San Miguel Foods, Inc. vs. Spouses Fabie and Fresh Link, Inc.

A party claiming breach of contract through unilateral termination must prove the fact of termination by preponderance of evidence; a mere shift from credit to cash deliveries, occasioned by the counterparty's failure to maintain a required standby letter of credit, constitutes a modification of payment terms rather than a pre-termination of the agreement.

Fresh Link, Inc., a corporation owned by spouses Ramon and Ma. Nelia Fabie, was appointed as SMFI's exclusive distributor of Magnolia chicken products to specific geographic territories in Makati City under a Complementary Distributorship Agreement first executed in October 1992 and renewed annually. Under the arrangement, Fresh Link guaranteed payment for its SMFI product purchases, initially through a real estate collateral and later through a Credit Line Agreement for ₱800,000.00 secured by an Irrevocable Domestic Standby Letter of Credit issued by the Bank of the Philippine Islands in favor of SMFI. The Credit Line Agreement and the distributorship agreement were renewed in April 1999, with both set to expire on March 31, 2000. The standby letter of credit, however, expired on May 31, 1999.

Fresh Link, Inc., a corporation owned by spouses Ramon and Ma. Nelia Fabie, entered into a Complementary Distributorship Agreement with San Miguel Foods, Inc. (SMFI) on October 27, 1992, under which Fresh Link was appointed as the exclusive distributor of SMFI products to specific territories or accounts for a period of six months. Fresh Link was required to guarantee payment for its purchases of SMFI products subject to sale and distribution. The spouses initially offered their house and lot as collateral, later replaced by postdated checks and a credit line under a Credit Line Agreement for ₱800,000.00 worth of purchases, secured by an Irrevocable Domestic Standby Letter of Credit issued by the Bank of the Philippine Islands (BPI) in favor of SMFI. The contract was renewed or extended yearly under substantially the same terms and conditions.

On May 15, 1998, the contract was renewed for one year pursuant to a Memorandum of Agreement on Complementary Distributorship, which required SMFI to maintain the exclusivity of the distributorship by not selling or offering for sale specified products to any person within the geographic territory assigned to Fresh Link, and to use its best endeavors to safeguard Fresh Link's exclusive rights. The assigned territory was Makati (except for talipapas or stalls located in Kalayaan, Sacramento, Pio del Pilar, Tejeros, and Bangkal) and the Guadalupe Wet Market. In April 1999, the parties renewed the agreement for another period expiring on March 31, 2000, with the Credit Line Agreement likewise remaining in effect until that date. Although respondents signed the renewed agreement, they alleged they were not given a copy and that their request for one—needed for the release of a new standby letter of credit from BPI—was not acted upon by SMFI.

On June 2 and June 3, 1999, respondents complained to SMFI regarding the supposed withholding of discounts or rebates, the proliferation of Magnolia chicken in the wet market within their assigned territory at prices lower than the invoice price given to them, and SMFI's refusal to furnish a copy of the renewed agreement. On June 4, 1999, SMFI ceased delivery of its products on credit to Fresh Link. SMFI maintained that the standby letter of credit had expired on May 31, 1999, compelling it to deliver products only upon receipt of cash payment. SMFI also claimed that Fresh Link had outstanding accounts totaling ₱1,899,645.97 that had become due and payable, which Fresh Link allegedly failed to settle despite repeated demands. Respondents, for their part, asserted that the Credit Line Agreement had been renewed and remained in effect until March 31, 2000, and that SMFI's cessation of credit deliveries constituted a unilateral pre-termination of the agreement.

The RTC found that SMFI unilaterally terminated the agreement without just cause and awarded actual, moral, and exemplary damages to respondents. The CA affirmed with modifications, replacing actual damages with ₱1,000,000.00 in temperate damages for lack of competent proof of actual losses, while sustaining the awards of moral and exemplary damages and attorney's fees, finding SMFI liable under Article 1170 of the Civil Code for pre-terminating the agreement and for underpricing, undersupplying, and allowing other distributors within Fresh Link's territory.

