Dart Philippines, Inc. vs. Spouses Calogcog

A complaint based on Article 19 of the Civil Code must fail where the elements of abuse of rights are not established—specifically, where there is no showing that a legal right was exercised in bad faith for the sole intent of prejudicing or injuring another. The exercise of a contractual right, supported by legitimate business reasons and in accord with the terms of the agreement, does not constitute abuse of rights, and damages resulting therefrom are damnum absque injuria.

Dart Philippines, Inc. is engaged in the business of manufacturing or importing Tupperware products into the Philippines and marketing them under a direct selling distribution system. The parties entered into successive Distributorship Agreements, the first on March 3, 1986, and a second on April 1, 1991, which was to expire on March 31, 1992 but was renewable on a yearly basis upon terms and conditions mutually agreed upon in writing. The agreements contained provisions governing termination, including Sections 8 and 9 addressing the disposition of products on hand and the transfer of goodwill to an incoming distributor. The contractual relationship was governed by the principle that agreements have the force of law between the parties.

Dart Philippines, Inc., engaged in manufacturing or importing Tupperware products and marketing them under a direct selling distribution system, entered into a Distributorship Agreement with spouses Francisco and Erlinda Calogcog on March 3, 1986. The agreement was to expire on March 31, 1987 but contained an automatic renewal clause for two one-year terms. On April 1, 1991, the parties executed another Distributorship Agreement which was to expire on March 31, 1992 but was renewable on a yearly basis upon terms and conditions mutually agreed upon in writing.

Following the expiration of the agreement, petitioner, on April 30, 1992, informed respondents that, due to the latter's several violations thereof, it would no longer renew the same. The letter enumerated respondents' violations: (a) submission of several "Vanguard Reports" containing false statements of the sales performance of their units; (b) unauthorized alteration of the mechanics of "Nan's Challenge," a Tupperware company-sponsored promotion campaign; and (c) charging the managers for accounts of their dealers and for overdue kits. Respondents then made a handwritten promise to observe and comply with the terms and conditions of the agreement. This convinced petitioner to extend, on July 24, 1992, the period of the distributorship up to September 30, 1992.

In the meantime, on July 2, 1992, petitioner subjected respondents' account to an audit review. In September 1992, petitioner informed respondents that it had engaged the services of an auditing firm and that it was again subjecting respondents' account to an audit review. As explained in petitioner's September 11, 1992 correspondence, the second audit was intended to cover the period not subject of the initial audit—the period prior to January 1 to June 30, 1992, and the period from July 1, 1992 to September 1992. Objecting to the second audit, respondents disallowed the auditing firm from inspecting their books and records. As a result, petitioner only accepted respondents' purchase orders on a pre-paid basis, which was implemented only during the last month of the agreement, in September 1992.

On September 29, 1992, a day before the expiry of the Distributorship Agreement, respondents filed before the RTC of Pasig City a Complaint for damages with application for a writ of injunction and/or restraining order. They alleged that petitioner abused its right when it caused the audit of their account and when it only honored their orders if they were pre-paid, thereby causing damages to them of around ₱1.3M. Respondents later filed a Supplemental Complaint alleging that petitioner refused to award benefits to the members of respondents' sales force and coerced the said members to transfer to another distributor; that petitioner refused to comply with Sections 8 and 9 of the Distributorship Agreement by not paying respondents the value of the products on hand and in their custody, and by not effecting the transfer of their good will to the absorbing distributor; and that petitioner, by its actions which resulted in the loss of respondents' sales force, had made inutile respondents' investment in their building. Respondents prayed for additional actual damages: ₱4,495,000.00 for the good will, ₱1M for the products on hand, and ₱3M for the cost of the building.

