G.R. No. L-11310; January 31, 1918
CARLOS PALANCA, plaintiff-appellant, vs. FRED WILSON & CO., defendant-appellee.

FACTS:
On June 11, 1913, Song Fo & Co., through its manager Carlos Palanca, entered into a contract with Fred Wilson & Co. for the purchase of a distilling apparatus for P10,000. The contract described the machine as a “Guillaume” apparatus for direct and continuous distillation-rectification, type “C,” Agricola, “de una capacidad de 6,000 litros cada 24 horas de trabajo, de un grado de 96-97 Gay Lussac,” according to a specified catalog. The machine was installed in January 1914. In May 1914, Palanca informed Wilson & Co. that the machine, upon examination by competent persons, was not capable of producing the stipulated amount of alcohol. The machine could treat 6,000 liters of raw material per day but produced only about 480 liters of rectified alcohol per day. Palanca filed an action for damages and specific performance in the Court of First Instance of Manila. The trial court ruled in favor of Wilson & Co., dismissing Palanca’s complaint and ordering him to pay the outstanding balance of P5,000 for the purchase price.

ISSUE:
Whether the term “capacidad de 6,000 litros cada 24 horas de trabajo” in the contract refers to the machine’s producing capacity (output of rectified alcohol) or its receiving/treating capacity (input of raw material).

RULING:
The Supreme Court affirmed the trial court’s decision. The Court held that the term “capacidad” in the contract, interpreted in light of the surrounding circumstances, referred to the machine’s capacity to receive or treat 6,000 liters of raw material per day, not its output of rectified alcohol. The Court found intrinsic ambiguity in the contract and considered extrinsic evidence, including: (1) the reference in the contract to a specific catalog, which described the machine’s grade of alcohol but not its daily capacity; (2) preliminary negotiations and correspondence indicating the parties contemplated a treating capacity; (3) plans and specifications describing a capacity of 6,000 liters of ferment; and (4) the fact that a machine capable of producing 6,000 liters of rectified alcohol daily would cost significantly more (P35,000P40,000) than the contract price of P10,000. The Court concluded that Wilson & Co. complied with the contract by delivering a machine that treated 6,000 liters of raw material per day and produced alcohol of the specified grade (9697 Gay Lussac). Thus, Palanca’s claim for breach of contract was without merit.

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