G.R. No. 127454 September 21, 2005
MAVEST (U.S.A.) INC., and MAVEST Manila Liaison Office, Petitioners, vs. SAMPAGUITA GARMENT CORPORATION, Respondent.

FACTS

Petitioner MAVEST (U.S.A.), Inc., a foreign corporation, through its local representative MAVEST Manila Liaison Office (MLO), engaged respondent Sampaguita Garment Corporation, a domestic manufacturer, to produce garments for foreign buyers. Among several orders, Sampaguita manufactured and shipped 8,000 pieces of cotton woven pants for buyer JC Penney, valued at US$29,200. This particular order was not covered by a letter of credit. Despite shipment and receipt by JC Penney, Sampaguita was not paid.
Sampaguita filed a collection case against MAVEST entities. Petitioners defended by claiming legal compensation, arguing that Sampaguita owed them a larger amount due to alleged breaches (e.g., delays, specification failures) in separate transactions for another buyer, Sears Roebuck. The trial court ruled for Sampaguita, ordering petitioners to pay the principal sum. The Court of Appeals affirmed but absolved other individual defendants and deleted the award for attorney’s fees.

ISSUE

Whether the Court of Appeals erred in: (1) not applying legal compensation to extinguish petitioners’ obligation; and (2) holding MLO solidarily liable with MAVEST (U.S.A.), Inc.

RULING

The Supreme Court denied the petition and affirmed the appellate court’s decision. On the first issue, legal compensation under Article 1278 of the Civil Code requires, among other conditions, that the debts be liquidated and demandable. Petitioners’ claim for damages from the Sears transactions was not liquidated; it was a contested amount arising from unproven breaches. The burden of proof for compensation lies with the party asserting it. Petitioners failed to substantiate their counterclaim with clear evidence, whereas respondent proved the existence and amount of the unpaid JC Penney order. Unliquidated claims cannot compensate a liquidated debt.
On the second issue, MLO was correctly held solidarily liable. The Court affirmed that MLO, as the duly registered liaison and representative office of MAVEST (U.S.A.) in the Philippines, acted as its extension and instrumentality in conducting business locally. As such, it can be held answerable for the liabilities incurred by its principal in the course of that representation. The nature of their relationship justifies holding them jointly and severally liable for the contractual obligation arising from the transactions MLO facilitated.