Sea Commercial Company, Inc. vs. Court of Appeals

A party to a non-exclusive dealership agreement may be held liable for abuse of rights under Article 19 of the Civil Code when, after learning of its dealer’s promotional efforts for a particular sale, it directly competes with and undercuts that dealer for the same transaction, thereby depriving the dealer of unrealized profits. The absence of an agency relationship does not preclude such liability.

SEACOM was a corporation engaged in the business of selling and distributing agricultural machinery, products, and equipment. By a dealership agreement dated September 20, 1966, it appointed JII as its exclusive dealer in the City and Province of Iloilo, with Tirso Jamandre executing a suretyship agreement binding himself jointly and severally for JII’s obligations. The agreement was later amended to include Capiz and to make the dealership non-exclusive. The governing statutory backdrop is Article 19 of the Civil Code, which requires every person to act with justice, give everyone his due, and observe honesty and good faith in the exercise of rights and performance of duties.

SEACOM was a corporation engaged in the business of selling and distributing agricultural machinery, products, and equipment. On September 20, 1966, SEACOM and JII entered into a dealership agreement under which SEACOM appointed JII as its exclusive dealer in the City and Province of Iloilo. Tirso Jamandre executed a suretyship agreement binding himself jointly and severally with JII to pay all obligations of JII to SEACOM. The agreement was later amended to include Capiz in the territorial coverage and to make the dealership non-exclusive. In the course of the dealership, JII allegedly incurred a balance of P18,843.85 for unpaid deliveries, and SEACOM brought an action to recover that amount plus interest and attorney’s fees.

JII filed an Answer denying the obligation and interposing a counterclaim for damages representing unrealized profits from the sale of twenty-one units of Mitsubishi power tillers to the Farm System Development Corporation (FSDC). According to JII, as a dealer in Capiz, it had contracted in 1977 to sell twenty-four units of Mitsubishi power tillers to a group of farmers to be financed by FSDC, a fact it made known to SEACOM; SEACOM, taking advantage of that information and acting in bad faith, went directly to FSDC, dealt with it, and sold twenty-one units, thereby depriving JII of an unrealized profit of P85,415.61.

The trial court found that JII had informed SEACOM as early as February 1977 of the promotions it had undertaken for the sale of twenty-four contracted units to FSDC and had requested a 50% discount to make the price competitive, as well as an increase in the warranty period from eight months to one year. In that letter, Jamandre clarified that JII was not amenable to SEACOM’s offering directly to FSDC and asked to be given only the usual overriding commission because JII had considerable investments in the transaction. SEACOM’s general sales manager declined the requested 50% discount but offered a “less 30% less 10% up to end March . . . on cash before delivery basis,” granted the requested extension of the warranty period, and stated that SEACOM was glad to note that JII had quite a number of units pending with FSDC. The trial court ruled that with that information, SEACOM dealt directly with FSDC and offered its units at a lower price, leaving FSDC no choice but to accept SEACOM’s offer.

The evidence showed that the price offered by JII to FSDC was P27,167.00 per unit, while the prices at which SEACOM sold to FSDC were P22,867.00 for Model CT 83-2, P21,093.50 for Model CT 83-E, and P18,979.25 for Model CT 534. Exhibit “N” confirmed that both SEACOM and Jamandre participated in the bidding, but SEACOM was awarded the contract directly from Manila. Tirso Jamandre testified that JII was the sole representative of SEACOM in the local demonstrations to convince the farmers and cooperative officers to accept the Mitsubishi brand of equipment in preference to other brands, and SEACOM did not rebut that testimony. SEACOM, for its part, claimed that the transaction with FSDC was concluded pursuant to a public bidding, not on the basis of information received from Tirso Jamandre, and that it did not underprice its products; it also invoked the non-exclusivity clause. JII maintained that the bidding was scheduled after its demonstration and after it informed SEACOM of the farmers’ preference for Mitsubishi tillers, that JII had nothing to do with the list of thirty-seven bidders and did not participate because it was not informed, and that the price at which SEACOM sold to FSDC was lower than the price given to JII.

The trial court found that JII had informed SEACOM of its FSDC negotiations and that SEACOM thereafter dealt directly with FSDC at a lower price, leaving FSDC no choice but to accept SEACOM’s offer. The Court of Appeals likewise found that SEACOM joined the bidding after JII had conducted demonstrations and promoted the equipment, and that Tirso Jamandre testified to feeling very aggrieved and to mental anguish and sleepless nights thinking of how SEACOM dealt with them behind their backs. The Court of Appeals also noted that the trial court failed to specify to which of the two appellees the award for moral and exemplary damages was granted.

