SPOUSES ALEXANDER AND JULIE LAM, DOING BUSINESS UNDER THE NAME AND STYLE “COLORKWIK LABORATORIES” AND “COLORKWIK PHOTO SUPPLY”, PETITIONERS, VS. KODAK PHILIPPINES, LTD., RESPOND…

Spouses Lam versus Kodak Philippines

The Case

This is a petition for review on certiorari brought by Spouses Alexander and Julie Lam, doing business under the names Colorkwik Laboratories and Colorkwik Photo Supply, against Kodak Philippines, Ltd. The Lam Spouses bought three units of the Kodak Minilab System 22XL under a letter agreement, but Kodak delivered only one unit. The Lam Spouses stopped paying their installments, Kodak canceled the sale and recovered the delivered unit through a replevin suit, and both sides now dispute who breached the contract and how much in damages the breach carries. The case matters because it teaches how the Court classifies an obligation as divisible or indivisible, and what happens to the parties once a reciprocal contract is rescinded.

Procedural History

Kodak Philippines, Ltd. filed a complaint for replevin and recovery of sum of money before the Regional Trial Court of Makati City. The Lam Spouses were declared in default for failing to appear at pre-trial and to submit a pre-trial brief, and judgment was rendered in Kodak's favor. The Lam Spouses went up to the Court of Appeals, which set aside the default orders and remanded the case for pre-trial. After inhibition of the judge who issued the writ of seizure, the case was reassigned, and the Regional Trial Court eventually rendered its decision dismissing the case and ordering Kodak to pay the value of a generator set and renovation expenses.

The Lam Spouses filed a notice of partial appeal, questioning the trial court's failure to award the larger damages they claimed. Kodak also appealed, but its appeal was dismissed for failure to file its appellant's brief, and that dismissal became final. The Court of Appeals modified the trial court's decision, reducing the renovation award and adding moral and exemplary damages. On motion for reconsideration, the Court of Appeals issued an amended decision restoring to the decretal portion the order for the return of the Minilab Equipment and the reimbursement of the partial payment. The Lam Spouses then filed this petition for review on certiorari before the Supreme Court. Kodak's own intended appeal was later declared closed and terminated for failure to file its petition.

Facts

On January 8, 1992, the Lam Spouses and Kodak Philippines, Ltd. entered into a letter agreement for the sale of three units of the Kodak Minilab System 22XL at 1,796,000 pesos per unit, for proposed outlets in Rizal Avenue in Manila, Tagum in Davao del Norte, and an existing photo counter in Cotabato City. The equipment was payable in forty eight monthly installments of 35,000 pesos inclusive of interest, with no downpayment, and the agreement carried a multiple order discount.

On January 15, 1992, Kodak delivered one unit to Tagum, which was installed in March 1992. The Lam Spouses issued postdated checks for the first twelve months. They asked Kodak not to negotiate the first two checks, but Kodak negotiated them and both were honored. The Lam Spouses then ordered their bank to stop payment on the remaining ten checks. Kodak canceled the sale and demanded the return of the delivered unit. The Lam Spouses ignored the demand and instead rescinded the contract in November 1992 because Kodak had failed to deliver the two remaining units.

Kodak then filed its replevin suit and, on the strength of a writ of seizure, took back the Minilab Equipment together with a generator set. The trial court later found that the generator set had not been sold by Kodak at all but had been purchased by the Lam Spouses from another trader, so Kodak had wrongfully taken it.

Issues

• Whether or not the contract between the Lam Spouses and Kodak Philippines, Ltd. pertained to obligations that are severable, divisible, and susceptible of partial performance under Article 1225 of the Civil Code.
• Whether or not, upon rescission of the contract, the parties are entitled to the restoration of what they respectively gave, under Articles 1190 and 1522 of the Civil Code.

Applicable Provisions

Article 1225 of the Civil Code, which the Court of Appeals applied in finding the obligations divisible, provides:

For the purposes of the preceding articles, obligations in which there is only one prestation shall be considered indivisible, and those in which there are several prestations shall be considered divisible.

It bears on the case because the Court tested whether the parties intended one indivisible package of three units or three separable obligations.

Article 1191 of the Civil Code, the rescission provision invoked by both sides, provides:

The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

It bears on the case because both parties resorted to rescission, and the Court had to work out its consequences.

Article 1522 of the Civil Code, on incomplete delivery, provides:

Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the buyer may reject them, but if the buyer accepts or retains the goods so delivered, knowing that the seller is not going to perform the contract in full, he must pay for them at the contract rate.

It bears on the case because the Lam Spouses accepted and used the delivered unit, which fixed their liability for its price.

Ruling

On the first issue, the Court held that the obligations were divisible and susceptible of partial performance. The letter agreement stated a separate price for each unit, provided for separate deliveries, and arranged payment per unit. The Lam Spouses accepted the first unit and made payments on it. The Court therefore ruled that Kodak's breach as to the two undelivered units did not excuse the Lam Spouses from paying for the unit actually delivered, and Kodak could recover that unit through replevin.

On the second issue, the Court held that rescission under Article 1191 requires the parties to be restored, as far as practicable, to their original situation. The Lam Spouses must return the Minilab Equipment and its standard accessories, while Kodak must return the 270,000 pesos in partial payments. The Court sustained the award of 130,000 pesos for the generator set with legal interest, 440,000 pesos in actual damages, 25,000 pesos in moral damages, and 50,000 pesos in exemplary damages, the last two resting on Kodak's bad faith in claiming a generator set it never sold. The Court found no basis for attorney's fees and litigation expenses, and no ground to increase the moral damages.

Doctrine

First, an obligation is divisible when it is capable of partial performance, and the test is the intention of the parties as shown by the price, the deliveries, and the payment arrangements. Where each item carries its own price and its own installment schedule, the contract is severable, and breach as to one item does not excuse payment for another already delivered.

Second, under Article 1522, a buyer who accepts and retains goods delivered in quantity less than contracted, knowing the seller will not perform in full, must pay for them at the contract rate.

Third, rescission under Article 1191 does not merely terminate the contract; it restores the parties to their original situation as far as practicable, each returning what was received.

Disposition

The petition was denied, and the amended decision of the Court of Appeals was affirmed, with the Lam Spouses returning the Minilab Equipment and accessories and Kodak returning the partial payments and paying the damages awarded.

Remember This

Memorize this line: a contract with separate prices, separate deliveries, and separate payment terms is divisible, so breach as to one unit does not excuse payment for another. Examiners use this case to test divisible obligations under Article 1225 and the restorative effect of rescission under Article 1191.