After trial on the merits, the RTC ruled that the second audit was unreasonable and was only made to harass respondents; that the shift from credit to pre-paid basis in the purchase orders was another act of harassment; that petitioner had no valid reason to refuse the renewal of the distributorship agreement; and that petitioner abused its rights under the said agreement. The trial court awarded respondents ₱23,500.17 for the salaries of internal auditors, ₱4,495,000.00 for goodwill money, ₱1,000,000.00 as reasonable compensation for acquiring a lot and constructing a warehouse, ₱500,000.00 as moral damages, ₱500,000.00 as exemplary damages, and ₱100,000.00 as attorney's fees plus ₱2,000.00 per Court appearance. The CA affirmed with modification, reducing moral damages to ₱100,000.00, exemplary damages to ₱50,000.00, and deleting the ₱1,000,000.00 award for the acquisition of the lot and construction of the building.

• Admission of Supplemental Complaint: Petitioner argued that the CA erred in affirming the trial court's decision admitting the supplemental complaint, thereby taking cognizance of the issues raised therein and rendering judgment thereon.
• Goodwill Money: Petitioner argued that the CA erred in affirming the trial court's holding that petitioner was liable to pay respondents the "goodwill money" they allegedly failed to realize.
• Damages and Attorney's Fees: Petitioner argued that while it lauded the CA's deletion of the ₱1,000,000.00 award for the acquisition of the lot and construction of the building, and appreciated the reduction of the awards for moral and exemplary damages, the CA still erred in not totally dismissing respondents' claims for damages including attorney's fees.
• Petitioner's Counterclaim for Attorney's Fees: Petitioner argued that the CA erred in not finding for petitioner and in not awarding damages in its favor by way of reasonable attorney's fees.

N/A — The decision does not recount respondents' specific appellate arguments beyond their position that petitioner abused its rights under the distributorship agreement.

• Abuse of Rights: Whether petitioner abused its rights under the distributorship agreement when it conducted an audit of respondents' account, when it accepted respondents' purchase orders only if they were on a pre-paid basis, and when it refused to renew the said distributorship agreement.
• Admission of Supplemental Complaint: Whether the CA erred in affirming the trial court's admission of the supplemental complaint.
• Goodwill Money: Whether the CA erred in affirming the trial court's holding that petitioner was liable to pay respondents the "goodwill money" they allegedly failed to realize.
• Damages and Attorney's Fees: Whether the CA erred in not totally dismissing respondents' claims for damages including attorney's fees.
• Petitioner's Counterclaim: Whether the CA erred in not awarding damages in favor of petitioner by way of reasonable attorney's fees.

• Abuse of Rights: No. Petitioner did not abuse its rights under the distributorship agreement. The elements of abuse of rights under Article 19 of the Civil Code—a legal right or duty exercised in bad faith for the sole intent of prejudicing or injuring another—were not established, as petitioner's acts were supported by legitimate reasons to protect its own business.
• Admission of Supplemental Complaint: Not resolved. The Court found no compelling reason to resolve this issue given the finding that petitioner did not abuse its rights.
• Goodwill Money: Not resolved. The Court found no compelling reason to resolve this issue given the finding that petitioner did not abuse its rights.
• Damages and Attorney's Fees: Not resolved. The Court found no compelling reason to resolve this issue given the finding that petitioner did not abuse its rights.
• Petitioner's Counterclaim: No. The Court cannot grant petitioner's claim for attorney's fees, as no premium should be placed on the right to litigate, and attorney's fees are not awarded every time a party wins a suit.

