Yu Tek and Co. vs. Basilio Gonzales

A contract for the delivery of a specified quantity of a generic commodity, such as 600 piculs of sugar, is an executory promise of sale, not a perfected sale, where no particular lot has been segregated or appropriated to the contract; parol evidence is inadmissible to add a condition that the goods are to be taken from the seller's own crop; and a stipulated sum payable upon breach may be recovered as liquidated damages.

Yu Tek and Co. advanced P3,000 to Basilio Gonzales under a written contract, Exhibit A, by which Gonzales bound himself to deliver 600 piculs of first- and second-grade sugar within a fixed three-month period. The contract also provided that failure to deliver would rescind the contract and obligate Gonzales to return the P3,000 plus P1,200 as indemnity for loss and damages. The dispute required application of the Civil Code provisions on perfected sale, particularly articles 1450 and 1452, and the rule excluding parol evidence to vary a written contract.

Under a written contract, Exhibit A, Basilio Gonzales acknowledged receipt of P3,000 Philippine currency from Yu Tek and Co. and, in consideration of that sum, obligated himself to deliver 600 piculs of first- and second-grade sugar, according to the result of polarization, within three months beginning January 1, 1912 and ending March 31, 1912. The contract required delivery to Yu Tek and Co. at any place within the municipality of Santa Rosa that Yu Tek and Co. or its representative might designate. It further provided that if Gonzales failed to deliver the 600 piculs within the three-month period, the contract would be rescinded and he would be obligated to return the P3,000 received and also pay P1,200 by way of indemnity for loss and damages. The decision refers to this indemnity clause as paragraph 4.

Yu Tek and Co. proved that no sugar had been delivered under the contract and that it had not been able to recover the P3,000. It prayed for judgment for the P3,000 and, in addition, for P1,200 under paragraph 4. The trial court rendered judgment for P3,000 only, and both parties appealed.

Gonzales alleged that the trial court erred in refusing to permit parol evidence showing that the parties intended the sugar to be secured from the crop he raised on his plantation. He claimed that he was unable to fulfill the contract by reason of the almost total failure of his crop. The written contract contained no intimation that the sugar was to be raised by Gonzales, and he did not limit his obligation to his own crop.

The trial court's opinion, as described in the decision, appeared to be based on the proposition that the sugar to be delivered was that which Gonzales expected to obtain from his own hacienda and that dry weather destroyed his growing cane, so that he could not comply with his part of the contract. The trial court nevertheless held that these conditions did not absolve him from returning the money he had received, and it treated the P1,200 clause as a limitation upon the amount of damages recoverable rather than as liquidated damages.

• Parol Evidence: Whether parol evidence was admissible to show that the sugar was to be secured from the crop raised by defendant on his plantation, thereby adding a condition not stated in the written contract.
• Perfected Sale and Loss of Thing Due: Whether the contract was a perfected sale of a specific thing, such that the failure of defendant's crop relieved him from delivering the sugar under articles 1452, 1096, and 1182 of the Civil Code.
• Liquidated Damages: Whether plaintiff was entitled to recover the additional P1,200 under paragraph 4 of the contract as liquidated damages.

• Parol Evidence: No. The written contract contained no clause limiting the sugar to defendant's own crop, and parol evidence cannot incorporate additional contemporaneous conditions not mentioned in the writing absent fraud or mistake.
• Perfected Sale and Loss of Thing Due: No. The contract was merely an executory agreement or promise of sale, not a perfected sale, because no specific lot of sugar had been segregated or appropriated; articles 1452, 1096, and 1182 were therefore inapplicable.
• Liquidated Damages: Yes. The P1,200 clause was clear liquidated damages, not a mere limitation on damages, and was enforceable under article 1255 of the Civil Code.

• Parol Evidence: The rule excluding parol evidence to add to or vary the terms of a written contract was decidedly applicable. The contract contained no intimation that the sugar was to be raised by Gonzales. Parties are presumed to have reduced to writing all essential conditions. Parol evidence may explain the meaning of written contracts, but it cannot incorporate additional contemporaneous conditions not mentioned in the writing unless there has been fraud or mistake. The Court cited Pastor vs. Gaspar, where parol evidence was declined to show that a party to a written contract was to become a partner instead of a creditor, and Eveland vs. Eastern Mining Co., where parol evidence was declined to show that salary payment was contingent upon the plaintiff's employment benefiting the defendant company. Here, Gonzales undertook to deliver a specified quantity of sugar within a specified time; the contract placed no restriction on how he was to obtain it. He was at liberty to purchase it on the market or raise it himself. That he owned a plantation and expected to raise the sugar did not limit his obligation to his own crop. The condition sought to be added by parol evidence could not be considered; the rights of the parties had to be determined by the writing itself.

