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*
G.R. No. 115117. June 8, 2000.

INTEGRATED PACKAGING CORP., petitioner, vs.


COURT OF APPEALS and FIL-ANCHOR PAPER CO.,
INC., respondents.

Obligations and Contracts; Reciprocal obligations are to be


performed simultaneously, so that the performance of one is
conditioned upon the simultaneous fulfillment of the other.—The
transaction between the parties is a contract of sale whereby
private respondent (seller) obligates itself to deliver printing
paper to petitioner (buyer) which, in turn, binds itself to pay
therefor a sum of money or its equivalent (price). Both parties
concede that the order agreement gives rise to reciprocal
obligations such that the obligation of one is dependent upon the
obligation of the other. Reciprocal obligations are to be performed
simultaneously, so that the performance of one is conditioned
upon the simultaneous fulfillment of the other. Thus, private
respondent undertakes to deliver printing paper of various
quantities subject to petitioner’s corresponding obligation to pay,
on a maximum 90-day credit, for these materials. Note that in the
contract, petitioner is not even required to make any deposit,
down payment or advance payment, hence, the undertaking of
private respondent to deliver the materials is conditional upon
payment by petitioner within the prescribed period. Clearly,
petitioner did not fulfill its side of the contract as its last payment
in August 1981 could cover only materials covered by delivery
invoices dated September and October 1980.
Same; Where a party has not paid for the materials covered by
delivery invoices on time, the other party has the right to cease
making further deliveries.—In this case, as found a quo
petitioner’s evidence failed to establish that it had paid for the
printing paper covered by the delivery invoices on time.
Consequently, private respondent has the right to cease making
further delivery, hence the private respondent did not violate the
order agreement. On the contrary, it was petitioner which
breached the agreement as it failed to pay on time the materials
delivered by private respondent. Respondent appellate court
correctly ruled that private respondent did not violate the order
agreement.

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* SECOND DIVISION.

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Integrated Packaging Corporation vs. Court of Appeals

Same; Principle of Relativity; Words and Phrases; The


principle of relativity of contracts provides that contracts can only
bind the parties who entered into it, and it cannot favor or
prejudice a third person, even if he is aware of such contract and
has acted with knowledge thereof.—As correctly held by the
appellate court, private respondent cannot be held liable under
the contracts entered into by petitioner with Philacor. Private
respondent is not a party to said agreements. It is also not a
contract pour autrui. Aforesaid contracts could not affect third
persons like private respondent because of the basic civil law
principle of relativity of contracts which provides that contracts
can only bind the parties who entered into it, and it cannot favor
or prejudice a third person, even if he is aware of such contract
and has acted with knowledge thereof.
Damages; While indemnification for damages comprehends
not only the loss suffered, that is to say actual damages (damnum
emergens), but also profits which the obligee failed to obtain,
referred to as compensatory damages (lucrum cessans), to justify a
grant of actual or compensatory damages, it is necessary to prove
with a reasonable degree of certainty, premised upon competent
proof and on the best evidence obtainable by the injured party, the
actual amount of loss.—The rule on compensatory damages is well
established. True, indemnification for damages comprehends not
only the loss suffered, that is to say actual damages (damnum
emergens), but also profits which the obligee failed to obtain,
referred to as compensatory damages (lucrum cessans). However,
to justify a grant of actual or compensatory damages, it is
necessary to prove with a reasonable degree of certainty,
premised upon competent proof and on the best evidence
obtainable by the injured party, the actual amount of loss. In the
case at bar, the trial court erroneously concluded that petitioner
could have sold books to Philacor at the quoted selling price of
P1,850,750.55 and by deducting the production cost of
P1,060,426.20, petitioner could have earned profit of P790,324.30.
Admittedly, the evidence relied upon by the trial court in arriving
at the amount are mere estimates prepared by petitioner. Said
evidence is highly speculative and manifestly hypothetical. It
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could not provide sufficient legal and factual basis for the award
of P790,324.30 as compensatory damages representing
petitioner’s self-serving claim of unrealized profit.