• Counterclaims disregarded: SMFI contended that the lower courts failed to rule on its counterclaims raised in its Answer with the RTC, praying for actual damages representing Fresh Link's unpaid accounts amounting to ₱1,899,645.97, which allegedly ballooned to ₱2,109,499.40 as of July 5, 1999.
• No pre-termination of the agreement: SMFI insisted there was no pre-termination but rather a mere modification of payment terms from credit to cash, attributed to Fresh Link's failure to obtain a replacement letter of credit or an extension thereof upon its expiration on May 31, 1999. Even assuming a replacement or extension was secured, SMFI claimed respondents failed to inform SMFI about its existence, such that SMFI could not be faulted for insisting on cash payments.
• Invalidation of termination clause unwarranted: SMFI argued that the CA erred in invalidating Article VI of the Agreement for violation of the mutuality of contracts, since the validity of the said provision was never challenged by any of the parties.
• Letter of credit issue not addressed: SMFI maintained that the lower courts erred in not discussing its arguments against the letter of credit submitted by respondents, including respondents' categorical and judicial admission of not renewing the same.
• Impropriety of damages: SMFI argued that the CA erred in awarding temperate and other damages, as well as attorney's fees.

• Mutuality of contracts violated: Respondents maintained that the lower courts correctly invalidated Article VI of the Agreement for being violative of the principle of mutuality of contracts.
• Letter of credit renewal: Respondents argued that the lower courts did not err in setting aside SMFI's arguments against the renewal of Fresh Link's letter of credit, contending that the Credit Line Agreement had been renewed and remained in effect and subsisting until March 31, 2000.

• Counterclaims: Whether the lower courts erred in not passing upon SMFI's counterclaims.
• Validity of Termination Clause: Whether the CA erred in invalidating Article VI of the Agreement for supposed violation of the mutuality of contracts, even if the validity of the provision was not challenged by any party.
• Letter of Credit: Whether the lower courts erred in not discussing SMFI's arguments against the letter of credit, including respondents' judicial admission of not renewing the same.
• Award of Damages: Whether the CA erred in awarding temperate and other damages, as well as attorney's fees, to respondents.

• Counterclaims: No. SMFI is not entitled to its counterclaims, the supporting documents being mere photocopies inadmissible under the best evidence rule, and the lower courts having effectively found SMFI's defense of non-payment lacking in merit.
• Validity of Termination Clause: No. The CA erred in striking down the termination clause as void; the law is deemed written into every contract, requiring a legal cause and 30-day written notice before termination, but the clause is not a blanket authority for unilateral termination.
• Letter of Credit: No. The evidence on record, including respondents' own judicial admission in their Memorandum before the RTC, confirms that the standby letter of credit expired on May 31, 1999, and was not renewed, justifying SMFI's insistence on cash payments.
• Award of Damages: No. Respondents failed to prove by preponderance of evidence that SMFI unilaterally terminated the agreement; the record shows only a modification of payment terms, not termination, and respondents' claims rested solely on the unsubstantiated testimony of Nelia Fabie without corroborating evidence.

• Counterclaims: SMFI's claim for actual damages of ₱1,899,645.97 was supported only by photocopies of Fresh Link's schedule of purchases, charge sales invoices, and bounced checks. Under the best evidence rule (Section 3, Rule 130 of the Rules of Court), when the subject of inquiry is the contents of a document, no evidence is admissible other than the original, except in specified instances—loss or destruction without bad faith, custody by the opposing party, numerous accounts, or public records. SMFI failed to show that any exception applied. Being the only proof presented, the photocopies were inadmissible and the counterclaims were necessarily denied. Moreover, both lower courts had found that SMFI had no reason to cease delivery, effectively rejecting SMFI's defense of non-payment and, by extension, its counterclaims.

