G.R. No. 70789 October 19, 1992
RUSTAN PULP & PAPER MILLS, INC., BIENVENIDO R. TANTOCO, SR., and ROMEO S. VERGARA, petitioners, vs. THE INTERMEDIATE APPELLATE COURT and ILIGAN DIVERSIFIED PROJECTS, INC., ROMEO A. LLUCH and ROBERTO G. BORROMEO, respondents.

FACTS

Petitioner Rustan Pulp & Paper Mills, Inc. (Rustan) established a pulp and paper mill in Baloi, Lanao del Norte. In April 1968, Rustan entered into a contract of sale with respondent Romeo A. Lluch, whereby Lluch agreed to sell pulp wood to Rustan at a specified price. The contract contained stipulations that: (1) Rustan had the option to buy from other qualified sellers, but Lluch had priority to supply its requirements; and (2) Rustan had the right to stop delivery of raw materials when the supply became sufficient, provided the seller was given sufficient notice. During the test run of the mill, major defects were discovered in the machinery. Consequently, on September 30, 1968, Rustan, through its Resident Manager Dr. Romeo S. Vergara, sent a letter to Lluch informing him that the supply of raw materials had become sufficient and directing him to stop delivery 30 days from the date of the letter. Despite this notice, Lluch and other suppliers continued to make deliveries, which Rustan accepted. Lluch sought clarification on whether the letter meant stoppage of delivery or termination of the contract, but received no answer. Subsequently, private respondents filed a complaint for breach of contract. The trial court dismissed the complaint but ordered Rustan to respect the contract if circumstances warranted full commercial operation. On appeal, the Intermediate Appellate Court modified the judgment, holding petitioners Rustan, Bienvenido R. Tantoco, Sr., and Romeo S. Vergara jointly and severally liable for moral damages and attorney’s fees.

ISSUE

1. Whether the Intermediate Appellate Court erred in holding petitioners Tantoco and Vergara personally liable under the contract of sale.
2. Whether Rustan’s decision to suspend taking delivery of pulp wood, prompted by serious and unforeseen defects in the mill, was a lawful exercise of its rights under the contract.
3. Whether the award of moral damages and attorney’s fees was proper in the absence of fraud or bad faith.

RULING

1. On the personal liability of Tantoco and Vergara: The Supreme Court agreed with petitioners. Tantoco, who signed the contract as a representative of Rustan, and Vergara, who did not sign the contract at all but signed the stoppage letter in his official capacity, cannot be held personally liable. The corporation has a separate and distinct personality from its officers. An officer who enters into a contract in his official capacity cannot be made personally liable in the absence of a stipulation to that effect. The exceptions under Article 1897 of the Civil Code, where an agent becomes directly responsible, are absent. Therefore, the Appellate Court erred in holding them jointly and severally liable. Only the corporation, Rustan Pulp & Paper Mills, Inc., should be liable.
2. On the lawfulness of Rustan’s stoppage of delivery: The Supreme Court held that Rustan’s exercise of the right to stop delivery was not lawful. Paragraph 7 of the contract, which allowed Rustan to stop delivery when supply became sufficient, was a potestative condition dependent solely on the will of the obligor (Rustan) and related to the fulfillment of an existing obligation. Such a condition must be disregarded as void, without affecting the rest of the contract. Furthermore, Rustan’s claim of frustration of the commercial object (due to machinery defects) under Article 1267 of the Civil Code was untenable because it continued to accept deliveries from suppliers after the stoppage notice. This conduct estopped Rustan from claiming that the machinery breakdown was an extraordinary obstacle to compliance. Its actions were inconsistent with a normal business enterprise seeking to avoid losses.
3. On the award of moral damages and attorney’s fees: The Supreme Court sustained the award of moral damages and attorney’s fees by the Appellate Court. The breach of contract was established. However, the award is to be paid solely by petitioner Rustan Pulp & Paper Mills, Inc., and not by the individual petitioners Tantoco and Vergara.
The decision of the Intermediate Appellate Court was MODIFIED. Only petitioner Rustan Pulp & Paper Mills, Inc. is ordered to pay moral damages and attorney’s fees as awarded.