Rustan Pulp & Paper Mills, Inc. v. The Intermediate Appellate Court
REITERATIONFacts
The Antecedents: Rustan Pulp and Paper Mills, Inc. (Rustan) entered into a contract of sale with Romeo A. Lluch for the supply of pulp wood. The contract stipulated that Rustan had the option to buy from other suppliers and the right to stop deliveries if the supply became sufficient, provided the seller was given sufficient notice. During the test run of Rustan's plant, major defects were discovered in the machinery, prompting the Japanese supplier to recommend stopping deliveries. Rustan sent a letter to Lluch on September 30, 1968, informing him to stop deliveries within 30 days due to sufficient supply. However, Rustan continued to accept deliveries from Lluch and other suppliers until December 23, 1968. Procedural History: Private respondents sued for breach of contract. The court of origin dismissed the complaint but enjoined petitioners to respect the contract if circumstances warranted full operation and to continue accepting deliveries. On appeal, the Intermediate Appellate Court (IAC) modified the judgment, ordering petitioners to pay private respondents P30,000.00 as moral damages and P15,000.00 as attorney's fees. The Petition: Petitioners argued that the IAC erred in holding petitioners Tantoco and Vergara personally liable, in ruling that Rustan's suspension of deliveries was not a lawful exercise of its rights, and in awarding moral damages and attorney's fees in the absence of fraud or bad faith.
Issue(s)
Whether petitioners Bienvenido R. Tantoco, Sr. and Romeo S. Vergara may be held personally liable under the contract of sale. Whether Rustan's decision to suspend taking delivery of pulp wood was a lawful exercise of its rights under the contract. Whether moral damages and attorney's fees were correctly awarded against both the corporation and the individual petitioners in the absence of fraud or bad faith.
Ruling
The decision of the Intermediate Appellate Court is MODIFIED. Only petitioner Rustan Pulp and Paper Mills, Inc. is ordered to pay moral damages and attorney's fees as awarded by the respondent Court.
Ratio Decidendi
On the personal liability of Tantoco and Vergara: The Court agreed with the petitioners that corporate officers are generally not personally liable for contracts entered into in their official capacity, absent any stipulation to that effect. The personality of the corporation is distinct from the persons composing it. Therefore, Tantoco, who signed as a representative, and Vergara, who did not sign the contract but signed a subsequent letter, cannot be made liable in their individual capacities. The exceptions under Article 1897 of the Civil Code were found to be absent. On the propriety of the stoppage of deliveries: The Court found that paragraph 7 of the contract, granting Rustan the right to stop deliveries when supply becomes sufficient, contained a purely potestative condition. This condition was dependent solely on Rustan's will in determining sufficiency and the need for resumption of deliveries. Such a condition, relating to the fulfillment of an existing obligation and being solely dependent on the obligor's will, must be obliterated from the contract as it violates the principle against purely potestative conditions. The Court also noted that Rustan continued to accept deliveries from other suppliers even after issuing the notice to stop, which belied their claim of sufficient supply or inability to operate. On the award of moral damages and attorney's fees: The Court found that Rustan's actions constituted a breach of contract. However, the award of moral damages and attorney's fees was modified to apply only to the corporation, Rustan Pulp and Paper Mills, Inc. This aligns with the principle that corporate officers are not personally liable for corporate acts unless specific exceptions apply. The Court did not find sufficient basis to hold the individual officers personally liable for these damages.
Main Doctrine
A purely potestative condition in a contract, which is dependent solely on the will of one party for the fulfillment of an existing obligation, must be obliterated from the contract without affecting the rest of the stipulations. Furthermore, corporate officers are generally not personally liable for contracts entered into in their official capacity unless there is a stipulation to that effect or they act outside their authority.