Cerrano vs. Tan Chuco

In the absence of an express stipulation or a satisfactorily proved local custom, the duration of a contract for the hire of personal property at a monthly rental is presumed to be from month to month, by analogy to Article 1581 of the Civil Code governing leases of real property, and the lessor who breaches such a contract is liable only for the lost profits attributable to the unexpired term.

The plaintiff, Vivencio Cerrano, was a lessee who rented cascos (flat-bottomed barges) for commercial use in the port of Manila. The defendant, Tan Chuco, was the owner of casco No. 1033. The dispute arose within the context of a port industry in which cascos were periodically docked for repairs, and the parties disagreed over whether a prevailing custom in the port of Manila fixed the duration of casco-hiring contracts at ten months—the period ordinarily elapsed between annual overhauls. The Civil Code in force at the time contained no rule expressly governing the duration of leases of personal property, requiring the Court to determine the applicable legal principle by analogy.

During January 1916, Tan Chuco, the owner of casco No. 1033, rented it to Vivencio Cerrano at a monthly rental of P70. The contract was made in Manila, and the casco was delivered to Cerrano in that city. There was no express agreement regarding the duration of the contract, and the rent was payable at the end of each month.

Sometime in May 1916, Tan Chuco notified Cerrano that the casco would need to be sent to Malabon for repairs the following month. Cerrano expressed his desire to rent the casco again after repairs were completed. Tan Chuco indicated willingness but at an increased rental of P80 per month. Cerrano contended that it was agreed he would take the casco at the increased rental, while Tan Chuco insisted his offer was never accepted. It is admitted that no agreement existed concerning the length of time the hire was to continue. Cerrano further contended, denied by Tan Chuco, that according to the custom prevailing in the port of Manila, a contract for the rental of a casco, when made by the owner, was deemed in the absence of an express stipulation to run from the date of the contract until the casco had to be docked for its annual overhauling and repair—a period of approximately ten months from one docking to another. Tan Chuco contended that in the absence of an express stipulation, the hiring was from month to month.

The casco was taken to Malabon by Cerrano in June 1916 and delivered at the shipyard selected by Tan Chuco. The casco remained there undergoing repairs until July 24, 1916. About one week before the end of the repair period, Tan Chuco sold the casco to Siy Cong Bieng & Co. J. Santos, the man Cerrano had employed as patron of the casco, upon hearing of the sale, went to the office of Siy Cong Bieng & Co. and asked for employment in the same capacity. He received P5 on account of wages and was instructed to go to Malabon and bring the casco to Manila, which he did, with Siy Cong Bieng & Co. supplying the launch for towing.

Upon the casco's arrival in Manila, Cerrano, claiming entitlement to possession under his contract with Tan Chuco regardless of the sale, induced Santos to refuse orders from the new owners. Siy Cong Bieng & Co. consequently brought a replevin action against Santos for recovery of possession. The sheriff seized the casco under a writ of replevin but redelivered it to Santos upon a delivery bond executed by Cerrano and his wife as sureties. After the casco had remained in Santos's possession for some three months, the replevin suit was submitted on a written stipulation admitting that the casco was the property of Siy Cong Bieng & Co. at the time the suit was commenced and that the "illegal detention" by Santos had caused damages of P457.98. Judgment was entered for delivery of the casco and P457.98 in damages. Cerrano paid this judgment under the delivery bond. He also paid P500 to the attorney he had employed to defend Santos in the replevin action, in which Santos was only a nominal defendant, the suit having been entirely controlled by Cerrano. Cerrano testified that the average profit he derived from other cascos during the period he claimed entitlement to the casco in question was P60 per month.

• Formation of Re-lease Contract: Whether it was agreed between the plaintiff and defendant that the casco was to be leased to the plaintiff again after it had been repaired.
• Duration of the Term: Whether the duration of the casco-hiring contract, in the absence of an express stipulation, was governed by a local custom fixing the term at ten months or was presumed to be from month to month.
• Measure of Damages: Whether the plaintiff was entitled to recover lost profits as damages for the breach, and whether the burden rested on the plaintiff to show he had attempted to mitigate damages by securing a replacement casco.
• Liability for Replevin Suit Costs: Whether the defendant was liable for the amounts the plaintiff paid as damages and attorney's fees in the replevin suit brought by Siy Cong Bieng & Co. against Santos.

