ASTURIAS SUGAR CENTRAL, INC., PLAINTIFF AND APPELLANT, VS. THE PURE CANE MOLASSES CO., INC., DEFENDANT AND APPELLEE.

Prior to the month of January, 1931, the
plaintiff Asturias Sugar Central, Inc., and the defendant Pure Cane
Molasses Co., entered into a contract, Exhibit A, whereby the former
bound itself to sell and the latter to buy all the molasses which the
said plaintiff would produce at the prices and under the conditions
specified therein, one of which was that the defendant deposit the sum
of P6,000 in the Bank of the Philippine Islands as security for
compliance with the terms of the contract, which the said defendant
did. In an action which the plaintiff later brought against the
defendant for the amendment of the contract Exhibit A, the latter, in
its answer, filed on January 14, 1931, raised the Question relative to
its right to cancel the contract upon payment of the sum of P6,000 in
accordance with the terms thereof, alleging that it had made a demand
on the plaintiff to accept the cancellation and to receive the sum of
P6,000, which said plaintiff refused. Consequently, it prayed that the
plaintiff be ordered to accept the said sum of P6,000 and that the
contract Exhibit A be declared cancelled. The lower court rendered
judgment therein holding, among other things, that the terms of the
contract Exhibit A did not authorize the defendant to cancel it and,
therefore, the cancellation was not in order. On appeal, this court
reversed the judgment of the trial court and held that, under the terms
of the contract, the defendant had the right to cancel it at any time
upon payment of the sum of P6,000, which had been deposited in the Bank
of the Philippine Islands for this and other purposes. Upon the filing
of a motion for reconsideration the judgment of this court was ratified
by resolution of this court of December 31, 1932, which further
declared that the contract was deemed cancelled only on November 18,
1932, the date when the defendant deposited the sum of P6,000 with the
clerk of the court and when the cancellation was consummated.^[1]

After the former case was remanded to the lower court, the plaintiff
brought another action against the defendant on February 3, 1933, for
the recovery of the sum of P72,569.28. This sum represented the alleged
damages suffered by the plaintiff by reason of the refusal of the
defendant to purchase the molasses which it had produced from the month
of January, 1931, to November 18, 1932. The trial court dismissed the
complaint and absolved the defendant therefrom. From this judgment the
plaintiff took the appeal now under consideration.

Although the judgment rendered by this court in the former case was not unanimous, it is now res judicata
that the defendant had the option to cancel the contract at any time
upon payment of the sum of P6,000, in accordance with the terms of the
document Exhibit A. However, the judgment of this court in the sense
that the contract was deemed cancelled on November 18, 1932, implies
that the contract in question was in force prior to that date,
Therefore, the whole question raised in this appeal hinges on whether
or not the plaintiff has the right to demand from the defendant the
payment of the amount claimed by it as damages resulting from the
defendant’s refusal to purchase the molasses it had produced from the
month of January, 1931, to November, 1932, and which said defendant was
bound to purchase under the contract which was in force during that
period.

It is an established fact that the defendant demanded the
cancellation of the contract and tendered payment of the sum of P6,000
in consideration thereof. The very answer of the defendant, which was
filed in the former case on January 14, 1931, is an express demand for
cancellation and a formal tender of the sum of P6,000. This demand and
tender were all that the defendant needed to make in order that the
plaintiff would be obliged to give its consent to the cancellation. It
was not necessary for the defendant to deposit the sum of P6,000 with
the clerk of the court merely because the plaintiff refused to accept
it. The tender made by the defendant in good faith was sufficient.
Article 1176 et seq. of the Civil Code requiring the deposit
of the thing due with the clerk of the court, are not applicable to
this case on the ground that they refer to the payment of a debt. In
this case the defendant owed the plaintiff nothing. The said sum of
P6,000 was not a debt of the defendant but merely a consideration for
the cancellation of the contract previously agreed upon. The payment
thereof constituted the obligation to be performed by the defendant,
and the cancellation of the contract, the corresponding obligation to
be performed by the plaintiff. The defendant was not obliged to pay the
sum of P6,000 before the plaintiff cancelled the contract, just as the
plaintiff was not obliged to cancel the contract before the defendant
paid the sum of P6,000. Both are reciprocal obligations which should
have been performed simultaneously. In principle, the defendant’s
obligation to pay the sum of P6,000 to the plaintiff for the
cancellation of the contract is the same as that of the vendor in a
contract of sale with the right of repurchase to refund the purchase
price to the purchaser, for the purposes of the resale, in which case
this court has held that deposit of the repurchase price is not
necessary to compel the purchaser to make the resale, if he refuses to
accept it. (Villegas vs. Capistrano, 9 Phil., 416.)

Furthermore, this court is of the opinion that the offer of the
defendant to pay to the plaintiff the sum of P6,000 was made in good
faith, taking into consideration, particularly, the fact that said sum
had been deposited in a bank at the disposal of the plaintiff, for the
purpose, among other things, of the cancellation of the contract.