• No Agency Relationship: Petitioner argued that the Court of Appeals gravely erred in ruling it liable to pay damages and unrealized profits despite the fact that no agency relationship existed between SEACOM and JII.
• Bad Faith Contrary to Evidence: Petitioner maintained that the Court of Appeals gravely erred in ruling it acted in bad faith against JII despite the evidence; the transaction with FSDC was concluded pursuant to a public bidding and not on the basis of alleged information received from Tirso Jamandre, and it did not underprice its products during the bidding in which both SEACOM and JII participated.
• Non-Exclusivity Clause: Petitioner argued that the Court of Appeals gravely erred in ruling that the non-exclusivity clause in the dealership agreement precluded SEACOM from competing with JII.
• Unrealized Profits, Moral and Exemplary Damages, Attorney’s Fees: Petitioner argued that the Court of Appeals gravely erred in awarding unrealized profits, moral and exemplary damages, and attorney’s fees; it also disputed the award of moral damages to JII, a corporation, absent evidence that the corporation had a good reputation that was debased.
• Jurisdiction and Factual Misapprehension: In its Reply, petitioner defended the Supreme Court’s jurisdiction over the petition on the ground that the Court of Appeals decision was based on a misapprehension of facts; it insisted that FSDC’s purchase was made pursuant to a public bidding and that, even if SEACOM did not participate, JII would not necessarily have closed the deal because thirty-seven bidders participated, and that no evidence proved the bidding was a fraudulent scheme of SEACOM and FSDC.

• Mixed Questions of Fact and Law: Private respondents contended that the four assigned errors raised mixed questions of fact and law and were therefore beyond the jurisdiction of the Supreme Court, which may take cognizance only of questions of law.
• Public Bidding and JII’s Non-Participation: JII maintained that the bidding set by FSDC on March 24, 1997 was scheduled after the demonstration conducted by JII and after JII informed SEACOM about the farmers’ preference to buy Mitsubishi tillers; JII had nothing to do with the list of thirty-seven bidders and could not be bound by the listing made by SEACOM’s employee, and JII did not participate in the bidding because it was not informed about it.
• Underpricing and Bad Faith: JII argued that the price at which SEACOM sold to FSDC was lower than the price it gave to JII; even if the dealership agreement was not exclusive, it was breached when petitioner in bad faith sold directly to FSDC, with whom JII had previously offered the subject farm equipment.
• Agency Relationship and Sham Bidding: In their Rejoinder, private respondents insisted that an agency relationship existed, citing evidence that credit memos and not cash vouchers were issued to JII by SEACOM for every delivery from November 26, 1976 to December 24, 1978; they maintained that SEACOM torpedoed the emerging deal between JII and FSDC after being informed about it by JII by dealing directly with FSDC at a lower price and, after betraying JII, covering up the deceit by conniving with FSDC to post a sham public bidding.
• Damages: With respect to the awards of moral and exemplary damages, JII sought affirmation of the ruling of the Court of Appeals justifying the awards.

• Bad Faith / Abuse of Rights: Whether SEACOM acted in bad faith when it competed with its own dealer, JII, in the sale of farm machineries to FSDC.
• Liability Despite No Agency: Whether SEACOM may be held liable for damages and unrealized profits even though no agency relationship existed between SEACOM and JII.
• Non-Exclusivity Clause: Whether the non-exclusivity clause in the dealership agreement entitled SEACOM to compete with JII for the FSDC sale.
• Unrealized Profits: Whether JII is entitled to recover unrealized profits for the twenty-one units of Mitsubishi power tillers sold by SEACOM to FSDC.
• Damages: Whether the awards of moral and exemplary damages, attorney’s fees, and costs are proper, and to whom the moral and exemplary damages should be paid.

• Bad Faith / Abuse of Rights: Yes. SEACOM acted in bad faith under Article 19 of the Civil Code when, after learning of JII’s promotional efforts, it directly competed with and undercut its own dealer for the FSDC sale.
• Liability Despite No Agency: Yes. Liability may attach even absent an agency relationship because the controlling basis is abuse of rights under Article 19, not agency.
• Non-Exclusivity Clause: No. The non-exclusivity clause did not entitle SEACOM to compete with its own dealer; it could not exercise its right unjustly or in a manner not in keeping with honesty and good faith.
• Unrealized Profits: Yes. The award of unrealized profits was affirmed because SEACOM’s bad-faith competition deprived JII of the opportunity to gain a clear profit of P85,000.00.
• Damages: Partly yes. The judgment was affirmed as to attorney’s fees and costs, but the P2,000.00 moral and exemplary damages were ordered paid to Tirso Jamandre, not JII, because moral damages are not as a general rule granted to a corporation and Tirso testified to mental anguish.

