SAMHWA COMPANY LTD., AND LOTUS EXPORTS SPECIALISTS, INC., PETITIONERS, VS. THE HONORABLE INTERMEDIATE APPELLATE COURT, LOUIS SHEFF AND HERSCHELL SWIRYN, RESPONDENTS.

This is a petition for review on certiorari of the
decision of the Court of Appeals affirming the trial court’s judgment which
ordered petitioner Samwha Company Ltd. (Samhwa for brevity) to pay damages to private respondents. The civil action was instituted before the
trial court against Samhwa by respondents Louis Sheff and Herschel Swiryn, who
were among the original stockholders of a company known as Lotus Export
Specialists, Inc. (Lotus, Inc. for
brevity).

The antecedent facts of the case as found both by the respondent appellate court and the trial court
are as follows:

“On September 28, 1977, the plaintiffs and the other original
stockholders sold their shareholdings in said company to Samhwa Company
Ltd. The terms of the sale were
embodied in a Memorandum of Agreement (Exhibit A) the pertinent provisions of
which provided that only 70% of the equity sold would be turned over to Samhwa
immediately (par. 3(a) of Exhibit A) and 30% upon release of the personal
guarantees and other collaterals stated in paragraph 3(c) of Exhibit A. The personal guarantees referred to in
Exhibit A cover the personal guarantees executed by the plaintiffs in favor of
the Development Bank of the Philippines, hereinafter referred to as DBP, to
guarantee payment of a loan extended by the DBP to Lotus. In addition, the original stockholders and
more particularly Mariano Marcos furnished the DBP with 212,980 shares of
Marcopper as collaterals for said loan. (In their various pleadings both parties placed the figure at 250,000
shares but Exhibit 3 only states 212,980 shares). After the sale for all intents and purposes, Samhwa took control
of the operations of Lotus and the management of said corporation remained in
the hands of Samhwa to the exclusion of plaintiffs.

“Under the terms of the Agreement of September 28, 1977 the
following provisions were brought to the attention of the Court as part of the
evidence and are vital to the consideration of the matters raised in issue
(par. 3(c) of Exhibit A):

‘1. The primary
consideration of this sale is the release of sellers from their individual or
personal guarantees and the collateral (250,000 shares of Marcopper Mining
Corporation given to the DBP in connection with a loan DBP has extended to
Lotus) x x x provided, however, that if, after two years from date of this
agreement, the said release of the SELLERS’ personal guarantees and collaterals
will not have been accomplished, BUYER undertakes to cause Lotus to pay DBP US
$50,000.00 and a further US $50,000.00 every six (6) months thereafter, aside
from payment of the regular amortization schedule due the DBP, until the
release of the said personal guarantees and the aforesaid collateral will have
been effected or until full payment of the Lotus loan whichever comes first
(par. 3(c) of Exhibit A).

‘2. Without
prejudice to Lotus entering into any arrangements regarding the payment
restructuring of all interest, BUYER undertakes to cause lotus to pay and keep
current all interests on said DBP loan; provided, however, that BUYER shall
cause Lotus to pay interest on said loans as and when due, it being understood
that any such restructuring as heretofore mentioned will not involve any
further monetary or other type of obligation on the part of SELLERS.’ (par. 5
of Exhibit A).

Reduced to its simplest terms the above provisions made it incumbent on
Samhwa to secure the release of the personal guarantees and collateral posted
by the plaintiffs and other original stockholders (par. 3(c) of Exhibit A) in
default of which Samhwa undertook to cause Lotus to pay the DBP US $50,000.00
every six (6) months two years from date of the agreement until the release of
the personal guarantees or full payment of the Lotus loan was made. Samhwa also undertook to cause Lotus to pay
and keep current all interests on said DBP loan. The other matter raised in the complaint of representation in the
Board was not proved or brought up during the hearing and therefore, for all
intents and purposes can be disregarded in this decision.

“On the other hand, under paragraph 3(b) of Exhibit A,
plaintiffs agreed and stipulated that if the negative net assets value of the
company exceeded the amount of P3,375,000.00 then the plaintiffs would pay
Samhwa any excess ‘at the time of release by the DBP of sellers’ personal guarantees
and other collaterals.’ In addition, plaintiffs also undertook to pay Samhwa
the difference between the peso equivalent and foreign currency loan extended
by the DBP to Lotus on the basis of prevailing rate of exchange available as of
September 28, 1977 but not to exceed P750,000.00 which payment again shall be
effected at the time of the release by the DBP of plaintiffs’ personal
guarantees and other collateral (par. 3, (b)-IV of Exhibit A).