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Integrated Packaging Corporation vs. Court of Appeals

Same; Moral damages may be awarded when in a breach of


contract the defendant acted in bad faith, or was guilty of gross
negligence amounting to bad faith, or in wanton disregard of his
contractual obligation.—The deletion of the award of moral
damages is proper, since private respondent could not be held
liable for breach of contract. Moral damages may be awarded
when in a breach of contract the defendant acted in bad faith, or
was guilty of gross negligence amounting to bad faith, or in
wanton disregard of his contractual obligation. Finally, since the
award of moral damages is eliminated, so must the award for
attorney’s fees be also deleted.

PETITION for review on certiorari of a decision of the


Court of Appeals.

The facts are stated in the opinion of the Court.


     Jose S. Santos, Jr. & Associates for petitioner.
     Balgos & Perez for private respondent.

QUISUMBING, J.:

This is a petition to review the decision of the Court of


Appeals rendered on April 20, 1994 reversing the judgment
of the Regional Trial Court of Caloocan City in an action for
recovery of sum of money filed by private respondent
against petitioner. In said decision, the appellate court
decreed:

“WHEREFORE, in view of all the foregoing, the appealed


judgment is hereby REVERSED and SET ASIDE. Appellee
[petitioner herein] is hereby ordered to pay appellant [private
respondent herein] the sum of P763,101.70, with legal interest
thereon, from the date of the filing of the Complaint, until fully
paid. 1
SO ORDERED.”

The RTC judgment reversed by the Court of Appeals had


disposed of the complaint as follows:

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1 Rollo, p. 34.

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Integrated Packaging Corporation vs. Court of Appeals

“WHEREFORE, judgment is hereby rendered:


Ordering plaintiff [herein private respondent] to pay defendant
[herein petitioner] the sum of P27,222.60 as compensatory and
actual damages after deducting P763,101.70 (value of materials
received by defendant) from P790,324.30 representing
compensatory damages as defendant’s unrealized profits;
Ordering plaintiff to pay defendant the sum of P100,000.00 as
moral damages;
Ordering plaintiff to pay the sum of P30,000.00 for attorney’s
fees; and to pay the2 costs of suit.
SO ORDERED.”

The facts, as culled from the records, are as follows:


Petitioner and private respondent executed on May 5,
1978, an order agreement whereby private respondent
bound itself to deliver to petitioner 3,450 reams of printing
paper, coated, 2 sides basis, 80 lbs., 38” x 23”, short grain,
worth P1,040,060.00 under the following schedule: May
and June 1978—450 reams at P290.00/ream; August and
September 1978—700 reams at P290/ream; January 1979
—575 reams at P307.20/ream; March 1979—575 reams at
P307.20/ream; July 1979-575 reams at P307.20/ream; and
October 1979—575 reams at P307.20/ream. In accordance
with the standard operating practice of the parties, the
materials were to be paid within a minimum of thirty days
and maximum of ninety days from delivery.
Later, on June 7, 1978, petitioner entered into a contract
with Philippine Appliance Corporation (Philacor) to print
three volumes of “Philacor Cultural Books” for delivery on
the following dates: Book VI, on or before November 1978;
Book VII, on or before November 1979 and; Book VIII, on
or before November 1980, with a minimum of 300,000
copies at a price of P10.00 per copy or a total cost of
P3,000,00.00.
As of July 30, 1979, private respondent had delivered to
petitioner 1,097 reams of printing paper out of the total
3,450

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2 Id., at 42.

