SECOND DIVISION

[G.R. No. 115117. June 8, 2000.]

INTEGRATED PACKAGING CORP. , petitioner, vs. COURT OF

APPEALS and FIL-ANCHOR PAPER CO., INC., respondents.

Jose S. Santos, Jr. & Associates for petitioner.

Balgos & Perez for private respondent.

SYNOPSIS

On May 5, 1978, petitioner and private respondent executed an order

agreement whereby private respondent bound itself to deliver to petitioner a
total of 3,450 reams of printing paper worth P1,040,060.00 within the period of
May, 1978 to October 1979 to be paid within a minimum of thirty days and
maximum of ninety days from delivery. As of July 30, 1979, private respondent
had delivered only 1,097 reams of printing paper to petitioner. Petitioner
demanded for the immediate delivery of the balance of the printing paper.
From June 5, 1980 to July 23, 1981 private respondent delivered various
quantities of printing paper amounting to P766,101.70. Subsequently,
petitioner encountered difficulties paying private respondent said amount.
Private respondent made a formal demand upon petitioner to settle its account.
The latter made partial payments totalling to P97,200.00 only which was
applied to its back accounts. On the other hand, petitioner failed to comply with
its additional printing contract with Philippine Appliance Corporation (Philacor),
hence, Philacor demanded compensation from petitioner for the delay and
damages it suffered on account thereof. On August 14, 1981, private
respondent filed with the Regional Trial Court of Caloocan City a collection suit
against petitioner. By way of counterclaim, petitioner alleged that private
respondent delivered only 1,097 reams in total disregard of their agreement
and that by reason thereof, it suffered actual damages and failed to realize
expected profits. Thereafter, the trial court rendered judgment declaring that
petitioner should pay private respondent the sum of P763,101.70 representing
the value of the printing paper delivered from June 5, 1980 to July 23, 1981.
However, it also found petitioner's counterclaim meritorious and ordered the
private respondent to pay the petitioner P790,324.00 as compensatory
damages, as well as it also awarded moral damages and attorney's fees. On
appeal, the Court of Appeals upheld the award in favor of private respondent
but deleted the award of damages in favor of petitioner for lack of factual and
legal basis. Hence, this petition.
The Court ruled that there is no dispute that the agreement provides for
the delivery of printing paper on different dates and a separate price had been
agreed upon for each delivery. It is also admitted that it is the standard practice
of the parties that the materials be paid within a minimum period of thirty (30)
days and a maximum of ninety (90) days from each delivery. Accordingly, the
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 private respondent's suspension of its deliveries to petitioner whenever the
latter failed to pay on time, as in this case, is legally justified under the second
paragraph of Article 1583 of the Civil Code.
Further, private respondent cannot be held liable under the contracts
entered into by petitioner with Philacor. Private respondent is not a party to
said agreements. It is also not a contract pour autrui. Aforesaid contracts could
not affect third persons like private respondent because of the basic civil law
principle of relativity of contracts which provides that a contract can only bind
the parties who entered into it, and it cannot favor or prejudice a third person,
even if he is aware of such contract and had acted with knowledge thereof.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; RECIPROCAL

OBLIGATIONS; UNDERTAKING OF SELLER TO DELIVER THE MATERIALS IS
CONDITIONAL UPON PAYMENT BY BUYER WITHIN THE PRESCRIBED PERIOD;
CASE AT BAR. — The transaction between the parties is a contract of sale
whereby private respondent (seller) obligates itself to deliver printing paper to
petitioner (buyer) which, in turn, binds itself to pay therefor a sum of money or
its equivalent (price). Both parties concede that the order agreement gives rise
to reciprocal obligations such that the obligation of one is dependent upon the
obligation of the other. Reciprocal obligations are to be performed
simultaneously, so that the performance of one is conditioned upon the
simultaneous fulfillment of the other. Thus, private respondent undertakes to
deliver printing paper of various quantities subject to petitioner's corresponding
obligation to pay, on a maximum 90-day credit, for these materials. Note that
in the contract, petitioner is not even required to make any deposit, down
payment or advance payment, hence, the undertaking of private respondent to
deliver the materials is conditional upon payment by petitioner within the
prescribed period.
2. ID.; SALES; SELLER'S SUSPENSION OF ITS DELIVERIES TO BUYER
WHENEVER THE LATTER FAILED TO PAY ON TIME IS LEGALLY JUSTIFIED. — [T]he
private respondent's suspension of its deliveries to petitioner whenever the
latter failed to pay on time, as in this case, is legally justified under the second
paragraph of Article 1583 of the Civil Code which provides that: "When there is
a contract of sale of goods to be delivered by stated installments, which are to
be separately paid for, and the seller makes defective deliveries in respect of
one or more installments, or the buyer neglects or refuses without just cause to
take delivery of or pay for one or more installments, it depends in each case on
the terms of the contract and the circumstances of the case, whether the
breach of contract is so material as to justify the injured party in refusing to
proceed further and suing for damages for breach of the entire contract, or
whether the breach is severable, giving rise to a claim for compensation but not
to a right to treat the whole contract as broken." (Italics supplied) In this case,
as found a quo petitioner's evidence failed to establish that it had paid for the
printing paper covered by the delivery invoices on time. Consequently, private
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 respondent has the right to cease making further delivery, hence the private
respondent did not violate the order agreement. On the contrary, it was
petitioner which breached the agreement as it failed to pay on time the
materials delivered by private respondent.

