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

Case Summary (G.R. No. 70789)

Factual Background

The parties entered into a contract of sale in April 1968 whereby Romeo A. Lluch agreed to sell and RUSTAN PULP & PAPER MILLS, INC. undertook to pay PHP 30.00 per cubic meter for pulp wood to be delivered at Rustan’s Baloi plant in Lanao del Norte. Deliveries commenced and were accepted while installation and test runs of Rustan’s mill proceeded during 1968. During testing, Rustan’s machinery exhibited major defects. The Japanese machinery supplier advised stoppage of deliveries, and on September 30, 1968 Rustan, through a letter signed by ROMEO S. VERGARA, informed Iligan Diversified Projects, Inc. to stop delivery thirty days from that date. Despite the letter, deliveries from Lluch and other suppliers continued to be accepted by Rustan until December 23, 1968.

Contract Terms Relevant to Dispute

The contract expressly provided that the BUYER would have the option to purchase from other qualified sellers and contained a clause granting the BUYER the right to stop delivery of raw materials “when supply of the same shall become sufficient until such time when need for said raw materials shall have become necessary provided, however, that the SELLER is given sufficient notice.” The contract also stated that the seller had priority to supply Rustan’s requirements and included a prohibition against buying from sellers whose wood emanated from lumber or firewood concessions.

Stoppage Letter and Conduct

Rustan’s September 30, 1968 letter informed respondents that supply had become sufficient and instructed cessation of deliveries after thirty days. Lluch sought clarification whether the letter suspended deliveries temporarily or terminated the contract, but Rustan did not respond to that query. Nevertheless, Lluch and other suppliers resumed deliveries after discussions between ROMEO S. VERGARA and ROMEO A. LLUCH, and Rustan continued accepting materials despite having issued the stoppage notice.

Procedural History

Private respondents filed a complaint for breach of contract on January 23, 1969. The court of origin dismissed the complaint but enjoined petitioners to respect the contract if circumstances warranted full commercial operation of Rustan’s Baloi plant and to continue accepting and paying for deliveries from Lluch. On appeal, the Intermediate Appellate Court modified the judgment by directing petitioners to pay respondents joint and several moral damages of P30,000.00 and attorney’s fees of P15,000.00. Petitioners sought review in the Supreme Court, limiting their assignments of error to three principal points: (A) personal liability of Tantoco and Vergara; (B) propriety of Rustan’s suspension of deliveries; and (C) award of moral damages and attorney’s fees absent fraud or bad faith.

Issues Presented

The case raised whether Rustan lawfully exercised a contractual right to stop deliveries; whether the stoppage letter constituted termination or a lawful suspension; whether corporate officers BIENVENIDO R. TANTOCO, SR. and ROMEO S. VERGARA could be held personally liable under the contract; and whether moral damages and attorney’s fees were properly awarded in the absence of fraud or bad faith.

Parties’ Contentions

Petitioners contended that paragraph 7 of the contract authorized a temporary suspension of deliveries and that the stoppage was prompted by serious and unforeseen defects in the mill, invoking Article 1267, New Civil Code for frustration of the commercial object. Petitioners further argued that TANTOCO signed only as corporate representative and VERGARA did not sign the contract, hence neither could be personally liable. Private respondents maintained that the September 30, 1968 letter effectively terminated the contract and that Rustan’s acceptance of deliveries from other suppliers after that date evidenced a breach and rendered the stoppage invalid.

Appellate Court’s Findings and Rationale

The Intermediate Appellate Court found the September 30, 1968 letter tantamount to termination and held that Rustan’s continued acceptance of deliveries from other suppliers belied any bona fide temporary suspension. The Appellate Court characterized paragraph 7’s prerogative as creating a condition susceptible of manipulation by the buyer and concluded that Rustan’s conduct was inconsistent and unjustifiable, warranting damages and attorney’s fees to private respondents.

Supreme Court’s Legal Analysis

The Supreme Court examined the contractual stop-delivery clause and deemed the condition as granting a unilateral power dependent solely on Rustan’s will, thereby rendering it an inoperative potestative condition under Article 1306, New Civil Code; the Court stated that a condition which makes fulfillment depend exclusively upon the obligor’s will must be obliterated from the contract without affecting other stipulations. The Court rejected petitioners’ reliance on Article 1267, New Civil Code because Rustan’s conduct in continuing to accept deliveries estopped it from invoking frustration as an extraordinary obstacle to performance. The Court further applied corporate law principles, citing authority that a corporate officer who signs in an official capacity does not incur personal liability absent an express stipulation or the exceptions in Article 1897, New Civil Code, and held that the exceptions were not present; consequ

Case Syllabus (G.R. No. 70789)

Parties and Procedural Posture

Petitioners were Rustan Pulp and Paper Mills, Inc., Bienvenido R. Tantoco, Sr., and Romeo S. Vergara as sued parties in the complaint for breach of contract.
Respondents were Iligan Diversified Projects, Inc., Romeo A. Lluch, and Roberto G. Borromeo as sellers and suppliers of pulp wood who filed the complaint.
The trial court dismissed the complaint but enjoined petitioners to respect the contract if full commercial operation justified it and to continue accepting and paying for deliveries from Romeo Lluch.
The Intermediate Appellate Court reversed in part and awarded moral damages and attorney’s fees jointly and severally against all petitioners.
The petition sought review of the Appellate Court ruling on the ground that the individual officers were wrongly held personally liable, that the stoppage was lawful, and that moral damages and fees were improper in the absence of fraud or bad faith.

Key Facts

Rustan established a pulp and paper mill in Baloi, Lanao del Norte, in 1966.
On March 20, 1967, Romeo Lluch, as a holder of a forest products license, offered to supply raw materials to Rustan.
The parties executed a contract of sale in April 1968 at P30.00 per cubic meter with delivery at the buyer’s plant.
During the test run the mill’s machinery showed major defects and the Japanese supplier recommended stopping deliveries.
On September 30, 1968 Rustan, through a letter signed by Dr. Romeo S. Vergara, informed suppliers to stop deliveries thirty days from that date.
Suppliers continued to deliver after discussions, and petitioners continued to accept deliveries until December 23, 1968, despite the September 30, 1968 letter.
A complaint for breach was filed on January 23, 1969.

Contract Terms

The contract expressly provided that the buyer had the option to buy from other qualified sellers and that the seller had priority to supply buyer’s requirements.
Paragraph seven of the contract provided that the buyer had the right to stop delivery when supply became sufficient, provided that the seller was given sufficient notice.
The contract included a thirty-day notice requirement as evidenced by the September 30, 1968 letter.

Letter and Conduct

The September 30, 1968 letter informed Iligan Diversified Projects, Inc. that supply had become sufficient and that deliveries should stop thirty days from that date.
Romeo Lluch sought clarification whether the letter intended stoppage or termination, and petitioners did not answer the query.
Despite the letter, suppliers resumed deliveries after talks with Romeo S. Vergara, and petitioners accepted deliveries thereafter.

Procedural History

The trial court dismissed the complaint but ordered petitioners to honor the contract if circumstances warranted full commercial operation and to accept and pay for deliveries from Romeo Lluch.
The Intermediate Appellate Court modified the judgment and ordered petitioners, jointly and severally, to pay P30,000.00 as moral damages and P15,000.00 as attorney’s fees.