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Integrated Packaging Corporation vs. Court of Appeals

reams stated in the agreement. Petitioner alleged it wrote


private respondent to immediately deliver the balance
because further delay would greatly prejudice petitioner.
From June 5, 1980 and until July 23, 1981, private
respondent delivered again to petitioner various quantities
of printing paper amounting to P766,101.70. However,
petitioner encountered difficulties paying private
respondent said amount. Accordingly, private respondent
made a formal demand upon petitioner to settle the
outstanding account. On July 23 and 31, 1981 and August
27, 1981, petitioner made partial payments totalling
P97,200.00 which was applied to its back accounts covered
by delivery invoices
3
dated September 29-30, 1980 and
October 1-2, 1980.
Meanwhile, petitioner entered into an additional
printing contract with Philacor. Unfortunately, petitioner
failed to fully comply with its contract with Philacor for the
printing of books VIII, IX, X and XI. Thus, Philacor
demanded compensation from petitioner for the delay and
damage it suffered on account of petitioner’s failure.
On August 14, 1981, private respondent filed with the
Regional Trial Court of Caloocan City a collection suit
against petitioner for the sum of P766,101.70, representing
the unpaid purchase price of printing paper bought by
petitioner on credit.
In its answer, petitioner denied the material allegations
of the complaint. By way of counterclaim, petitioner alleged
that private respondent was able to deliver only 1,097
reams of printing paper which was short of 2,875 reams, in
total disregard of their agreement; that private respondent
failed to deliver the balance of the printing paper despite
demand therefor, hence, petitioner suffered actual damages
and failed to realize expected profits; and that petitioner’s
complaint was prematurely filed.
After filing its reply and answer to the counterclaim,
private respondent moved for admission of its
supplemental

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3 Id. at 35-36.

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Integrated Packaging Corporation vs. Court of Appeals

complaint, which was granted. In said supplemental


complaint, private respondent alleged that subsequent to
the enumerated purchase invoices in the original
complaint, petitioner made additional purchases of printing
paper on credit amounting to P94,200.00. Private
respondent also averred that petitioner failed and refused
to pay its outstanding obligation although it made partial
payments in the amount of P97,200.00 which was applied
to back accounts, thus, reducing petitioner’s indebtedness
to P763,101.70.
On July 5, 1990, the trial court rendered judgment
declaring that petitioner should pay private respondent the
sum of P763,101.70 representing the value of printing
paper delivered by private respondent from June 5, 1980 to
July 23, 1981. However, the lower court also found
petitioner’s counterclaim meritorious. It ruled that were it
not for the failure or delay of private respondent to deliver
printing paper, petitioner could have sold books to Philacor
and realized profit of P790,324.30 from the sale. It further
ruled that petitioner suffered a dislocation of business on
account of loss of contracts and goodwill as a result of
private respondent’s violation of its obligation, for which
the award of moral damages was justified.
On appeal, the respondent Court of Appeals reversed
and set aside the judgment of the trial court. The appellate
court ordered petitioner to pay private respondent the sum
of P763,101.70 representing the amount of unpaid printing
paper delivered by private respondent to petitioner, with
legal interest thereon from4 the date of the filing of the
complaint until fully paid. However, the appellate court
deleted the award of P790,324.30 as compensatory
damages as well as the award of moral damages and
attorney’s fees, for lack of factual and legal basis.
Expectedly, petitioner filed this instant petition
contending that the appellate court’s judgment is based on
erroneous conclusions of facts and law. In this recourse,
petitioner assigns the following errors:

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4 Id. at 34.

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Integrated Packaging Corporation vs. Court of Appeals

[I]

THE COURT OF APPEALS ERRED IN CONCLUDING THAT


PRIVATE RESPONDENT DID NOT VIOLATE THE ORDER
AGREEMENT.

[II]

THE COURT OF APPEALS ERRED IN CONCLUDING THAT


RESPONDENT IS NOT LIABLE FOR PETITIONER’S BREACH
OF CONTRACT WITH PHILACOR.

[III]

THE COURT OF APPEALS ERRED IN CONCLUDING THAT


PETITIONER IS NOT ENTITLED
5
TO DAMAGES AGAINST
PRIVATE RESPONDENT.”

