ACE-AGRO DEVELOPMENT CORPORATION, PETITIONER, VS. COURT OF APPEALS AND COSMOS BOTTLING CORPORATION, RESPONDENTS.

Ace-Agro versus Cosmos Bottling

The Case

This is a petition for review on certiorari brought by Ace-Agro Development Corporation against Cosmos Bottling Corporation, arising from a complaint for damages for breach of contract. Ace-Agro had cleaned soft drink bottles and repaired wooden shells for Cosmos under service contracts renewed every year since 1979. When a fire struck the Cosmos plant in April 1990, Cosmos terminated the contract, and the question became who, if anyone, was guilty of breach. The case matters because it teaches the bar candidate how a force majeure event suspends performance without extending the term of a contract with a resolutory period, and how a party's unjustified refusal to resume work can itself amount to breach.

Procedural History

Ace-Agro sued Cosmos for breach of contract and damages in the Regional Trial Court of Malabon. The trial court found Cosmos guilty of breach and ordered it to pay actual damages, exemplary damages, attorney's fees, and costs. Cosmos appealed to the Court of Appeals, which reversed the trial court and dismissed the complaint for lack of merit. Ace-Agro moved for reconsideration, but its motion was denied. Ace-Agro then came to the Supreme Court by petition for review on certiorari.

Facts

Since 1979, Ace-Agro had been cleaning soft drink bottles and repairing wooden shells for Cosmos, rendering its services inside the Cosmos plant in San Fernando, Pampanga. The parties signed yearly service contracts; the one in question covered January 1 to December 31, 1990. Cosmos had also engaged Aren Enterprises, which worked outside the plant, because Ace-Agro could handle only about 2,000 to 2,500 cases a day against Cosmos's daily production of 8,000 cases.

On April 25, 1990, fire broke out in the plant and destroyed the area where Ace-Agro worked, stopping its operations. On May 15, 1990, Cosmos advised Ace-Agro that, because the fire had practically burned all the old soft drink bottles and wooden shells, it was terminating their contract. Ace-Agro asked for reconsideration twice, in June and July 1990, citing the welfare of its workers. On August 28, 1990, Cosmos offered to let Ace-Agro resume repairing wooden shells, but outside the plant premises. Ace-Agro refused, saying the added transportation cost would eat up its meager profits.

On November 7, 1990, Cosmos advised Ace-Agro that it could now resume the repair of wooden shells inside the plant under their existing contract. Ace-Agro again refused, citing a pending labor case filed by its employees. In truth, as its manager admitted, it wanted the contract extended to cover the period of inactivity, and Cosmos declined, insisting on a new contract after December 31, 1990. Meanwhile, the labor case ended with Ace-Agro held liable to its employees, while Cosmos was absolved for lack of privity.

Issues

• Whether or not Cosmos was justified in unilaterally terminating the service contract on account of the fire as a force majeure event.
• Whether or not Ace-Agro's refusal to resume work under the offers of August 28 and November 7, 1990 constituted breach of contract, such that Cosmos may be held liable for damages.

Applicable Provisions

Article 1231 of the Civil Code, which the Court of Appeals discussed in extinguishing obligations, provides:

Obligations are extinguished: (1) By payment or performance; (2) By the loss of the thing due; (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation. Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code.

This provision frames the discussion of whether the fire extinguished the obligation, which the Court resolves by holding that it merely suspended performance.

Ruling

On the first issue, the Court held that the Court of Appeals did not rule that the fire extinguished the contract. On the contrary, the appellate court rejected Cosmos's claim and found that the fire caused, at most, a temporary suspension of work, not a valid cause for termination. The Court stressed that the suspension was due to force majeure and that the contract was subject to a resolutory period running from January 1 to December 31, 1990. The period during which work was suspended did not justify an extension of the term, for the contract relieved the parties of their obligations during the suspension but did not stop the running of the period.

On the second issue, the Court held that Cosmos was not guilty of breach. Cosmos had withdrawn its termination and made efforts at accommodation, first by offering work outside the plant and later by allowing work inside under the existing contract. Ace-Agro unjustifiably refused both offers, insisting on an extension of the contract, which in effect was a demand for a new contract requiring Cosmos's consent. The Court found no basis for the claim that Cosmos favored Aren Enterprises, since that contract predated the fire and Ace-Agro could not handle the full production. Since the question was whether Cosmos was guilty of breach, and Cosmos was blameless, the appellate decision stood.

Doctrine

A fortuitous event or force majeure suspends the performance of obligations under a contract with a resolutory period, but it does not stop the running of that period nor entitle a party to an extension. The period of suspension cannot be deducted from the stipulated term. A party's unjustified refusal to resume work under the terms of an existing contract, in order to demand an extension, is itself a breach of contract. The party seeking relief must show that the other party is guilty of breach; where neither party is at fault for the failure to resume, no liability for breach attaches.

Disposition

The petition for review was denied and the decision of the Court of Appeals was affirmed; Cosmos won, and Ace-Agro's complaint for damages was dismissed.

Remember This

Memorize this line: force majeure suspends performance but does not extend the term of a contract with a resolutory period. Examiners use this case to test whether a student can distinguish suspension of obligations from extinguishment, and whether an unjustified refusal to resume work is itself a breach.