NATIONAL POWER CORPORATION, PLAINTIFF-APPELLANT, VS. EIN CHEMICAL CORPORATION AND PHILIPPINE INTERNATIONAL SURETY CO., DEFENDANTS-APPELLEES.

National Power Corporation versus EIN Chemical Corporation

The Case

This is a civil action for damages arising from breach of contract, brought by the National Power Corporation against EIN Chemical Corporation and the Philippine International Surety Company. The National Power Corporation, which I will call NPC, awarded EIN a contract to supply and deliver crude sulfur to its fertilizer plant in Iligan City. When EIN failed to deliver in full, NPC sued for damages, and the surety was impleaded on its performance bond. The case matters because it fixes a clean rule on the relationship between a letter of credit and a delivery date, and because it reminds us that a creditor's leniency does not amount to a waiver of its contractual rights.

Procedural History

NPC filed its complaint for damages for breach of contract before the then Court of First Instance of Manila, Branch Sixteen. The trial court dismissed the case. It held that EIN was not in bad faith; that the extension of the expiry date of the letter of credit carried with it an extension of the delivery time; that before EIN's duty to deliver arose, NPC should first have opened the letter of credit notwithstanding the fixed delivery date; that NPC was unjustified in disqualifying EIN from the next bidding; and that there was a scarcity of bottoms, meaning available cargo ships, at the time the expiry date was extended. NPC appealed the trial court's decision, questioning all of those points. The appeal reached the Supreme Court, which resolved the sole question of whether EIN committed a breach of contract entitling NPC to damages.

Facts

On March 23, 1956, after public bidding, NPC awarded EIN a contract, formalized on April 19, 1956, to supply and deliver 3,691 long tons of crude sulfur in one shipment to the Maria Cristina Fertilizer Plant in Iligan City on or before May 10, 1956, for the price of 374,374 pesos and 91 centavos, to be paid by NPC. To guarantee its obligation, EIN posted a bond from the Philippine International Surety Company in the amount of 74,874 pesos and 98 centavos.

EIN obtained from NPC a letter of credit with the Philippine National Bank in New York on May 8, 1956, amounting to 185,794 dollars, with an expiry date originally set for May 30, 1956. Upon EIN's request, NPC reset that expiry date to June 30, 1956, and later, again upon request, extended it to September 30, 1956. On August 19, 1956, EIN delivered only 1,000 long tons of crude sulfur, ostensibly due to lack of bottoms, and NPC paid it 101,764 pesos and 5 centavos for that partial delivery.

Even though it had failed to deliver in full, EIN asked to be allowed to join another bidding by NPC, and NPC disqualified it. NPC then sued EIN for damages on December 17, 1956. EIN countered that NPC failed to inform it that shipping from the United States Atlantic ports to the Philippines would take 45 days; that NPC delayed in opening the letter of credit; that the extensions of the letter of credit were really meant to extend the delivery time; that it should have been allowed to join the second bidding; and that the scarcity of bottoms could have been avoided had NPC opened the letter of credit within a reasonable time.

Issues

• Whether or not EIN committed a breach of contract which would entitle NPC to damages.
• Whether or not the extensions of the expiry date of the letter of credit operated as extensions of the delivery date under the contract.
• Whether or not NPC incurred a delay in opening the letter of credit, or had a duty to inform EIN of the shipping time, such that EIN's failure to deliver was excused.

Applicable Provisions

The decision does not quote a specific statutory article; it rests on the terms of the contract and on the general law of obligations and contracts. The governing principle it applies is that obligations arising from contracts have the force of law between the parties and must be complied with in good faith. That principle bears on the case because the Court measured EIN's conduct against the delivery date fixed in the contract, not against the letter of credit.

Ruling

On the first issue, the Court held that EIN clearly committed a breach of contract by failing to completely deliver on its contract despite the leniency of NPC in enforcing its rights. It stressed that laxity of a contracting party in the enforcement of its rights under the contract does not in any manner diminish its rights thereunder.

On the second issue, the Court held that the extensions of the expiry dates of the letter of credit cannot, by any means, be interpreted as extensions of the delivery date. The contract's provisions indicate no relationship between the delivery date and the opening of the letter of credit, which was anyway opened within a reasonable time after the signing of the contract. Had the parties intended an extension of the delivery date, a corresponding date or deadline could have been provided, and as the terms show, no other delivery date can even be inferred. The claim that the parties intended EIN to ship only upon notice of the opening of the letter of credit was held without merit.

On the third issue, the Court found the imputation of malicious delay on the part of NPC groundless, there being no proof to that effect. On the contrary, NPC had been very lenient, extending the expiry date of the letter of credit thrice despite EIN's failure to fully deliver. The problem of bottoms is well known and anticipated by suppliers and shippers, and NPC cannot be faulted for it since it opened the letter of credit within a reasonable time. NPC had no duty to inform EIN of the shipping time between the United States Atlantic ports and the Philippines, since all shippers and suppliers are presumed to know this as part of their business.

Doctrine

A contract freely entered into in good faith binds the parties according to its terms. The extension of the expiry date of a letter of credit does not, by itself, extend the delivery date fixed in the contract; if the parties intended such an extension, they would have provided a corresponding date or deadline. A creditor's leniency in enforcing its rights under a contract does not diminish those rights. Finally, shippers and suppliers are presumed to know the ordinary incidents of their business, including shipping time, and the scarcity of bottoms is a risk they bear.

Disposition

The Court set aside the appealed decision and rendered a new one directing EIN and the Philippine International Surety Company, jointly and severally, to pay NPC the amount of the performance bond, liquidated damages from August 19, 1956 up to January 20, 1958 when NPC purchased crude sulfur from other sources, and the costs.

Remember This

Memorize the line that laxity of a contracting party in the enforcement of its rights does not diminish its rights under the contract. Examiners use this case to test whether a student will confuse the expiry date of a letter of credit with the delivery date, and to test the presumption that suppliers know the ordinary risks of their trade.