SECOND DIVISION

[G.R. No. 115117. June 8, 2000.]

INTEGRATED PACKAGING CORP. , petitioner, vs . COURT OF APPEALS

and FIL-ANCHOR PAPER CO., INC. , respondents.

Jose S. Santos, Jr. & Associates for petitioner.

Balgos & Perez for private respondent.

SYNOPSIS

On May 5, 1978, petitioner and private respondent executed an order agreement

whereby private respondent bound itself to deliver to petitioner a total of 3,450 reams of
printing paper worth P1,040,060.00 within the period of May, 1978 to October 1979 to be
paid within a minimum of thirty days and maximum of ninety days from delivery. As of July
30, 1979, private respondent had delivered only 1,097 reams of printing paper to
petitioner. Petitioner demanded for the immediate delivery of the balance of the printing
paper. From June 5, 1980 to July 23, 1981 private respondent delivered various quantities
of printing paper amounting to P766,101.70. Subsequently, petitioner encountered
di culties paying private respondent said amount. Private respondent made a formal
demand upon petitioner to settle its account. The latter made partial payments totalling to
P97,200.00 only which was applied to its back accounts. On the other hand, petitioner
failed to comply with its additional printing contract with Philippine Appliance Corporation
(Philacor), hence, Philacor demanded compensation from petitioner for the delay and
damages it suffered on account thereof. On August 14, 1981, private respondent led with
the Regional Trial Court of Caloocan City a collection suit against petitioner. By way of
counterclaim, petitioner alleged that private respondent delivered only 1,097 reams in total
disregard of their agreement and that by reason thereof, it suffered actual damages and
failed to realize expected pro ts. Thereafter, the trial court rendered judgment declaring
that petitioner should pay private respondent the sum of P763,101.70 representing the
value of the printing paper delivered from June 5, 1980 to July 23, 1981. However, it also
found petitioner's counterclaim meritorious and ordered the private respondent to pay the
petitioner P790,324.00 as compensatory damages, as well as it also awarded moral
damages and attorney's fees. On appeal, the Court of Appeals upheld the award in favor of
private respondent but deleted the award of damages in favor of petitioner for lack of
factual and legal basis. Hence, this petition.
The Court ruled that there is no dispute that the agreement provides for the delivery
of printing paper on different dates and a separate price had 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) days 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 justi ed under
the second paragraph of Article 1583 of the Civil Code.
Further, 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
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 respondent because of the basic civil law principle of relativity of contracts which provides
that a contract 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 had acted with
knowledge thereof.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; RECIPROCAL OBLIGATIONS;

UNDERTAKING OF SELLER TO DELIVER THE MATERIALS IS CONDITIONAL UPON
PAYMENT BY BUYER WITHIN THE PRESCRIBED PERIOD; CASE AT BAR. — 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
ful llment 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.
2. ID.; SALES; SELLER'S SUSPENSION OF ITS DELIVERIES TO BUYER
WHENEVER THE LATTER FAILED TO PAY ON TIME IS LEGALLY JUSTIFIED. — [T]he private
respondent's suspension of its deliveries to petitioner whenever the latter failed to pay on
time, as in this case, is legally justi ed 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." (Italics supplied) 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.
3. ID.; CONTRACTS; PRINCIPLE OF RELATIVITY; APPLIED IN CASE AT BAR. —
Private respondent cannot be held liable under the contracts entered into by petitioner
with Philacor. Private respondent is not 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.
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
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 pointed out by private respondent and not refuted by petitioner, the paper speci ed in the
order agreement between petitioner and private respondent are markedly different from
the paper 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 led its
complaint on August 14, 1981. This demand relates to contracts with Philacor dated April
12, 1983 and May 13, 1983, which were entered into by petitioner after private respondent
led 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.
4. ID.; DAMAGES; COMPENSATORY; MUST BE PROVED WITH REASONABLE
DEGREE OF CERTAINTY. — The rule on compensatory damages is well established. True,
indemni cation for damages comprehends not only the loss suffered, that is to say actual
damages (damnum emergens), but also pro ts 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.
5. ID.; ID.; ID.; NOT ESTABLISHED IN CASE AT BAR. — In the case at bar, the trial
court erroneously concluded that petitioner could have sold books to Philacor at the
quoted ceiling price of P1,850,750.55 and by deducting the production cost of
P1,060,426.20, petitioner could have earned pro t 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
could not provide su cient legal and factual basis for the award of P790,324.30 as
compensatory damages representing petitioner's self-serving claim of unrealized profit. AaSCTD

6. ID.; ID.; AWARD OF MORAL DAMAGES AND ATTORNEY'S FEES IS NOT

PROPER WHEN BREACH OF CONTRACT WAS NOT ESTABLISHED. — [T]he 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.

