San Miguel Foods, Inc. and James A. Vinoya vs. Ernesto Raoul V. Magtuto

A verbal contract for growing broiler chicks is valid and binding even without a written agreement, provided all essential requisites of a contract are present, and a corporation may be bound by an unauthorized agent's contract when it impliedly ratifies the same through its subsequent acts, such as delivering chicks, providing feeds and medicines, harvesting grown chickens, and paying grower's fees over multiple growing periods. However, where the verbal agreement does not specify a period of renewal, the contract is deemed to be on a "per grow basis," and damages are limited to the loss arising from the particular growing season in question.

San Miguel Foods, Inc. (SMFI) is a company engaged in the business of breeding and hatching broiler chickens, poultry processing, and manufacturing of poultry and livestock feeds. Respondent Ernesto Raoul V. Magtuto was a businessman engaged in growing broiler chicks under the business name Alyssandra Farms, maintaining several grow-out facilities in Carolina, Nabua, and Baao, Camarines Sur. Magtuto had been a grower for Swift Foods, Inc. for six years from 1996 to 2002, and was well-known as one of the biggest broiler chick growers in the Bicol region. Swift Foods, Inc. was closing operations in Bicol at the end of 2002, prompting a gathering of its broiler chick growers to explore business opportunities with SMFI, which was looking into recruiting new growers or getting additional capacity for its production program in the region.

Sometime in July 2002, Ernesto Raoul V. Magtuto, a businessman engaged in growing broiler chicks under the name Alyssandra Farms, attended a gathering of broiler chick growers of Swift Foods, Inc. at Villa Caceres Hotel in Naga City. The gathering was organized by Dr. Edwin Rosales, the Branch Manager of the Bicol branch and a veterinarian for the contract growing operation of Swift Foods, Inc., which was closing operations in Bicol at the end of 2002. Those in attendance included broiler chick growers, some employees of Swift Foods, Inc., and representatives of petitioner San Miguel Foods, Inc. (SMFI), including petitioner Dr. James A. Vinoya, SMFI's veterinarian and production supervisor, and Engr. Rene C. Ogilvie, SMFI's Bicol Region Poultry Operations Manager. The growers were there to know if they could do business with SMFI, which was looking into recruiting new growers or getting additional capacity for the company's production program in the region. At the gathering, SMFI presented its chick growing scheme, payment system, and benefits to the contract growers.

Several months after the gathering, sometime in September 2002, Magtuto and Vinoya arrived at an agreement. Vinoya told Magtuto that he could be accommodated as a broiler chick grower of SMFI only if excess chicks would be available from the SMFI hatchery located in Laguna. They did not execute a written contract, but Vinoya showed Magtuto a copy of SMFI's standard Broiler Chicken Contract Growing Agreement and told him that he would be bound by the same terms and conditions as their regular contract growers, to which Magtuto agreed. The agreement involved the delivery of 36,000 day-old chicks by SMFI, which Magtuto would grow for a period of about 30-35 days at his grow-out facility in Carolina, Camarines Sur. SMFI would provide all the feeds, medicines, materials, and technical support. After the growing period, the grown chickens would be harvested and hauled by SMFI, and Magtuto would be given 15 days to clear, disinfect, and prepare his facility for the next delivery. To guarantee faithful performance, Magtuto gave SMFI ₱72,000 as a cash bond, equivalent to two successive grows of ₱36,000 per grow. For the months of October and November 2002, and January and April 2003, SMFI delivered chicks to Magtuto four times, consisting of 36,000 chicks per delivery, and after every harvest, SMFI paid Magtuto a grower's fee.

Sometime in June 2003, on the fifth delivery, the broiler chicks delivered by SMFI were short of 4,000 heads — only 32,000 chicks were delivered instead of 36,000. Magtuto reported this to Vinoya, who replied that there were no more excess chicks due to the low supply from the hatchery and the decline in demand for chicken in the market because of the influx of cheap imported chicken. Magtuto demanded more chicks to maximize his facility's capacity, but Vinoya said that Magtuto was only being accommodated and that priority would be given to official contract growers of SMFI. After several exchanges of messages, Magtuto felt that Vinoya responded arrogantly and in an insulting manner, so he sent a letter-complaint dated 12 June 2003 to Ogilvie expressing dissatisfaction with Vinoya's alleged "arrogance, incompetence and unprofessional attitude." Ogilvie did not take any action on the matter. On 12 August 2003, Vinoya informed Magtuto that their arrangement was terminated due to "poor working relationship." Magtuto was surprised, claiming the termination was prompted by his complaint against Vinoya. Magtuto then sent a letter dated 25 August 2003 to Benjamin Hilario, SMFI's Assistant Vice President and Luzon Processing Manager, narrating his experience and stating that he was withdrawing the ₱72,000 cash bond.