If, according to the judgment of this court in the former case,
Exhibit A grants the defendant the option to cancel the contract at any
time, upon payment of the sum of P6,000, and if the defendant demanded
such cancellation offering to pay said sum in good faith, the plaintiff
in refusing to consent to such cancellation, violated the contract.
Such being the case, the plaintiff has no cause of action against the
defendant because it is based on the alleged obligation of the said
defendant to purchase its molasses during the period in which such
obligation would not have existed, had not the plaintiff, in violation
of the contract, refused the cancellation thereof. In such case, the
plaintiff derives its cause of action from its own violation thereof.
To recognize the validity of such cause of action would be to sanction
and legalize such breach. On the other hand, such breach of contract
cannot be the source of rights. Had the contract been cancelled in
January, 1931, when the defendant demanded its cancellation, as it had
a right to do, there would have been no contract to be complied with by
the defendant from that date and the plaintiff’s cause of action could
not have been based on the cancelled contract. Plaintiff’s violation of
that contract by refusing to cancel the same cannot now be the basis of
its cause of action.

Wherefore, the judgment appealed from is hereby affirmed, with costs against the appellant. So ordered.

Street, Hull, Vickers, Butte, and Goddard, JJ., concur.

---

^[1] 57 Phil., 519, 534.

 

IMPERIAL, J., with whom concur MALCOLM, VILLA-REAL, and ABAD SANTOS, JJ., dissenting:

On March 21, 1929, the plaintiff entered into a written contract
with the defendant whereby the latter bound itself to purchase from
200,000 to 400,000 gallons of molasses from the former at the rate of
four (4) centavos a gallon, for five consecutive agricultural years,
beginning with the year 1929-1930. It was also stipulated, among other
things, that the plaintiff bound itself to sell all the molasses
produced annually in its sugar central, with the exception of 15 per
cent thereof, and that the defendant had the option to cancel the
contract upon notice and payment of the sum of P6,000, which was
likewise fixed as a security or bond to be given by the defendant for
the faithful compliance with its obligations under the contract.

The plaintiff instituted civil case No. 8436 in the Court of First
Instance of Iloilo wherein it is prayed that the terms of the contract
be clarified in the sense that the sum of P6,000 which had been offered
by the defendant be considered as a bond or security for the faithful
compliance with its obligations and not as a consideration for its
option to cancel the contract, and that the quantity of molasses which
it was obliged to deliver to said defendant should be only one-half of
the central’s production, in addition to other quantities belonging to
the planters the ownership of which had passed to it for failure of the
said owners to have the molasses removed within 48 hours in accordance
with the existing milling contracts. At first the defendant was in
accord with the allegations of the complaint, but in its supplementary
answer, and by way of a cross-complaint, it prayed that the contract of
sale of molasses be cancelled, on the ground that under its terms it
was given the option to cancel it upon payment of the sum of P6,000
which it tendered and placed at plaintiffs disposal.

The trial court sustained the plaintiff’s allegations and rendered
judgment in accordance with the prayer of the complaint. On appeal (G.
R. No. 36026),^[1] this
court reversed the appealed judgment and declared the contract
cancelled, and in its resolution on the motion for reconsideration held
further that the contract was deemed cancelled on November 18, 1932,
when the defendant deposited the sum of P6,000 with the clerk of the
court.

Subsequently, the plaintiff instituted this action (civil case No.
9384 of the Court of First Instance of Iloilo) to recover the sum of
P72,569.28 from the defendant. According to the complaint, this sum
represents the stipulated cost of the molasses produced during the
agricultural years 1930-1931, 1931-1932, 1932-1933, which the defendant
unjustifiably refused to purchase and accept with the exception of a
small quantity thereof sold to La Jarolena of La Paz, Iloilo, to
minimize the damages which the plaintiff suffered.

In its second amended answer, the defendant set up the following
special defenses: that the judgment rendered by this court in civil
case No. 8436 (G. R. No. 36026), definitely decided all the questions
which the plaintiff raises again in its second complaint and that its
claim is now res judicata; that in the aforesaid civil case
plaintiff did not claim the damages which it now seeks to recover from
the defendant for which reason plaintiff lost whatever right it might
have had therein; that in its motion for reconsideration of the
judgment rendered by. this court, the plaintiff asked, among other
things, that the contract be not cancelled, but in the event that
cancellation lies, the same should not be decreed until the defendant
has paid for all the molasses which it refused to accept, and that
according to the judgment of this court the sum of P6,000, which the
defendant was bound to pay to the plaintiff, also represented whatever
damages may be due the latter resulting from the cancellation of the
contract.

When the case was submitted, the trial court upheld the defendant’s
contention that the sum of P6,000, now deposited with the clerk of the
court and at the plaintiff’s disposal, likewise represented the damages
now claimed by the plaintiff due to defendant’s refusal to receive the
molasses in question, and rendered judgment absolving the defendant
from the complaint, without costs. Appealing from this judgment
plaintiff here vigorously contends that it is entitled to the damages,
which it has undisputably proven.