• Formation of Re-lease Contract: Yes. The evidence sustained the conclusion that it was understood between the parties that the plaintiff was to have the casco again at the increased rental of P80 per month as soon as repairs were completed, and the sale to Siy Cong Bieng & Co. constituted a breach of that contract.
• Duration of the Term: The alleged custom fixing a ten-month term was rejected; the term was presumed to be one month. By analogy to Article 1581 of the Civil Code governing leases of real property, a monthly rental of personal property is presumed to run from month to month in the absence of an express stipulation or proved custom.
• Measure of Damages: Yes, the plaintiff was entitled to recover lost profits of P50 for the one-month term. The burden of proving that the plaintiff could have mitigated damages by securing a replacement casco rested on the defendant, who produced no such evidence.
• Liability for Replevin Suit Costs: No. The defendant was not liable for the P457.98 paid as damages or the P500 paid as attorney's fees in the replevin suit, because the plaintiff acted voluntarily and officiously in financing the unlawful detention of the casco by Santos against its lawful new owners.

• Formation of Re-lease Contract: The Court found that the understanding between the parties was demonstrated by the fact that Cerrano paid for the towage of the casco to the dry dock at Malabon, left his equipment in it, and his patron stayed with the casco during the time it was on the dock. These acts were inconsistent with any intention other than that Cerrano was to resume possession after repairs. The sale to Siy Cong Bieng & Co. therefore constituted a breach of the contract of hire.

• Duration of the Term: The Court found the evidence on the alleged port custom of a ten-month term conflicting and unsatisfactory, insufficient to warrant a finding of its existence. The Court reasoned that there is no definite season when cascos must be docked, and the interval between overhauls depends on the age and condition of the vessel, making a fixed ten-month period unreasonable. If such a custom existed, it would produce the absurd result that in one case the parties might be bound for over a year while in another a contract in the same terms might not last a month. Finding no rule of law expressly applicable to the hiring of personal property and no satisfactorily proved custom, the Court applied general principles of law pursuant to Article 6 of the Civil Code, adopting by analogy Article 1581, which provides that a lease of a house is deemed made from day to day, month to month, or year to year according to whether a daily, monthly, or yearly rent is paid. The Court concluded that a similar presumption arises for the hire of personal property: one who agrees to pay a monthly rent intends the tenancy to endure for a like period, subject to indefinite tacit renewals. The Court cited French law as stated by Dalloz in support of this principle. Accordingly, the defendant was bound to deliver the casco for one month from the date repairs ended, but was under no obligation to renew beyond that.

• Measure of Damages: The Court held that the plaintiff was entitled to recover the profit he would have earned had the contract been performed. Cerrano testified without contradiction that his average net profit from the casco was P60 per month while paying P70 rent; at the increased rental of P80, the profit would be reduced to P50 per month. Article 1106 of the Civil Code establishes that prospective profits may be recovered as damages, while Article 1107 provides that damages for breach of obligations not originating in fraud are those which were or might have been foreseen at the time the contract was entered into. The Court found it unquestionable that the defendant must be deemed to have foreseen that his breach would cause the plaintiff to lose the profit reasonably expected from the casco's use. On the question of mitigation, the Court acknowledged the principle that damages from avoidable consequences are not recoverable, but held that the burden of proof rests on the defendant to show the plaintiff could have reduced damages. The defendant made no effort to show that other similar cascos were available or at what price; accordingly, it would not be presumed that the plaintiff could have secured a replacement.

• Liability for Replevin Suit Costs: The Court held that a contract of lease or hiring does not create a right in rem in favor of the lessee, except in the case of a recorded lease of real estate. The casco had been sold to Siy Cong Bieng & Co., and Santos's attempt to retain possession against the lawful owners was unlawful. Cerrano was not a party to the replevin suit and acted voluntarily and officiously in becoming a surety on Santos's bond and paying the attorney. The proximate cause of the loss incurred by the unlawful acts of Santos was not the defendant's breach of contract but the plaintiff's own imprudence. The defendant was liable only for damages foreseeable as the natural and probable consequence of the breach, which did not include the costs of the replevin suit.