Thereafter, Magtuto filed a complaint for damages against SMFI, Vinoya, and Ogilvie before the RTC of Naga City, Branch 22. Magtuto claimed that because of the abrupt unilateral termination of the contract, he was deprived of income for July 2003 in the amount of not less than ₱360,000, incurred expenses in preparing his grow-out facility in the amount of not less than ₱150,000, and suffered social humiliation, mental anguish, and serious anxiety, which SMFI must compensate in the amount of not less than ₱500,000. He also alleged that SMFI's act in terminating the agreement was contrary to justice and good faith, warranting nominal damages of not less than ₱100,000 and exemplary damages of not less than ₱200,000. Further, Magtuto claimed that the 4,000 broiler chicks lacking in the June 2003 delivery deprived him of income amounting to ₱48,000, demanded the return of the ₱72,000 bond, and claimed attorney's fees of ₱100,000 and ₱1,500 per appearance fee.

In its Answer, SMFI claimed that Magtuto was not a contract grower of SMFI and that no written broiler chicken contract growing agreement was executed. SMFI narrated that Vinoya, without the knowledge and prior consent of SMFI, entered into a private arrangement by way of "accommodation" with Magtuto, promising to deliver broiler chicks only when surplus was not earmarked for delivery to contract growers. SMFI asserted that Vinoya required Magtuto to post a ₱72,000 bond to secure SMFI from any loss and Vinoya from being held liable for extending the accommodation. SMFI claimed there was no termination of contract but a mere withdrawal or termination of the accommodation due to the decrease in production and decline in demand. Magtuto presented himself as a witness, along with Dr. Edwin Rosales and Ramon B. Bayta, Jr., a former co-contract grower at Swift Foods, Inc. who had also been "accommodated" by SMFI. SMFI presented Vinoya, Ogilvie, and Dante Gito, a Finance Analyst of SMFI Naga Plant.

The RTC resolved the case in favor of Magtuto, stating that he was a contract grower of SMFI even in the absence of a written agreement, explaining that the verbal agreement created respective obligations between them. The RTC did not treat the arrangement as an accommodation only but as a contract growing agreement. The CA affirmed with modification, increasing the actual or compensatory damages to ₱383,835.85 but deleting the awards for moral, exemplary, and nominal damages. Petitioners filed a Motion for Reconsideration, which was denied by the CA in a Resolution dated 6 May 2016, prompting the petition before the Supreme Court.

• Absence of Written Contract: Petitioner SMFI contended that there was never any written broiler chicken contract growing agreement between SMFI and Magtuto, and that the agreement was unenforceable in the absence of a written contract.
• Lack of Authority: SMFI asserted that it had no participation in and knowledge of the agreement made to Magtuto by Vinoya, who had no authority to enter into a contract growing agreement with any person on behalf of SMFI, and that Vinoya only accommodated Magtuto on the condition that excess chicks would be available.
• Contingent Nature of the Arrangement: SMFI submitted that the continuity of the accommodation and the supply of day-old chicks were contingent upon the availability of excess chicks from SMFI's hatchery, and that Vinoya and Magtuto did not even fix a duration for the arrangement.
• Insufficient Proof of Damages: SMFI insisted that the lower and appellate courts, in awarding actual or compensatory damages, erroneously relied on the self-serving testimony of Magtuto, absent any clear and convincing proof that Magtuto is entitled to such damages.

• Existence of a Valid Contract: Magtuto claimed that he was a contract grower of SMFI even in the absence of a written agreement, as the verbal agreement of Magtuto and Vinoya created respective obligations between them, with Magtuto posting a cash bond and SMFI delivering chicks, harvesting grown chickens, and paying grower's fees like any of its contract growers.
• Entitlement to Damages: Magtuto claimed that because of the abrupt unilateral termination of the contract, he was deprived of income for July 2003, incurred considerable expenses in preparing his grow-out facility, and suffered social humiliation, mental anguish, and serious anxiety, warranting actual, moral, nominal, and exemplary damages, as well as attorney's fees and litigation expenses.