“Time went by and
defendants Samhwa and Lotus did not secure the release of the individual and
personal guarantees of the plaintiffs despite the fact that on December 10,
1980 under Res. 4083 (par. 7 of Exhibit A) the DBP approved the substitution of
the personal guarantees of Louis Sheff, Isabel Wilson, Herschel Swiryn and
Alfredo Africa by Samhwa under certain conditions. It also appears from the record that until the time of the trial
no payment was made on the principal obligation due the DBP and that defendants
allowed the DBP loan to become delinquent (tsn, April 5, 1982; pp. 22-23; pp.
28-29; pp. 32-35). Inspite of the fact
that the principal obligations due the DBP had not been settled on time and
interest payments were delinquent as of the date of the trial Samhwa and Lotus
never paid the US $50,000.00 every
six (6) months provided in
paragraph 3(c) of Exhibit A. This was
admitted by the witness for Samhwa himself, Mr. Sae Chae Lee (tsn, Oct. 22,
1982, pp. 75-78).

“Having failed to compel defendants to comply with their
undertakings under Exhibit A, plaintiff brought the present complaint to this
court with the prayer that defendants be ordered:

“1. To open its books of account and records for inspection;

“2. To pay the DBP amortization;

“3. To pay interest on the DBP loan;

“4. To deposit US $200,000.00 with the DBP
representing payments due for September 1979, March 1980, September 1980 and
March 1981;

“5. To release the personal guarantees of
the plaintiffs with the DBP;

“6. To pay plaintiffs damages in the amount of
P1,000,000.00; and

“7. Such other relief as this Court may deem
just and proper.

“In its Answer to the complaint the defendants, while
admitting the existence of Exhibit A, allege that the complaint was malicious
and unfounded and was filed to avoid plaintiffs’ obligations under the said
agreement which was quantified as follows:

“1. Excess of negative net

assets value, under

par. 3(b) of the

Memorandum Agreement
…………. P679,950.75

“2. Foreign currency

differential under

par. 3(b)-iv of the

Memorandum of

Agreement ……………….. 750,000.00

P1,429.950.75

The theory offered by the defendants is that under the provisions of Exhibit
A and particularly paragraph 3(b), plaintiffs had to pay defendants the amount
of P1,429,950.75 and having failed to do so the defendants did not have to
comply with the undertakings stated in the complaint. x x x” (pp. 84-88, Rollo).

On September 2, 1983, the trial court rendered a decision in favor of respondents, the
dispositive portion of which reads:

“WHEREFORE, in view of the foregoing, judgment is hereby
rendered in favor of plaintiffs Louis Sheff
and Herschel Swiryn and against defendants Samhwa Company Ltd. and Lotus
Exports Specialists Inc. as follows:

“1. That the defendants take immediate steps to
maintain the obligation due the DBP in such a manner as to free the plaintiffs from any further liability to the DBP;

“2. That the defendants immediately secure the
release of the personal guarantees of the plaintiffs and the collateral of Mr.
Mariano Marcos without any further demands on the plaintiffs;

“3. That the plaintiffs upon receipt of the
clearances from the DBP turn over to the defendants the 30% equity of Lotus;

“4. That the counterclaims of defendants in the
amount of P1,429,950.75 is offset against plaintiffs right of damages against defendants in the amount of P2,250,627.30 so that defendants are jointly and
severally ordered to pay plaintiffs
the amount of P833,455.35 in actual damages; and

“5. That the
defendants are ordered to pay plaintiffs the sum of P150,000.00 as exemplary
damages for bad faith and malice in the
handling of the matter in issue.

“With costs against the defendants.

“SO ORDERED.” (pp. 45-46, Rollo)

Not satisfied with the decision, petitioners appealed to the
Court of Appeals. On November 15, 1985,
the respondent appellate court rendered judgment affirming the decision of the
trial court. On a motion for
reconsideration filed by petitioners, the Court of Appeals on April 9, 1986
issued the following resolutions:

“We find that there is sufficient evidence of actual damages, but
no sufficient evidence of malice and
bad faith.

“WHEREFORE, the Motion for Reconsideration is denied, except
that the order for defendants to pay P150,000.00 as exemplary damages to the
plaintiffs is ordered deleted from the dispositive portion of the lower court’s
decision.

