Magat, Jr. vs. Court of Appeals

Radio transceivers were not contraband but merely regulated goods; the Letter of Instruction No. 1 and Administrative Circular No. 4 did not render them illegal per se or outside the commerce of man, so a contract for their purchase was valid. A party prevented from performing by the government's denial of a required import permit is released from the obligation under Article 1267 of the Civil Code, and damages cannot be awarded absent bad faith or proof of pecuniary loss with a reasonable degree of certainty.

Santiago A. Guerrero was the President and Chairman of Guerrero Transport Services, a single proprietorship that won a 1972 bid to operate a fleet of radio-controlled taxicabs within the Subic Naval Base in Olongapo, requiring 160 operational radio-controlled taxis. Victorino D. Magat was the General Manager of Spectrum Electronic Laboratories, a single proprietorship engaged in the supply of radio equipment, and Isidro Q. Aligada of Reliance Group Engineers, Inc. acted as middleman and broker. The transaction unfolded against martial law: Proclamation No. 1081 dated September 21, 1972, Letter of Instruction No. 1 dated September 22, 1972 ordering the takeover and control of all media of communication, and Radio Control Office Administrative Circular No. 4 dated September 25, 1972 suspending the acceptance and processing of applications for permits to own, possess, transfer, purchase and sell radio transmitters and transceivers.

Santiago A. Guerrero was the President and Chairman of Guerrero Transport Services, a single proprietorship. Sometime in 1972, Guerrero Transport Services won a bid for the operation of a fleet of taxicabs within the Subic Naval Base in Olongapo, obliging it, as highest bidder, to provide a radio-controlled taxi service within the U.S. Naval Base utilizing, as demand required, 160 operational taxis consisting of four-wheel, four-door, four-passenger, radio-controlled, meter-controlled sedans not more than one year old. Victorino D. Magat was the General Manager of Spectrum Electronic Laboratories, a single proprietorship engaged in the supply of radio equipment, while Isidro Q. Aligada of Reliance Group Engineers, Inc. acted as middleman and broker for the transaction.

On September 22, 1972, with martial law in force, President Ferdinand E. Marcos issued Letter of Instruction No. 1, directing the takeover and control of all privately owned newspapers, magazines, radio and television facilities and all other media of communication for the duration of the national emergency. On September 25, 1972, the Radio Control Office issued Administrative Circular No. 4, suspending the acceptance and processing of applications for radio station construction permits and for permits to own, possess, transfer, purchase and sell radio transmitters and transceivers, exempting aeronautical stations, aeronautical fixed stations, aircraft stations, coastal stations, and ship stations.

On the same day, September 25, 1972, Guerrero and Victorino, as General Manager of Spectrum Electronic Laboratories, executed a letter-contract for the purchase of transceivers at a quoted price of US$77,620.59, FOB Yokohama, with delivery within 60 to 90 days after Guerrero's notice of the assigned radio frequency, "taking note of Government Regulations." The contract was signed and Victorino contacted his Japanese supplier, Koide & Co., Ltd., and placed an order for the transceivers. On September 29, 1972, Navy Exchange Officer A.G. Mason confirmed that Guerrero had won the bid for the commercial transportation contract.

On October 4, 1972, Aligada wrote Victorino informing him that no radio frequency had yet been assigned to Guerrero and that government regulations might complicate the importation of the transceivers; nonetheless, Victorino was advised to tell his supplier "to proceed (with) production pending frequency information," and was assured of Guerrero's financial capability to comply with the contract. On October 6, 1972, Guerrero informed Aligada of the frequency number assigned by Subic Naval Base authorities and instructed him to "proceed with the order thru Spectrum Electronics Laboratories." The following day, Aligada relayed the assigned frequency number to Magat and advised Victorino to "proceed with the order upon receipt of letter of credit."

On January 10, 1973, Guerrero applied for a letter of credit with the Metropolitan Bank and Trust Company, but the application was not pursued. On March 27, 1973, Victorino, through his lawyer Atty. Sinesio S. Vergara, informed Guerrero that the order with the Japanese supplier had not been canceled; that should the contract be canceled, the Japanese firm would forfeit 30% of the deposit and charge an unascertained cancellation fee, which Guerrero would bear; and that Victorino would additionally demand an amount equivalent to 10% of the contract price. Unable to obtain a letter of credit from the Central Bank because the Philippine government, through the Radio Regulation Office, refused to issue a permit to import the transceivers, Guerrero commenced operation of the taxi cabs within Subic Naval Base using radio units borrowed from the U.S. government through the Subic Naval Base authorities. Victorino then canceled his order with his Japanese supplier.

