Case Summary (G.R. No. 132988)
Letter Agreement — essential terms
The parties executed a single written Letter Agreement (January 8, 1992) for a “package” sale of three Kodak Minilab System 22XL units. Material terms included: total unit price stated at P1,796,000.00 per unit; a 19% multiple-order discount applied to the package and delivered in merchandise/start-up packages; “NO DOWNPAYMENT”; payment in 48 monthly installments at P35,000.00 inclusive of interest for the first 12 months, re-amortization thereafter; price subject to change; secured by post-dated checks (PDCs); first monthly amortization due 45 days after installation. The Letter Agreement was addressed to Colorkwik and written by Kodak representatives.
Factual chronology
Delivery, payments, and breakdown in performance
One Minilab unit was delivered (Tagum) on January 15, 1992 and installed March 9, 1992. The Lams issued postdated checks intended as installment payments; two early checks (March 31 and April 30, 1992) were negotiated and honored, but the Lams thereafter instructed their bank to stop payment on the remaining ten checks, which were dishonored. Kodak demanded return of the delivered unit and later filed a replevin/action for recovery on November 25, 1992. Kodak executed a writ of seizure (December 1992) and took possession of the delivered unit, accessories, and a generator set. The Lams later rescinded the contract (Nov. 18, 1992) for Kodak’s alleged failure to deliver the two remaining units.
Procedural history
Trial and appellate trajectory
Regional Trial Court (Branch 65, Makati) rendered a February 26, 1999 decision finding Kodak in default for failure to deliver two units within a reasonable time, ordered dismissal of Kodak’s claim, and awarded the Lams P130,000 (generator set) plus 12% interest and P1,300,000 for renovation expenses. The Court of Appeals set aside earlier procedural defaults, remanded for pre-trial, and on March 30, 2005 (amended September 9, 2005) modified the RTC outcome: it ordered Kodak to return P270,000 (partial payments), P130,000 for the generator set with interest, and awarded the Lams P440,000 actual damages, P25,000 moral damages, and P50,000 exemplary damages; it also ordered the Lams to return the Minilab unit and accessories. The Supreme Court docketed the petition for review, consolidated matters as appropriate, and ultimately affirmed with modification.
Central legal issues
Issues presented to the Court
(1) Whether the Letter Agreement created divisible/“separable” obligations such that Kodak’s partial delivery (one unit) justified recovery of the contract price for that unit; and (2) upon rescission of the contract, what restitution and damages are proper under Articles 1191 and 1522 of the New Civil Code.
Divisibility analysis and contract character
Court’s analysis on divisibility vs indivisibility
The Court closely examined Article 1225 and the parties’ expressed intent. Although the Minilab units are physically severable and the Court of Appeals emphasized indicators of separability (separate unit prices, separate deliveries, and separate payment arrangements), the Supreme Court found the Letter Agreement manifested a single package transaction: one agreement covering three units, a shared 19% multiple-order discount applied to the package, a single “no downpayment” term, and express reference to a “Minilab Equipment Package.” Under Article 1225 and controlling jurisprudence, an obligation is indivisible if so intended by the parties despite the physical divisibility of the object. The Supreme Court concluded the parties meant a single, indivisible obligation covering the three-unit package.
Rescission, mutual restitution, and legal effects
Rescission under Article 1191 and consequences
Both parties exercised the power to rescind under Article 1191 (reciprocal obligations). The Court reiterated that rescission abrogates the contract from inception and requires mutual restitution “as far as practicable.” Because both parties invoked rescission, Kodak must restore what it received (return of the Lams’ partial payments) and the Lams must restore what they received (relinquish the delivered Minilab unit and accessories). The Court emphasized that an off-set of the two monthly installments against Kodak’s award is improper because rescission aims to revert parties to pre-contract positions; therefore Kodak should return the P270,000 in partial payments and the Lams must return the unit.
Seller’s default and buyer’s liability for accepted goods
Application of Article 1522 to accepted partial deliveries
The Court analyzed Article 1522 to qualify the Lams’ liability for the delivered unit. Even where a seller fails to deliver fully, a buyer who accepts and uses delivered goods before knowing further nonperformance may be liable only for the fair value of what was received. The Supreme Court affirmed that the Lams accepted and used the unit prior to knowledge of non-delivery and thus had obligations limited by rescission and restitution principles; Kodak’s recovery of the unit by replevin was supportable but subject to mutual restitution.
