G.R. No. 70789 - Rustan Pulp and Paper Mills, Inc. vs. Intermediate Appellate Court

Case Summary (G.R. No. 70789)

Petitioner

Rustan Pulp & Paper Mills, Inc., a corporation that established a pulp and paper mill in Baloi, Lanao del Norte in 1966; and its officers, Tantoco (as signatory) and Vergara (as resident manager).

Respondent

Iligan Diversified Projects, Inc., a supplier of pulp wood under contract; its principal, Romeo A. Lluch; and co‐defendant Roberto G. Borromeo.

Key Dates

• 1966: Establishment of the Baloi plant
• March 20, 1967: Lluch’s offer to supply pulp wood
• April 1968: Execution of the contract of sale at P30.00 per cubic meter
• September 30, 1968: Letter from petitioners directing stoppage of deliveries
• December 23, 1968: Last deliveries accepted from respondents
• January 23, 1969: Complaint for breach filed
• October 19, 1992: Supreme Court decision

Applicable Law

• 1987 Philippine Constitution (decision after 1990)
• New Civil Code: Article 1267 (impossibility/frustration), Article 1306 (validity of stipulations), Article 1897 (agent’s liability)
• Rule 131(3)(d), Revised Rules of Court (ordinary business negligence)
• Jurisprudence: Taylor v. Uy Tieng Piao (43 Phil. 873), Bangue Generale Belge v. Walter Bull & Co., Inc. (84 Phil. 164)

Summary of Facts

Contract of Sale (April 1968): Lluch agreed to deliver pulp wood at Rustan’s plant; Rustan retained the option to purchase from other licensed suppliers; Lluch granted “priority” but subject to Rustan’s discretion.
Stoppage Clause (para. 7): Rustan “shall have the right to stop delivery” when supply becomes sufficient, with 30 days’ notice, and may resume when need re-arises.
Operational Difficulties: Defective machinery during test run led to stockpiling of pulp wood. On Japanese supplier’s advice, Rustan sent a letter (September 30, 1968) directing respondents to cease deliveries.
Continued Deliveries: Despite the letter, Ajian Diversified and other suppliers continued deliveries until December 23, 1968.
Procedural History: Respondents sued for breach. Trial court dismissed but ordered Rustan to honor the contract when commercial operations warranted. The Intermediate Appellate Court reversed, finding breach and awarding moral damages and attorney’s fees against all petitioners.

Issues Presented

Whether Tantoco and Vergara, as corporate officers, can be held personally liable under the contract.
Whether Rustan validly exercised its contractual right to suspend deliveries.
Whether moral damages and attorney’s fees are proper absent fraud or bad faith.

Supreme Court Ruling

The stoppage clause is a purely potestative (ill-usory) condition dependent solely on Rustan’s will. Under Article 1306, such a stipulation is void and must be stricken, leaving the obligation intact.
Petitioners’ conduct—sending a notice to stop yet continuing to accept deliveries—estops them from invoking frustration (Article 1267) or a valid suspension. Their inconsistent actions belie reliance on defects or sufficient stock.
Tantoco and Vergara, having signed in their representative capacities, are not personally liable under Article 1897. No express stipulation held them individually responsible; the corporate personality remains distinct from its officers.
Moral damages and attorney’s fees are justified by petitioners’ breach and inconsistency but may be awarded only against the corporate obligor.

Reasoning

• Potestative Condition: A clause granting unilateral suspension “when supply … is sufficient as determined by buyer” is inoperative (Art. 1306). Unl