DECISION

QUISUMBING , J : p

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 led by private respondent against petitioner. In said decision,
the appellate court decreed: LibLex

"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
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 thereon, from the date of the filing of the Complaint, until fully paid.
SO ORDERED." 1

The RTC judgment reversed by the Court of Appeals had disposed of the complaint
as follows:
"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 the costs of suit.
SO ORDERED." 2

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

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
307.20/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 P3,000,000.00.
As of July 30, 1979, private respondent had delivered to petitioner 1,097 reams of
printing paper out of the total 3,450 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 di culties 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 dated September 29-30, 1980 and October 1-2, 1980. 3
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
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 for the delay and damage it suffered on account of petitioner's failure. LLphil

On August 14, 1981, private respondent led 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 ling its reply and answer to the counterclaim, private respondent moved for
admission of its supplemental 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. LibLex

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 pro t 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 from the date of the ling of the
complaint until fully paid. 4 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 led 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: LLpr

[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]
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 THE COURT OF APPEALS ERRED IN CONCLUDING THAT PETITIONER IS NOT
ENTITLED TO DAMAGES AGAINST PRIVATE RESPONDENT." 5

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, rstly, 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 to pay therefor a sum of money or its equivalent (price). 6 Both parties
concede that the order agreement gives rise to a reciprocal obligations 7 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 ful llment of the other. 8 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 ful ll 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) days and a maximum of ninety (90) days from each delivery.
9 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 justi ed under the second
paragraph of Article 1583 of the Civil Code which provides that: prLL

"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)

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
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 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
into it, and it cannot favor or prejudice a third person, 1 0 even if he is aware of such
contract and has acted with knowledge thereof. 1 1
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 speci ed in the
order agreement between petitioner and private respondent are markedly different from
the paper involved in the contracts of petitioner with Philacor. 1 2 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 led its
complaint on August 14, 1981. 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. LexLib

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, indemni cation for
damages comprehends not only the loss suffered, that is to say actual damages (damnum
emergens), but also pro ts 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. 1 3 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 pro t of
P790,324.30. Admittedly, the evidence relied upon by the trial court in arriving at the
amount are mere estimates prepared by petitioner. 1 4 Said evidence is highly speculative
and manifestly hypothetical. It could not provide su cient legal and factual basis for the
award of P790,324.30 as compensatory damages representing petitioner's self-serving
claim of unrealized profit. cdasia

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 guilty of
gross negligence amounting to bad faith, or in wanton disregard of his contractual
obligation. 1 5 Finally, since the award of moral damages is eliminated, so must the award
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 for attorney's fees be also deleted. 1 6
WHEREFORE, the instant petition is DENIED. The decision of the Court of Appeals is
AFFIRMED. Costs against petitioner.
SO ORDERED.
Bellosillo (Acting C.J.), Mendoza, Buena and De Leon, Jr., JJ., concur.

Footnotes
1. Rollo, p. 34.
2. Id. at 42.
3. Id. at 35-36.
4. Id. at 34.
5. Id. at 90, 93, 97.
6. De Leon, Comments and Cases on Sales, p. 5 (1995).
7. Rollo, pp. 48, 92.
8. Tolentino IV Civil Code of the Philippines, p. 175 (1985).
9. Rollo, pp. 92, 117.
10. Ramos vs. CA, 302 SCRA 589, 599 (1999).
11. Tolentino IV Civil Code of the Philippines, p. 428 (1985).

12. Rollo, p. 125.

13. Coca-Cola Bottlers Phils. Inc. vs. Roque, G.R. 118985, June 14, 1999, p. 8.
14. Rollo, p. 131.
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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