLO") represents MAVEST U.S.A. in the Philippines.
- Respondent Sampaguita Garment Corporation is a domestic Philippine corporation specializing in garment manufacture and export.
- The case arose from respondent’s filing of an action for collection involving a sum of money against petitioners and two others—Mavest International Co., Ltd. (MICL) and Patrick Wang (former General Manager of MLO)—before the Regional Trial Court (RTC) in Makati City.
Factual Antecedents and Transaction Details
- In July and August 1989, petitioners entered into several transactions with respondent whereby raw materials were supplied from abroad by petitioners for respondent to manufacture finished garments for shipment to petitioners’ foreign buyers—Sears Roebuck and JC Penney.
- Each transaction was governed by purchase orders (POs) specifying garment styles (e.g., Styles 33303, 45712, 45714, 45715, 7511, DJ-1 BR, DJ-1 XT), quantities, and delivery modes/dates.
- Sears Roebuck orders were fully paid via letter of credit.
- JC Penney’s order consisted of 8,000 pieces of cotton woven pants for US$29,200.00, but was not covered by a letter of credit.
- JC Penney received shipment but failed to pay, prompting respondent to demand payment which was ignored.
- Respondent filed a complaint for collection of US$29,200.00 plus damages on April 27, 1990.
Petitioners’ Counterclaims and Legal Arguments
- Petitioners and co-defendants answered on June 21, 1990, alleging legal compensation and that respondent owed them US$5,799.57 due to damages caused by respondent’s breaches in previous shipments to Sears Roebuck.
- The alleged breaches included failure to meet specifications and quantity, shipping delays, overvaluation, short shipments, and non-return of raw materials totaling US$34,999.57.
- Petitioners claimed also losses due to JC Penney shipment delays.
- They later amended the answer, claiming respondent owed more than US$101,000 by virtue of legal compensation.
Trial Court and Court of Appeals Rulings
- Trial court ruled in favor of respondent, ordering petitioners and co-defendants jointly and severally liable to pay US$29,200 plus 6% interest, attorney’s fees of P300,000.00, and costs of suit.
- On appeal, the Court of Appeals (CA) modified the decision:
- Dismissed complaint against MICL and Patrick Wang.
- Ordered only MAVEST U.S.A. and MLO to pay US$29,200 plus interest at 6% per annum.
- Deleted attorney’s fees and costs of suit award.
- Petitioners then filed this certiorari petition challenging:
- The denial of legal compensation.
- Application of Art