G.R. No. 70789.
October 19, 1992 (Case Brief / Digest)
### Title:
Rustan Pulp & Paper Mills, Inc., et al. vs. The Intermediate Appellate Court and Iligan
Diversified Projects, Inc., et al.
### Facts:
In 1966, Rustan Pulp and Paper Mills, Inc. (Rustan) established a pulp and paper mill in
Baloi, Lanao del Norte, Philippines. By March 20, 1967, Romeo A. Lluch, of Iligan Diversified
Projects, Inc. (respondents) holding a forest products license, approached Rustan proposing a
supply of raw materials. This led to negotiations culminating in a contract of sale on April
1968, with Lluch agreeing to sell pulp wood to Rustan at P30.00 per cubic meter.
Initially, the arrangement went as planned. However, due to major defects discovered in the
mill’s machinery during the test run, which led to an unexpected stockpiling of raw materials,
Rustan, on September 30, 1968, issued a suspension of further deliveries from Lluch, citing
the contractual provision allowing for stoppage in case of sufficient stock. Despite this, some
deliveries resumed after discussions, but the arrangement soon fell apart leading Lluch to file
a complaint for breach of contract.
The trial court dismissed the complaint but enjoined Rustan to respect the contract if
conditions warranted. Dissatisfied, Lluch appealed to the Intermediate Appellate Court,
which found Rustan, along with its executives Tantoco and Vergara, liable, ordering them to
pay moral damages and attorney’s fees.
### Issues:
1. The liability of Tantoco and Vergara alongside Rustan under the contract of sale.
2. The legality of Rustan’s suspension of wood pulp deliveries, claiming sufficient stock as
justified within their contractual rights.
3. The awarding of moral damages and attorney’s fees in the absence of proven fraud or bad
faith.
### Court’s Decision:
The Supreme Court modified the decision of the Intermediate Appellate Court. It
acknowledged the contractual agreement allowing Rustan the right to suspension of
deliveries but criticized the execution as being illogically pursued, particularly since Rustan
continued accepting deliveries from other suppliers. Ultimately, it was determined that the
stoppage condition was predicated too heavily on Rustan’s discretion, rendering it
inoperative and the temporary suspension of deliveries unjustifiable. Regarding the liability
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G.R. No. 70789. October 19, 1992 (Case Brief / Digest)
for damages, the Supreme Court only held Rustan accountable, exempting Tantoco and
Vergara, acknowledging the principle of separate corporate legal identity and the lack of
personal liability in the contractual obligations of a corporation.
### Doctrine:
The decision reiterates corporate legal principles, distinguishing between corporate and
individual liability. Furthermore, it emphasizes that conditions of contracts dependent solely
on one party’s will, especially in fulfilling existing obligations, are inoperative.
### Class Notes:
– Corporate officers (Tantoco and Vergara) cannot be held personally liable for actions taken
in their official capacity unless specific exceptions apply.
– A clause allowing suspension of deliveries based solely on one party’s evaluation is
considered inoperative as it is a potestative condition.
– Continuation of accepting deliveries from other sources despite claiming sufficient stock
undermines the credibility of the claim for suspension.
– Moral damages and attorney’s fees can be awarded in contractual breaches where bad faith
or illogical business practices are evident.
### Historical Background:
This case demonstrates the complexities of contractual agreements in a business context and
emphasizes the protections afforded by corporate law. It showcases the practical challenges
in executing business agreements when unforeseen circumstances arise and the legal
interpretations that determine liability and enforcement of contracts in the Philippine legal
system.
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