3. ID.; CONTRACTS; PRINCIPLE OF RELATIVITY; APPLIED IN CASE AT

BAR. — Private respondent cannot be held liable under the contracts entered
into by petitioner with Philacor. Private respondent is not party to said
agreements. It is also not a contract pour autrui. Aforesaid contracts could not
affect third persons like private respondent because of the basic civil law
principle of relativity of contracts which provides that contracts can only bind
the parties who entered into it, and it cannot favor or prejudice a third person,
even if he is aware of such contract and has acted with knowledge thereof.
Indeed, the order agreement entered into by petitioner and private respondent
has not been shown as having a direct bearing on the contracts of petitioner
with Philacor. As pointed out by private respondent and not refuted by
petitioner, the paper specified in the order agreement between petitioner and
private respondent are markedly different from the paper involved in the
contracts of petitioner with Philacor. Furthermore, the demand made by
Philacor upon petitioner for the latter to comply with its printing contract is
dated February 15, 1984, which is clearly made long after private respondent
had filed its complaint on August 14, 1981. This demand relates to contracts
with Philacor dated April 12, 1983 and May 13, 1983, which were entered into
by petitioner after private respondent filed the instant case. To recapitulate,
private respondent did not violate the order agreement it had with petitioner.
Likewise, private respondent could not be held liable for petitioner's breach of
contract with Philacor. It follows that there is no basis to hold private
respondent liable for damages.
4. ID.; DAMAGES; COMPENSATORY; MUST BE PROVED WITH
REASONABLE DEGREE OF CERTAINTY. — The rule on compensatory damages is
well established. True, indemnification for damages comprehends not only the
loss suffered, that is to say actual damages (damnum emergens), but also
profits which the obligee failed to obtain, referred to as compensatory damages
(lucrum cessans). However, to justify a grant of actual or compensatory
damages, it is necessary to prove with a reasonable degree of certainty,
premised upon competent proof and on the best evidence obtainable by the
injured party, the actual amount of loss.

5. ID.; ID.; ID.; NOT ESTABLISHED IN CASE AT BAR. — In the case at

bar, the trial court erroneously concluded that petitioner could have sold books
to Philacor at the quoted ceiling price of P1,850,750.55 and by deducting the
production cost of P1,060,426.20, petitioner could have earned profit of
P790,324.30. Admittedly, the evidence relied upon by the trial court in arriving
at the amount are mere estimates prepared by petitioner. Said evidence is
highly speculative and manifestly hypothetical. It could not provide sufficient
legal and factual basis for the award of P790,324.30 as compensatory damages
representing petitioner's self-serving claim of unrealized profit. AaSCTD

6. ID.; ID.; AWARD OF MORAL DAMAGES AND ATTORNEY'S FEES IS NOT

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 PROPER WHEN BREACH OF CONTRACT WAS NOT ESTABLISHED. — [T]he
deletion of the award of moral damages is proper, since private respondent
could not be held liable for breach of contract. Moral damages may be awarded
when in a breach of contract the defendant acted in bad faith, or was guilty of
gross negligence amounting to bad faith, or in wanton disregard of his
contractual obligation. Finally, since the award of moral damages is eliminated,
so must the award for attorney's fees be also deleted.

