Rustan Pulp & Paper Mills, Inc. vs. Intermediate Appellate Court

A contractual condition that makes the fulfillment of an existing obligation purely dependent upon the will of one of the obligors is a void potestative condition and is considered not written.

Petitioner Rustan Pulp & Paper Mills, Inc. (Rustan) operated a pulp and paper mill. In 1968, it entered into a contract of sale with private respondent Romeo A. Lluch, whereby Lluch would supply pulp wood raw materials to Rustan's plant. The contract contained a clause (paragraph 7) stipulating that the buyer (Rustan) had the right to stop delivery when its supply became sufficient, subject to giving the seller sufficient notice.

• Nature of the Action: The case originated from a complaint for breach of a contract of sale of pulp wood raw materials.
• The Contract: In April 1968, petitioner Rustan, represented by its officers, entered into a contract with private respondent Lluch. Paragraph 7 of the contract stated: "That the BUYER shall have the right to stop delivery of the said raw materials by the seller covered by this contract when supply of the same shall become sufficient until such time when need for said raw materials shall have become necessarily provided, however, that the SELLER is given sufficient notice."
• The Stoppage of Deliveries: On September 30, 1968, petitioner Rustan, through Resident Manager Romeo S. Vergara, sent a letter to Lluch stating that the supply of raw materials had become sufficient and directing him to stop delivery 30 days from the date of the letter.
• Subsequent Conduct: Despite the letter, petitioner Rustan continued to accept deliveries from Lluch and other suppliers until at least December 23, 1968. The IAC found this conduct inconsistent with the claim of sufficient supply and defective machinery.
• Lower Court Findings: The IAC found that the stoppage was a breach of contract. It noted that accepting deliveries from other suppliers after September 30, 1968, belied the claim of sufficient supply or inability to operate.

• Personal Liability: Petitioner Tantoco argued he signed the contract only as a representative of Rustan, and petitioner Vergara argued he did not sign the contract at all. They maintained that corporate officers cannot be held personally liable on a contract they signed in their official capacity.
• Lawful Exercise of Right: Petitioners argued that the decision to stop accepting deliveries was a lawful exercise of their right under paragraph 7 of the contract, prompted by serious and unforeseen defects in the mill machinery.
• Damages and Bad Faith: Petitioners argued that moral damages and attorney's fees were improperly awarded in the absence of any showing of fraud or bad faith on their part.

• Breach of Contract: Respondents countered that the September 30, 1968 letter constituted a termination of the contract, not a temporary suspension. They argued that Rustan's continued acceptance of deliveries from other suppliers after that date proved the stoppage was not due to sufficient supply.
• Illusory Condition: Respondents argued that the condition in paragraph 7 was purely potestative, making the obligation to accept deliveries illusory and dependent solely on the buyer's will.
• Corporate Liability: Respondents contended that the corporation, Rustan, was liable for the breach, and the award of damages was proper.

• Personal Liability of Officers: Whether petitioner Tantoco, who signed the contract as a corporate representative, and petitioner Vergara, who did not sign the contract, can be held personally liable for the breach.
• Validity of Stoppage: Whether petitioner Rustan's act of stopping deliveries pursuant to paragraph 7 of the contract was a lawful exercise of a contractual right or a breach of contract.
• Propriety of Damages: Whether the award of moral damages and attorney's fees was proper in the absence of fraud or bad faith.

• Personal Liability of Officers: The corporate officers cannot be held personally liable. A corporate officer who signs a contract in his official capacity is not personally bound absent a stipulation to that effect, due to the separate juridical personality of the corporation. Vergara's act of sending the stoppage letter was an official act and did not create personal liability.
• Validity of Stoppage: The stoppage constituted a breach of contract. Paragraph 7, which allowed the buyer to stop deliveries based solely on its determination of supply sufficiency, created a purely potestative condition. Such a condition, making the fulfillment of an existing obligation dependent exclusively on the will of one party, is void under Article 1306 of the Civil Code and is considered not written. Consequently, Rustan's reliance on it to stop deliveries was unlawful.
• Propriety of Damages: The award of moral damages and attorney's fees against the corporation was proper. The breach of contract was attended by bad faith, as evidenced by Rustan's inconsistent conduct of stopping deliveries while continuing to accept them from other suppliers, and its unjustified refusal to clarify the intent of the stoppage letter.

• Potestative Condition (Article 1182, Civil Code) — A condition which is both potestative (or facultative) and resolutory may be valid. However, a condition that makes the fulfillment of an already existing obligation purely dependent upon the will of the obligor is void. The Court distinguished this from a condition affecting the inception of an obligation, which may be valid even if potestative.

• "A purely potestative imposition of this character must be obliterated from the face of the contract without affecting the rest of the stipulations considering that the condition relates to the fulfillment of an already existing obligation and not to its inception."
• "It was indeed incongruous for petitioners to have sent the letters calling for suspension and yet, they in effect disregarded their own advice by accepting the deliveries from the suppliers."

• Taylor vs. Uy Tieng Piao and Tan Liuan, 43 Phil. 873 — Cited by petitioners to argue that a potestative resolutory condition is valid. The Court distinguished this precedent, noting that in Taylor, the condition related to the birth of the obligation (arrival of machinery), not to the fulfillment of an existing one as in the present case.
• Bangued Generale Belge vs. Walter Bull and Co., Inc., 84 Phil. 164 — Cited for the rule that a corporate officer who signs a contract in his official capacity is not personally liable thereon.

• Article 1182, Civil Code — Provides that when the fulfillment of a condition depends upon the sole will of the debtor, the conditional obligation shall be void.
• Article 1306, Civil Code — Stipulates that contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
• Article 1267, Civil Code — On frustration of purpose. The Court rejected its application because petitioners continued to accept deliveries, estopping them from claiming the defective machinery was an extraordinary obstacle.

• Justice Hugo E. Gutierrez, Jr.
• Justice Abdulwahid A. Bidin
• Justice Hilario G. Davide, Jr.
• Justice Flerida Ruth P. Romero