PACMAC, INC., PETITIONER, VS. THE HONORABLE INTERMEDIATE APPELLATE COURT AND VULCAN INDUSTRIAL & MINERAL EXPLORATION CORPORATION, RESPONDENTS.

This is a petition for review on certiorari of the
decision of the then Intermediate Appellate Court, now the Court of Appeals,
which set aside the earlier decision in Civil Case No. Q-9386
of the then Court of First Instance of Rizal, 7th
Judicial District Branch V-Quezon City.

In Civil Case No. Q-9386, PACMAC
Incorporated (hereinafter called PACMAC) alleged that by virtue of an existing
contract and arrangement with VULCAN Manufacturing Company Incorporated
(hereinafter called VULCAN), the former since 1953 continuously up to August 3,
1965 has been the exclusive distributor of the latter’s products and that in
said arrangement VULCAN was obliged to periodically deliver and sell, at its
own dictated price any number or volume of its products exclusively to
PACMAC.  PACMAC would, in turn,
exclusively sell and distribute said products to the open market, whether in
wholesale or retail, at a price set and commanded by VULCAN, and that on August 3, 1965 VULCAN unilaterally
terminated the contract of exclusive distributorship causing damages to PACMAC.

In its answer, VULCAN denied the contract of exclusive distributorship
with PACMAC.  By way of counterclaim,
VULCAN alleged that PACMAC is indebted to it as of September 30, 1965 in the
sum of P320,220.25 plus interest representing the unpaid purchase price of VULCAN’s products sold and delivered to PACMAC.

The facts of the case as found by the trial court are not
disputed.  The apellate
court adopted these factual findings, to wit:

“It appears from the evidence that plain­tiff Pacmac, Inc., was organized in 1949 as a trading concern,
with Russell T., Elliott as its president and general manager.  Follow­ing researches and experimentation
conducted at Pacmac, Inc., Elliott subsequently
organized the defendant corporation in 1953, as a manufacturing concern,
starting off with the production of rubber cement.  Upon the organization of defendant
corporation, then known as the Vulcan Manufacturing Co., Inc., Elliott
also became its president and general manager, at the same time that he
remained president and general manager of the Pacmac,
Inc.  Both corporations had their offices
in the same building inside the compound of Pacmac,
Inc. from 1953 up to 1967.  From the
start, defendant sold its products to plaintiff on 60-day terms, and plaintiff
in turn dealt on said products in the open market.  It was understood that plaintiff would not
sell similar products from other sources competitive with those of defendant.

“In 1956, Patrocinio Bautista who
had known Elliott since 1952, became vice president
concurrently of both corporations, while Elliott continued to be president and
general manager also of both as from the start. 
At the same time, many if not all of the members of the board of
directors of plaintiff corpo­ration were likewise members of the board of
directors of defendant corporation.  The
set-up remained as such until the early part of 1960, when upon the suggestion
of Elliott for the reason that the growth of both corporations had made it
difficult for him to manage both, Patrocinio Bautista
was made president and general manager of Pacmac,
Inc. at the same time ceasing to be vice president of Vulcan Manufacturing Co.,
Inc., while Elliott stayed on as president and general manager only of the
latter company.  The shift in management
responsibilities over the two corpo­rations was eventually followed by a change
in the stockholdings of Elliott and Bautista, who were substantial stockholders
in both.  Elliott gave up his shares in Pacmac, Inc. and acquired more shares in the Vulcan
Manufacturing Co., Inc. while Bautista gave up all his shares in the latter
corporation and acquired more shares in Pacmac,
Inc.  According to the evidence of
plaintiff, this happened also in 1960, but the evidence of defendant places
this occurrence in 1962 after a power struggle over the control in the
management of Vulcan Manufacturing Co., Inc., between the group of Elliott, on
one hand, and that of Bautista, on the other, which Bautista lost in the
showdown at the annual stockholders’ meeting in that year.

“The drift of events appears to lend more probability to the
claim of defendant in this respect.  It
appears that on February 17, 1962,
the majority of the members of the board of directors of defendant
corporation approved an amendment to its articles of incorporation
thereby authorizing the said corporation to engage in the merchandizing
business as one of its secondary purposes and increasing the kind of products
it could manufacture.  This amendment
likewise was subsequently approved by the stockholders of the corporation
during the annual meeting held February
20, 1962.  In the directors’
certificate to this amendment, dated March
20, 1962, Bautista still appears to have signed as director of
defendant corporation (Exhs. “8”
and “8-A”).