• Bad Faith / Abuse of Rights: Article 19 requires every person, in the exercise of rights and performance of duties, to act with justice, give everyone his due, and observe honesty and good faith. The principle of abuse of rights departs from the classical theory that “he who uses a right injures no one”; the modern tendency grants indemnity for damages where there is an abuse of rights even if the act is not illicit. The elements are (1) a legal right or duty; (2) exercised in bad faith; and (3) for the sole intent of prejudicing or injuring another. Absence of good faith is essential; good faith is an honest intention to abstain from taking any unconscientious advantage of another, even through the forms or technicalities of law, together with an absence of all information or belief of fact that would render the transaction unconscientious; in business relations, it means good faith as understood by men of affairs. Although Article 19 may have been intended as a mere declaration of principle, it has given rise to rules: where a person exercises rights arbitrarily or unjustly or performs duties not in keeping with honesty and good faith, he opens himself to liability. Here, SEACOM had a legal right under the dealership agreement, but after JII informed it of the promotions for the FSDC sale, requested a discount, and clarified that it was not amenable to SEACOM offering directly to FSDC, SEACOM declined the 50% discount, offered a lesser discount, participated in the bidding, and sold to FSDC at a lower price than JII’s price. JII had conducted demonstrations at its expense for five months and FSDC approved its facilities; Tirso’s testimony that JII was the sole local representative in the demonstrations was unrebutted. The fact that SEACOM may have offered JII a discount effectively translating to 37% of the list price and sold to FSDC at 35% less than the list price did not detract from the fact that it actually competed with its own dealer. The bad faith of SEACOM was thus established.
• Liability Despite No Agency: The Court of Appeals found no agency relationship, but the Supreme Court was convinced that with or without an agency relationship, and notwithstanding the lower court’s error in finding that an agency relationship existed, SEACOM was liable for the unrealized profits JII could have gained had SEACOM not unjustly stepped in and in bad faith unethically intervened. The basis of liability was Article 19’s abuse of rights rule, not agency. Thus, the absence of agency did not shield SEACOM.
• Non-Exclusivity Clause: Even if the dealership agreement was amended to make it non-exclusive, SEACOM could not exercise its right unjustly or in a manner not in keeping with honesty or good faith; otherwise it opened itself to liability under Article 19. The very purpose of the dealership agreement was for SEACOM to have JII as its dealer to sell its products in Capiz and Iloilo. The non-exclusive basis did not entitle SEACOM to join the fray against its dealer; competition in the market as regards the sale of farm equipment was to be between JII, as SEACOM’s dealer, and other companies, not against SEACOM itself. By joining the competition against JII, SEACOM changed the scenario and rendered the dealership agreement inutile to JII’s manifest prejudice.
• Unrealized Profits: The trial court resolved JII’s counterclaim for unrealized profit on the twenty-one units sold by SEACOM to FSDC in JII’s favor based on documentary evidence. JII had informed SEACOM as early as February 1977 of the promotions for the sale of twenty-four contracted units to FSDC and requested a 50% discount and warranty extension; Jamandre clarified that JII was not amenable to SEACOM offering directly to FSDC and asked only for the usual overriding commission because of its considerable investments. SEACOM’s general sales manager declined the 50% discount but offered a “less 30% less 10% up to end March . . . on cash before delivery basis,” granted the warranty extension, and noted JII had units pending with FSDC. With that information, SEACOM dealt directly with FSDC and offered units at a lower price, leaving FSDC no choice but to accept. The price offered by JII was P27,167.00 per unit, while SEACOM sold at P22,867.00 for Model CT 83-2, P21,093.50 for Model CT 83-E, and P18,979.25 for Model CT 534. Exhibit “N” confirmed both SEACOM and Jamandre participated in the bidding, but SEACOM was awarded the contract directly from Manila. The Court found no cogent reason to overturn the factual finding of the two courts that SEACOM joined the bidding after being informed that JII was already promoting the sales to FSDC. The award for unrealized profits was accordingly affirmed.
• Damages: The Court of Appeals noted that the trial court failed to specify to which of the two appellees the award for moral and exemplary damages was granted. Moral damages are not as a general rule granted to a corporation. Tirso Jamandre was the one who testified on his feeling very aggrieved and on his mental anguish and sleepless nights thinking of how SEACOM “dealt with us behind (our) backs.” The award should therefore go to defendant Jamandre, President of JII. The judgment appealed from was affirmed with that modification; costs were against appellant.