Damages: proofs and limits of review
Standard of appellate review on damages and findings of fact
The Supreme Court emphasized Rule 45’s confines: a petition for review on certiorari is principally a vehicle for questions of law and does not allow re-evaluation of factual findings. Absent grave abuse of discretion, trial and appellate factual findings on damages are binding. The Court found that the Court of Appeals’ awards for actual damages (P440,000) were supported by documentary evidence (incentive fee, lease rider advance, compromise payment for lease pre-termination) and that the Lams failed to substantiate other claimed actual damages. The Court also noted that petitioners’ own breach (stopping payment) warranted tempering Kodak’s liability for its failure to deliver remaining units under Article 1192 (equitable tempering when both parties breach reciprocal obligations).
Moral, exemplary damages, and attorney’s fees
Rationale for moral, exemplary damages, and attorney’s fees award
The Court affirmed the Court of Appeals’ finding that Kodak did not act in bad faith in seeking recovery of the Minilab unit but did misrepresent ownership/right over the separately procured generator set, thereby acting in bad faith for that item. Accordingly, the award of exemplary damages (P50,000) was justified to sanction wrongful misrepresentation and discourage abuse of judicial processes; moral damages (P25,000) were adequate compensation for the Lams’ moral suffering. Because exemplary damages were appropriate, the Court applied Article 2208 to award reasonable attorney’s fees (P20,000), citing precedents that attorney’s fees may be awarded in tandem with exemplary damages and as reasonable compensation in such circumstances.
Equitable adjustment pursuant
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Case Caption, Docket and Nature of Proceeding
- Supreme Court Second Division; G.R. No. 167615; decision promulgated January 11, 2016 (Leonen, J.).
- Petition for Review on Certiorari under Rule 45 filed by Spouses Alexander and Julie Lam against the Court of Appeals Decision dated March 30, 2005 and the Amended Decision dated September 9, 2005 (Court of Appeals case CA‑G.R. No. CV‑64158, Kodak Philippines, Ltd. v. Spouses Alexander and Julie Lam).
- Petition challenges the Court of Appeals’ modification of the Regional Trial Court’s February 26, 1999 decision reducing the amount of damages awarded to the Lam Spouses; issue framed as entitlement to greater damages because of respondent’s alleged breach of contract of sale.
- Related procedural matters: Kodak filed a separate Motion for Extension/appeal under Rule 45 docketed as G.R. No. 169639; consolidation and later deconsolidation of G.R. Nos. 167615 and 169639 were addressed by this Court; G.R. No. 169639 declared closed for Kodak’s failure to file a petition for review.
Material Facts — Contract Formation and Subject Matter
- On January 8, 1992 the Lam Spouses and Kodak Philippines, Ltd. executed a Letter Agreement for the sale of three (3) units of the Kodak Minilab System 22XL at a stated price of P1,796,000.00 per unit.
- The Letter Agreement described the transaction as a package for three units to be installed at Rizal Avenue (Manila), Tagum (Davao del Norte), and Cotabato City, and set forth specific terms and conditions applying to the whole package.
- Key contractual terms included: (a) a total 19% multiple order discount applicable to the package if purchased not later than June 30, 1992; (b) the 19% discount to be applied in merchandise and delivered in advance upon signing; (c) no downpayment; (d) payment by 48 monthly installments at P35,000.00 inclusive of 24% interest for the first 12 months, with re‑amortization thereafter; (e) prevailing price stated as P1,796,000.00 per unit as of January 8, 1992; (f) price subject to change without prior notice; and (g) secured with post‑dated checks (PDCs), first monthly amortization due 45 days after installation.
- The Kodak Minilab System 22XL is described in the record as a Noritsu QSS 1501 with 430‑2 Film Processor (non‑plumbed) with standard accessories.
Delivery, Payments and the Breakdown of Performance
- Kodak delivered one (1) Minilab unit to Tagum, Davao Province on January 15, 1992; installation by Noritsu representatives occurred March 9, 1992.
