Danfoss, Inc. vs. Continental Cement Corporation

A complaint for damages based on non-delivery states no cause of action, and is premature, where it is filed before the obligor’s performance becomes due and demandable and the obligee has cancelled the contract before the agreed delivery date; the anticipatory breach doctrine applies only to future periodic deliveries and a willful refusal to comply, not to a single indivisible obligation absent such refusal.

Continental Cement Corporation operated a cement plant in Barrio Bigte, Norzagaray, Bulacan, and required two Danfoss brand frequency converters for the Finish Mill of its plant. It dealt with Mechatronics Instruments and Controls, Inc., which relayed its purchase order to Danfoss, Inc., the manufacturer/supplier, with payment to be made through a letter of credit in favor of Danfoss Industries Pte. Ltd. The dispute concerned whether Danfoss could be held liable for damages after CCC cancelled the order before the delivery period expired.

On September 1, 1997, Continental Cement Corporation (CCC) purchased from Mechatronics Instruments and Controls, Inc. (MINCI) two 132 KW Danfoss Brand Frequency Converter/Inverter for use in the Finish Mill of its cement plant in Barrio Bigte, Norzagaray, Bulacan. The purchase was covered by Purchase Order No. 36625, which stipulated delivery within eight to ten weeks from the opening of the letter of credit. MINCI relayed the purchase order to Danfoss, Inc., represented by Klaus Stove and Hans Vigaard, who forwarded it to Danfoss’s Asian Regional Office in Singapore and Head Office in Denmark for shipment. Danfoss’s commitment to deliver the two units was relayed by MINCI to CCC upon the assurance of Stove and Vigaard.

In September 1997, CCC received MINCI’s pro-forma invoice through fax transmission indicating payment through an irrevocable letter of credit in favor of Danfoss Industries Pte. Ltd., with address at 6 Jalan Pesawat, Singapore 619364, Danfoss’s Asian Regional Office. CCC executed and opened Letter of Credit No. 970884 in favor of Danfoss Industries Pte. Ltd. The motion to dismiss later fixed the opening of the letter of credit on September 9, 1997, making the delivery period expire on November 19, 1997. On September 17, 1997, MINCI informed CCC by fax that the two units were ready for shipment and requested an amendment of the letter of credit changing the port of origin/loading from Singapore to Denmark. CCC complied and amended the letter of credit.

On November 6, 1997, MINCI informed CCC that Danfoss Industries Pte. Ltd. was still checking the status of the shipment with Danfoss Denmark. CCC replied by letter dated November 7, 1997, reiterating that every delay in shipment would cause substantial losses in its operations and requesting an early work out and immediate shipment to avoid further loss. On November 9, 1997, Danfoss informed MINCI by fax, copy furnished CCC, that it had delivery problems because some supplied components for the new VLT 5000 series did not meet the agreed quality standard; its factory was canvassing for another supplier, and there was no clear message when normal production would resume. CCC surmised that MINCI and Danfoss could not deliver the two units within the maximum ten-week period from the opening of the letter of credit, and no definite commitment for delivery was received.

By letter dated November 13, 1997, CCC, through its Purchasing Manager, informed MINCI of its intention to cancel the order. CCC claimed that, as a consequence of the delay, it suffered actual substantial production losses of P8,064,000.00 due to time lost and delay in the delivery of the two units, and that it was compelled to look for another supplier. On November 5, 1998, CCC filed a complaint for damages against Danfoss and MINCI before the Regional Trial Court of Quezon City, Branch 80. Danfoss moved to dismiss on February 17, 1999, arguing that the complaint stated no cause of action because CCC had cancelled the order on November 13, 1997, before the November 19, 1997 delivery deadline, and before any breach, delay, or demand.

• No Cause of Action: Petitioner argued that the complaint failed to state a cause of action because it showed that the delivery period had not yet expired when CCC cancelled its order; no breach or delay had occurred.
• Obligation Not Yet Demandable: Petitioner maintained that the eight-to-ten-week delivery period was for the benefit of both parties, so CCC could not demand delivery before November 19, 1997, and no extrajudicial demand was made.
• No Accrued Damages: Petitioner argued that CCC’s claim for damages could not accrue until petitioner incurred delay, which had not happened.
• Prematurity: Petitioner contended that the cause of action could not arise earlier than November 19, 1997, making the complaint premature.

• Delay as Debatable Issue: Respondent maintained that whether the defendants incurred delay in delivering the equipment within the stipulated period was a debatable question requiring a trial on the merits, where the parties could adduce evidence.
• Impossibility Excusing Demand: Respondent argued that the acts of the defendants made compliance with their obligation to deliver within the stipulated period impossible, so no demand was necessary because demand would be useless.
• MINCI as Principal: Respondent contended that MINCI dealt with it not as an agent but also as a principal, making MINCI’s liability a debatable issue requiring evidence.

• Cause of Action: Whether the Court of Appeals erred in affirming the denial by the court a quo of petitioner’s motion to dismiss the complaint for damages on the ground that it failed to state a cause of action, including whether the complaint was premature.

• Cause of Action: Yes. The Court of Appeals erred. The complaint failed to state a cause of action and was premature because petitioner had not breached any obligation when respondent cancelled the order before the agreed delivery date; the anticipatory breach doctrine did not apply.