DECISION

QUISUMBING, J : p

This is a petition to review the decision of the Court of Appeals rendered

on April 20, 1994 reversing the judgment of the Regional Trial Court of
Caloocan City in an action for recovery of sum of money filed by private
respondent against petitioner. In said decision, the appellate court decreed: LibLex

"WHEREFORE, in view of all the foregoing, the appealed

judgment is hereby REVERSED and SET ASIDE. Appellee [petitioner
herein] is hereby ordered to pay appellant [private respondent herein]
the sum of P763,101.70, with legal interest thereon, from the date of
the filing of the Complaint, until fully paid.
SO ORDERED." 1

The RTC judgment reversed by the Court of Appeals had disposed of the
complaint as follows:
"WHEREFORE, judgment is hereby rendered:
Ordering plaintiff [herein private respondent] to pay defendant
[herein petitioner] the sum of P27,222.60 as compensatory and actual
damages after deducting P763,101.70 (value of materials received by
defendant) from P790,324.30 representing compensatory damages as
defendant's unrealized profits;

Ordering plaintiff to pay defendant the sum of P100,000.00 as

moral damages;

Ordering plaintiff to pay the sum of P30,000.00 for attorney's

fees; and to pay the costs of suit.
SO ORDERED." 2

The facts, as culled from the records, are as follows: cdll

Petitioner and private respondent executed on May 5, 1978, an order

agreement whereby private respondent bound itself to deliver to petitioner
3,450 reams of printing paper, coated, 2 sides basis, 80 lbs., 38" x 23", short
grain, worth P1,040,060.00 under the following schedule: May and June 1978 —
450 reams at P290.00/ream; August and September 1978 — 700 reams at
P290/ream; January 1979 — 575 reams at P307.20/ream; March 1979 — 575
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 reams at P307.20/ream; July 1979 — 575 reams at 307.20/ream; and October
1979 — 575 reams at P307.20/ream. In accordance with the standard operating
practice of the parties, the materials were to be paid within a minimum of thirty
days and maximum of ninety days from delivery.

Later, on June 7, 1978, petitioner entered into a contract with Philippine

Appliance Corporation (Philacor) to print three volumes of "Philacor Cultural
Books" for delivery on the following dates: Book VI, on or before November
1978; Book VII, on or before November 1979 and; Book VIII, on or before
November 1980, with a minimum of 300,000 copies at a price of P10.00 per
copy or a total cost of P3,000,000.00.

As of July 30, 1979, private respondent had delivered to petitioner 1,097

reams of printing paper out of the total 3,450 reams stated in the agreement.
Petitioner alleged it wrote private respondent to immediately deliver the
balance because further delay would greatly prejudice petitioner. From June 5,
1980 and until July 23, 1981, private respondent delivered again to petitioner
various quantities of printing paper amounting to P766,101.70. However,
petitioner encountered difficulties paying private respondent said amount.
Accordingly, private respondent made a formal demand upon petitioner to
settle the outstanding account. On July 23 and 31, 1981 and August 27, 1981,
petitioner made partial payments totalling P97,200.00 which was applied to its
back accounts covered by delivery invoices dated September 29-30, 1980 and
October 1-2, 1980. 3

Meanwhile, petitioner entered into an additional printing contract with

Philacor. Unfortunately, petitioner failed to fully comply with its contract with
Philacor for the printing of books VIII, IX, X and XI. Thus, Philacor demanded
compensation from petitioner for the delay and damage it suffered on account
of petitioner's failure. LLphil

On August 14, 1981, private respondent filed with the Regional Trial Court
of Caloocan City a collection suit against petitioner for the sum of P766,101.70,
representing the unpaid purchase price of printing paper bought by petitioner
on credit.

In its answer, petitioner denied the material allegations of the complaint.

By way of counterclaim, petitioner alleged that private respondent was able to
deliver only 1,097 reams of printing paper which was short of 2,875 reams, in
total disregard of their agreement; that private respondent failed to deliver the
balance of the printing paper despite demand therefor, hence, petitioner
suffered actual damages and failed to realize expected profits; and that
petitioner's complaint was prematurely filed.
After filing its reply and answer to the counterclaim, private respondent
moved for admission of its supplemental complaint, which was granted. In said
supplemental complaint, private respondent alleged that subsequent to the
enumerated purchase invoices in the original complaint, petitioner made
additional purchases of printing paper on credit amounting to P94,200.00.
Private respondent also averred that petitioner failed and refused to pay its
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 outstanding obligation although it made partial payments in the amount of
P97,200.00 which was applied to back accounts, thus, reducing petitioner's
indebtedness to P763,101.70. LibLex

