Solar Harvest vs Davao Corrugated Carton (Civil Law)

SOLAR HARVEST, INC.

VS.

DAVAO CORRUGATED CARTON CORPORATION

--- Even in reciprocal obligations, if the period for the fulfillment of the obligation is fixed, demand upon the obligee is still necessary before the obligor can be considered in default and before a cause of action for rescission will accrue.

[G.R. No. 176868 : July 26, 2010]

NACHURA, J.:

FACTS:

In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an agreement with Davao Corrugated Carton Corporation, for the purchase of corrugated carton boxes, specifically designed for petitioner's business of exporting fresh bananas, at US$1.10 each. The agreement was not reduced into writing. To get the production underway, petitioner deposited, on March 31, 1998, US$40,150.00 in respondent's US Dollar Savings Account with Westmont Bank, as full payment for the ordered boxes.

Solar Harvest’s allegations and evidence:

• Despite full payment, it did not receive any boxes. It made repeated follow-ups but respondent only showed samples, and promised to deliver the boxes 30 days from completion, as they had agreed.
• Because of the nondelivery of the boxes, its transaction with China Zero Food for the delivery of bananas to China did not push through.
• Thus, on January 3, 2001, petitioner wrote a demand letter for reimbursement of the amount paid. Eventually, it filed a complaint for sum of money (refund of the $40k) and damages against respondent.
• Petitioner also claims that the agreement was that it would be respondent who would deliver the boxes to TADECO (Tagum Agricultural Dvpt Corp; one who delivered the bananas to be put on the boxes)
• During the trial, sole witness Que, the representative of Solar Harvest, testified that when he visited respondent’s factory, he saw that the boxes had no print of petitioner’s logo. He followed up the order a few months later, yet respondent said it had full production, thus promised that the production of the order would be rushed. He told respondent that it should indeed rush because the need for the boxes was urgent. Thereafter, he asked his partner, Alfred Ong, to cancel the order because it was already too late for them to meet their commitment to ship the bananas to China.
• During cross-examination, Que admitted that he was not the one who personally placed the order to Jamie Tan (president of respondent); and that he did not give authority to respondent to deliver the boxes to TADECO because he claims that the same were not yet complete.
• Que denied that Solar Harvest made an additional order of 24k boxes

Davao Corrugated Carton’s allegations and evidence:

• As early as April 3, 1998, it had already completed production of the 36,500 boxes;
• Petitioner made an additional order of 24k boxes, out of which, 14k had been completed without waiting for petitioner's payment.
• Petitioner was to pick up the boxes at the factory as agreed upon, but petitioner failed to do so.
• Oct. 1998, petitioner's representative, Bobby Que (Que), went to the factory and saw that the boxes were ready for pick up.
• Feb. 1999, Que visited the factory again and supposedly advised respondent to sell the boxes as rejects to recoup the cost of the unpaid 14,000 boxes, because petitioner's transaction to ship bananas to China did not materialize. 
• As counterclaim, respondent prayed that judgment be rendered ordering petitioner to pay the $15.4k for the additional 24k boxes, storage fee at P60 per sq.m. for every month from April 1998 as the boxes were occupying warehouse space, plus interest, moral and exemplary damages, attorney's fees, and costs of the suit.
• During the trial, it presented Estanislao who testified that he met Que in Davao to inspect the boxes and the latter got samples of them; that his company finished production of the 36,500 boxes on April 3, 1998; that petitioner made a second order of 24,000 boxes; that the agreement was for respondent to produce the boxes and for petitioner to pick them up from the warehouse.
• He also said that the reason why petitioner did not pick up the boxes was that the ship that was to carry the bananas did not arrive; that during the last visit of Que, he asked him to withdraw the boxes immediately because they were occupying a big space in his plant, but they, instead, told him to sell the cartons as rejects. He was able to sell 5,000 boxes at P20.00 each for a total of P100,000.00. Que then told him to apply the said amount to the unpaid balance.

