BUENASENSO SY, PETITIONER, VS. THE HON. COURT OF APPEALS, (SEVENTH DIVISION) AND JAIME LUZON, RESPONDENTS.

We gave due course to
this Petition for the Review of the decision of the then Court of Appeals (in
CA-G.R. No. 49112-R entitled Jaime Luzon, Plaintiff-Appellee
vs. Buenasenso Sy,
Defendant-Appellant) “only as to the amount of liquidated damages”.^[1]

On March
20, 1969,
petitioner, Buenasenso SY, and private respondent,
Jaime LUZON, entered into a Distributorship Agreement, whereby LUZON, as producer, would supply SY, as
distributor, sixty metric tons monthly of ipil-ipil
leaves at the price stipulated therein. The agreement was to last for two
years, extendible for another two years upon mutual agreement of the parties. Paragraph
VI of the Agreement provided:

“In the event of violation
of any of the provisions of this contract by any of the contracting
parties, the complaining party shall give the other a warning to correct said
violation within a period of Sixty (60) days. If after said period, the
violator has failed to take proper remedies to comply with the provision in
question, a notice Sixty (60) days shall
be given the violator for the final termination of the contract, with
right on the part of the aggrieved party to collect liquidated damages in the
sum of TWENTY Thousand (P20,000.00) Pesos Philippine Currency, and attorney’s fees and other expenses in the cases of litigation by reason of such
violation.”

The Agreement also
stipulated:

“III

DISTRIBUTOR shall extend to ‘X’ (the producer) the sum of Four
Thousand (P4,000.00) Pesos as revolving capital, payable at Fifty (P50.00) Pesos per shipment
of Ipil-Ipil delivered to DISTRUBUTOR without
interest x x x “

Pursuant to their
agreement, SY extended to LUZON the
revolving capital of P4,000.00.

From March to June, 1969,
or a period of approx­imately three (3) months, LUZON effected deliveries of
approximately 133.2 metric tons of ipil-ipil leaves
(Exhibits “B-D”), valued at P29,645.14^[2], short
of the stipulated quantity of 60 metric tons a month. Subsequently, the following
events transpired, as summarized by the Court of Appeals:

“x x
x In June, after the seventh and eighth
shipments, the defendant (Buenasenso SY) presented to
the plaintiff (Jaime LUZON) the
statement of account, Exhibit D, whereby defendant deducted from the
value of the shipments all the advances, including the sun of P3,700.00 still due on the
revolving capital, leaving a net proceed in favor of the plaintiff in the sum
of P1,963.19. This was received by the plaintiff and he signed the statement of
account, Exhibit D, on the promise of the defendant that he would send the
money to the plaintiff. When defendant failed to send the revolving ca­pital to
the plaintiff, the latter sent a telegram on June 21, 1969, Exhibit E, reiterating his request that
defendant transmit to him immediately the agreed amount and to wire his reply. Defendant
did not answer this letter. About the end of July, plaintiff came to Manila
and asked the defendant to deliver to him the advance capital. Defendant did
not give it, and plaintiff had to beg him even for his expenses; and defendant gave him the measly amount of P50.00 for which he signed a
receipt dated July 29, 1969.
When the advance capital was not forthcoming, the plaintiff wrote the letter, Exhibit
F, dated August 7, 1969, requesting that defendant correct the violation of the
terms of the agreement within sixty days from the receipt thereof, and that
‘the same (letter) shall be the
written notice in accordance with paragraph 6 of the contract.’ Defendant
likewise did not answer this letter.
Hence, on November 18, 1969,
plaintiff filed the present complaint.”^[3]

On April 20, 1971,
the Court of First Instance of Camarines Sur rendered judgment against SY for having violated the
contract, even as the Court found that LUZON was short
in deliveries, reasoning that since no demand or notice was served on him by
SY, apparently the latter had condoned such delinquent performance. The decretal portion of that Court’s judgment reads:

“IN VIEW OF ALL THE FOREGOING, the court finds for the
plaintiff. The terms of the contract between him and the defendant Buenaseso Sy having been violated
by the latter, the said defendant should pay unto the court or the plaintiff
the sum of P4,000.00 representing the revolving capital which ought to have
been paid by the defendant to plaintiff and the sum of TWENTY THOUSAND PESOS
(P20,000.00) liquidated damages; P2,000.00 for attorney’s fees and the costs of
the proceedings.”

On appeal by SY, the
Court of Appeals eliminated the sum of P4,000.00, representing the revolving capital which should have been extended to LUZON, stating that the latter, by praying for
liquidated damages, is suing for
rescission and not for specific performance. The dispositive portion of the
Appellate Court’s judgment reads:

‘WHEREFORE, judgment is rendered ordering the defendant to pay to
the plaintiff liquidated damages in the amount of P20,000.00,
and attorney’s fees of P2,000.00. No costs.”

In seeking a reduction of
damages, if not a reversal of the judgment before us, SY contends:

“(a)  Liquidated damages must be reduced here the
claimant violated the terms of the contract and in any case where award becomes
unconscionable or inequitable; the nature and the circumstances of the
violation by the offender also a relevant factor in determining amount of
damages.

“(b)  Other factors exist upon which to predicate
reversal or mitigation; petitioner’s lack of bad faith important in determining
issue.”

There is no question that
liquidated damages of P20,000.00 were
agreed upon by the parties in case of breach thereof. There is no question
either that SY had violated the contract by not continuing to provide the
revolving capital. As provided for by Article 2227 of the Civil Code, however,

“Liquidated damages,
whether intended as an indemnity or a penalty, shall be equitably reduced if
they are iniquitous or unconscionable.”

In the present case, the
Court of Appeals found as a fact that LUZON “had not delivered the 60 tons
of ipil-ipil leaves monthly as agreed upon”^[4], a factual finding that is binding upon us. He,
therefore, neither complied faithfully with the agreement. Equitably,
therefore, since LUZON had also violated the contract, although the
violation was not actionable, and in the exercise of the Court’s discretion, we
reduce the liquidated damages to P10,000.00, which
amount, we believe, is ade­quate for the purpose intended.

ACCORDINGLY, the judgment under review is hereby
modified, and the liquidated damages awarded thereunder
is hereby reduced to P10,000.00. The
rest of the judgment is affirmed.

No costs.

SO ORDERED.

Teehankee, Acting C.J., Plana, Vasquez, Relova, and Gutierrez, Jr., JJ., concur.

^[1]
Resolution, March 3, 1975, p. 66, Rollo.

^[2]
Private Respondent’s Brief, p. 3.

^[3]
Pp. 4-5, Decision, pp. 26-27, Rollo.

^[4]
p. 7, Decision.