• Existence of a Valid Contract: Whether a valid broiler chicken contract growing agreement existed between Magtuto and SMFI despite the absence of a written contract and Vinoya's alleged lack of authority to bind SMFI.
• Entitlement to Actual or Compensatory Damages: Whether Magtuto is entitled to actual or compensatory damages due to (1) the shortage of 4,000 broiler chicks at the fifth delivery made in June 2003, (2) the expenses incurred during the 15-day rest period while preparing his grow-out facility for the next chick delivery, and (3) the loss of possible income for the month of July 2003 due to the termination of the contract.

• Existence of a Valid Contract: Yes. A valid contract existed between Magtuto and SMFI despite the absence of a written agreement, as all the essential elements of consent, object, and cause were present, and SMFI impliedly ratified Vinoya's authority through its subsequent acts of delivering chicks, providing feeds and medicines, harvesting grown chickens, and paying grower's fees over five growing periods.
• Entitlement to Actual or Compensatory Damages: Partially. Magtuto is entitled to actual or compensatory damages only for the shortage of 4,000 broiler chicks on the fifth delivery in June 2003, in the amount of ₱38,383.58, but not for expenses incurred during the 15-day rest period or loss of possible income for the succeeding month, since the verbal agreement was on a "per grow basis" and the renewal of the contract occurs from one growing season to another.

• Existence of a Valid Contract: The Court applied Article 1318 of the Civil Code, which requires consent of the contracting parties, object certain, and cause of the obligation for a valid contract. All three essential elements were present: Magtuto entered into an agreement with Vinoya for the growing of broiler chicks, the chicks delivered by SMFI and grown by Magtuto constituted the object, and the grower's fee was the consideration. Under Article 1356, contracts are obligatory in whatever form they may have been entered into, provided all essential requisites for their validity are present. The Court rejected SMFI's claim that the agreement was unenforceable due to Vinoya's lack of authority, citing Article 1317, which provides that a contract entered into by one without authority is unenforceable unless ratified, expressly or impliedly, by the person on whose behalf it was executed. The Court found implied ratification under the doctrine in Prime White Cement Corp. vs. IAC, which held that implied ratification may take various forms, including silence or acquiescence, acts showing approval or adoption of the contract, or acceptance and retention of benefits flowing therefrom. SMFI delivered day-old chicks to Magtuto for almost a year, administered the growth of the chicks by providing feeds, medicines, and technical support, harvested the grown chickens, and paid Magtuto for growing the chicks — all of which occurred not once but five times over the course of nine months. The Court also noted that Magtuto had full faith that Vinoya had authority because Vinoya and Ogilvie attended the gathering as official representatives of SMFI, Vinoya directly dealt with Magtuto as a chick grower, Magtuto was shown a standard Broiler Chicken Contract Growing Agreement, and Magtuto posted a ₱72,000 cash bond. The Court further observed that SMFI issued official documents including cash receipts, delivery receipts, transfer receipts, trust/delivery receipts, and statements of payment, which proved that SMFI approved of the arrangement. The Court quoted the RTC's finding that SMFI and Vinoya were in estoppel, and the CA's observation that SMFI's subsequent actions, such as the delivery of chicks, medicines, and feeds, and the checks issued in favor of Magtuto, indicated that SMFI ratified the action of Vinoya assuming arguendo that he was not authorized.