• Cause of Action: Under Section 1(g), Rule 16 of the 1997 Revised Rules on Civil Procedure, a motion to dismiss may be based on the ground that the pleading asserting the claim states no cause of action. Section 2, Rule 2 defines a cause of action as the act or omission by which a party violates a right of another, or the delict or wrongful act or omission committed by the defendant in violation of the plaintiff’s primary right. The insufficiency must appear on the face of the complaint; the court must hypothetically admit the truth of the facts alleged and determine whether it can render a valid judgment in accordance with the prayer. Applying this test, the complaint failed to state a cause of action. The allegations showed that the delivery period was eight to ten weeks from the opening of the letter of credit on September 9, 1997, or until November 19, 1997. CCC cancelled its order on November 13, 1997, six days before the obligation became due and demandable. Danfoss had not yet breached its obligation to deliver, had not incurred delay, and had not received any extrajudicial demand for delivery on the due date. CCC’s own cancellation made performance impossible before the delivery date, negating any breach or damage. CCC’s claim rested only on surmise or apprehension that Danfoss might not be able to deliver on time, which is not a cause of action. The anticipatory breach doctrine in Blossom & Company, Inc. vs. Manila Gas Corporation did not apply because it contemplates future periodic deliveries and a willful refusal to comply; here, the obligation was single and indivisible—to deliver two units by November 19, 1997—and there was no showing that Danfoss refused to deliver; instead, Danfoss exerted efforts to find other suppliers. The complaint was also premature because the obligation was not yet due and demandable when it was filed, and premature invocation of judicial intervention is fatal to the cause of action. The trial court therefore erred in denying the motion to dismiss, and the Court of Appeals erred in affirming that denial.

• Cause of Action — Defined under Section 2, Rule 2 as the act or omission by which a party violates a right of another; it is the delict or wrongful act or omission committed by the defendant in violation of the plaintiff’s primary right. In this case, no cause of action arose because Danfoss had not committed any violation when CCC filed suit; CCC’s complaint rested on surmise that Danfoss might not deliver.
• Sufficiency of Allegations in a Complaint — A motion to dismiss for failure to state a cause of action is tested solely by the allegations of the complaint. The insufficiency must appear on the face of the complaint; the court must hypothetically admit the truth of the facts alleged and determine whether it can render a valid judgment in accordance with the prayer. The Court applied this test and found the complaint insufficient.
• Anticipatory Breach — Under Blossom & Company, Inc. vs. Manila Gas Corporation, even if a contract is divisible in performance and future periodic deliveries are not yet due, if the obligor has already manifested a willful refusal to comply with future periodic obligations, the contract is entire and the breach total, allowing one action for damages. The doctrine contemplates future periodic deliveries and a willful refusal. It did not apply because Danfoss’s obligation was single and indivisible—to deliver two units by November 19, 1997—and there was no showing of refusal; Danfoss even tried to find other suppliers.
• Prematurity — A cause of action requires that the obligation be due and demandable. A complaint filed before the obligation becomes due and demandable is premature; premature invocation of judicial intervention is fatal to the cause of action. Here, CCC filed suit before November 19, 1997, and cancelled the order on November 13, 1997, so the obligation had not yet become due and demandable.
• No Breach Where Obligee Prevents Performance — Where the obligee cancels the order before the agreed delivery date, it makes performance impossible and negates any breach by the obligor; no damages can be claimed for a breach that has not occurred. The Court applied this to CCC’s cancellation.

• "A cause of action is the act or omission by which a party violates a right of another." — This is the statutory definition under Section 2, Rule 2, which the Court used to frame the inquiry into whether the complaint stated a cause of action.
• "In order to sustain a dismissal on the ground of lack of cause of action, the insufficiency must appear on the face of the complaint. And the test of the sufficiency of the facts alleged in the complaint to constitute a cause of action is whether or not, admitting the facts alleged, the court can render a valid judgment thereon in accordance with the prayer of the complaint. For this purpose, the motion to dismiss must hypothetically admit the truth of the facts alleged in the complaint." — This states the test for a motion to dismiss for failure to state a cause of action.
• "How could respondent hold petitioner liable for damages (1) when petitioner had not yet breached its obligation to deliver the goods and (2) after respondent made it impossible for petitioner to deliver them by cancelling its order even before the agreed delivery date?" — This is the core reasoning on the absence of breach and causation.
• "Thus, the principle contemplates future periodic deliveries and a willful refusal to comply therewith." — This defines the anticipatory breach doctrine and explains why it did not apply to Danfoss’s single and indivisible obligation.

• Blossom & Company, Inc. vs. Manila Gas Corporation, 55 Phil. 226 (1930) — Distinguished. The Court held the anticipatory breach principle therein did not apply because it requires future periodic deliveries and a willful refusal to comply, whereas Danfoss’s obligation was single and indivisible and no refusal was shown.
• Joseph vs. Bautista, G.R. No. 41423, February 23, 1989, 170 SCRA 540 — Cited for the definition of cause of action as the delict or wrongful act or omission committed by the defendant in violation of the plaintiff’s primary right.
• Consolidated Dairy Products vs. Court of Appeals, G.R. No. 100401, August 24, 1991, 212 SCRA 810 — Cited for the rule that the motion to dismiss must hypothetically admit the truth of the facts alleged in the complaint and that insufficiency must appear on the face of the complaint.
• Laguna CATV Network, Inc. vs. Maraan, 440 Phil. 734 (2002) — Cited for the rule that premature invocation of the court’s intervention is fatal to the cause of action.

• Section 1(g), Rule 16, 1997 Revised Rules on Civil Procedure — Provides that a motion to dismiss may be made on the ground that the pleading asserting the claim states no cause of action. The Court used this as the procedural basis for Danfoss’s motion.
• Section 2, Rule 2, 1997 Revised Rules on Civil Procedure — Defines a cause of action as the act or omission by which a party violates a right of another. The Court applied this definition to hold that no cause of action existed because Danfoss had not violated any right of CCC.

Artemio V. Panganiban (Acting Chief Justice, Chairman, on official business), Angelina Sandoval-Gutierrez, Conchita Carpio Morales, and Cancio C. Garcia.