In our view, the crucial issues for resolution in this case are
as follows:

(1) Whether or not private respondent violated the


order agreement, and;
(2) Whether or not private respondent is liable for
petitioner’s breach of contract with Philacor.

Petitioner’s contention lacks factual and legal basis, hence,


bereft of merit.
Petitioner contends, firstly, that private respondent
violated the order agreement when the latter failed to
deliver the balance of the printing paper on the dates
agreed upon.
The transaction between the parties is a contract of sale
whereby private respondent (seller) obligates itself to
deliver printing paper to petitioner (buyer) which, in turn,
binds itself
6
to pay therefor a sum of money or its equivalent
(price). Both parties concede that 7
the order agreement
gives rise to reciprocal obligations such that the obligation
of one is dependent upon the obligation of the other.
Reciprocal obligations are to

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5 Id. at 90, 93, 97.


6 De Leon, Comments and Cases on Sales, p. 5 (1995).
7 Rollo, pp. 48, 92.

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Integrated Packaging Corporation vs. Court of Appeals

be performed simultaneously, so that the performance of


one is8 conditioned upon the simultaneous fulfillment of the
other. Thus, private respondent undertakes to deliver
printing paper of various quantities subject to petitioner’s
corresponding obligation to pay, on a maximum 90-day
credit, for these materials. Note that in the contract,
petitioner is not even required to make any deposit, down
payment or advance payment, hence, the undertaking of
private respondent to deliver the materials is conditional
upon payment by petitioner within the prescribed period.
Clearly, petitioner did not fulfill its side of the contract as
its last payment in August 1981 could cover only materials
covered by delivery invoices dated September and October
1980.
There is no dispute that the agreement provides for the
delivery of printing paper on different dates and a separate
price has been agreed upon for each delivery. It is also
admitted that it is the standard practice of the parties that
the materials be paid within a minimum period of thirty
(30) days9 and a maximum of ninety (90) days from each
delivery. Accordingly, the private respondent’s suspension
of its deliveries to petitioner whenever the latter failed to
pay on time, as in this case, is legally justified under the
second paragraph of Article 1583 of the Civil Code which
provides that:

“When there is a contract of sale of goods to be delivered by stated


installments, which are to be separately paid for, and the seller
makes defective deliveries in respect of one or more installments,
or the buyer neglects or refuses without just cause to take delivery
of or pay for one or more installments, it depends in each case on
the terms of the contract and the circumstances of the case,
whether the breach of contract is so material as to justify the
injured party in refusing to proceed further and suing for damages
for breach of the entire contract, or whether the breach is
severable, giving rise to a claim for compensation but not to a
right to treat the whole contract as broken.” (Emphasis supplied)

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8 Tolentino IV Civil Code of the Philippines, p. 175 (1985).


9 Rollo, pp. 92, 117.

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Integrated Packaging Corporation vs. Court of Appeals

In this case, as found a quo petitioner’s evidence failed to


establish that it had paid for the printing paper covered by
the delivery invoices on time. Consequently, private
respondent has the right to cease making further delivery,
hence the private respondent did not violate the order
agreement. On the contrary, it was petitioner which
breached the agreement as it failed to pay on time the
materials delivered by private respondent. Respondent
appellate court correctly ruled that private respondent did
not violate the order agreement.
On the second assigned error, petitioner contends that
private respondent should be held liable for petitioner’s
breach of contract with Philacor. This claim is manifestly
devoid of merit.
As correctly held by the appellate court, private
respondent cannot be held liable under the contracts
entered into by petitioner with Philacor. Private
respondent is not a party to said agreements. It is also not
a contract pour autrui. Aforesaid contracts could not affect
third persons like private respondent because of the basic
civil law principle of relativity of contracts which provides
that contracts can only bind the parties who entered
10
into it,
and it cannot favor or prejudice a third person, even if he
is aware 11
of such contract and has acted with knowledge
thereof.
Indeed, the order agreement entered into by petitioner
and private respondent has not been shown as having a
direct bearing on the contracts of petitioner with Philacor.
As pointed out by private respondent and not refuted by
petitioner, the paper specified in the order agreement
between petitioner and private respondent are markedly
different from the paper 12
involved in the contracts of
petitioner with Philacor. Furthermore, the demand made
by Philacor upon petitioner for the latter to comply with its
printing contract is dated February 15, 1984, which is
clearly made long after private respondent had filed its
complaint on August 14, 1981.

