OBLIGATIONS AND CONTRACTS: Remedies of Creditor in Case of Breach

Case Name Visayan Sawmill v. Court of Appeals and RJH Trading

GR No. | Date G.R. No. 83851 | March 3, 1993 Ponente Davide, J.

Topic Rescission

Doctrine A contract to sell contains a positive suspensive condition, which if not fulfilled, does not give rise to
the obligation nor converts that contract to that of a sale. Accordingly, the contract may be rescinded by
the parties.

Laws Art. 1597, NCC: Where the goods have not been delivered to the buyer, and the buyer has repudiated
the contract of sale, or has manifested his inability to perform his obligations, thereunder, or has
committed a breach thereof, the seller may totally rescind the contract of sale by giving notice of his
election so to do to the buyer.

Source of Obligation Contract Contract Entered Contract to Sell (vs. Contract of Sale)

Action Petition for Review – Set Aside the Decision for an Action for Specific Performance

Cause of Action Non-fulfillment of Suspensive Condition

Summary Petitioner Visayan Sawmill entered into a sale of scrap iron with respondent RJH Trading subject to a
condition that RJH Trading will open a letter of credit in favor of petitioner on or before May 15, 1983.
The agreement was evidenced by a contract entitled, “Purchase and Sale of Scrap Iron,” duly signed by
the parties. Petitioners were not informed of the status of the opening of the letter of credit until May
24, prompting them to cancel the contract earlier on May 23, 1983. As a result, respondents filed an
action for specific performance against the petitioners. The petitioners justified that the cancellation was
justified because of the respondents’ non-compliance of the essential preconditions of the contract.
However, the trial court decided in favor of the respondents and ordered for the specific performance of
the petitioners. The decision was likewise affirmed by the Court of Appeals.

Upon appeal to the Supreme Court, the Supreme court ruled in favor of the petitioner, holding that the
contract agreement was merely a contract to sell, and not a contract of sale. As a result, the opening of
the letter of credit is a positive suspensive condition needed to be performed before the obligation
arises. Since the respondent failed to comply with the positive suspensive condition, the obligation of
the petitioner to convey title was prevented from acquiring binding force. Accordingly, the petitioner
may totally rescind the contract, pursuant to Art. 1597 of the Civil Code.

Facts of the Case

Statement of Facts:
 May 1, 1983 – petitioner Visayan Sawmill Co. and respondent RJH Trading entered to a sale involving
scrap iron located at the stockyard of the petitioner-appellant, subject to a condition that respondent-
appellee will open a letter of credit in the amount of Php 250,000 in favor of the appellant on or before May
15, 1983. This is evidenced by a contract entitled, “Purchase and Sale of Scrap Iron” duly signed by both
parties.
 May 17, 1983 – plaintiff appellee (RJH Trading) started digging and gathering scrap iron at the defendant’s
premises until May 30, when defendant appellant (Visayan Sawmill) directed them to desist from pursuing
work in iew of an alleged case filed against them by Alberto Pursuelo.
 May 23, 1983 – defendant appellant (Visayan Sawmill) sent a telegram cancelling the contract of sale
because of failure of the latter to comply with the conditions.
 May 24, 1983 – plaintiff-appellee (RJH Trading) informed defendant-appellants (Visayan Sawmill) that the
letter of credit was opened May 12, 1983 at the Bank of the Philippine Islands
  May 26, 1983 – defendant-appellants received a letter advice from Dumaguete branch of BPI that the Letter
of Credit account of Armaco-Marsteel Alloy Corporation is opened of favor of Ang Tay c/o Visayan
Sawmill for shipments of 500 MT assorted steel crap marine/heavy equipment, expiring on July 24,
1983 without recourse at sight.
 July 19, 1983 – plaintiff-appellee (RJH Trading) sent telegrams stating that the case filed against him by
Pursuelo had been dismissed. It also demanded defendants to comply with the deed of sale.
 July 20, 1983 – defendant Visayan Sawmill’s lawyer informed appellee’s lawyer that defendant-appellant
is unwilling to continue with the sale due to appellee’s failure to comply with essential pre-conditions of
the contract.
 July 29, 1983 – plaintiff-appellee (RJH Trading) filed a complaint with petition for preliminary attachment.
However, the petition was unserved since the appellant is no longer in operation.
 Private respondent RJH Trading prayed for judgment ordering petitioner to comply with the contract by
delivering to him the scrap iron subject. It also sought an award for damages attorney’s fees and the costs
of suit.