“On December 6, 1962,
both parties entered into a written contract (Exh.
“6”) of exclusive distributorship for two years beginning November
16, 1962 over two products manufactured by defendant, the most pertinent pro­vision
of which reads:

‘1.  That the PURCHASER shall have the exclusive
right to distribute and resell the MANUFACTURER’s
SODIUM SILICATES and ADHESIVE products. 
However, in consideration of this exclusive privilege, the PURCHASER
agrees not to distribute or resell adhesives and sodium silicates products of
other manu­facturers or brands; (This agreement does not cover shoe cement
products, moulds, dies, show ranks and other products manufactured by Vulcan).’

It appears that the two products subject of
the written agreement of exclusive distributor­ship were new products of
defendant and the contract was prompted by an agitation in the board of
directors of defendant in view of a desire to go into the merchandizing
business, as was suggested to plaintiff. 
Along with that, defendant also claims that there was disatisfaction with an alleged lag in plaintiff’s payments
of its accounts with defendant.

“While the agreement (Exh.
“6”) was not renewed at the end of its two-year term, the purchase
and sale by plaintiff of the two products continued.  x x x

“xxx on August 3, 1965, defendant, x x x wrote plaintiff a letter (Exh.
“7”) advising the latter that as of that date defendant would no
longer deliver any of its products to plaintiff except those items for which
orders had already been booked, unless the same would be cancelled by
plaintiff.  Defendant justified its
action on the ‘knowledge that PACMAC is now distributing ‘Durabond‘
Sole Attaching Cement as manufactured by Regional Enterprise’.  In a letter of reply of the same date (Exh. “15”), plaintiff, x x x denied and protested against
the accusation x x x.  On the other hand, it was recalled that
Elliott had pre­viously admitted that defendant had been distri­buting its own
products ‘despite (its) existing relationship’ with plaintiff.  Plaintiff’s letter also advised that its
orders previously booked still stood.  It
does not appear, however, that deliveries on the pending orders were thereafter
made, as it is admitted that defendant stopped deliveries as of August 3,
1965.  The reason given by defendant for
refusing to make further deliveries on the pending orders from plaintiff was the
latter’s failure to pay a balance of P23,000.00 in
accordance with an understanding between them on August 10, 1965 (Exh.
“17”).” (Rollo, pp.
44-47).

The trial court found for the petitioner.  Considering however, that PACMAC owed VULCAN
the amount of P304,855.50 representing the unpaid
purchase price of VULCAN’s products sold and
delivered to PACMAC and that the damages due PACMAC was fixed in the amount of
P189,908.76, the trial court ordered PACMAC to pay VULCAN the sum of
P114,946.74 with interest therein at the legal rate from September 30, 1965
until the same is paid.

Both parties appealed the decision to the then Intermediate
Appellate Court.

As stated earlier, the appellate court set aside the trial
court’s decision.  The dispositive portion of the decision reads:

“WHEREFORE, the decision appealed from is hereby set aside and
judgment is rendered on the counterclaim, ordering plaintiff PACMAC
Incorporated to pay the defendant Vulcan Manufacturing and Trading Corporation,
the sum of P304,855.50 with legal interest from September 30, 1965 until the
same is fully paid, with costs against plaintiff-appellant.  This amount was mutually submitted and agreed
between the parties during the pre-trial proceedings as the balance due the
defendant from the plaintiff on said date.” (Rollo, pp. 49-50).

The main issue in the instant petition hinges on the actual
business relationship between PACMAC and VULCAN on August 3, 1965 when the
latter suddenly stopped deliveries of its products to the former.

The conclusions of the appellate court on factual matters differ
from those of the trial court.  Hence, a
minute scrutiny by this Court is in order and resort to duly proven evidence
becomes necessary.  (Serrano
v. Court of Appeals 139 SCRA 179; Legaspi v. Court of
Appeals, 69 SCRA 360; Tolentino v. De Jesus, 56 SCRA
167).

Although the appellate court found that there existed an implied
contract of exclusive distributorship between the two parties with PACMAC as
distributor of VULCAN’s products beginning in 1953,
it ruled that this implied contract was terminated when on December 6, 1962
both parties entered into a formal written contract (Exhibit ‘6’) of exclusive
distributorship for two years beginning November 16, 1982 covering only two
products, namely sodium silicates and adhesive products manufactured by
VULCAN.  Under this theory, the appellate
court opined that the terms in the written contract superseded    all previous contracts between the two
parties.  Consequently, the appellate
court concluded that since the contract provides for the expiration of the
exclusive distributorship after 2 years, specifically on November 16, 1964,
there could have been no gross and evident bad faith on the part of VULCAN when
on August 3, 1965 it terminated the exclusive distributorship agreement
embodied in Exhibit “6”.