• Entitlement to Actual or Compensatory Damages: The Court held that since the parties did not execute any written contract and their verbal agreement involved growing chicks from delivery until harvest, the contract was clearly on a "per grow basis," the duration of which is for one growing season. The Court analogized the case to a lease without a written contract, citing Article 1687 of the Civil Code, which provides that if the period for the lease has not been fixed, it is understood to be from month to month if the rent is monthly. Citing De Miranda vs. Lim Shi, the Court held that when there is no clear period of renewal agreed upon, the implied renewed contract is on a month-to-month basis. Similarly, the verbal agreement between Vinoya and Magtuto did not specify any clear period of renewal, so the renewal of the contract would be from one growing season to another or until the next delivery of the new batch of day-old chicks. Since SMFI delivered 36,000 heads four times since the start of the contract, SMFI could not escape its obligation to deliver the same number of chicks required for the particular growing season in question. Under Article 1159, obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Since SMFI's obligation was to deliver 36,000 day-old chicks in June 2003 and there was a shortage of 4,000 heads, Magtuto must be compensated for SMFI's non-fulfillment. However, given that the renewal of the contract occurs from one growing season to another, Magtuto was not entitled to expenses incurred during the 15-day rest period after the fifth delivery or loss of possible income for the succeeding month. As to the amount, the Court applied Articles 2199 and 2200 of the Civil Code, which require proof of pecuniary loss for actual or compensatory damages. Citing Terminal Facilities and Services Corporation vs. Philippine Ports Authority and Producers Bank of the Philippines vs. Court of Appeals, the Court explained that damages consisting of unrealized profits (ganacias frustradas or lucrum cessans) are not granted on the basis of mere speculation but by reference to some reasonably definite standard, and the injured party must produce the best evidence of which his case is susceptible. The Court agreed with the appellate court's computation based on the grower's fee paid by SMFI to Magtuto from December 2002 to July 2003, as proved by flock records, liquidation statements, payment request memoranda, check vouchers, and deposit slips. The appellate court came up with an average income of ₱345,452.27 per grow, and the unrealized income of the 4,000 heads was computed as ₱38,383.58. The Court also applied Nacar vs. Gallery Frames, holding that an award of interest in the concept of actual or compensatory damages may be imposed at the rate of 6% per annum when an obligation not constituting a loan or forbearance of money is breached, and thus the actual or compensatory damages shall earn interest at 6% per annum from the date of finality of the Decision until full payment.

• Implied Ratification of an Unauthorized Contract — Under Article 1317 of the Civil Code, a contract entered into in the name of another by one who has no authority or legal representation is unenforceable unless ratified, expressly or impliedly, by the person on whose behalf it has been executed. Implied ratification may take various forms, such as silence or acquiescence, acts showing approval or adoption of the contract, or acceptance and retention of benefits flowing therefrom. In this case, SMFI impliedly ratified Vinoya's unauthorized contract with Magtuto by delivering day-old chicks, providing feeds, medicines, and technical support, harvesting grown chickens, and paying grower's fees over five growing periods spanning nine months.

• Per Grow Basis Contract — Where a verbal contract for growing broiler chicks does not specify a clear period of renewal, the contract is deemed to be on a "per grow basis," the duration of which is for one growing season, and renewal occurs from one growing season to another or until the next delivery of a new batch of day-old chicks. This is analogous to a lease without a written contract under Article 1687 of the Civil Code, where the basis of the lease is on a month-to-month basis when no period has been fixed.

• Actual or Compensatory Damages Require Proof of Pecuniary Loss — Under Articles 2199 and 2200 of the Civil Code, actual or compensatory damages are awarded in satisfaction of or in recompense for loss or injury sustained, and require proof of pecuniary loss. Damages consisting of unrealized profits (ganacias frustradas or lucrum cessans) are not granted on the basis of mere speculation, conjecture, or surmise, but by reference to some reasonably definite standard such as market value, established experience, or direct inference from known circumstances. The injured party must produce the best evidence of which his case is susceptible.

• "The contract, assuming that Vinoya had no authority to sign for SMFI, was impliedly ratified when the broiler chicks subject of the contract were delivered by SMFI, together with the feeds, medicines and materials, until the grown chickens were harvested by SMFI. This occurred not only once but five times over the course of nine months." — This passage articulates the Court's application of the doctrine of implied ratification, holding that SMFI's repeated performance of its obligations under the contract constituted ratification of Vinoya's authority.

• "Clearly, the arrangement between SMFI and MAGTUTO is not an accommodation as the arrangement and/or engagement of the latter to the former was not made as a favor but upon a consideration received by MAGTUTO from SMFI for his services rendered as contract-grower." — This quotation from the RTC, adopted by the Court, distinguishes a valid contract growing agreement from a mere accommodation, emphasizing that the presence of consideration negates the claim of accommodation.