At trial, Guerrero testified that a permit to import the transceivers from Japan was denied by the Radio Control Board. He stated that he, together with Aligada, Victorino and a certain John Dauden, personally went to the Radio Control Office and were denied a permit to import; they also went to the Office of the President, where Secretary Ronaldo B. Zamora explained that radios were "banned like guns because of martial law." Guerrero testified that this prevented him from securing a letter of credit from the Central Bank, and this testimony was not rebutted. Aligada, testifying for the heirs, stated that as a result of the cancellation of the contract Victorino had to suspend transactions with his Japanese supplier for six months, that the volume of Victorino's business with Subic Naval Base diminished significantly, and approximated Victorino's unrealized business opportunities at P400,000.00.

• Validity of the Contract: Whether the contract between Victorino and Guerrero for the purchase of radio transceivers was void, or stated differently, whether the transceivers subject of the contract were banned contraband items prohibited by Letter of Instruction No. 1 and Administrative Circular No. 4 to import.
• Breach of Contract: Whether the contract was breached, given Guerrero's failure to secure a letter of credit and to take delivery of the transceivers.
• Award of Damages: Whether temperate, moral, exemplary and actual damages, including unrealized profits, may be awarded in favor of the heirs of Victorino.

• Validity of the Contract: No. The contract was valid; the radio transceivers were not contraband but merely regulated goods, and the Letter of Instruction and Administrative Circular did not render them illegal per se or outside the commerce of man.
• Breach of Contract: No. Guerrero's inability to secure a letter of credit and to comply with his obligation was a direct consequence of the denial of the permit to import, a circumstance for which he cannot be faulted and which released him from the obligation.
• Award of Damages: No. Even assuming a breach, damages cannot be awarded, there being no bad faith on Guerrero's part and no competent proof of pecuniary loss; the claim for unrealized profits rested on self-serving and hearsay testimony.

• Validity of the Contract: The Court of Appeals had declared the contract void ab initio on the theory that the importation of the transceivers meant the inevitable passing of such goods through Philippine ports, where the Letter of Instruction and the Administrative Circular had to be observed and applied with full force and effect, rendering the proposed importation contrary to law. The Supreme Court disagreed, holding that nowhere in the Letter of Instruction and the Administrative Circular is there an express ban on the importation of transceivers. "Contraband" generally refers to any property which is unlawful to produce or possess, or goods exported and imported into a country against its laws. The Letter of Instruction and the Administrative Circular did not render radios and transceivers illegal per se; the Administrative Circular merely ordered the Radio Control Office to suspend the acceptance and processing of applications for permits to possess, own, transfer, purchase and sell radio transmitters and transceivers. Possession and importation of the transmitters and transceivers was therefore legal provided one had the necessary license, a license being a right or permission granted by some competent authority to carry on a business or to do an act which, without such license, would be illegal. Transceivers were not prohibited but merely regulated goods, and the Letter of Instruction and Administrative Circular did not render them outside the commerce of man; under Article 1347 of the Civil Code, all things which are not outside the commerce of men, including future things, may be the object of the contract. They were valid objects of the contract.

• Breach of Contract: Having affirmed the validity of the contract, the Court proceeded to determine whether it was breached. Guerrero testified that a permit to import the transceivers from Japan was denied by the Radio Control Board; that he, together with Aligada, Victorino and a certain John Dauden, personally went to the Radio Control Office and were denied a permit to import; and that they also went to the Office of the President, where Secretary Ronaldo B. Zamora explained that radios were "banned like guns because of martial law." This testimony was not rebutted. Guerrero further testified that the denial prevented him from securing a letter of credit from the Central Bank. Under Article 1267 of the Civil Code, when the service required by the contract has become so manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. Guerrero's inability to secure a letter of credit and to comply with his obligation was a direct consequence of the denial of the permit to import, for which he cannot be faulted.