• Abuse of Rights: The Court applied Article 19 of the Civil Code, which requires every person to act with justice, give everyone his due, and observe honesty and good faith in the exercise of his rights. To find the existence of abuse of right under the said article, the following elements must be present: (1) there is a legal right or duty; (2) which is exercised in bad faith; (3) for the sole intent of prejudicing or injuring another. The Court noted that malice or bad faith is at the core of Article 19, and that good faith is presumed; thus, he who alleges bad faith has the duty to prove the same. Bad faith does not simply connote bad judgment or simple negligence; it involves a dishonest purpose or some moral obloquy and conscious doing of a wrong, a breach of known duty due to some motives or interest or ill will that partakes of the nature of fraud. Applying these principles, the Court found that petitioner's exercise of its rights under the agreement to conduct an audit, to vary the manner of processing purchase orders, and to refuse the renewal of the agreement was supported by legitimate reasons, principally to protect its own business. The April 30, 1992 letter had already pointed out respondents' violations of the agreement, including false Vanguard Reports, unauthorized alteration of promotion mechanics, and improper charging of managers. The second audit was intended to cover periods not subject of the initial audit. The pre-paid basis was implemented only during the last month of the agreement. The Court concluded that the exercise of petitioner's rights was not impelled by any evil motive designed, whimsically and capriciously, to injure or prejudice respondents, and that the rights exercised were all in accord with the terms and conditions of the distributorship agreement, which has the force of law between them. A complaint based on Article 19 must necessarily fail if it has nothing to support it but innuendos and conjectures. Since petitioner did not abuse its rights, it should not be held liable for any of the damages sustained by respondents, as the law affords no remedy for damages resulting from an act which does not amount to a legal wrong—situations appropriately denominated damnum absque injuria.
• Reimbursement of Auditor's Salaries: The Court sustained the trial court's order for the reimbursement by petitioner to respondents of ₱23,500.17, with 12% interest per annum computed from the filing of the original complaint up to actual payment, representing the salaries of the internal auditors, because the award was never questioned by petitioner, and petitioner was the one which engaged the services of the auditors.
• Petitioner's Counterclaim for Attorney's Fees: The Court denied petitioner's claim for attorney's fees, emphasizing that no premium should be placed on the right to litigate. Attorney's fees are not to be awarded every time a party wins a suit. Even when a claimant is compelled to litigate or to incur expenses to protect his rights, still attorney's fees may not be awarded where there is no sufficient showing of bad faith in a party's persistence in a case other than an erroneous conviction of the righteousness of his cause.

• Abuse of Rights (Article 19, Civil Code) — Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. The elements of abuse of rights are: (1) there is a legal right or duty; (2) which is exercised in bad faith; (3) for the sole intent of prejudicing or injuring another. The exercise of a right shall always be in accordance with the purpose for which it has been established, and must not be excessive or unduly harsh—there must be no intention to injure another. A person will be protected only when he acts in the legitimate exercise of his right, that is, when he acts with prudence and in good faith, not when he acts with negligence or abuse. In this case, the Court found that petitioner's exercise of its contractual rights was supported by legitimate business reasons and was not impelled by bad faith, thus no abuse of rights existed.
• Bad Faith and Malice — Malice or bad faith is at the core of Article 19 of the Civil Code. Good faith refers to the state of mind which is manifested by the acts of the individual concerned; it consists of the intention to abstain from taking an unconscionable and unscrupulous advantage of another. It is presumed, and he who alleges bad faith has the duty to prove the same. Bad faith does not simply connote bad judgment or simple negligence; it involves a dishonest purpose or some moral obloquy and conscious doing of a wrong, a breach of known duty due to some motives or interest or ill will that partakes of the nature of fraud. Malice connotes ill will or spite and speaks not in response to duty; it implies an intention to do ulterior and unjustifiable harm. In this case, the Court found that respondents failed to prove bad faith on the part of petitioner.
• Damnum Absque Injuria — The law affords no remedy for damages resulting from an act which does not amount to a legal wrong. Where a party exercises a contractual right in good faith and in accordance with the terms of the agreement, any damage sustained by the other party is damnum absque injuria. In this case, since petitioner did not abuse its rights, respondents' claimed damages were not recoverable.
• Attorney's Fees — No premium should be placed on the right to litigate. Attorney's fees are not to be awarded every time a party wins a suit. Even when a claimant is compelled to litigate or to incur expenses to protect his rights, still attorney's fees may not be awarded where there is no sufficient showing of bad faith in a party's persistence in a case other than an erroneous conviction of the righteousness of his cause.

