Lorenzo Shipping Corp. vs. BJ Marthel International, Inc.

Time is not of the essence in a contract of sale when the delivery date is not fixed or is stated in indefinite terms; in such cases, delivery must be made within a reasonable time.

Lorenzo Shipping Corporation, a domestic coastwise shipping operator, ordered spare parts from BJ Marthel International, Inc., an importer and distributor of industrial commodities. After respondent submitted a formal quotation specifying a two-month delivery period, petitioner issued purchase orders that omitted any delivery date. Respondent subsequently ordered the parts from Japan and delivered them in April 1990. Petitioner refused full payment, claiming the delivery was late and the contract rescinded, prompting respondent to file a collection suit.

• Business Relations: From 1987, respondent supplied petitioner with spare parts for its marine engines.
• The Quotation: In May 1989, petitioner requested a quotation for engine parts. Respondent submitted an offer specifying delivery "Within 2 months after receipt of firm order" and terms of "25% upon delivery."
• The Purchase Orders: Petitioner issued Purchase Order No. 13839 (November 2, 1989) for one cylinder liner and Purchase Order No. 14011 (January 15, 1990) for another. Both purchase orders omitted the delivery date. The first purchase order also modified the payment terms to "25% down payment," for which petitioner issued ten postdated checks instead of paying upon delivery.
• Delivery and Dishonor: One postdated check was deposited and dishonored for insufficient funds; the remaining nine were returned to petitioner. Respondent opened a letter of credit with its Japanese supplier in February 1990. On April 20, 1990, respondent delivered the two cylinder liners to petitioner's warehouse, which were received "subject to verification."
• Refusal to Pay: Despite demands, petitioner refused to pay the full amount, offering only P150,000. Petitioner claimed the delivery was late, the vessel for which the parts were intended had been scrapped, and it would sell the parts in Singapore to cover the balance.

• Time of the Essence: Petitioner argued that time was of the essence in the contract, and respondent should be bound by the two-month delivery period stated in the formal quotation.
• Inseparability of Documents: Petitioner maintained that the quotation and the purchase orders cannot be taken separately as distinct contracts, asserting the quotation's terms survived into the purchase orders.
• Valid Rescission: Petitioner contended that the contract was validly rescinded due to respondent's delay in delivering the cylinder liners.

• Renegotiation of Terms: Respondent countered that the quotation and purchase orders reflected renegotiated terms, as evidenced by the omission of the delivery date and the change in down payment terms in the purchase orders.
• Absence of Delay: Respondent argued that no delay was incurred because no judicial or extrajudicial demand for fulfillment was made by petitioner, as required by Article 1169 of the Civil Code.
• Waiver by Acceptance: Respondent asserted that petitioner waived any claim of delay by accepting the cylinder liners upon delivery.

• Time of the Essence: Whether time was of the essence in the contract of sale, justifying petitioner's refusal to pay due to alleged late delivery.
• Rescission: Whether the contract of sale was validly rescinded by petitioner due to respondent's alleged delay.

• Time of the Essence: Time was not of the essence. The purchase orders, which omitted the delivery date, prevailed over the prior quotation, indicating that the parties had renegotiated the terms of the sale. When the time of delivery is not fixed, the law implies that delivery must be made within a reasonable time. The delivery in April 1990 was reasonable given the need to order from Japan. Petitioner's failure to notify respondent of the specific deadline for its dry dock repairs was fatal to its claim.
• Rescission: The contract was not validly rescinded. Because there was no delay by respondent, the power to rescind under Article 1191 of the Civil Code did not arise. Moreover, petitioner waived any delay by accepting the goods. Petitioner also failed to notify respondent of its intent to rescind, and respondent's opening of a letter of credit in February 1990 belied any prior cancellation.

• Stages of a Contract — A contract undergoes three distinct stages: preparation or negotiation, perfection, and consummation. A formal quotation represents merely the negotiation phase, where the parties are at liberty to discuss and modify provisions prior to perfection.
• Time of the Essence — When the time of delivery is not fixed or is stated in general and indefinite terms, time is not of the essence of the contract. Delivery must be made within a reasonable time. The intention of the parties is the ultimate criterion, requiring sufficient manifestation in the contract or surrounding circumstances.
• Waiver of Breach — Even where time is of the essence, a breach of the contract in that respect may be waived by the other party's subsequently treating the contract as still in force, such as by accepting the delivered goods.
• Extrajudicial Rescission — The party who deems a contract violated may consider it rescinded and act accordingly without previous court action, but proceeds at its own risk. The act of treating a contract as cancelled must be made known to the other party and is always subject to judicial scrutiny.

• "When the time of delivery is not fixed or is stated in general and indefinite terms, time is not of the essence of the contract. . . . In such cases, the delivery must be made within a reasonable time."
• "Even where time is of the essence, a breach of the contract in that respect by one of the parties may be waived by the other party's subsequently treating the contract as still in force."
• "The party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law."

• Bugatti v. Court of Appeals, G.R. No. 138113, October 17, 2000 — Followed. Cited for the principle that a contract undergoes three distinct stages: negotiation, perfection, and consummation.
• Smith, Bell & Co., Ltd. v. Matti, G.R. No. 16570, March 9, 1922 — Followed. Cited for the rule that when the time of delivery is not fixed, time is not of the essence and delivery must be made within a reasonable time.
• University of the Philippines v. De los Angeles, G.R. No. L-28602, September 29, 1970 — Followed. Cited for the doctrine that extrajudicial rescission is allowed but proceeds at the risk of the rescinding party, subject to final court review.

• Article 1169, Civil Code — Provides that those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands fulfillment. Applied to show respondent could not be in delay absent a prior demand from petitioner.
• Article 1191, Civil Code — Provides the power to rescind obligations in reciprocal contracts in case of non-compliance. Applied to deny rescission because there was no failure of performance by respondent.
• Article 1249, Civil Code — Provides that the delivery of bills of exchange produces the effect of payment only when cashed. Applied to show that respondent's obligation to deliver could not have arisen in January 1990 because petitioner's postdated checks had yet to be cashed.

Puno, Austria-Martinez, Callejo, Sr., and Tinga.