• Award of Damages: Even assuming that there was a breach of contract, damages cannot be awarded; the loss was damnum absque injuria, there being no bad faith. Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong, and means a breach of a known duty through some motive or interest or ill will that partakes of the nature of fraud. Guerrero honestly relied on the representations of the Radio Control Office and the Office of the President. That he borrowed equipment from the Subic Naval Base authorities at zero cost did not automatically translate to bad faith; faced with the danger of cancellation of his contract with the Subic Naval Base, he borrowed equipment as a prudent and swift alternative, and there was no proof that he resorted to this option with a deliberate and malicious intent to dishonor his contract with Victorino. An award of damages cannot be based on mere hypotheses, conjectures and surmises; good faith is presumed, and the burden of proving bad faith rests on the one alleging it, which petitioners did not effectively discharge. To recover moral damages in an action for breach of contract, the breach must be palpably wanton, reckless, malicious, in bad faith, oppressive or abusive, which was not the case. Exemplary damages likewise cannot be awarded, Guerrero not having acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. Neither can actual damages be awarded: while indemnification contemplates not only actual loss suffered (damnum emergens) but unrealized profits (lucrum cessans) as well, the loss must be actually suffered and duly proved, and to recover actual damages the amount of loss must not only be capable of proof but must be proven with a reasonable degree of certainty, upon competent proof or the best evidence obtainable such as receipts or other documentary proof. Only the testimony of Aligada was presented to substantiate the claim for unrealized profits, and being a witness for Victorino's heirs who stood to gain from the contract's fulfillment, his testimony was self-serving and also hearsay; it failed to prove actual damages with a reasonable degree of certainty. Where proof is flimsy, actual damages cannot be awarded.

• Regulated goods distinguished from contraband — Property is contraband only when it is unlawful to produce or possess, or when it is exported or imported into a country against its laws. A statute or issuance that merely suspends the acceptance and processing of applications for permits, without expressly banning importation or possession, does not render the article illegal per se; possession and importation remain legal provided the necessary license is obtained. Because Letter of Instruction No. 1 and Administrative Circular No. 4 merely suspended the processing of permits for radio transmitters and transceivers, the transceivers were regulated rather than prohibited goods and remained valid objects of contract.
• Things outside the commerce of man — Under Article 1347 of the Civil Code, all things which are not outside the commerce of men, including future things, may be the object of a contract, as may all rights which are not intransmissible. The Court held that the transceivers were not rendered outside the commerce of man by the martial-law issuances and could therefore be the subject of a binding contract.
• Release of the obligor under Article 1267 — When the service required by the contract has become so manifestly beyond the contemplation of the parties, the obligor may be released therefrom, in whole or in part. Guerrero's inability to secure a letter of credit and to comply with his obligation, being a direct consequence of the government's denial of the permit to import, released him from liability and could not be charged against him.
• Damnum absque injuria — Damage suffered without injury to a legal right is not compensable. Even assuming a breach of contract, the loss sustained by the heirs of Victorino was damnum absque injuria because Guerrero acted in good faith.
• Bad faith — Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong, and means a breach of a known duty through some motive or interest or ill will that partakes of the nature of fraud. Good faith is presumed, and the burden of proving bad faith rests on the one alleging it. Guerrero's honest reliance on the representations of the Radio Control Office and the Office of the President, and his borrowing of equipment from the Subic Naval Base authorities as a prudent alternative, negated bad faith.
• Moral damages in breach of contract — To recover moral damages in an action for breach of contract, the breach must be palpably wanton, reckless, malicious, in bad faith, oppressive or abusive. The standard was not met.
• Exemplary damages — Exemplary damages cannot be awarded absent a showing that the defendant acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.
• Actual damages and lucrum cessans — Indemnification for damages contemplates both actual loss suffered (damnum emergens) and unrealized profits (lucrum cessans), but to be entitled to adequate compensation for pecuniary loss, the loss must be actually suffered and duly proved. The amount of loss must not only be capable of proof but must be proven with a reasonable degree of certainty, premised upon competent proof or the best evidence obtainable, such as receipts or other documentary proof. Where the only evidence of unrealized profits is the self-serving and hearsay testimony of a witness with a stake in the outcome, the proof is flimsy and actual damages cannot be awarded.

• "The contract was valid; the radio transceivers were not contraband." — This is the Court's direct statement of the ratio decidendi on the principal issue, reversing the Court of Appeals' declaration that the contract was void ab initio.
• "Transceivers were not prohibited but merely regulated goods. The LOI and Administrative Circular did not render the transceivers outside the commerce of man. They were valid objects of the contract." — This passage supplies the canonical formulation of the regulated-goods doctrine as applied to martial-law issuances and is the core holding on contractual validity.
• "Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It means a breach of a known duty through some motive or interest or ill will that partakes of the nature of fraud." — This is the Court's definition of bad faith, drawn from Ford Philippines, Inc. vs. Court of Appeals and Priscilla L. Tan vs. Northwest Airlines, Inc., and is the standard applied to defeat the award of moral and exemplary damages.
• "To recover actual damages, the amount of loss must not only be capable of proof, but must be proven with a reasonable degree of certainty. The claim must be premised upon competent proof or upon the best evidence obtainable, such as receipts or other documentary proof." — This passage states the evidentiary standard for actual damages and explains why the testimony of Aligada on unrealized profits was insufficient.