“SO ORDERED.” (p. 121, Rollo)

Hence, this petition was filed with the petitioners assigning the
following errors committed by the respondent appellate court:

“1. Respondent Court has decided a question of
substance, not heretofore determined by this Honorable Court, involving the
propriety or fairness of an award for actual damages despite the admitted
absence of actual proof substantiating
pecuniary loss.

“2. Respondent Court has decided in a way not in accord with law or
with applicable decisions of this Honorable Court by awarding actual damages
based on unsupported allegations, speculations, and conjectures.

“3. Respondent Court has awarded actual damages
in an excessive amount despite the fact that private respondents did not incur
any actual or additional cost or expense as a consequence of the acts and
omissions complained of.” (pp. 2-3, Rollo)

The errors assigned by petitioners boil down to the issue of
whether or not the award of actual damages made by the trial court and affirmed
by the respondent appellate court in favor of respondents Sheff and Swiryn is
proper.

Petitioners contend that the actual damages awarded by the trial
court in favor of respondents representing guaranty fees which banks normally
charge, which in this case amounted to 1,111,663.30, has no legal basis
considering that respondents did not suffer any damage resulting from the
non-release of their personal guarantees; that respondents did not pay any
amount to the DBP on the loan of petitioner Lotus, Inc. nor were they called
upon to make good their subsidiary liability on their personal guarantees. Petitioners also submit that those actual damages awarded to respondents
equivalent to the value of the Marcopper shares which respondents could have
realized if the shares were released by petitioners on time is speculative,
there being no proof of the actual value of the shares or of the availability
of buyers thereof during said period. Further, as to the
difference in the exchange value of US $50,000 which petitioners committed to
pay the DBP every six months pursuant to the memorandum agreement, petitioners
argue that this cannot be the basis for awarding damages to respondents since
this is also remote and speculative, taking into account again the fact that
respondents Sheff and Swiryn were never made to pay any amount on the loan to
DBP.

The contract has the force of law between the parties. From the moment the contract is perfected,
the parties are bound not only to the fulfillment of what has been expressly
stipulated but also to all the consequences which, according to their nature,
may be in keeping with good faith, usage and law (Art. 1315, Civil Code).
Hence, those who in the performance of their
obligations under the contract are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are liable for
damages (Art. 1170, Civil Code).

There is no doubt that petitioners have committed a substantial breach
of the contract when they failed without reasonable ground to release
respondents Sheffs and Swiryn from their personal guaranties on the loan of
petitioner Lotus, Inc. from DBP and when petitioners failed to pay the
indebtedness of Lotus, Inc. within the stipulated period as provided in the
Memorandum Agreement. In this case, the
damages to which said respondents are entitled are governed by Article 2201 of
the Civil Code which states:

“Art. 2201. In
contracts and quasi-contracts, the damages for which the obligor who acted in
good faith is liable shall be
those that are the natural and probable consequences of the breach of the
obligation, and which the parties have foreseen or could have reasonably foreseen at the time the obligation was
constituted.

“In case of fraud, bad faith, malice or wanton attitude, the
obligor shall be responsible for all damages which may be reasonably attributed
to the non-performance of the obligation.”

The trial court awarded actual damages in favor of respondents in
the form of guaranty fees, loss in the value of Marcopper shares and the
difference in the peso value of US $50,000.00 payable semi-annually by
petitioners to DBP, as well as exemplary damages in the amount of P150,000.00
due to bad faith on the part of petitioners. Except as to the award of exemplary damages, the respondent appellate
court affirmed the findings of the trial court as to the award of actual
damages. These were their findings:

“It was incumbent upon defendants:

“1. To keep the payment of the principal obligation and interests with the
DBP up to date;

“2. To secure within the two-year period
stipulated the release of the personal guarantees and collateral of the
plaintiffs. They failed in the above to
pay US $50,000.00 every six (6) months starting September 1979. Having failed to perform any of the
foregoing under the provision of Articles 1169 and 1181 of the Civil Code
quoted above the plaintiffs had no obligation to pay defendants the demanded
P1,429,950.75.

“‘The total obligation to the DBP was P19,762,995.31 (Exhibit
F) computed at a conservative 12% per annum from the target date of payment or
2 years after September 18, 1977 or September 1979 to the present or for 3
years and 9 months or 45 months. Plaintiffs’ exposure for interest alone to the DBP is equivalent to
P8,893.347.87.