On July 5, 1990, the trial court rendered judgment declaring that

petitioner should pay private respondent the sum of P763,101.70 representing
the value of printing paper delivered by private respondent from June 5, 1980
to July 23, 1981. However, the lower court also found petitioner's counterclaim
meritorious. It ruled that were it not for the failure or delay of private
respondent to deliver printing paper, petitioner could have sold books to
Philacor and realized profit of P790,324.30 from the sale. It further ruled that
petitioner suffered a dislocation of business on account of loss of contracts and
goodwill as a result of private respondent's violation of its obligation, for which
the award of moral damages was justified.
On appeal, the respondent Court of Appeals reversed and set aside the
judgment of the trial court. The appellate court ordered petitioner to pay
private respondent the sum of P763,101.70 representing the amount of unpaid
printing paper delivered by private respondent to petitioner, with legal interest
thereon from the date of the filing of the complaint until fully paid. 4 However,
the appellate court deleted the award of P790,324.30 as compensatory
damages as well as the award of moral damages and attorney's fees, for lack of
factual and legal basis.
Expectedly, petitioner filed this instant petition contending that the
appellate court's judgment is based on erroneous conclusions of facts and law.
In this recourse, petitioner assigns the following errors: LLpr

[I]
"THE COURT OF APPEALS ERRED IN CONCLUDING THAT PRIVATE
RESPONDENT DID NOT VIOLATE THE ORDER AGREEMENT.
[II]
THE COURT OF APPEALS ERRED IN CONCLUDING THAT RESPONDENT IS
NOT LIABLE FOR PETITIONER'S BREACH OF CONTRACT WITH PHILACOR.
[III]
THE COURT OF APPEALS ERRED IN CONCLUDING THAT PETITIONER IS
NOT ENTITLED TO DAMAGES AGAINST PRIVATE RESPONDENT." 5

In our view, the crucial issues for resolution in this case are as follows:
(1) Whether or not private respondent violated the order
agreement, and;

(2) Whether or not private respondent is liable for petitioner's

breach of contract with Philacor.

Petitioner's contention lacks factual and legal basis, hence, bereft of

merit.

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 Petitioner contends, firstly, that private respondent violated the order
agreement when the latter failed to deliver the balance of the printing paper on
the dates agreed upon.
The transaction between the parties is a contract of sale whereby private
respondent (seller) obligates itself to deliver printing paper to petitioner (buyer)
which, in turn, binds itself to pay therefor a sum of money or its equivalent
(price). 6 Both parties concede that the order agreement gives rise to a
reciprocal obligations 7 such that the obligation of one is dependent upon the
obligation of the other. Reciprocal obligations are to be performed
simultaneously, so that the performance of one is conditioned upon the
simultaneous fulfillment of the other. 8 Thus, private respondent undertakes to
deliver printing paper of various quantities subject to petitioner's corresponding
obligation to pay, on a maximum 90-day credit, for these materials. Note that
in the contract, petitioner is not even required to make any deposit, down
payment or advance payment, hence, the undertaking of private respondent to
deliver the materials is conditional upon payment by petitioner within the
prescribed period. Clearly, petitioner did not fulfill its side of the contract as its
last payment in August 1981 could cover only materials covered by delivery
invoices dated September and October 1980.

There is no dispute that the agreement provides for the delivery of

printing paper on different dates and a separate price has been agreed upon
for each delivery. It is also admitted that it is the standard practice of the
parties that the materials be paid within a minimum period of thirty (30) days
and a maximum of ninety (90) days from each delivery. 9 Accordingly, the
private respondent's suspension of its deliveries to petitioner whenever the
latter failed to pay on time, as in this case, is legally justified under the second
paragraph of Article 1583 of the Civil Code which provides that: prLL

"When there is a contract of sale of goods to be delivered by

stated installments, which are to be separately paid for, and the seller
makes defective deliveries in respect of one or more installments, or
the buyer neglects or refuses without just cause to take delivery of or
pay for one or more installments, it depends in each case on the terms
of the contract and the circumstances of the case, whether the breach
of contract is so material as to justify the injured party in refusing to
proceed further and suing for damages for breach of the entire
contract, or whether the breach is severable, giving rise to a claim for
compensation but not to a right to treat the whole contract as broken."
(Emphasis supplied)

In this case, as found a quo petitioner's evidence failed to establish that it

had paid for the printing paper covered by the delivery invoices on time.
Consequently, private respondent has the right to cease making further
delivery, hence the private respondent did not violate the order agreement. On
the contrary, it was petitioner which breached the agreement as it failed to pay
on time the materials delivered by private respondent. Respondent appellate
court correctly ruled that private respondent did not violate the order
agreement.