(RTC) ruled that respondent did not commit any breach of faith that would justify rescission of the contract and the consequent reimbursement of the amount paid by petitioner. The RTC said that respondent was able to produce the ordered boxes but petitioner failed to obtain possession thereof because its ship did not arrive. It also dismissed respondent’s counterclaim for lack of merit.

CA affirmed the RTC decision. According to the CA, it was unthinkable that, over a period of more than two years, petitioner did not even demand for the delivery of the boxes. The CA added that even assuming that the agreement was for respondent to deliver the boxes, respondent would not be liable for breach of contract as petitioner had not yet demanded from it the delivery of the boxes.

ISSUE:

WON there was default on the part of Davao Corrugated Carton to deliver the boxes and thus make it liable for breach of contract to Solar Harvest

May Solar Harvest be allowed to rescind the contract?

HELD: None, thus, Solar Harvest cannot demand for the refund of its payment, which in essence is actually a claim for rescission.

Based on Art. 1191, in reciprocal obligations, the right to rescind a contract arises once the other party defaults in the performance of his obligation. In determining when default occurs, Art. 1191 should be taken in conjunction with Art. 1169  which provides as to when delay is incurred.

In reciprocal obligations, as in a contract of sale, the general rule is that the fulfillment of the parties' respective obligations should be simultaneous.  Hence, no demand is generally necessary because, once a party fulfills his obligation and the other party does not fulfill his, the latter automatically incurs in delay.  But when different dates for performance of the obligations are fixed, the default for each obligation must be determined by the rules given in the first paragraph of Art. 1169, that is, the other party would incur in delay only from the moment the other party demands fulfillment of the former's obligation. Thus, even in reciprocal obligations, if the period for the fulfillment of the obligation is fixed, demand upon the obligee is still necessary before the obligor can be considered in default and before a cause of action for rescission will accrue.

Evident from the records and even from the allegations in the complaint was the lack of demand by petitioner upon respondent to fulfill its obligation to manufacture and deliver the boxes. The Complaint only alleged that petitioner made a "follow-up" upon respondent, which, however, would not qualify as a demand for the fulfillment of the obligation. Note is taken of the fact that, with respect to their claim for reimbursement, the Complaint alleged and the witness testified that a demand letter was sent to respondent.  Without a previous demand for the fulfillment of the obligation, petitioner would not have a cause of action for rescission against respondent as the latter would not yet be considered in breach of its contractual obligation.

Even assuming that a demand had been previously made before filing the present case, petitioner's claim for reimbursement would still fail, as the circumstances would show that respondent was not guilty of breach of contract.

The existence of a breach of contract is a factual matter. As correctly observed by the CA, there is ample showing that the boxes had already been manufactured by respondent. Que's absolute assertion that the boxes were not manufactured is implausible and suspicious. We note that respondent's counsel manifested during trial, that his client was willing to shoulder expenses for a representative of the court to visit the plant and see the boxes. Even in its Comment to this petition, respondent prays that petitioner be ordered to remove the boxes from its factory site, which could only mean that the boxes are, up to the present, still in respondent's premises.

We also believe that the agreement between the parties was for petitioner to pick up the boxes from respondent's warehouse, contrary to petitioner's allegation. Thus, it was due to petitioner's fault that the boxes were not delivered to TADECO. Petitioner had the burden to prove that the agreement was, in fact, for respondent to deliver the boxes within 30 days from payment, as alleged in the Complaint. It failed to do so. Its sole witness, Que, was not even competent to testify on the terms of the agreement because he did not personally place the order with Tan. Moreover, assuming that respondent was obliged to deliver the boxes, it could not have complied with such obligation because as admitted by Que, he did not give respondent the authority to deliver the boxes to TADECO
Surely, without such authority, TADECO would not have allowed respondent to deposit the boxes within its premises.

In sum, the Court finds that petitioner failed to establish a cause of action for rescission, the evidence having shown that respondent did not commit any breach of its contractual obligation. As previously stated, the subject boxes are still within respondent's premises.  To put a rest to this dispute, we therefore relieve respondent from the burden of having to keep the boxes within its premises and, consequently, give it the right to dispose of them, after petitioner is given 30 days within which to remove them from the premises.