FACTS:

In the first quarter of 1998, petitioner Solar Harvest, Inc. entered into an agreement with respondent Davao Corrugated Carton Corporation for the purchase of corrugated carton boxes. The agreement was not reduced into writing, but petitioner made a full payment of US$40,150.00 for the ordered boxes. However, despite the payment, petitioner did not receive any boxes from respondent.

Petitioner sent a demand letter for reimbursement on January 3, 2001, and respondent replied on February 19, 2001, stating that the boxes had been completed as early as April 3, 1998 but petitioner failed to pick them up from the warehouse. Respondent also claimed that petitioner made an additional order of 24,000 boxes. Respondent demanded petitioner to remove the boxes from the factory and pay the balance for the additional boxes and storage fee.

On August 17, 2001, petitioner filed a Complaint for sum of money and damages against respondent, alleging that respondent failed to deliver the ordered boxes within the agreed time and refusing to refund the payment made.

Respondent, in its Answer with Counterclaim, insisted that it completed production of the boxes and that petitioner failed to pick them up. Respondent also claimed that petitioner made a second order of 24,000 boxes. Respondent counterclaimed for payment of the remaining balance, damages, and storage fees.

During the trial, petitioner presented Que as its sole witness to testify that the boxes were not delivered and that petitioner did not make a second order of 24,000 boxes. Respondent presented Estanislao and Tan as witnesses to support their claim that the boxes were completed and petitioner failed to pick them up.

The Regional Trial Court ruled in favor of respondent, stating that respondent produced the boxes but petitioner failed to obtain possession due to the non-arrival of their ship. The court dismissed petitioner's complaint and respondent's counterclaims.

Petitioner appealed to the Court of Appeals, but the appeal was denied for lack of merit. The CA held that petitioner failed to prove their agreement and failed to demand the delivery of the boxes.

Petitioner filed a motion for reconsideration, which was denied by the CA.

ISSUES:

1. Whether petitioner's claim for reimbursement is a claim for rescission of contract.

2. Whether demand by the creditor is necessary in order for default to exist in reciprocal obligations.

3. Whether the boxes were manufactured by the respondent.

4. Whether the agreement between the parties obligated the respondent to deliver the boxes to the petitioner within 30 days from payment.

5. Whether the petitioner established a cause of action for rescission.

RULING:

1. Petitioner's claim for reimbursement is considered as a claim for rescission of contract under Article 1191 of the Civil Code.

2. In reciprocal obligations, demand by the creditor is necessary in order for default to exist, unless the obligation or the law expressly declares that demand is not necessary. In this case, there was no demand made by the petitioner upon the respondent, therefore the respondent cannot be considered in default.

3. The Court finds that the boxes were manufactured by the respondent. There is evidence from a witness who accompanied the petitioner to the respondent's factory, confirming that they saw a pile of petitioner's boxes and the petitioner took samples. The respondent's counsel even offered to have a representative from the court visit the plant and see the boxes. The Court also notes that the respondent prays in their Comment that the petitioner be ordered to remove the boxes from its factory site, indicating that the boxes are still in the respondent's premises.

4. The Court believes that the agreement between the parties was for the petitioner to pick up the boxes from the respondent's warehouse, contrary to the petitioner's allegation that the respondent should deliver the boxes. The burden of proof was on the petitioner to establish the terms of the agreement, but their sole witness was not competent to testify on the terms. It was even admitted that the boxes were ordered through another person, not the petitioner. Furthermore, even if the respondent was obliged to deliver the boxes, they could not have complied since they did not have the authority from the petitioner to deliver them.

5. The Court finds that the petitioner failed to establish a cause of action for rescission as they did not prove that the respondent committed any breach of its contractual obligation. The subject boxes are still within the respondent's premises. The Court relieves the respondent from the burden of keeping the boxes and gives them the right to dispose of them, after giving the petitioner a period of time to remove the boxes.

PRINCIPLES:

• The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. (Article 1191, Civil Code)

• In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. (Article 1169, Civil Code)

• In reciprocal obligations with fixed dates for performance, the other party incurs in delay only from the moment the other party demands fulfillment of the former's obligation. Thus, in order for a cause of action for rescission to accrue, demand by the creditor is necessary.

• The burden of proof lies on the party asserting a claim or defense.

• Parties to a contract are bound by its terms and must establish the existence of the contract and its terms through competent evidence.

• A cause of action for rescission must be based on a breach of the contractual obligations of the other party.