Facts Raised by the Respondent:

 The control and possession over the subject matter of the contract was given to the plaintiff-appellee, the
buyer, when the defendant-appellants allowed them to enter the corporation’s premises and to dig-up scrap
iron. The pieces of scrap iron were then place at the disposal of the buyer. Delivery was therefore complete.
 Where there has already been delivery, the intervention of the court is necessary to annul the contract

Facts Raised by the Petitioner:

 The cancellation of the contract is justified because of private respondent’s non-compliance with essential
pre-conditions, among which is the opening of an irrevocable and unconditional letter of credit not later
than May 15, 1983.
 There was no delivery since the purchase documents states that the “seller agreed to sell and the buyer
agreed to buy an undetermined quantity of scrap iron and junk.” Since there is no identification and
designation, there could be no delivery.

Lower Courts: Decision

 Trial Court – rendered judgment in favor of the respondent, ordering petitioner to pay damages. It also
ordered that there was delivery of the scrap iron subject of the contract of sale, and that rescission is
improper since the breach is only very slight.
 Court of Appeals – affirmed the decision of the Trial Court

Ratio Decidendi

Issue 1: Was the contract entitled Purchase and Sale of Scrap Iron dated May 1, 1983, executed by the parties
cancelled and terminated? Were the reasons or grounds for cancelling valid and justified?
Yes.

Application in the case at bar:

The agreement states that the seller bound and promised itself to sell the scrap iron upon the fulfillment by the
private respondent of his obligation to make or indorse an irrevocable and unconditional letter of credit in payment
of the purchase price. In that regard, the court held that the said contract is a mere contract to sell or promise to sell,
and not a contract of sale, which obligation to sell is unequivocally subject to a positive suspensive condition.

The respondent failed to comply with the positive suspensive condition. It did not only fail to open, make or indorse
an irrevocable and unconditional letter of credit on or before May 15, 1983, but the letter of advice it sent, and was
received by the petitioner corporation on May 26, 1983, is also not in accordance with the stipulation made between
the parties on these grounds:
 Not opened, made or indorsed by the private respondent, but by a corporation which is not a party to the
contract – Armaco-Marsteel Alloy Corporation
 Not opened with the bank agreed upon
 Not irrevocable and unconditional
The failure to comply with the positive suspensive condition is not a breach, but rather an event that prevented the
obligation of petitioner corporation to convey title from acquiring binding force. There was to be no actual sale until
the fulfillment of the positive suspensive condition.

Accordingly, the petitioner corporation may totally rescind, pursuant to Article 1597 of the Civil Code.

Conclusion:
The obligation to sell did not arise since the respondent failed to comply with the positive suspensive condition. It
cannot be compelled by specific performance to comply with its prestation. In short, Art. 1191 of the Civil Code
does not apply, but pursuant to Art. 1597 of the Civil Code, the petitioner corporation may totally rescind.

Issue 2: Did the implied delivery of the subject scrap iron on May 17, 1983, when private respondent’s men started
digging up and gathering scrap iron within the petitioner’s premises, convert the initial contract to a contract of sale?
No.

Application in the case at bar:

The court held that there is no conversion of the initial contract to a contract of sale by the petitioner’s alleged
implied delivery of the scrap iron.
 In the first place, there is no obligation yet arisen to deliver the subject of the contract in view of the
respondent’s failure to comply with the positive suspensive condition.
o As there is no obligation yet to deliver, Art. 1497 of the Civil Code on the Obligations of the
vendor does not apply.
 The permission given was a mere accommodation to expedite the weighing and hauling of the iron in the
event that the sale would materialize. Thus, the private respondent was not thereby placed in possession of
and control over the scrap iron.
 The action and conduct of the parties in the premises do not support this conclusion since the petitioners
demanded fulfillment of the suspensive condition and eventually cancelled the contract.