- The Lam Spouses issued post‑dated checks amounting to P35,000.00 each for 12 months as payment for the first delivered unit, with the first check due March 31, 1992; the Lam Spouses requested Kodak not to negotiate the March and April 1992 checks alleging insufficiency, but both were negotiated and honored by the depository bank.
- Ten subsequent checks were dishonored after the Lam Spouses ordered the depository bank to stop payment.
- The Lam Spouses later rescinded the contract by letter dated November 18, 1992, citing Kodak’s failure to deliver the remaining two (2) units. Kodak, by correspondence dated October 14, 1992, had earlier demanded surrender of the delivered unit and had asserted rescission based on Article 1191.
- Kodak sued (Complaint filed November 25, 1992) for replevin and/or recovery of sum of money; the case was raffled to Branch 61, RTC Makati City, later to Branch 65 after a motion for inhibition and reassignment.
Procedural History in the Trial Court and Enforcement
- The Lam Spouses were personally served with summons and complaint; they failed to appear for pretrial despite extensions and were declared in default on July 30, 1993; Kodak presented ex‑parte evidence.
- The trial court issued a decision in favor of Kodak ordering seizure of the Minilab Equipment (the one delivered unit), its standard accessories, and a separate generator set; Kodak obtained and enforced a writ of seizure in December 1992 and took physical possession.
- Lam Spouses sought relief from the Court of Appeals which set aside certain trial court orders and remanded for pretrial; the matter continued through further proceedings before retrial and eventual decision dated February 26, 1999 by RTC Branch 65 (penal considerations and findings set out below).
Trial Court Findings and Disposition (RTC February 26, 1999)
- Trial court found Kodak defaulted in performance of its obligation to deliver all three units within a reasonable time, noting delivery of first unit five days after agreement but failure to deliver the other two units despite at least three months’ lapse and repeated demands; Article 1521 (reasonable time for delivery when no time fixed) cited.
- The trial court held that the Lam Spouses, having accepted delivery of the first unit and used it, became liable for the fair value of goods received under Article 1522; thus they were obligated to pay for the delivered unit and could not suspend payment for it despite failure to deliver remaining units.
- The trial court nevertheless concluded that Kodak elected to cancel the sale and retrieve the delivered unit; consequently Kodak could not claim deterioration damages for the unit while in Lam custody.
- Regarding the generator set, the trial court found Kodak had misrepresented ownership; evidence showed the Lam Spouses purchased the generator from Davao Ken Trading, so Kodak wrongfully took it and must replace it.
- Dispositive holdings of the RTC: dismissal of Kodak’s complaint (on the basis of Kodak’s default), and an order that the plaintiff (Kodak) pay the Lam Spouses P130,000.00 for the generator set plus legal interest at 12% per annum from December 1992 until fully paid, and P1,300,000.00 as actual expenses in renovating the Tagum, Davao and Rizal Ave., Manila outlets.
Appeals to the Court of Appeals — Issues and Rulings (March 30, 2005; Amended Sept. 9, 2005)
- Both parties appealed: Lam Spouses filed partial appeal pressing for larger awards including P2,040,000 actual damages, P50,000,000 moral damages, P20,000,000 exemplary damages, attorney’s fees P353,000, and litigation expenses P300,000. Kodak filed an appeal which was dismissed December 16, 2002 for failure to file appellant’s brief (partial entry of judgment became final January 4, 2003).
- Court of Appeals (Special Fourteenth Division) modified the RTC decision. The CA concluded the Letter Agreement showed the parties’ obligations were divisible and susceptible of partial performance under Article 1225 because: (a) separate purchase price for each unit; (b) acceptance by Lam of separate deliveries; and (c) separate payment arrangements for each unit.
- On that basis the CA held Kodak had performed its separable obligation with respect to the first unit and thus was entitled to recover for the delivered unit. CA affirmed the propriety of a writ of replevin for the delivered unit and accessories and held Lam liable for the unpaid balance of the first unit (P1,526,000.00 remaining after payments totalling P270,000.00).
- The CA also applied Article 1522 — Lam’s receipt and use of the Minilab before knowing Kodak would not deliver the other two units rendered them liable