Case Summary (G.R. No. 185765)
Contractual Terms and Breach
PEZA invited bids on October 4, 1997, for two fire trucks with specified water and foam capacities. Three companies, including Pilhino, participated; Pilhino won at a negotiated price of ₱2,900,000.00 per unit. The contract required delivery within 45 days of PEZA’s purchase order (issued November 6, 1997) and imposed a penalty of one-tenth of one percent of the total contract price per day of delay. Pilhino failed to deliver, prompting formal demands on July 27, 1998, and February 23, 1999, which went unheeded.
Procedural History
PEZA filed a complaint for rescission of contract and damages (Civil Case No. 00-0343, RTC Branch 108, Pasay City). The RTC, by Decision dated November 2, 2005, rescinded the contract, forfeited Pilhino’s performance bond, awarded liquidated damages (1/10 of 1% of ₱5,800,000.00 per day from June 19, 1998), exemplary damages of ₱100,000.00, and costs. Pilhino appealed to the Court of Appeals, which on May 2, 2008, deleted bond forfeiture and reduced liquidated damages to ₱1,400,000.00. PEZA’s motion for reconsideration was denied on November 25, 2008, leading to this Petition for Review on Certiorari under Rule 45.
Issues Presented
- Whether liquidated-damages stipulations survive the rescission of the contract containing them.
- Whether the Court of Appeals properly reduced the liquidated damages based on Pilhino’s purported mitigation.
Court of Appeals’ Findings on Mitigation
The Court of Appeals found that Pilhino had manifested assent to the purchase order by posting a performance bond and indemnity agreement. It noted Pilhino’s March 29, 1999 letter proposing alternative truck specifications at ₱3,600,000.00 per unit and offering to shoulder the price difference “in lieu of the penalty,” concluding this constituted mitigation under Articles 1229 and 2227. Equitably, it set liquidated damages at the ₱1,400,000.00 difference between the original contract price (₱5,800,000.00) and the new proposal (₱7,200,000.00).
Supreme Court’s Ruling on Enforceability of Liquidated Damages
The Supreme Court held that Article 1191 of the Civil Code allows rescission with concomitant payment of damages and that parties’ freely stipulated liquidated damages establish their own measure of compensation for breach. Mutual restitution required by rescission does not abrogate enforceable liquidated-damages clauses. Jurisprudence (e.g., Spouses Velarde, Laperal) affirms that contracts rescinded under Article 1191 remain subject to agreed penalty or liquidated-damages provisions unless equitably reduced under Articles 1229 or 2227.
Supreme Court’s Rejection of Mitigation Argument
The Court found Pilhino’s offer to supply trucks under new specifications unavailing because it was tendered after PEZA had already filed suit and ceased to b
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Facts
- On October 4, 1997, the Philippine Economic Zone Authority (PEZA) invited bids for two new fire trucks with capacities of 4,000–5,000 liters of water and 500–1,000 liters of chemical foam, complete with accessories.
- Three firms—Starbilt Enterprise, Inc., Shurway Industries, Inc., and Pilhino Sales Corporation (Pilhino)—participated in the public bidding; Pilhino emerged as the lowest bidder.
- The contract price was originally ₱3,000,000 per truck but was reduced to ₱2,900,000 per truck upon negotiation.
- The parties agreed that Pilhino would deliver two FF3HP fire trucks within 45 days of PEZA’s issuance of the purchase order.
- A penalty clause provided that Pilhino would pay liquidated damages at the rate of 1/10 of 1% of the total contract price for each day of delay.
- PEZA issued its purchase order on November 6, 1997. Pilhino failed to deliver as agreed, prompting formal demands on July 27, 1998, and February 23, 1999, to no avail.
Procedural History
- PEZA filed a Complaint for rescission of contract and damages in Civil Case No. 00-0343 before the Regional Trial Court (RTC) of Pasay City, Branch 108.
- Pilhino defended on grounds of no definite delivery start date, lack of acceptance of the purchase order, and absence of a meeting of minds.
- On November 2, 2005, the RTC rendered judgment:
- Ordered rescission of the contract;
- Awarded liquidated damages at 1/10 of 1% of ₱5,800,000 per day of delay from June 19, 1998;
- Granted exemplary damages of ₱100,000;
- Forfeited Pilhino’s performance bond;
- Imposed costs on Pilhino.
- Pilhino appealed to the Court of Appeals (CA).
- In its May 2, 2008 Decision, the CA:
- Deleted the forfeiture of Pilhino’s performance bond;
- Reduced liquidated damages to ₱1,400,000 based on Pilhino’s late proposal of new specificatio