Conclusion:
Article 1497 falls under the Chapter, Obligations of the Vendor, which is found in Title VI (Sales), Book IV of the
Civil Code. As such, the obligation imposed therein is premised on an existing obligation to deliver the subject of
the contract. This provision will only apply if the obligation had already arisen.

Issue 3: Are the parties entitled to damages they respectively claim under the pleadings?
No.

Application in the case at bar:

The court held that there is a clear absence of any legal and factual basis in the moral and exemplary damages
awarded to the private respondents. It further held that the refusal of the petitioners to deliver the scrap iron was
founded on the non-fulfillment by the respondent of a suspensive condition. It cannot, therefore, be said that the
herein petitioners had acted fraudulently and in bad faith or in a wanton, reckless, oppressive or malevolent manner.

Conclusion:
Moral damages may be recovered if defendants acted fraudulently and in bad faith, while exemplary damages may
only be awarded if defendants acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.

Moral damages are emphatically not intended to enrich a complainant at the expense of the defendant. Its award is
aimed at the restoration, within the limits possible, of the spiritual status quo ante, and it must be proportional to the
suffering inflicted.

Ruling
Wherefore, the instant petition is GRANTED. The decision of public respondent Court of Appeals in C.A.-G.R. CV
No. 08807 is REVERSED and Civil Case No. 15128 of the Regional Trial Court of Iloilo is ordered DISMISSED.
Costs against the private respondent.

So Ordered.

Separate Opinions

Romero, J., dissenting

I vote to dismiss the petition.

Petitioner Visayan Sawmill Co., Inc. entered into a contract on May 1, 1983 with private respondent RJH Trading
Co, represented by Ramon J. Hibionada. The contract, entitled “Purchase and Sale of Scrap Iron,” stated that:
 Seller Visayan Sawmill agrees to sell, and Buyer RJH Trading Co. agrees to buy, an undetermined
quantity of scrap iron and junk … at Fifty Centavos (P0.50) per kilo on the following terms:
o Weighing shall be done in the premises of the seller
o To cover payment of the purchase price, buyer will open, make or indorse an irrevocable and
unconditional letter of credit not later than May 15, 1983 at Consolidated Bank and Trust
Company … in favor of the seller in the sum of Two Hundred and Fifty Thousand Pesos
(P250,000), Philippine Currency.
o The seller will furnish the buyer free of charge at least three (3) cargo trucks with drivers… All
expenses for labor, loading and unloading shall be for the account of the buyer.
o Seller shall be entitled to a deduction of three percent (3%) per ton as rust allowance.

On May 17, 1983, the workers of private respondents were allowed inside petitioner company’s premises to gather
scrap iron. However, on May 23, 1983, petitioner company sent a telegram, [cancelling the contract] …
 Hibionada wired back on May 24, 1983: “Letter of Credit Amounting P250,000 opened May 12, 1983,
Bank of PI Main Office, Ayala Avenue, Makati, Metro Manila…”
 May 26, 1983 – petitioner company received advice from Dumaguete City Branch of BPI: “Opened today
our irrevocable domestic letter of credit … in favor of Ang Tay c/o Visayan Sawmill Co., Inc. Dumaguete
City Negros Oriental Account of Armaco-Marsteel Alloy Corporation… shipments of about 500 MT of
assorted steel scrap marine/heavy equipment expiring on July 23, 1983 with recourse …”
 Subsequently, petitioners’ counsel sent another telegram stating that: “Visayan Sawmill Company
unwilling to continue sale…”

Private respondents filed a complaint for specific performance and damages with the RTC of Iloilo, which decided
in favor of private respondents. The RTC decision having been affirmed by the CA, the present petition was filed.

The distinction between a contract to sell and a contract of sale is crucial in this case.

When the parties entered into the contract entitled “Purchase and Sale of Scrap Iron” on May 1, 1983, the contract
reached the stage of perfection, there being a meeting of the minds upon the object and the price. Applying Article
1475 of the Civil Code, from that moment, the parties may reciprocally demand performance of the obligations
incumbent upon them.

