G.R. No. 83851. March 3, 1993.
VISAYAN SAWMILL COMPANY, INC., and ANG TAY, petitioners, vs. THE HONORABLE COURT OF APPEALS and RJH TRADING, represented by RAMON J. HIBIONADA, proprietor, respondents.

FACTS

Petitioner Visayan Sawmill Company, Inc., through its manager Ang Tay, entered into a contract entitled “Purchase and Sale of Scrap Iron” with private respondent RJH Trading on May 1, 1983. The contract stipulated that the purchase price was to be paid by means of an irrevocable and unconditional letter of credit. On May 17, 1983, with the consent of Ang Tay, private respondent sent men to the petitioner’s stockyard to dig, gather, and stock the scrap iron for weighing. The private respondent failed to open the required letter of credit. Consequently, the petitioner corporation cancelled the contract and refused to deliver the scrap iron. Private respondent filed a complaint for specific performance and damages. The Court of Appeals ruled in favor of the private respondent, ordering the petitioners to deliver the scrap iron and awarding damages. Petitioners elevated the case to the Supreme Court.

ISSUE

The primary issue is whether the contract is a contract of sale or a contract to sell, and the legal effects of the private respondent’s failure to open the irrevocable letter of credit as stipulated.

RULING

The Supreme Court ruled in favor of the petitioners, reversing the decision of the Court of Appeals.
1. The contract is a contract to sell, not a contract of sale. The petitioner’s obligation to sell was subject to a positive suspensive condition—the opening, making, or indorsing of an irrevocable and unconditional letter of credit by the private respondent. The agreement was to deliver the scrap iron only upon payment via such letter of credit. Therefore, there was to be no actual sale until the condition was fulfilled. The private respondent’s failure to comply was not a breach but an event that prevented the petitioner’s obligation to convey title from arising. Citing Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., the Court held that if a suspensive condition is not fulfilled, the obligation is considered non-existent.
2. Since the obligation to sell did not arise, the petitioner could not be compelled by specific performance. Article 1191 of the Civil Code on rescission of reciprocal obligations does not apply. Instead, pursuant to Article 1597 of the Civil Code, the seller may totally rescind the contract when the goods have not been delivered and the buyer has repudiated the contract, manifested inability to perform, or committed a breach. The petitioner’s cancellation of the contract was a valid total rescission.
3. The consent given to the private respondent to enter the stockyard to dig and gather the scrap iron for weighing did not constitute delivery under Article 1497 of the Civil Code. This act did not place the private respondent in control and possession of the scrap iron. First, the obligation to deliver under Article 1497 presupposes an existing obligation, which had not yet arisen due to the unfulfilled suspensive condition. Second, it was a mere accommodation to expedite future weighing and hauling if the sale materialized. Third, the petitioners’ subsequent demand for the letter of credit and cancellation of the contract negated any intent to effect delivery.
4. The awards of moral and exemplary damages were deleted. Moral damages in contracts are recoverable only if the defendant acted fraudulently and in bad faith; exemplary damages require wanton, fraudulent, reckless, oppressive, or malevolent conduct. The petitioners’ refusal to deliver was based on the lawful ground of the unfulfilled suspensive condition, not on bad faith. The Court emphasized that damages must be proportional to the suffering and not enrich the complainant.
DISSENTING OPINION (Justice Romero):
Justice Romero argued that the contract was a perfected contract of sale under Articles 1458 and 1475 of the Civil Code, as there was a meeting of minds on the object and price. The provision for payment by letter of credit was a mere modality of payment, not a suspensive condition that prevented perfection. By allowing the buyer’s men to enter the premises and begin operations, the seller effected delivery under Article 1497, transferring control and possession. The reservation of title is what typically distinguishes a contract to sell, and the contract here lacked such a clear reservation. Therefore, the seller’s remedy was an action for payment of the price, not rescission.