• Corona vs. United Harbor Pilots Association of the Philippines, 283 SCRA 31 (1997) — Cited for the definition of a "license" as a right or permission granted by some competent authority to carry on a business or to do an act which, without such license, would be illegal; used to establish that possession and importation of transceivers was legal provided the necessary license was obtained.
• Ford Philippines, Inc. vs. Court of Appeals, 267 SCRA 320, 328 (1997) — Cited, together with Priscilla L. Tan vs. Northwest Airlines, Inc., as the source of the Court's definition of bad faith.
• Priscilla L. Tan vs. Northwest Airlines, Inc., G.R. No. 135802, March 3, 2000 — Cited with Ford Philippines for the definition of bad faith.
• AFP Mutual Benefit Association, Inc. vs. Court of Appeals, G.R. Nos. 104769-135016, March 3, 2000 — Cited for the rule that good faith is presumed and that the burden of proving bad faith rests on the one alleging it.
• Far East Bank and Trust Company vs. Court of Appeals, 241 SCRA 671 (1995) — Cited, together with Go vs. Court of Appeals, for the requirement that the breach be palpably wanton, reckless, malicious, in bad faith, oppressive or abusive to justify moral damages in an action for breach of contract.
• Go vs. Court of Appeals, 272 SCRA 752 (1997) — Cited with Far East Bank on the standard for moral damages in breach of contract.
• Philippine Air Lines vs. Miano, 242 SCRA 235 (1995) — Cited for the rule that exemplary damages cannot be awarded absent wanton, fraudulent, reckless, oppressive or malevolent conduct.
• Integrated Packaging Corp. vs. Court of Appeals, G.R. No. 115117, June 8, 2000 — Cited for the principle that indemnification for damages contemplates both damnum emergens and lucrum cessans.
• Scott Consultants & Resource Development Corporation, Inc. vs. Court of Appeals, 242 SCRA 393 (1995) — Cited, together with Kierulf vs. Court of Appeals, for the requirement that pecuniary loss be actually suffered and duly proved.
• Kierulf vs. Court of Appeals, 269 SCRA 433 (1997) — Cited with Scott Consultants on proof of pecuniary loss.
• Bernardo vs. Court of Appeals (Special Sixth Division), 275 SCRA 413 (1997) — Cited for the requirement of competent proof or the best evidence obtainable to support a claim for actual damages.
• People of the Philippines vs. Carlito Ereno, G.R. No. 124706, February 22, 2000 — Cited for the rule that actual damages must be supported by receipts or other documentary proof.
• Del Mundo vs. Court of Appeals, 240 SCRA 348 (1995) — Cited for the requirement that actual damages be proven with a reasonable degree of certainty.
• Sulpicio Lines, Inc. vs. Court of Appeals, 246 SCRA 376 (1995) — Cited, together with Central Bank of the Philippines vs. Spouses Alfonso, for the rule that flimsy proof cannot sustain an award of actual damages.
• Central Bank of the Philippines vs. Spouses Alfonso, G.R. No. 131074, March 27, 2000 — Cited with Sulpicio Lines on the insufficiency of flimsy proof for actual damages.

• Article 1267, Civil Code of the Philippines — Provides that when the service required by the contract has become so manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. Applied to release Guerrero from his obligation, his inability to secure a letter of credit and to comply having been a direct consequence of the government's denial of the permit to import.
• Article 1347, Civil Code of the Philippines — Provides that all things which are not outside the commerce of men, including future things, may be the object of the contract, and that all rights which are not intransmissible may also be the object of contracts. Cited to establish that the transceivers, being merely regulated and not contraband, were valid objects of the contract.
• Article 2201, Civil Code of the Philippines — Referenced in the Court's discussion of the heirs' claim for unrealized profits in the amount of P52,393.89, which they anchored on Article 2201 while averring that Guerrero acted in bad faith; the claim failed for want of proof of bad faith and of the loss with reasonable certainty.

Davide, Jr., C.J., Puno, Kapunan and Ynares-Santiago, JJ., concur.