• "Given that the parties did not execute any written contract and their verbal agreement involved growing chicks which starts from delivery of the day-old chicks until the grown chickens are harvested, then it is clearly understood that the contract entered into by Vinoya and Magtuto was on a 'per grow basis,' the duration of which is for one growing season." — This passage establishes the Court's interpretation of the verbal agreement as a per grow basis contract, which limited the extent of damages recoverable by Magtuto.

• "To be entitled to compensatory damages, the amount of loss must be capable of proof and actually proven with a reasonable degree of certainty, premised upon competent proof or the best evidence obtainable. The burden of proof of the damage suffered is imposed on the party claiming the same, who should adduce the best evidence available in support thereof." — This passage states the standard for awarding actual or compensatory damages, requiring proof of pecuniary loss with reasonable certainty.

• Prime White Cement Corp. vs. IAC, 292-A Phil. 198, 204 (1993) — Cited as controlling precedent for the doctrine that implied ratification may take various forms, including silence or acquiescence, acts showing approval or adoption of the contract, or acceptance and retention of benefits flowing therefrom.

• De Miranda vs. Lim Shi, 120 Phil. 1392 (1964) — Cited as precedent for the rule that when there is no clear period of renewal agreed upon between the parties, the implied renewed contract is on a month-to-month basis, applied by analogy to the per grow basis contract in this case.

• Terminal Facilities and Services Corporation vs. Philippine Ports Authority, 428 Phil. 99, 138 (2002) — Cited for the explanation of the two kinds of actual or compensatory damages: loss of what a person already possesses, and failure to receive as a benefit that which would have pertained to him, with unrealized profits not granted on the basis of mere speculation.

• Producers Bank of the Philippines vs. Court of Appeals, 417 Phil. 646, 660 (2001) — Cited for the rule that the injured party must produce the best evidence of which his case is susceptible, and if that evidence warrants the inference that he has been damaged by the loss of profits which he might with reasonable certainty have anticipated, he is entitled to recover.

• Nacar vs. Gallery Frames, 716 Phil. 267, 278-279 (2013) — Cited as controlling precedent for the imposition of 6% per annum legal interest on an award of actual or compensatory damages from the date of finality of the decision until full payment.

• Pryce Properties Corporation vs. Spouses Octobre, 802 Phil. 391, 397 (2016) — Cited for the rule that the burden of proof of the damage suffered is imposed on the party claiming the same, who should adduce the best evidence available in support thereof.

• Article 1318, Civil Code — Provides the essential requisites of a contract: consent of the contracting parties, object certain which is the subject matter of the contract, and cause of the obligation which is established. The Court applied this provision to find that a valid contract existed between Magtuto and SMFI.

• Article 1317, Civil Code — Provides that no one may contract in the name of another without being authorized, and that a contract entered into by one without authority is unenforceable unless ratified, expressly or impliedly, by the person on whose behalf it has been executed. The Court applied this provision to find that SMFI impliedly ratified Vinoya's contract with Magtuto.

• Article 1356, Civil Code — Provides that contracts shall be obligatory in whatever form they may have been entered into, provided all the essential requisites for their validity are present. The Court applied this provision to hold that the verbal agreement between Magtuto and Vinoya was binding despite the absence of a written contract.

• Article 1159, Civil Code — Provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. The Court applied this provision to hold that SMFI was obligated to deliver 36,000 day-old chicks and must compensate Magtuto for the 4,000-head shortage.

• Article 1687, Civil Code — Provides that if the period for a lease has not been fixed, it is understood to be from year to year, month to month, week to week, or day to day, depending on the rent period. The Court applied this provision by analogy to determine that the verbal agreement was on a "per grow basis."

• Article 2199, Civil Code — Provides that one is entitled to adequate compensation only for such pecuniary loss suffered as he has duly proved, referred to as actual or compensatory damages. The Court applied this provision to require proof of Magtuto's pecuniary loss.

• Article 2200, Civil Code — Provides that indemnification for damages shall comprehend not only the value of the loss suffered, but also that of the profits which the obligee failed to obtain. The Court applied this provision to compute the unrealized income from the 4,000-chick shortage.

Perlas-Bernabe, Caguioa, J. Reyes, Jr., and Lazaro-Javier, JJ., concurred.