• Validity of Termination Clause: The Court declined to strike down Article VII (numbered Article VI in the CA Decision) of the Agreement as void. While the clause appeared silent on the requirement of a legal cause—stating SMFI could terminate "for any cause at any time"—the law is deemed written into every contract. Thus, the clause was not a blanket authority; termination required (1) a legal cause and (2) at least 30 days' advance written notice. However, before applying this provision, the Court found it imperative to first ascertain whether SMFI had in fact decided to pre-terminate the agreement, as without such a finding, the provision's application would be futile.

• Letter of Credit: The evidence confirmed that the standby letter of credit expired on May 31, 1999. The document referenced in the CA's Decision—an approved Credit Line Agreement dated April 6, 1999—was itself only a photocopy and inadmissible under the best evidence rule. More decisively, respondents admitted in their Memorandum submitted to the RTC that they "did not renew the bank guarantee when it expired on May 31, 1999." Even assuming a replacement or extension was validly secured, Nelia Fabie's own testimony established that SMFI was never furnished a copy or made aware of its existence. SMFI therefore could not be blamed for insisting on cash payments, as without a letter of credit there was effectively no credit line to speak of.

• Award of Damages: The Court found that respondents failed to establish by preponderance of evidence that SMFI unilaterally terminated the agreement. The lower courts' findings rested solely on Nelia Fabie's testimony and complaint letters, without corroborating evidence such as marketing materials announcing a new distributor or testimonies from Fresh Link employees. The complaint itself alleged only that SMFI ordered no more chicken to be supplied "unless this was paid in cash"—a denial of credit purchases, not a termination. This was corroborated by SMFI's Business Development Officer Eugene de la Paz, who testified that Fresh Link was still allowed to make purchases on a cash basis, and by Nelia Fabie's own admission that cash payment was possible "anytime." The absence of any 30-day written termination notice reinforced the conclusion that SMFI never intended to terminate the agreement. Respondents' additional allegations of underpricing, undersupplying, and allowing other distributors within Fresh Link's territory likewise rested solely on Nelia Fabie's unsubstantiated testimony. Because the party making allegations bears the burden of proving them by preponderance of evidence and must rely on the strength of its own evidence, the absence of corroborating proof rendered all awards of actual, temperate, moral, and exemplary damages improper, and the award of attorney's fees was likewise deleted.

• Preponderance of Evidence — In civil cases, the party having the burden of proof must establish its cause of action by preponderance of evidence, meaning the testimony of one side is more believable than that of the other, and the probability of truth lies on one side. The party making allegations bears the burden of proving them and must rely on the strength of its own evidence, not on the weakness of the opponent's defense. The Court applied this doctrine to hold that respondents' sole reliance on Nelia Fabie's uncorroborated testimony and complaint letters, without additional concrete evidence, was insufficient to establish that SMFI unilaterally terminated the agreement or committed the alleged breaches.

• Best Evidence Rule — When the subject of inquiry is the contents of a document, no evidence is admissible other than the original document itself, except when the original has been lost or destroyed without bad faith, is in the custody of the opposing party, consists of numerous accounts, or is a public record. The Court applied this rule to exclude both SMFI's photocopies of purchase schedules, invoices, and bounced checks supporting its counterclaims, and respondents' photocopy of the approved Credit Line Agreement dated April 6, 1999, rendering both parties' documentary submissions inadmissible.

• Law Deemed Written into Every Contract — Even where a contractual termination clause appears to permit termination "for any cause at any time," the law is deemed written into every contract, requiring a legal cause and compliance with stipulated notice procedures. The Court invoked this principle to decline striking down the termination clause as void, instead reading into it the requirements of legal cause and 30-day written notice.

• Exceptions to Factual Findings in Rule 45 Petitions — While the Supreme Court is not a trier of facts and Rule 45 petitions are limited to reviewing errors of law, the Court may conduct its own factual analysis where the findings of fact are premised on the absence of evidence and are contradicted by evidence on record. The Court invoked this exception because the lower courts' decisions rested heavily on the testimony of a single witness, Nelia Fabie, and the Court found that respondents had failed to substantiate their claims by preponderance of evidence.

