NATIONAL RICE & CORN CORPORATION (NOW RICE & CORN ADMINISTRATION), PETITIONER, VS. THE HONORABLE COURT OF APPEALS, DAVAO MERCHANDISING CORPORATION, FIELDMEN’S INSURANCE COMPANY …

National Rice and Corn Corporation versus Davao Merchandising Corporation

The Case

This is a petition for review by certiorari brought by the National Rice and Corn Corporation, now the Rice and Corn Administration, against the Court of Appeals and Davao Merchandising Corporation, with Fieldmen's Insurance Company impleaded as a party. The action below was one for the recovery of a sum of money — the balance of the value of corn and rice that Davao Merchandising had exported for the National Rice and Corn Corporation on a no-dollar remittance or barter basis. The case matters because it teaches how the Court reads a complicated barter contract as a whole, and how a supervening government act that makes performance legally impossible affects a reciprocal obligation and the promissory notes that secure it.

Procedural History

The National Rice and Corn Corporation sued Davao Merchandising and Fieldmen's Insurance in the Court of First Instance of Manila. Fieldmen's Insurance answered with a cross-claim against Davao Merchandising and, with leave of court, a third-party complaint against Cesar Ceballos, Jesus Marquez, and Bartolome Cabangbang based on indemnity agreements. The trial court rendered judgment for the plaintiff, ordering Davao Merchandising and Fieldmen's Insurance to pay jointly and severally the sum of 209,995 pesos and 16 centavos with interest at eight percent per annum from September 1, 1961, plus 10,000 pesos as attorney's fees and the costs. On the cross-claim and third-party complaint, Davao Merchandising and the third-party defendants were ordered to reimburse Fieldmen's Insurance whatever it may be obliged to pay, plus ten percent thereof as attorney's fees.

Davao Merchandising and Fieldmen's Insurance appealed to the Court of Appeals. On August 27, 1969, the Court of Appeals modified the judgment, fixing the liability of Davao Merchandising at 199,690 pesos and 97 centavos with interest at eight percent per annum from July 17, 1962, and reducing the attorney's fees to 2,000 pesos. On motion for reconsideration by Davao Merchandising, the Court of Appeals issued a resolution on January 23, 1970, reversing its own decision and dismissing the complaint as premature and for lack of cause of action, without pronouncement as to costs. The National Rice and Corn Corporation then filed this petition for certiorari to review that resolution.

Facts

The National Rice and Corn Corporation held on stock eight thousand metric tons of corn that it could not dispose of because of its poor quality. It called for bids for the purchase and export of the corn and rice, but the bids did not attract good offers. Davao Merchandising then made an offer, which the President, the Cabinet, and the board of directors accepted as the most advantageous. Under the contract, Davao Merchandising was to act as agent of the National Rice and Corn Corporation in exporting the corn and rice, and in importing collateral goods through barter on a back to back letter of credit or no-dollar remittance basis, and to buy those collateral goods as they arrived.

Because the corn would be exported on a no-dollar basis, Davao Merchandising would receive no money for it; its real consideration was the privilege of buying the collateral goods at a modest profit. It exported all the rice and corn at its own expense and paid for the collateral goods as they were received. But because of the inferior quality of the corn, it had to be replaced with more acceptable stock, and the delay caused the letters of credit to expire before the National Rice and Corn Corporation could draw the full amounts. Davao Merchandising replaced the lapsed letters of credit with postdated checks and promissory notes as a token of good faith and as security for the unpaid portion of the price.

Then the government, under a new administration, suspended barter transactions and did not renew the barter permits. As a result, Davao Merchandising could not import the remaining collateral goods worth about 480,000 dollars. Of the value of the corn exported, only 199,690 pesos and 97 centavos remained unliquidated as of July 16, 1962, meaning Davao Merchandising had already paid in advance some 760,309 pesos on the collateral goods yet to be imported. The National Rice and Corn Corporation sued on the promissory notes.

Issues

• Whether or not the Court of Appeals erred in holding that Davao Merchandising acted merely as an agent in the exportation of the corn and importation of the collateral goods, and not as a buyer of the corn.
• Whether or not the complaint on the promissory notes was premature and without cause of action, given the suspension of barter transactions by the government.

Applicable Provisions

Article 1266 of the Civil Code provides:

The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor.

This is the provision on which the Court of Appeals relied in holding that the obligation to import the collateral goods, and with it the obligation to pay the promissory notes, had become unenforceable.

Article 1378 of the Civil Code provides:

If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual.

This supports the reading of the onerous barter contract in favor of the greatest reciprocity of interests between the parties.

Ruling

On the first issue, the Court held that the Court of Appeals did not err. The contract was bilateral and gave rise to reciprocal obligations, consisting of two parts: the exportation by Davao Merchandising as agent of the National Rice and Corn Corporation, and the importation of collateral goods by barter. Davao Merchandising would not have entered the agreement were it not for the stipulation allowing it to purchase the collateral goods, from which it expected a modest profit to cover its exportation expenses and losses. The designation of the parties as seller and buyer was merely nominal, since the contract itself set forth the role of the buyer as agent of the seller. The Court stressed that the importation and purchase of the collateral goods was the main consideration, and that it would be iniquitous to compel Davao Merchandising to make a full accounting of the purchase price without first requiring the National Rice and Corn Corporation to secure the license enabling it to import the remaining collateral goods.

On the second issue, the Court held that the complaint was indeed premature. The promissory notes were executed only as a token of good faith and as security while the collateral goods had not yet been brought in. That obligation became unenforceable when importation became legally impossible due to the suspension of barter transactions and the refusal to renew the barter permit by the government, of which the National Rice and Corn Corporation was an agency. The Court quoted with approval the reasoning that until such importation, the obligation of Davao Merchandising to pay the promissory notes is unenforceable under Article 1266 of the Civil Code, and hence the action is premature. It was not the fault of Davao Merchandising that it failed to import the goods; it was the duty of the National Rice and Corn Corporation to make the necessary representations with the government.

Doctrine

A contract is to be read as a whole, and where it is onerous, any doubt is settled in favor of the greatest reciprocity of interests. The true consideration of a barter arrangement may lie not in the nominal sale of the export commodity but in the privilege of importing collateral goods, and the labels of seller and buyer yield to the actual roles the parties agreed to perform.

Where a reciprocal obligation to import goods becomes legally impossible without the fault of the obligor because the government suspends the very transaction that would make performance possible, the obligation is released under Article 1266 of the Civil Code, and a suit to enforce the promissory notes securing that obligation is premature. The government agency that could have secured the necessary permit bears the duty to make the representations, not the innocent party.

Disposition

The petition was denied, and the resolution of the Court of Appeals dismissing the complaint as premature and for lack of cause of action was upheld, with Davao Merchandising prevailing.

Remember This

Memorize this line: when the government itself makes the prestation legally impossible without the debtor's fault, the obligation is released under Article 1266, and a suit on the notes securing it is premature. Examiners use this case to test reciprocal obligations in barter contracts and the effect of a supervening government act on promissory notes.