• Abuse of Rights under Article 19 — Article 19 of the Civil Code provides that every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. The elements of an abuse of rights are: (1) there is a legal right or duty; (2) which is exercised in bad faith; and (3) for the sole intent of prejudicing or injuring another. The Court applied this doctrine against SEACOM, which had a legal right under the dealership agreement but exercised it in bad faith by competing with and undercutting its own dealer after learning of JII’s promotional efforts.
• Good Faith in Business Relations — Good faith is an honest intention to abstain from taking any unconscientious advantage of another, even through the forms or technicalities of the law, together with an absence of all information or belief of fact which would render the transaction unconscientious; in business relations, it means good faith as understood by men of affairs. The Court found that SEACOM’s direct dealing with FSDC at a lower price, after being informed of JII’s efforts and investments, was not in keeping with good faith.
• Non-Exclusive Dealership Does Not License Unfair Competition Against the Dealer — Even if a dealership agreement is non-exclusive, the manufacturer or distributor may not exercise its right unjustly or in a manner not in keeping with honesty or good faith; otherwise it opens itself to liability under the abuse of right rule embodied in Article 19. The Court held that SEACOM could not use the non-exclusivity clause to justify competing with its own dealer for the same FSDC sale.
• Moral Damages Not Generally Granted to Corporations — As a general rule, moral damages are not granted to a corporation. Where the trial court failed to specify to which appellee the award of moral and exemplary damages was granted, and the individual officer testified to mental anguish and sleepless nights, the award should go to the individual officer. The Court accordingly modified the award to be paid to Tirso Jamandre, President of JII.
• Equity and Justice above Strict Legalism — Article 19, together with the succeeding article on human relations, was intended to embody basic principles for the rightful relationship between human beings and for the stability of the social order; what is sought to be written into the law is the pervading principle of equity and justice above strict legalism. The Court invoked this principle to prevent SEACOM from using the non-exclusivity clause as a strict legal defense to defeat JII’s equitable claim for unrealized profits.

• “The elements of an abuse of rights under Article 19 are: (1) there is a legal right or duty; (2) which is exercised in bad faith; (3) for the sole intent of prejudicing or injuring another.” — This passage states the Court’s canonical formulation of the elements of abuse of rights under Article 19, which served as the doctrinal basis for SEACOM’s liability.
• “Even if the dealership agreement was amended to make it on a non-exclusive basis, SEACOM may not exercise its right unjustly or in a manner that is not in keeping with honesty or good faith; otherwise it opens itself to liability under the abuse of right rule embodied in Article 19 of the Civil Code above-quoted.” — This is the ratio decidendi on the non-exclusivity clause: a non-exclusive dealership does not authorize the manufacturer to compete unfairly with its own dealer.
• “Clearly, the bad faith of SEACOM was established. By appointing as a dealer of its agricultural equipment, SEACOM recognized the role and undertaking of JII to promote and sell said equipment.” — This passage explains why SEACOM’s participation in the bidding after JII’s promotional efforts constituted bad faith.
• “However, in view of the fact that moral damages are not as a general rule granted to a corporation, and that Tirso Jamandre was the one who testified on his feeling very aggrieved and on his mental anguish and sleepless nights thinking of how SEACOM "dealt with us behind (our) backs", the award should go to defendant Jamandre, President of JII.” — This passage supports the modification of the award of moral and exemplary damages from JII to Tirso Jamandre.

• Philippine National Bank vs. Court of Appeals, 83 SCRA 237 — Cited as authority for the rule that Article 19, though a declaration of principle, has given rise to liability where rights are exercised arbitrarily or unjustly or duties are performed not in keeping with honesty and good faith.
• Velayo vs. Shell Co., 100 Phil. 186 — Cited for the proposition that Article 19 may have been intended as a mere declaration of principle.
• Sanchez vs. Rigos, 45 SCRA 368 — Cited in support of the rule that a person who exercises his rights arbitrarily or unjustly, or performs his duties contrary to honesty and good faith, opens himself to liability.
• Llorente vs. Sandiganbayan, 202 SCRA 309 — Cited alongside Sanchez and PNB for the same rule on liability arising from the unjust exercise of rights.

• Article 19, Civil Code — “Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due and observe honesty and good faith.” The Court applied this provision because SEACOM’s non-exclusive right to sell was exercised in bad faith by competing with its own dealer after learning of JII’s promotional efforts, making SEACOM liable for unrealized profits and damages.
• Succeeding Article on Human Relations, Civil Code (referred to but not numbered in the text) — The Court stated that Article 19, together with the succeeding article on human relations, was intended to embody basic principles for the rightful relationship between human beings and for the stability of the social order, and that what is sought is the pervading principle of equity and justice above strict legalism.

Melo, Vitug, Panganiban, and Purisima, JJ., concur.