FERNANDO A. GAITE, PLAINTIFF AND APPELLEE, VS. ISABELO FONACIER, GEORGE KRAKOWER, LARAP MINES & SMELTING CO., INC., SEGUNDINA VIVAS, FRANCISCO DANTE, PACIFICO ESCANDOR AND FERNA…

Gaite versus Fonacier

The Case

This is an action for the payment of a sum of money arising from a contract of sale of iron ore. Fernando Gaite sues Isabelo Fonacier and the sureties on two bonds for the unpaid balance of the purchase price of approximately 24,000 tons of iron ore. The case matters because it draws the classic dividing line between a suspensive condition and a suspensive period, and because it applies the rule that a debtor who fails to furnish or maintain the security he promised loses the benefit of the term.

Procedural History

Gaite filed a complaint in the Court of First Instance of Manila for the balance of 65,000 pesos, consequential damages, and attorney's fees. The trial court held that the obligation was one with a term, that the term expired on December 8, 1955, and that the obligation became due and demandable under Article 1198 of the Civil Code. It also found that Gaite did have approximately 24,000 tons of ore at the mining claims at the time of the contract. Judgment was rendered for Gaite, ordering the defendants to pay jointly and severally 65,000 pesos with interest at six percent per annum from December 9, 1955, plus costs. The defendants appealed directly to the Supreme Court because the claims involved aggregate more than 200,000 pesos.

Facts

Isabelo Fonacier owned or held eleven iron lode mineral claims known as the Dawahan Group in Jose Panganiban, Camarines Norte. By a deed of assignment dated September 29, 1952, he appointed Fernando Gaite as his attorney-in-fact to enter into a contract for the exploration and development of the claims on a royalty basis of not less than 50 centavos per ton. Gaite in turn assigned the development and exploitation to the Larap Iron Mines, his own single proprietorship, on the same royalty basis. Gaite then developed the claims, opened roads, installed facilities, and extracted what he estimated to be approximately 24,000 metric tons of iron ore.

Fonacier later decided to revoke the authority, and Gaite assented subject to conditions. On December 8, 1954, they executed a document entitled Revocation of Power of Attorney and Contract. Gaite transferred to Fonacier his rights over the roads, improvements, and facilities, the business name and its goodwill, and all his rights over the 24,000 tons of iron ore, more or less, for 75,000 pesos. Ten thousand pesos was paid upon signing. The balance of 65,000 pesos was to be paid from the first letter of credit covering the first shipment of ore or the first amount derived from the local sale of ore by the Larap Mines and Smelting Company. To secure that balance, Fonacier promised to execute a surety bond. He delivered one bond with himself as principal and the company and its stockholders as sureties, and a second bond with the Far Eastern Surety and Insurance Company as additional surety. The second bond provided that the surety company's liability would attach only upon an actual sale of ore of not less than 65,000 pesos, and would automatically expire on December 8, 1955.

On the same day, Fonacier conveyed the right to develop and exploit the claims, together with the ore, to the Larap Mines and Smelting Company. Up to December 8, 1955, when the surety company's bond expired, no sale of the ore had been made and the 65,000 peso balance had not been paid. Gaite demanded payment on the theory that the defendants had lost the right to use the period when the bond expired. When they refused, he sued.

Issues

• Whether or not the obligation to pay the 65,000 peso balance is one with a suspensive condition rather than one with a suspensive period.
• Whether or not the defendants forfeited the right to make use of the period by their failure to renew or replace the surety company's bond upon its expiration.
• Whether or not there were actually 24,000 tons of iron ore in the stockpiles, and whether the buyers are entitled to damages for short delivery.

Applicable Provisions

Article 1198 of the Civil Code provides:

ART. 1198. The debtor shall lose every right to make use of the period: (1) * * * * * (2) When he does not furnish to the creditor the guaranties or securities which he has promised. (3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through fortuitous event they disappear, unless he immediately gives new ones equally satisfactory.

This is the provision on which the forfeiture of the term rests, because the defendants failed to renew the security they had given.

Article 1378 of the Civil Code provides:

if the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.

This rule of interpretation supports reading the obligation as existing but deferred, rather than as contingent.

Ruling

On the first issue, the Court held that the shipment or local sale of the ore was not a suspensive condition but only a suspensive period. What characterizes a conditional obligation is that its efficacy or obligatory force is subordinated to a future and uncertain event, so that if the condition does not take place, the parties stand as if the obligation had never existed. The contract expressed no such contingency. There was no uncertainty that payment would have to be made sooner or later; only the exact date was undetermined. A contract of sale is normally commutative and onerous, and the contingent character of an obligation must clearly appear. To subordinate payment to the sale or shipment would leave payment at the discretion of the debtor, who could postpone it indefinitely. Any doubt would be settled in favor of the greatest reciprocity of interests.

On the second issue, the Court held that the defendants had forfeited the right to compel Gaite to wait. The expiration of the bonding company's undertaking substantially reduced the security of the vendor's rights as creditor, a security Gaite considered essential and had insisted upon. Their failure to renew or extend the bond plainly impaired the securities given, unless immediately renewed or replaced, and the case falls squarely under paragraphs 2 and 3 of Article 1198. The Court also rejected the argument of waiver, since Gaite stood to lose and had nothing to gain by it.

On the third issue, the Court held that this was a sale of a specific mass of fungible goods for a single lump sum, the quantity of 24,000 tons, more or less, being a mere estimate. No provision was made for measuring or weighing the ore to perfect the sale, and the price was not based on any such measurement. All that was required of Gaite was to deliver in good faith all of the ore found in the mass. Even accepting the buyers' figure of 6,609 cubic meters and multiplying it by the average tonnage factor of 3.3 tons per cubic meter, the product is 21,809.7 tons, not far from the estimate of 24,000 tons. There was therefore no short delivery and no fraud.

Doctrine

A Bar candidate should retain these rules. First, a suspensive condition makes the very existence of the obligation depend on a future and uncertain event; a suspensive period merely defers demandability while the obligation already exists. Second, in an onerous contract, doubt is settled in favor of the greatest reciprocity of interests, so an obligation is presumed to exist with only its maturity deferred. Third, under Article 1198, the debtor loses the benefit of the term when he fails to furnish the guaranties or securities he promised, or when by his own acts he impairs them. Fourth, in a sale of a specific mass of fungible goods for a lump sum, the stated quantity is a mere estimate, and the seller complies by delivering in good faith all of the mass.

Disposition

The Supreme Court affirmed the decision of the trial court, with costs against the appellants.

Remember This

Memorize the line that the shipment or sale of the ore was not a condition precedent but only a suspensive period, so the obligation existed from the start and only its maturity was deferred. Examiners use this case to test the condition-versus-term distinction and the forfeiture of the term under Article 1198.