• "Based on the preceding statements, it appears that SMFI did not unilaterally terminate the Agreement; rather, it merely altered the payment terms for the purchased products. To the best of SMFI's knowledge, respondents did not obtain a replacement letter of credit or an extension thereof upon its expiration on May 31, 1999. Even assuming that respondents obtained a replacement letter of credit or an extension thereof, they admittedly failed to inform SMFI about its existence. Therefore, SMFI should not be blamed for insisting on cash payments from Fresh Link for the SMFI products it acquired." — This passage articulates the ratio decidendi: the distinction between modifying payment terms and unilaterally terminating a contract, and the justification for requiring cash payment when the required collateral has expired and the counterparty failed to notify of any renewal.

• "This Court observes, however, that the documents submitted by SMFI are mere photocopies. The best evidence rule requires that when the subject of inquiry is the contents of a document, no evidence is admissible other than the original document itself except in the instances mentioned in Section 3, Rule 30 of the Rules of Court. As such, mere photocopies of documents are inadmissible pursuant to the best evidence rule." — This passage applies the best evidence rule to bar both parties' documentary evidence, a critical evidentiary ruling that undermined both SMFI's counterclaims and respondents' proof of the renewed credit line.

• "While the said clause appears to be silent on the requirement of a legal cause, that is, 'for any cause,' before SMFI could terminate the same, it is basic that the law is deemed written into every contract." — This passage states the principle that statutory requirements are read into contractual provisions, declining to invalidate a termination clause that appeared to allow termination "for any cause" but construing it to require legal cause and notice.

• "In civil cases, it is fundamental that the party making allegations has the burden of proving them by a preponderance of evidence. Moreover, the parties must rely on the strength of their own evidence, not upon the weakness of the defense offered by their opponent." — This passage restates the burden of proof in civil cases and the prohibition against relying on the weakness of the opposing party's defense, underpinning the dismissal of respondents' claims.

• Bank of the Philippine Islands vs. Reyes, 568 Phil. 188 (2008) — Cited for the definition of preponderance of evidence as evidence of greater weight or more convincing than that in opposition.
• Heirs of Villanueva vs. Heir of Syquia Mendoza, 810 Phil. 172 (2017) — Cited for the enumerated exceptions to the rule that factual findings cannot be reviewed in a Rule 45 petition, including when findings of fact are premised on the absence of evidence and contradicted by evidence on record.
• Spouses Tapayan vs. Martinez, 804 Phil. 523 (2017) — Cited for the best evidence rule requiring production of original documents when the subject of inquiry is their contents.
• Halili vs. Justice for Children International, 769 Phil. 456 (2015) — Cited for the principle that the law is deemed written into every contract.
• Tan, Jr. vs. Hosana, 780 Phil. 258 (2016) — Cited for the rule that the party making allegations bears the burden of proving them by preponderance of evidence and must rely on the strength of its own evidence.
• Lim vs. Tan, 801 Phil. 13 (2016) — Cited for the requirement that actual damages must be proven with a reasonable degree of certainty through competent proof.

• Article 1170, Civil Code — Provides that those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. The CA relied on this provision to hold SMFI liable, but the Supreme Court reversed, finding no proven breach.
• Section 3, Rule 130, Rules of Court — Sets forth the best evidence rule, requiring the original document when the subject of inquiry is the contents of a document, with enumerated exceptions. Applied to exclude both parties' photocopies of key documents.
• Section 1, Rule 133, Rules of Court — In civil cases, the party having the burden of proof must establish its cause of action by preponderance of evidence. Applied as the governing standard for evaluating respondents' breach of contract claim and SMFI's counterclaims.

Gesmundo, C.J. (Chairperson), Zalameda, Rosario, and Marquez, JJ., concurred.