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ARCO PULP v. DAN T. LIM

FACTS:

Dan T. Lim, operating as Quality Paper and Plastic Products Enterprises, delivered scrap papers worth P7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper). They had an agreement that Arco Pulp and Paper would either pay Dan T. Lim the value of the raw materials or deliver their finished products of equivalent value. However, when Dan T. Lim deposited the post-dated check issued by Arco Pulp and Paper, it bounced. On the same day, Arco Pulp and Paper, together with Eric Sy, executed a memorandum of agreement where Arco Pulp and Paper committed to deliver their finished products to Megapack Container Corporation owned by Eric Sy, with Dan T. Lim supplying the raw materials. Dan T. Lim demanded payment from Arco Pulp and Paper, but they failed to make the payment. Dan T. Lim filed a complaint in the RTC for collection of a sum of money. The trial court ruled in favor of Arco Pulp and Paper, stating that novation took place when Arco Pulp and Paper and Eric Sy executed the memorandum of agreement. The Court of Appeals reversed the trial court's decision and ordered Arco Pulp and Paper to pay Dan T. Lim the amount of P7,220,968.31 with damages. Arco Pulp and Paper, along with Candida A. Santos, its President and Chief Executive Officer, filed a petition for review on certiorari arguing that novation occurred and that Santos should not be personally liable. Dan T. Lim argued that there was no proper novation and that Santos should be held solidarily liable for the outstanding debt.

ISSUES:

  1. Whether or not novation took place in the case

  2. Whether or not petitioner Arco Pulp and Paper's obligation remains valid and existing

  3. Whether the outcome of the case constitutes a legal injury or a violation of the standards of care required in Article 19.

  4. Whether breach of contract can be the basis for the recovery of moral damages.

  5. Whether the actions of the petitioner show bad faith and warrant the award of moral damages.

  6. Whether exemplary damages can be awarded based on the defendant's wanton, fraudulent, reckless, oppressive, or malevolent conduct.

  7. Whether attorney's fees and cost of the suit can be recovered.

  8. Whether petitioner Candida A. Santos is solidarily liable with petitioner corporation.

  9. Whether the rate of interest due on the obligation should be reduced.

  10. Whether the interest due on the obligation should be at 6% per annum computed from the time of demand until the finality of the judgment;

  11. Whether petitioners should be ordered to pay moral damages, exemplary damages, and attorney's fees.

RULING:

  1. Novation did not take place as there was no clear agreement between the parties and petitioner Arco Pulp and Paper's act of tendering partial payment conflicted with their alleged intent to pass on their obligation.

  2. Since novation did not take place, petitioner Arco Pulp and Paper's obligation remains valid and existing. They must pay respondent the full amount of P7,220,968.31.

  3. The outcome of the case is considered a legal injury on the part of the plaintiff and a violation of the standards of care required in Article 19.

  4. Breach of contract can be the basis for the recovery of moral damages, provided that it is done fraudulently or in bad faith.

  5. The actions of the petitioner show bad faith, which warrants the award of moral damages.

  6. Exemplary damages can be awarded based on the defendant's wanton, fraudulent, reckless, oppressive, or malevolent conduct.

  7. Attorney's fees and cost of the suit can be recovered.

  8. Yes, petitioner Candida A. Santos is solidarily liable with petitioner corporation. The Supreme Court held that the corporate veil may be pierced when the separate corporate personality of a corporation is abused or used for wrongful purposes. In this case, petitioner Santos issued an unfunded check and contracted with a third party in an effort to shift petitioner Arco Pulp and Paper's liability. These acts clearly amounted to bad faith, justifying the piercing of the corporate veil and holding petitioner Santos solidarily liable with petitioner Arco Pulp and Paper.

  9. The rate of interest due on the obligation must be reduced from 12% per annum to 6% per annum from the time of demand, in accordance with the Supreme Court's decision in Nacar v. Gallery Frames. The guidelines for the rate of legal interest laid down in the Eastern Shipping Lines case have been modified to embody BSP-MB Circular No. 799.

  10. The interest due on the obligation should be at 6% per annum computed from the time of demand until the finality of the judgment.

  11. Petitioners are ordered to pay respondent moral damages in the amount of P50,000.00, exemplary damages in the amount of P50,000.00, and attorney's fees in the amount of P50,000.00.

PRINCIPLES:

  • Novation requires clear agreement and replacement of the original obligation.

  • The act of tendering partial payment conflicts with the intent of passing on the obligation.

  • When there is no novation, the original obligation remains valid and existing.

  • Moral damages may be awarded for breach of contract if it is shown that the breach was due to fraud or bad faith.

  • Moral damages must meet certain conditions such as injury sustained, culpable act or omission, proximate cause, and being within the cases stated in Article 2219 of the Civil Code.

  • Breaches of contract done in bad faith are not specified in the enumeration of cases where moral damages may be awarded, but they are covered under Article 19 of the Civil Code.

  • Article 19 requires persons entering into contractual relations to act with justice, give everyone his due, and observe honesty and good faith.

  • Articles 20 and 21 of the Civil Code cover violations of law and injuries caused by acts contrary to morals, good customs, and public policy respectively.

  • Obligations arising from contracts should be complied with in good faith. (Article 1159)

  • Breaches of contract can be the basis for the recovery of moral damages under Article 2220, as well as Articles 19 and 20 in relation to Article 1159.

  • To recover moral damages in an action for breach of contract, the breach must be palpably wanton, reckless and malicious, in bad faith, oppressive, or abusive. (Adriano v. Lasala)

  • Bad faith implies a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of known duty through some motive or interest or ill will that partakes of the nature of fraud. (Adriano v. Lasala)

  • Exemplary damages may be awarded if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. (Article 2232)

  • Exemplary damages cannot be recovered as a matter of right; their determination depends on the amount of compensatory damages awarded and the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive, or malevolent manner. (Article 2233)

  • Business owners must be forthright in their dealings, and exemplary damages may be awarded to deter those who use fraudulent means to evade their liabilities.

  • Attorney's fees and cost of the suit can be recovered, in the absence of stipulation, except for judicial costs. (Article 2208)

  • A corporation is a juridical entity with a legal personality separate and distinct from those acting for and on its behalf.

  • Directors, officers, or employees of a corporation are generally not held personally liable for obligations incurred by the corporation.

  • The veil of corporate fiction may be pierced if complainant is able to prove that the officer is guilty of negligence or bad faith, and such negligence or bad faith was clearly and convincingly proven.

  • The rate of interest due on an obligation can be reduced in accordance with the Supreme Court's decision in Nacar v. Gallery Frames.

  • The interest due on an obligation of payment of a sum of money should be that which may have been stipulated in writing. In the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default.

  • Interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest shall be adjudged on unliquidated claims or damages until the demand can be established with reasonable certainty.

  • Judgments that have become final and executory prior to July 1, 2013, shall not be disturbed and shall continue to be implemented applying the rate of interest fixed therein.