The appellate court came up with this conclusion applying the parol evidence rule which is Section 7, Rule 130 of the
Revised Rules of Court, to wit:

“When the terms of an agreement have been reduced to writing,
it is to be considered as containing all such terms, and, therefore, there can
be, between the parties and their successors in interest, no evidence of the
terms of the agreement other than the contents of the writing, xxx.”

The petitioner now contends that the parol
evidence rule was erroneously applied by the appellate court because there was
evidence of an oral agreement and acts implementing that agreement on the part
of both parties subsequent to the execution of the written contract which
changed and added to the terms of the distributorship arrangement.  Under these circumstances, PACMAC argues that
the written contract was an inadequate measure of the entire agreement between
the parties thereto.

The stand of the petitioner is rightly premised on the principle
that the parol evidence rule does not preclude the
admission of extrinsic evidence to prove subsequent agreements between
the parties to a written contract, to wit:

“The rule forbidding the admission of parol
or extrinsic evidence to alter, vary, or contradict a written instrument does
not apply so as to prohibit the establishment by parol
of an agreement bet­ween the parties to a writing, entered into subsequent to
the time when the written instrument was executed, notwithstanding such
agreement may have the effect of adding to, changing, modifying, or even
altogether abrogating the contract of the parties as evidenced by the writing;
for the parol evidence does not in any way deny that
the original agreement of the parties was that which the writing purports to
express, but merely goes to show that the parties have exercised their right to
change or abrogate the same, or to make a new and independent contract.”
(32 C.J.S. 1008-1009 cited in Francisco, Evidence, Volume
VII Part I 1973, p. 167.  See Canuto v. Mariano 37 Phil. 840)

The appellate court, therefore, erred when it failed to consider
the evidence proving that the exclusive contract of distributorship between the
parties went beyond the expiration of the two year written contract between the
parties.

The petitioner presented evidence to show that after sensing VULCAN’s desire to go into distribution of its own
products, Patrocinio Bautista, president and general
manager of PACMAC secured verbal assurances from Russel
Elliott, VULCAN’s president and general manager, to
give the former at least a year’s notice in advance before cutting off the
distributorship arrangement between the two parties.  This was given credence by the trial court
over the denials of VULCAN.

Jose Basa, a witness for VULCAN testified
that in a letter dated November 16, 1964 (Exh.
“4”, alleged true copy of letter) VULCAN notified PACMAC of the
expiry date of the 2-year distributorship agreement; that in reply to this
letter, PACMAC through P.E. Bautista, asked for at least 3-months notice before
the business relationship could be effectively terminated by either of the
parties.  This letter, marked as Exh. 5, was an alleged true copy of the letter written by
P.E. Bautista.  This was denied by
Bautista.

With two conflicting pieces of evidence before it, the trial
court said:

“xxx Of the
two conflicting evidence on the point, the Court is more inclined to give
credence to the testimony of Bautista, than to Exh. 5
of defendant which was testified to by witness Jose Basa
whose testimony has heretofore been found to suffer from doubtful
veracity.  Moreover, considering the
extent and volume of business carried on between plaintiff and defendant under
the distributorship arrangement, it is improbable that plaintiff would have
bargained for only a minimum of three months’ notice within which to adjust its
business.  One year’s notice could not
have been unreasonable it appearing that for the year ending December 31, 1966,
plaintiff managed to make a net income of only P68,404.57 (Exh.
D-4) as compared to its net income for the year 1964, when the distributorship
arrangement was still intact, in the amount of P218,313.33 (Exh.
D-2).  xxx” (Joint Record on Appeal, pp. 99-100)

We find no substantial reason from the records to deviate from, much
less reverse, these factual findings of the trial court.  The trial court’s conclusion that evidence on
the one year notice to terminate the exclusive distributorship arrangement
between the two parties is more credible than the proof of a three-month notice
alleged by VULCAN due to the volume of business carried on by the two parties
is bolstered by the unrebutted evidence of PACMAC
that before the distributorship arrangement was terminated, more than 60% of
its gross sales consisted of VULCAN’s products.  VULCAN continued to supply the same amounts
and under the same terms to PACMAC of its entire range of products.  After termination, gross sales of P2,621,857.46 were reduced by P1,570,000.00 in one year’s
sales.