In affirming the appealed judgment the majority of the members of
this court rely on the general principle that when a contract is
decreed cancelled, its legal effects should retroact to the date the
right thereto commenced, which, in this case, was January 14, 1931,
when the defendant notified the plaintiff of its option to cancel the
contract and offered to pay the sum of P6,000.

There is an apparent confusion of terms herein. There is an attempt
to apply the same principle both to a case wherein a contract is
rescinded or annulled and that wherein a contract is cancelled by the
parties. When a contract is rescinded or annulled on any of the grounds
specified by the law, the parties are undoubtedly entitled only to the
remedies expressly reserved for them in articles 1295, 1303, 1304,
1305, 1306, 1307 and 1308 of the Civil Code and they may not demand
performance of any obligation arising from the rescinded or annulled
contract. Neither can they maintain an action for damages based on a
breach of contract save the cases excepted by articles 1295 and 1307.
The reason for this is obvious: when a contract is rescinded or
annulled, it ceases to exist and the contracting parties are entitled
to have the subject matter thereof restored to its original status quo.

“Where a contract has been rescinded by mutual
consent, the parties are as a general rule restored to their original
rights with relation to the subject matter, and no action for breach
can be maintained thereafter, nor are the parties bound by the contract
with reference to their subsequent actions.” (13 C. J., pp. 602, 603.)

However, when the contract is merely cancelled or terminated by
express agreement of the parties, as in this case, such cancellation
does not affect nor annul already existing obligations.

“Ordinarily any claim in respect of performance and
of what has been paid or received on the contract will be referred to
the agreement of rescission, where the contract is rescinded while in
the course of performance, and as a general rule no such claim may be
made unless it has been expressly or impliedly reserved; but there are
cases which hold that the fact that the parties agree to terminate the
contract does not in itself show that they agree to release all rights
of action for breach which may have arisen up to that time, it being
held that the mere fact that parties make use of the terms ‘rescind’ or
‘cancel’ does not show that they intend their acts to have such legal
effect.” (13 C. J., p. 603.)

“Where under the contract a
party may terminate ‘it at his option, he is not liable after
termination for further transactions thereunder, but obligations which
have already accrued are not affected. * * *” (13 C. J., p. 608.)

The right to cancel the contract was reserved to the defendant upon
payment of the sum of P6,000. Under this option, it could terminate the
contract but the obligations arising therefrom were enforceable while
it was in existence and until its cancellation has been agreed upon by
the parties or decreed by the court. To wipe out already existing and
enforceable obligations before the termination of the contract would be
to annul completely the agreement and obligations voluntarily
stipulated by the parties.

Anticipating the commencement of this action by the plaintiff, it
was stated in the resolution upon the motion for reconsideration that
the contract should not be deemed cancelled except from November 18,
1932, when the defendant deposited the sum of P6,000 with the clerk of
the court. To hold now that such cancellation commenced on January 14,
1931, would be to ignore a settled question.

As to the amount of damages, the sum claimed by the plaintiff
should be reduced to P35,000 because the defendant was only bound to
purchase molasses up to November 18, 1932. It is difficult to establish
a correct and clear basis for this sum in round numbers, but at least
it represents the approximate value of the molasses which the defendant
was bound to receive and pay for under the terms of the contract.

Some of the members of the court have taken the view that the
aforesaid sum should be deemed to include the P6,000 deposited with the
clerk of court. This latter sum was awarded to the plaintiff, and the
defendant bound itself to pay it, by way of consideration or price of
the option to cancel. The amount having been given for a different
purpose, it should not be confused with, or deducted from the damages.

The appealed judgment should be reversed and damages in the sum of
P35,000 awarded to the plaintiff, with costs in both instances.

---

^[1] 57 Phil., 519, 534.

---

DIAZ, J.,

It is with regret that I have to dissent from the majority opinion.
Inasmuch as it has already been held in the decision rendered in case
G. R. No. 36026 that the cancellation of the contract Exhibit A,
entered into by the parties, should be understood as having taken
effect on November 18, 1932, when the defendant had ceased purchasing
the molasses which the plaintiff had been placing at its disposal since
the agricultural year 1930-1931, in violation of the terms of said
contract, it is my opinion that said defendant is obliged to indemnify
the plaintiff for the damages it suffered by reason of such breach, but
certainly not in the amount of P72,569.28, which it claims in the
complaint. It may be true that the plaintiff suffered the damages in
question but, from the communications exchanged between the parties,,
which form part of the documentary evidence presented during the
hearing, it may be inferred that, having foreseen the possibility of a
disagreement similar to the one which gave rise to this suit between
them, they had fixed the indemnity which said defendant should pay the
plaintiff at P6,000. Therefore, the question raised by the parties
should be decided by awarding the plaintiff an indemnity in the sum of
P6,000, notwithstanding the fact that it had already been allowed a
like sum in the aforesaid case G. R. No. 36026, on the ground that the
former was for a different cause or purpose.