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10 Ramos vs. CA, 302 SCRA 589, 599 (1999).


11 Tolentino IV Civil Code of the Philippines, p. 428 (1985).

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12 Rollo, p. 125.

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Integrated Packaging Corporation vs. Court of Appeals

This demand relates to contracts with Philacor dated April


12, 1983 and May 13, 1983, which were entered into by
petitioner after private respondent filed the instant case.
To recapitulate, private respondent did not violate the
order agreement it had with petitioner. Likewise, private
respondent could not be held liable for petitioner’s breach
of contract with Philacor. It follows that there is no basis to
hold private respondent liable for damages. Accordingly,
the appellate court did not err in deleting the damages
awarded by the trial court to petitioner.
The rule on compensatory damages is well established.
True, indemnification for damages comprehends not only
the loss suffered, that is to say actual damages (damnum
entergens), but also profits which the obligee failed to
obtain, referred to as compensatory damages (lucrum
cessans). However, to justify a grant of actual or
compensatory damages, it is necessary to prove with a
reasonable degree of certainty, premised upon competent
proof and on the best evidence obtainable
13
by the injured
party, the actual amount of loss. In the case at bar, the
trial court erroneously concluded that petitioner could have
sold books to Philacor at the quoted selling price of
P1,850,750.55 and by deducting the production cost of
P1,060,426.20, petitioner could have earned profit of
P790,324.30. Admittedly, the evidence relied upon by the
trial court in arriving 14at the amount are mere estimates
prepared by petitioner. Said evidence is highly speculative
and manifestly hypothetical. It could not provide sufficient
legal and factual basis for the award of P790,324.30 as
compensatory damages representing petitioner’s self-
serving claim of unrealized profit.
Further, the deletion of the award of moral damages is
proper, since private respondent could not be held liable for
breach of contract. Moral damages may be awarded when
in a breach of contract the defendant acted in bad faith, or
was

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13 Coca-Cola Bottlers Phils., Inc. vs. Roque, GR-118985, June 14, 1999,
p. 8, 308 SCRA 215.
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14 Rollo, p. 131.

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Integrated Packaging Corporation vs. Court of Appeals

guilty of gross negligence amounting to bad faith,


15
or in
wanton disregard of his contractual obligation. Finally,
since the award of moral damages is eliminated,
16
so must
the award for attorney’s fees be also deleted.
WHEREFORE, the instant petition is DENIED. The
decision of the Court of Appeals is AFFIRMED. Costs
against petitioner.
SO ORDERED.

     Bellosillo (Actg. C.J., Chairman), Mendoza, Buena


and De Leon, Jr., JJ., concur.

Petition denied, judgment affirmed.

Notes.—In a unilateral promise to sell, where the


debtor fails to withdraw the promise before the acceptance
by the creditor, the transaction becomes a bilateral contract
to sell and to buy and the parties may reciprocally demand
performance. (Serra vs. Court of Appeals, 229 SCRA 60
[1994])
Contracts can only bind the parties who had entered
into it, and it cannot favor or prejudice a third person.
(Ramos vs. Court of Appeals, 302 SCRA 589 [1999])

——o0o——

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15 J. Vitug. Compendium of Civil Law and Jurisprudence, p. 841 (1993).


16 Bernardo vs. CA, 275 SCRA 413, 432 (1997).

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Workers of Antique Electric Cooperative, Inc. vs. NLRC

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