The records establish that after the termination of the two-year
written contract, the parties agreed on another term regarding the duration of
their distributorship arrangement.  They
also agreed that the distributorship arrangement would remain in full force
until one year from and after notice of its termination would have been given
to PACMAC.

The inevitable conclusion, therefore, is that the parties’
contract of exclusive distributorship arrangement was still in existence on
August 3, 1965 when VULCAN decided to stop deliveries of its products to
PACMAC.  VULCAN’s
unilateral act of terminating the contract without legal justification makes it
liable for damages suffered by PACMAC pursuant to Article 1170 of the New Civil
Code which provides:

“Those who in the performance of their obligations are guilty
of fraud, negligence, or delay, and those who in any manner contravene the
tenor thereof, are liable for damages.”

The petitioner argues on the basis of the evidence it presented
before the trial court that it is entitled to actual and compensatory damages
of at least P360,000.00 plus interest, exemplary
damages of at least P100,000.00, attorney’s fees of at least P50,000.00 and
litigation expenses of at least P25,000.00.

The trial court reduced the claims for damages to more reasonable
levels.  We agree with its findings that:

“Neither can the Court reasonably go along with plaintiff that
the measure of damages due it should be based on the average monthly profit of
P31,307.68 it was getting out of the sales of
defendant’s products during the existence of the distributorship arrangement (Exh. D). 
Evidently, and as can be gathered from the testimony of
plaintiff’s witness Felicisimo S. de Ocampo, who prepared Exh. D, the
average monthly profit arrived at in the sum of P31,307.68
does not actually represent the average net monthly profit from the sale of
defendant’s products, since the selling or administrative expenses have not
been taken into account.  As a matter of
fact, Ocampo could not state what part of plaintiff’s
selling expenses referred to defendant’s products.  Moreover,            it
was incumbent upon plaintiff to minimize its damages by getting other suppliers
and selling other products when defendant altogether stopped selling to
plaintiff.  It is reasonable to assume
that, indeed, plaintiff did just this. 
The more equitable basis then would be the diminution in the net income
of plaintiff during the entire year following the termination of the
distributorship arrangement, or the difference between its net income of P218,313.33 in 1964, shown by its own evidence (Exh. D­-2), as against P68,404.57
in 1966, also shown by its own evidence (Exh. D-4),
which is P149,908.76. 
For having acted in gross and evident bad faith, considering defendant’s
unjustified and sudden cutting off of its sales to plaintiff, after having
surreptitiously sold its products in the open market (see Exhs.
9-A, 10-A, 11-A and 12-A), all in a wilful breach of
the distributorship arrangement with plaintiff and mindless of the prejudice to
the latter’s business, defendant is also liable to plaintiff for exemplary
damages in the amount of P30,000.00 and attorney’s fees in the amount of
P10,000.00.

“On the other hand, upon defendant’s counterclaim, plaintiff
is in turn liable for the payment of its admitted account with defendant in the
amount of P304,855.50 as of September 30, 1965 (Exh.
C or 1). 
Compensating the amounts due plaintiff under its complaint in the total
sum of P189,908.76 against the amount defendant under its counterclaim in the
sum of P304,855.50, there still remains a net amount of P114,946.74, exclusive
of interest, due defendant from plaintiff. 
Defendant’s claim for interest on plaintiff’s account at twelve (12%)
percent per annum is not sufficiently supported by, the evidence.  Except for the sodium silicates and adhesives
subject of the written two-year agreement (Exh. 6),
wherein it was stipulated that nonpayment within sixty (60) days would make
plaintiff liable to one (1%) percent interest charge per month until the
account is paid, there is nothing in the evidence to prove that the plaintiff’s
accounts as to the other products were also subject to the same rate of
penalty, or what part, if any, of plain­tiff’s accounts pertained to unpaid
purchases of sodium silicates and adhesives. 
However, defendant is entitled to interest at the legal rate on the
amount due it from plaintiff after compensating their respective claims.” (Joint Record on Appeal, pp. 100­-103).

WHEREFORE, the instant petition is GRANTED.  The questioned decision of the Intermediate
Appellate Court is REVERSED and SET ASIDE. 
The trial court’s decision is REINSTATED.

SO ORDERED.

Fernan, (Chairman), Paras, Bidin, and Cortes, JJ., concur.

Padilla, took
no part; private respondent’s counsel is a partner of Sen. Ambrosio Padilla who
is related to me.