“‘On the other hand, this obligation was restructured as early
as December 10, 1980 and April 1, 1981 (Exhibit E & 7) so that in fact DBP
has looked primarily to defendants for the payment of the obligation secured by
plaintiff’s guarantees and collateral. Such being the case it would not be fair to charge defendants for this
total interest figure but the fact of the matter is that plaintiffs remained
liable to the DBP for the loan subsidiarily and this has a cost of at least
1-1/2% per annum which is what banks charge as a guaranty fee or P1,111,668.30
for the 45 months after September 28, 1979. (Arts. 1191 & 1192, Civil Code of the Philippines)

“‘In September of 1979 the Marcopper shares had a value of
P1,011,665.00 computed at P4.75 per share (Manila Stock Market Price). This is what plaintiffs could have realized
from said shares if they had been released at the correct time. The Marcopper shares only fetch P1.20 (price
as of July 6, 1983) per share or P255,576.00 for the 212,980 shares. This means
a loss to the plaintiffs of P756,089.00.

“‘On the US $50,000.00 that defendants committed to pay the
DBP every six (6) months the Court agrees with the computation of the
plaintiffs that in exchange value alone the plaintiffs were in the amount of
P382,870.00 up to September of 1982 computed as follows:

Date

Payment of

US $

50,000.00                                                                               Dollar

should                                 Dollar                                          is

have been              was                                            now

made                                  worth                 or                      worth                 or                      Loss

Sept 1979           P 7.3715                 368,575 P 8.95      P 447,500 P78,925.00

March 1980            7.426                   371,300             8.95                   447,500             76,200.00

Sept 1980            7.5605                 378,025             8.95                   447,500             69,475.00

March 1981            7.75                     387,500             8.95                   447,500             60,000.00

Sept 1981           8.02                     401,000             8.95                   447,500             46,500.00

March 1982            8.2764                 413,820             8.95                   447,500             33,680.00

Sept 1982           8.5882                 429,410             8.95                   447,500             18,090.00

P382,870.00

All in all, therefore, on the basis of
actual damage plaintiffs lost because of the delay in the settlement of the DBP
account the following:

P1,111,668.30 as guaranty cost

756,089.00 on the
Marcopper shares

382,870.00 on
the dollar difference

2,250,627.30 total

“‘The above figure more than compensates what could be due
defendants on their claim arising out of Exhibit A.

“‘Plaintiffs did not contest the correctness of the figure of
P1,429,950.75 and so it stands uncontroverted and is accepted by the Court as
correct.

“’When the guarantee and collateral are released, therefore, the
said amount becomes due defendants from plaintiffs subject to plaintiffs claim
for damages’ (pp. 210-213, Original Records).’” (pp. 42-45, Rollo)

We give weight to the factual findings of the respondent
appellate court and trial court
with respect to the loss suffered by respondents in the value of the Marcopper
shares and as to the guaranty fees and difference in the peso equivalent of the
sum of US $50,000.00 that should have been paid semi-annually. Petitioners failed in the performance of
their contract, and as provided under the Civil Code, the person who fails in
the performance of his obligations shall be subject to indemnify for the losses
and damage caused thereby. The true
measure of damages for the breach of such a contract is what the private
respondents have lost by the breach (De la Cruz v. Seminario de Manila, 18
Phil. 330). While the contract imposed
no penalty for such violation, this does not grant any of the parties the
unbridled liberty to breach it with impunity. Our law on contracts recognizes the principle that actionable injury
inheres in every contractual breach (Boysaw v. Interphil Promotions, Inc., No.
L-22590, March 20, 1987, 148 SCR 635).

Since the trial court and respondent appellate court found that
private respondents did not refute their liability to petitioners under the
contract in the amount of P1,429,950.75, this should be set off against the
aforestated damages due to respondents in the amount of P2,250,627.30. Hence, petitioners shall be liable to pay respondents in the amount of
P820,676.55.

ACCORDINGLY, the petition is DENIED and the assailed
decision of the respondent appellate court dated November 15, 1985 and its
resolution dated April 9, 1986 are AFFIRMED. Petitioners Samhwa Company Ltd. and Lotus Exports Specialists Inc. shall
be jointly and severally liable to pay respondents Louis Sheff and Herschell
Swiryn in the amount of P820,676.55.

SO ORDERED.

Narvasa, C.J., Cruz, and
Grino-Aquino, JJ., concur.