Solar Harvest, Inc. vs. Davao Corrugated Carton Corporation

In reciprocal obligations where the period for fulfillment is fixed, a prior demand upon the obligor is necessary before they can be considered in default and before a cause of action for rescission accrues.

In early 1998, petitioner Solar Harvest, Inc. ordered 36,500 corrugated carton boxes from respondent Davao Corrugated Carton Corporation for its banana export business, paying US$40,150.00 upfront. Petitioner claimed the agreement required delivery within 30 days, while respondent asserted the agreement was for pick-up and that the boxes were completed by April 3, 1998. Petitioner never retrieved the boxes because the ship intended to carry the bananas did not arrive.

• The Agreement: In the first quarter of 1998, petitioner ordered 36,500 boxes from respondent at US$1.10 each. The agreement was not reduced to writing. Petitioner deposited US$40,150.00 as full payment.
• Petitioner's Position: Petitioner alleged respondent was obligated to deliver the boxes within 30 days of payment but failed to manufacture and deliver them. Petitioner claimed to have made follow-ups, seeing only blank samples, and eventually canceled the order, demanding a refund on January 3, 2001.
• Respondent's Position: Respondent maintained the initial 36,500 boxes were completed by April 3, 1998, and that petitioner made an additional order of 24,000 boxes (14,000 of which were manufactured). The agreement was for petitioner to pick up the boxes within 30 days of completion. Petitioner failed to do so because its banana shipment to China fell through.
• Trial Evidence: Petitioner's sole witness, Que, admitted he did not personally place the order with respondent's president, did not give authority to deliver the boxes to TADECO, and only made "follow-ups" rather than formal demands. Respondent's witnesses testified the boxes were manufactured and that Que visited the factory to get samples. Respondent sold 5,000 boxes as rejects.

• Failure to Manufacture: Petitioner argued respondent did not completely manufacture the ordered boxes.
• Breach of Delivery Obligation: Petitioner maintained respondent was obliged to deliver the boxes to TADECO and committed a breach by failing to do so, justifying rescission and reimbursement.

• Completion of Obligation: Respondent countered that it fully manufactured the initial order and part of a second order.
• Petitioner's Fault: Respondent argued the agreement was for petitioner to pick up the boxes, and petitioner failed to do so because its ship did not arrive.
• Counterclaim: Respondent sought payment for the balance of the second order, storage fees, and damages.

• Cause of Action for Rescission: Whether petitioner possesses a cause of action for rescission under Article 1191 of the Civil Code absent a prior demand for fulfillment.
• Breach of Contract: Whether respondent committed a breach of contract by failing to manufacture and deliver the boxes.

• Cause of Action for Rescission: No cause of action for rescission accrued. Petitioner failed to make a prior demand for fulfillment, which is necessary to put the obligor in default in reciprocal obligations with a fixed period. A mere "follow-up" does not qualify as a demand for fulfillment.
• Breach of Contract: No breach was committed by respondent. The factual findings of the lower courts, supported by evidence, established that the boxes were manufactured and the agreement was for petitioner to pick them up. Petitioner's witness lacked competence to testify on the delivery terms and admitted not giving respondent authority to deliver to TADECO.

• Rescission in Reciprocal Obligations — The right to rescind a contract arises once the other party defaults in the performance of their obligation. Default, in turn, requires a judicial or extrajudicial demand for fulfillment, except in specific exceptions under Article 1169. In reciprocal obligations with a fixed period for performance, demand upon the obligor is still necessary before they can be considered in default and before a cause of action for rescission accrues.

• "Thus, even in reciprocal obligations, if the period for the fulfillment of the obligation is fixed, demand upon the obligee is still necessary before the obligor can be considered in default and before a cause of action for rescission will accrue."
• "Without a previous demand for the fulfillment of the obligation, petitioner would not have a cause of action for rescission against respondent as the latter would not yet be considered in breach of its contractual obligation."

• Omengan v. Philippine National Bank, G.R. No. 161319, January 23, 2007 — Cited as controlling precedent for the rule that the Court in petitions for review under Rule 45 limits its inquiry to questions of law and is not a trier of facts.
• Filipinas (Pre-Fab Bldg.) Systems, Inc. v. MRT Development Corporation, G.R. Nos. 167829-30, November 13, 2007 — Followed for the doctrine that factual findings of the trial court, especially when reiterated by the Court of Appeals, are given great respect and are considered final.

• Article 1191, Civil Code — Governs the power to rescind obligations in reciprocal contracts in case of non-compliance. Applied to determine that rescission requires default by the obligor, which was absent here due to lack of demand.
• Article 1169, Civil Code — Defines when delay (mora) occurs, requiring a judicial or extrajudicial demand unless exceptions apply. Applied to establish that in reciprocal obligations with a fixed period, demand is necessary to constitute delay and trigger the right to rescind.

Antonio T. Carpio, Diosdado M. Peralta, Roberto A. Abad, Jose Catral Mendoza