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 On the second assigned error, petitioner contends that private respondent
should be held liable for petitioner's breach of contract with Philacor. This claim
is manifestly devoid of merit.
As correctly held by the appellate court, private respondent cannot be
held liable under the contracts entered into by petitioner with Philacor. Private
respondent is not a party to said agreements. It is also not a contract pour
autrui. Aforesaid contracts could not affect third persons like private respondent
because of the basic civil law principle of relativity of contracts which provides
that contracts can only bind the parties who entered into it, and it cannot favor
or prejudice a third person, 10 even if he is aware of such contract and has
acted with knowledge thereof. 11
Indeed, the order agreement entered into by petitioner and private
respondent has not been shown as having a direct bearing on the contracts of
petitioner with Philacor. As pointed out by private respondent and not refuted
by petitioner, the paper specified in the order agreement between petitioner
and private respondent are markedly different from the paper involved in the
contracts of petitioner with Philacor. 12 Furthermore, the demand made by
Philacor upon petitioner for the latter to comply with its printing contract is
dated February 15, 1984, which is clearly made long after private respondent
had filed its complaint on August 14, 1981. This demand relates to contracts
with Philacor dated April 12, 1983 and May 13, 1983, which were entered into
by petitioner after private respondent filed the instant case.LexLib

To recapitulate, private respondent did not violate the order agreement it

had with petitioner. Likewise, private respondent could not be held liable for
petitioner's breach of contract with Philacor. It follows that there is no basis to
hold private respondent liable for damages. Accordingly, the appellate court did
not err in deleting the damages awarded by the trial court to petitioner.

The rule on compensatory damages is well established. True,

indemnification for damages comprehends not only the loss suffered, that is to
say actual damages (damnum emergens), but also profits which the obligee
failed to obtain, referred to as compensatory damages (lucrum cessans).
However, to justify a grant of actual or compensatory damages, it is necessary
to prove with a reasonable degree of certainty, premised upon competent proof
and on the best evidence obtainable by the injured party, the actual amount of
loss. 13 In the case at bar, the trial court erroneously concluded that petitioner
could have sold books to Philacor at the quoted selling price of P1,850,750.55
and by deducting the production cost of P1,060,426.20, petitioner could have
earned profit of P790,324.30. Admittedly, the evidence relied upon by the trial
court in arriving at the amount are mere estimates prepared by petitioner. 14
Said evidence is highly speculative and manifestly hypothetical. It could not
provide sufficient legal and factual basis for the award of P790,324.30 as
compensatory damages representing petitioner's self-serving claim of
unrealized profit. cdasia

Further, the deletion of the award of moral damages is proper; since

private respondent could not be held liable for breach of contract. Moral
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 damages may be awarded when in a breach of contract the defendant acted in
bad faith, or was guilty of gross negligence amounting to bad faith, or in
wanton disregard of his contractual obligation. 15 Finally, since the award of
moral damages is eliminated, so must the award for attorney's fees be also
deleted. 16
WHEREFORE, the instant petition is DENIED. The decision of the Court of
Appeals is AFFIRMED. Costs against petitioner.

SO ORDERED.
Bellosillo (Acting C.J.), Mendoza, Buena and De Leon, Jr., JJ., concur.

Footnotes
1. Rollo, p. 34.
2. Id. at 42.
3. Id. at 35-36.
4. Id. at 34.
5. Id. at 90, 93, 97.
6. De Leon, Comments and Cases on Sales, p. 5 (1995).
7. Rollo, pp. 48, 92.
8. Tolentino IV Civil Code of the Philippines, p. 175 (1985).
9. Rollo, pp. 92, 117.
10. Ramos vs. CA, 302 SCRA 589, 599 (1999).
11. Tolentino IV Civil Code of the Philippines, p. 428 (1985).
12. Rollo, p. 125.
13. Coca-Cola Bottlers Phils. Inc. vs. Roque, G.R. 118985, June 14, 1999, p. 8.
14. Rollo, p. 131.
15. J. Vitug, Compendium of Civil Law and Jurisprudence, p. 841 (1993).
16. Bernardo vs. CA, 275 SCRA 413, 432 (1997).

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