• Duration of Hire of Personal Property by Analogy — In the absence of an express stipulation or a proved local custom, the duration of a contract for the hire of personal property at a monthly rental is presumed to be from month to month, by analogy to Article 1581 of the Civil Code governing leases of real property. The Court adopted the presumption that one who agrees to pay a monthly rent intends the tenancy to endure for a like period, subject to indefinite tacit renewals.

• Recovery of Lost Profits as Damages — Prospective profits may be recovered as damages for breach of contract under Article 1106 of the Civil Code, provided they were or might have been foreseen at the time the contract was entered into (Article 1107). Absolute certainty as to the amount is not required; the injured party must produce the best evidence of which the case is susceptible, and if that evidence warrants the inference that profits were lost with reasonable certainty, recovery is allowed.

• Burden of Proof on Mitigation of Damages — While the law recognizes that damages from avoidable consequences are not recoverable, the burden of proof rests on the defendant to show that the plaintiff could have reduced damages. In the absence of evidence that a replacement was available, it will not be presumed that the plaintiff could have secured one.

• Lease Does Not Create a Right in Rem — A contract of lease or hiring does not create a right in rem in favor of the lessee, except in the case of a recorded lease of real estate. The lessee's rights are enforceable against the lessor, not against a third-party purchaser of the leased property.

• "There being no rule of law, expressly applicable to the hiring of personal property in general or of vessels in particular, by which the duration of such a contract is to be determined, and no local custom having been satisfactorily proved, we are required to apply the general principles of law. (Civil Code, art. 6.) Under this authorization we may adopt and apply by analogy the general rules established by the Code relating to the lease of real property." — This passage articulates the ratio decidendi for determining the duration of a personal property lease: the Court's application of Article 6 of the Civil Code to adopt by analogy Article 1581's month-to-month presumption.

• "When the existence of a loss is established, absolute certainty as to its amount is not required." — This formulation of the standard for recovering lost profits is the controlling rule on the measure of damages, frequently cited in subsequent jurisprudence on contractual damages.

• "It is equally well-settled, however, that the burden of proof rests upon the defendant to show that the plaintiff might have reduced the damages." — This passage defines the allocation of the burden of proof on the duty to mitigate, placing it on the defendant rather than the plaintiff.

• "The contract of lease or hiring does not create a right in rem in favor of the lessee, except in the case of a recorded lease of real estate." — This statement defines the nature of the lessee's rights under a contract of hire, distinguishing personal property leases from recorded real estate leases.

• Algarra vs. Sandejas, 27 Phil. Rep., 284 — Cited in support of the proposition that a plaintiff may recover compensation for gains prevented by the defendant's wrongful act, as recognized in Sedgwick on Damages.
• Hicks vs. Manila Hotel Co., 28 Phil. Rep., 325 — Cited alongside Algarra vs. Sandejas as authority for the recovery of lost profits as damages.

• Article 6, Civil Code — Authorizes the application of general principles of law when no rule of law is expressly applicable to a given situation. The Court used this provision to justify adopting by analogy the rules on lease of real property to determine the duration of a personal property hire.
• Article 1581, Civil Code — Provides that when no definite agreement has been made regarding duration, the lease of a house is deemed made from day to day, month to month, or year to year according to whether a daily, monthly, or yearly rent is paid. Applied by analogy to the hire of a casco to establish a month-to-month term.
• Article 1106, Civil Code — Establishes that prospective profits may be recovered as damages. Applied to allow recovery of P50 in lost profits for one month.
• Article 1107, Civil Code — Provides that damages for breach of obligations not originating in fraud are those which were or might have been foreseen at the time the contract was entered into. Applied to hold the defendant liable for lost profits, as these were foreseeable.

Arellano, C.J., Carson, Street, Avanceña, JJ., and Malcolm, J., concurred.

• Torres, J. — Dissented, stating that the judgment appealed from should be affirmed, without providing extended reasoning in the text.