• "To find the existence of abuse of right under the said article, the following elements must be present: (1) there is a legal right or duty; (2) which is exercised in bad faith; (3) for the sole intent of prejudicing or injuring another." — This passage articulates the canonical three-element test for abuse of rights under Article 19 of the Civil Code, which is the controlling doctrine in this case.
• "From these facts, we find that bad faith cannot be attributed to the acts of petitioner. Petitioner's exercise of its rights under the agreement to conduct an audit, to vary the manner of processing purchase orders, and to refuse the renewal of the agreement was supported by legitimate reasons, principally, to protect its own business." — This passage states the Court's application of the abuse of rights doctrine to the facts, finding that legitimate business reasons negate bad faith.
• "Clearly, petitioner could not be said to have committed an abuse of its rights. It may not be amiss to state at this juncture that a complaint based on Article 19 of the Civil Code must necessarily fail if it has nothing to support it but innuendos and conjectures." — This passage emphasizes the evidentiary burden on a party alleging abuse of rights and the insufficiency of mere innuendos and conjectures.
• "The law affords no remedy for damages resulting from an act which does not amount to a legal wrong. Situations like this have been appropriately denominated damnum absque injuria." — This passage defines the doctrine of damnum absque injuria and its application where no legal wrong has been committed.

• BPI Express Card Corporation vs. Court of Appeals, 357 Phil. 262 (1998) — Cited as controlling authority for the elements of abuse of rights under Article 19 of the Civil Code and for the principle that damages resulting from an act which does not amount to a legal wrong are damnum absque injuria.
• Doles vs. Angeles, G.R. No. 149353, June 26, 2006, 492 SCRA 607 — Cited for the exceptions to the rule that the Supreme Court will not review findings of fact made by the appellate court, specifically when the judgment is based on a misapprehension of facts and when the appellate court manifestly overlooked certain relevant facts not disputed by the parties.
• Heirs of Purisima Nala vs. Cabansag, G.R. No. 161188, June 13, 2008, 554 SCRA 437 — Cited for the principle that the exercise of a right shall always be in accordance with the purpose for which it has been established, and must not be excessive or unduly harsh.
• National Power Corporation vs. Philipp Brothers Oceanic, Inc., 421 Phil. 532 (2001) — Cited for the principle that a person will be protected only when he acts in the legitimate exercise of his right, that is, when he acts with prudence and in good faith.
• Development Bank of the Philippines vs. Court of Appeals, G.R. No. 137916, December 8, 2004, 445 SCRA 500 — Cited for the definition of good faith and the presumption thereof, and the duty of the party alleging bad faith to prove the same.
• Saber vs. Court of Appeals, G.R. No. 132981, August 31, 2004, 437 SCRA 259 — Cited for the definitions of bad faith and malice.
• Barons Marketing Corporation vs. Court of Appeals, G.R. No. 126486, February 9, 1998, 286 SCRA 96 — Cited for the principle that agreements have the force of law between the parties.
• Nikko Hotel Manila Garden vs. Reyes, G.R. No. 154259, February 28, 2005, 452 SCRA 532 — Cited for the principle that a complaint based on Article 19 of the Civil Code must necessarily fail if it has nothing to support it but innuendos and conjectures.
• ABS-CBN Broadcasting Corporation vs. Court of Appeals, 361 Phil. 499 (1999) — Cited for the principle that no premium should be placed on the right to litigate and that attorney's fees are not awarded every time a party wins a suit.

• Article 19, Civil Code — Provides that every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. This is the central provision applied in the case, and the Court found that petitioner did not violate it because bad faith was not established.
• Section 13, Article VIII, Constitution — Referenced in the Certification portion of the decision, relating to the certification of the conclusions reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

Carpio Morales, J. (concurring and dissenting in part); Chico-Nazario, J.; Velasco, Jr., J.; Peralta, J.

• Carpio Morales, J. (concurring and dissenting in part) — Concurred with the ponencia with respect to the reimbursement of payment of professional fees in favor of respondent spouses, but dissented with respect to the imposition of 12% interest per annum on the reimbursable amount. Justice Carpio Morales argued that the obligation in this case is not a forbearance of money, as "forbearance" in the context of the usury law is a contractual obligation of a lender or creditor to refrain from requiring the borrower or debtor to repay a loan or debt then due and payable. Citing similar cases involving reimbursements or refunds where 6% per annum interest was imposed, she submitted that the proper interest to be imposed on the reimbursable amount is 6% per annum from the time of judicial demand to the finality of the decision, and 12% per annum from the finality of the decision until full satisfaction, conformably with Eastern Shipping Lines vs. Court of Appeals.