G.R. No. 234849 , April 03, 2024
SAN MIGUEL FOODS, INC., PETITIONER, VS. SPOUSES RAMON AND MA. NELIA FABIE, AND FRESH LINK, INC., RESPONDENTS.

FACTS

Respondent Fresh Link, Inc., owned by respondent spouses Ramon and Nelia Fabie, entered into a series of yearly-renewed Complementary Distributorship Agreements with petitioner San Miguel Foods, Inc. (SMFI), appointing Fresh Link as the exclusive distributor of SMFI products in specified territories, including Makati and Guadalupe Wet Market. The agreement was secured by a credit line and a standby letter of credit. In April 1999, the parties renewed the Agreement until March 31, 2000. Respondents alleged that SMFI violated the agreement by withholding discounts, allowing the proliferation of underpriced products within Fresh Link’s territory, and refusing to furnish a copy of the renewed contract. On June 4, 1999, SMFI ceased credit deliveries to Fresh Link, prompting the latter to file a Complaint for Breach of Contract and Damages. SMFI countered that it stopped credit deliveries because Fresh Link’s outstanding accounts had become due and payable and its letter of credit collateral had expired. The Regional Trial Court (RTC) ruled in favor of respondents, awarding actual, moral, and exemplary damages and attorney’s fees. The Court of Appeals (CA) affirmed the RTC with modifications, deleting the award of actual damages for lack of competent proof and awarding temperate damages instead. The CA also found that SMFI pre-terminated the Agreement in violation of its termination clause, which it declared null and void for violating the principle of mutuality of contracts. SMFI filed the instant Petition for Review.

ISSUE

Whether the Court of Appeals erred in invalidating the termination clause of the Agreement for violating the rule on mutuality of contracts, even though its validity was not challenged by the parties.

RULING

The Supreme Court denied the petition and affirmed the CA Decision with modifications. The Court held that the termination clause in the Agreement, which allowed SMFI to terminate the contract at any time for any violation by Fresh Link without affording Fresh Link the same right, was indeed void for violating the principle of mutuality of contracts under Article 1308 of the Civil Code. A contract must bind both parties equally; its validity or compliance cannot be left to the will of one of them. The Court found that SMFI unilaterally pre-terminated the Agreement without valid grounds, as Fresh Link’s obligation to pay was not yet due and demandable at the time credit deliveries were stopped, and the expired letter of credit was not the sole security for the credit line. SMFI was therefore liable for breach of contract. However, the Court deleted the award of temperate damages, as such damages are not recoverable in breach of contract cases where no actual damages are proven. The awards for moral damages, exemplary damages, and attorney’s fees were sustained due to SMFI’s bad faith and wanton disregard of its contractual obligations. All monetary awards shall earn legal interest at 6% per annum from finality of judgment until full payment.