G.R. No. 141009 ; July 2, 2002
BATAAN SEEDLING ASSOCIATION, INC. and CARLOS VALENCIA, petitioners, vs. REPUBLIC OF THE PHILIPPINES, represented by the DEPARTMENT OF ENVIRONMENT and NATURAL RESOURCES, respondent.

FACTS

Petitioner Bataan Seedling Association, Inc. (BSAI) entered into a Community Based Reforestation Contract with the Republic, represented by the DENR, to reforest a fifty-hectare area in Bataan for a contract price. A mobilization fund was advanced to BSAI to start the project, to be returned upon completion or deducted from periodic payments. The DENR later cancelled the contract, alleging BSAI’s failure to fully plant the area in the first year, abandonment of the project site, disposal of seedlings to other contractors, and failure to report a forest fire and submit required accomplishment reports. Due to BSAI’s failure to respond to the notice and refund the mobilization fund, the Republic filed a complaint for damages.
The Regional Trial Court found sufficient grounds for the contract’s cancellation but only ordered petitioners to pay exemplary damages, refusing to order a refund of the mobilization fund and advance payments. Both parties appealed. The Court of Appeals affirmed the cancellation and modified the decision, ordering petitioners to jointly and severally refund the balance of the mobilization fund with 12% interest per annum from 1994 and upholding the award of exemplary damages.

ISSUE

The core issues are: (1) whether the unilateral cancellation of the contract by the DENR was valid; and (2) whether the order for petitioners to refund the balance of the mobilization fund with interest is correct.

RULING

The Supreme Court affirmed the validity of the contract cancellation but modified the monetary awards. On the first issue, the Court upheld the cancellation. Petitioners argued their obligation was merely to “turn-over” a fully developed area after three years, not to fully plant within the first year. The Court, however, ruled that the contract must be read as a whole. The accompanying Project Development Plan and Approved Schedule of Progress Payments, which were integral parts of the agreement, detailed a specific annual cash flow and schedule of activities. This established a year-by-year implementation plan, making the first-year planting commitment a material condition. Petitioners’ failure to meet this schedule, coupled with the findings of abandonment and failure to report the fire, constituted a willful violation warranting rescission under Article 1191 of the Civil Code.
On the second issue, the Court sustained the order to refund the unearned portion of the mobilization fund (P56,290.69) but modified the interest rate. Applying the rules outlined in Eastern Shipping Lines, Inc. v. Court of Appeals, the obligation to refund a sum of money arising from a contract incurs legal interest only from the time of judicial demand or, if none, from the date of the court’s decision. Since the complaint served as judicial demand, the obligation was only liquidated upon the finality of the Court of Appeals’ decision. Therefore, interest should be at 6% per annum from the date of that appellate decision (October 14, 1998) until finality of this Supreme Court resolution, after which it shall be 12% per annum until full payment. The Court also reduced the exemplary damages from P50,000 to P20,000, finding the original award excessive for its purpose of deterrence rather than enrichment.