Petitioner admits that before the opening of the letter of credit, buyer Ramon Hibionada went to Mr. Ang Tay and
informed him … if it was possible for him (buyer) to start cutting and digging the scrap iron before the letter of
credit arrives and the former (seller) manifested no objection… From the time the seller gave access to the buyer to
enter his premises, … he has placed the goods in the control and possession of the vendee and delivery is effected.
That payment of the price in any form was not yet effected is immaterial to the transfer of right to ownership. In a
contract of sale, the non-payment of the price is a resolutory condition which extinguishes the transaction.
 Positive Suspensive Condition in a contract to sell - ownership is not transferred upon delivery of property
but upon full payment of the purchase price.
In a contract of sale, after delivery of the object of the contract has been made, the seller loses ownership and cannot
recover the same unless the contract is rescinded. But in the contract to sell, the seller retains ownership and the
buyer’s failure to pay cannot even be considered a breach, but an event that prevented the seller’s duty to transfer
title.

A provision in the contract regarding the mode of payment, like the requirement for the opening of the Letter of
Credit…, is not among the essential requirements of a contract of sale. Not every provision regarding payment
should automatically be classified as a suspensive condition. For a provision in the contract regarding payment of
the price to be considered a suspensive condition, the parties must have made this clear in certain and unambiguous
terms, such as by reserving or withholding title to the goods until full payment by the buyer.
 Dignos v. CA: Absent a proviso in the contract that the title to the property is reserved in the vendor until
full payment of the purchase price, the transaction is an absolute contract of sale, and not a contract to
sell.
 In the instant case, nowhere in the contract did it state that the petitioners reserve title to the goods until
private respondents have opened a letter of credit.

In some pleadings in the course of this litigation, petitioners referred to the transaction as a contract of sale. It is
evident that the stipulation for the buyer to open a letter of credit in order to cover the payment of the purchase price
does not bear the marks of a suspensive condition. The agreement between the parties was a contract of sale, and the
“terms and conditions” embodied therein which are standard form, are clearly resolutory in nature. Contrary to the
conclusions arrived at in the ponencia, the transaction is not a contract to sell but a contract of sale.

However, the determination of the nature of the contract does not settle the controversy. A breach of contract was
committed, and the rights and liabilities of the parties must be established.

In every contract which contains reciprocal obligations, the right to rescind is always implied under Art. 1191 of the
Civil Code in case one of the parties fails to comply with his obligations. The right to rescind pursuant to Art. 1991
is not absolute. Rescission will not be permitted for slight or casual breach. Petitioners claim that the breach is so
substantial not only because the Letter of Credit was not opened on May 15, 1983, as stipulated in the contract, but
also because of the following factors:
 Letter of Credit was made against the account of a certain Marsteel Alloy Corporation, instead of private
respondent’s account
 Letter of Credit referred to “assorted steel scrap” instead of “scrap of iron and junk” as provided in the
contract
 Letter of Credit place the quantity of the goods at “500 MT” while the contract mentioned “an
undetermined quantity of scrap iron and junk”
 No amount from the Letter of Credit will be released unless accompanied by a Certificate of Acceptance
 Letter of Credit had an expiry date.

I am not convinced that the above circumstances may be characterized as so substantial and fundamental as to defeat
the object of the parties in making the agreement. None of the alleged defects in the Letter of Credit would serve to
defeat the object of the parties. The above-mentioned factors could not have prevented such payment.

The private respondents were supposed to open the Letter of Credit on May 15, 1983 but, it was not until May 26,
1983 or eleven (11) days later that they did so. Is the eleven-day delay a substantial breach of the contract as could
justify the rescission of the contract?
 There was no indicia in this case that can lead one to conclude that time was of the essence.
 In the absence of any indication, the eleven-day delay must be deemed a casual breach which cannot justify
a rescission.

Petitioners were not justified in law in rescinding the agreement.

Additional Notes
Letter of Credit – letter from a bank guaranteeing the timely payment, in the appropriate amount, of the buyer.
Through this document, the bank or third person will cover for the payment or reimbursement of the addressee on
the amount advanced to a third person.