• Perfected Sale and Loss of Thing Due: Gonzales's second contention assumed that the contract was limited to sugar from his own plantation, that it was a perfected sale, and that the failure of his crop relieved him by loss of the thing due under articles 1452, 1096, and 1182. The argument was faulty because there was no perfected sale. Article 1450 provides that a sale is perfected between vendor and vendee and binding on both if they have agreed upon the thing which is the object of the contract and upon the price, even when neither has been delivered. Article 1452 provides that injury to or profit of the thing sold shall, after the contract has been perfected, be governed by articles 1096 and 1182. The Court had consistently held that there is a perfected sale with regard to the "thing" whenever the article of sale has been physically segregated from all other articles. In McCullough vs. Aenlle and Co., a particular tobacco factory with its contents was held sold under a contract that did not provide for delivery of the price or the thing until a future time. In Barretto vs. Santa Marina, specified shares of stock in a tobacco factory were held sold by a contract that deferred delivery of both the price and the stock until the stock had been appraised by an inventory of the entire assets of the company. In Borromeo vs. Franco, a sale of a specific house was held perfected between vendor and vendee although delivery of the price was withheld until the necessary documents of ownership were prepared by the vendee. In Tan Leonco vs. Go Inqui, hemp had been delivered into the defendant's warehouse; the defendant drew a bill of exchange for the agreed price; before the bill was presented for payment, the hemp was destroyed; because the hemp had already been delivered, title had passed and the loss was the vendee's. The case at bar was different. Gonzales undertook to sell 600 piculs of sugar of the first and second classes. Sugar is a staple commodity; for purposes of sale its bulk is weighed, the customary unit being a picul. There was no delivery under the contract. If called upon to designate the article sold, Gonzales could only say that it was "sugar"; he could only use this generic name for the thing sold. There was no appropriation of any particular lot of sugar. Neither party could point to any specific quantity and say, "This is the article which was the subject of our contract." The Louisiana cases cited by the Court confirmed this position. In Witt Shoe Co. vs. Seegars and Co., a contract by sample for shoes, part not manufactured and the rest incorporated in the plaintiff's stock in Lynchburg, Va., was an executory contract of sale because it was impossible for the parties to have agreed upon the specific objects to which title was to pass; identification and appropriation were necessary to make a sale. State vs. Shields held that receiving an order for a quantity of goods of a kind and at a price agreed on, to be supplied from a general stock warehoused at another place, merely entered into an executory contract for the sale of goods, which did not transfer title to any determinate object and became effective only when specific goods were thereafter appropriated to the contract; absent a more specific agreement, appropriation took place when the goods ordered were delivered to the public carriers at the place from which they were to be shipped, consigned to the person who gave the order. Larue and Prevost vs. Rugely, Blair and Co. involved a contract for the sale by weight of a lot of cotton; the defendants had received $3,000 on account of the price and had given an order for delivery, which had been presented to the purchaser and recognized by the press in which the cotton was stored, but the cotton was destroyed by fire before it was weighed; it was held that it was still at the seller's risk and that the buyer was entitled to recover the $3,000 paid on account of the price. The Court concluded that the contract in the case at bar was merely an executory agreement, a promise of sale and not a sale. Because there was no perfected sale, articles 1452, 1096, and 1182 were not applicable. Gonzales having defaulted in his engagement, Yu Tek and Co. was entitled to recover the P3,000 advanced, and that portion of the judgment was affirmed.

• Liquidated Damages: Yu Tek and Co. appealed from the trial court's judgment on the ground that it was entitled to recover the additional P1,200 under paragraph 4. The trial court held that paragraph 4 was simply a limitation upon the amount of damages recoverable and not liquidated damages as contemplated by law. It also stated that in any event Gonzales was prevented from fulfilling the contract by a condition over which he had no control, but that these conditions were not sufficient to absolve him from returning the money he received. That opinion appeared based on the proposition that the sugar to be delivered was that which Gonzales expected to obtain from his own hacienda and that dry weather destroyed his growing cane. This view was erroneous because, under the contract, Gonzales was not limited to his growth crop to make delivery. He agreed to deliver the sugar, and nothing was said in the contract about where he was to get it. The Court found a clear case of liquidated damages. The contract plainly stated that if Gonzales failed to deliver the 600 piculs of sugar within the time agreed on, the contract would be rescinded and he would be obliged to return the P3,000 and pay P1,200 by way of indemnity for loss and damages. There was no doubt about the meaning of this language or the intention of the parties, and no room for interpretation or construction. Under article 1255 of the Civil Code, contracting parties are free to execute the contracts they may consider suitable, provided they are not in contravention of law, morals, or public order. Nothing in the contract was opposed to these principles. The judgment was therefore modified by allowing recovery of P1,200 under paragraph 4.

• Perfected Sale of a Specific Thing vs. Executory Sale of Generic Goods — Under Article 1450, a sale is perfected when the parties agree upon the thing and the price, even if neither has been delivered. The Court held that for a sale to be perfected with regard to the "thing," the article of sale must have been physically segregated from all other articles or otherwise appropriated to the contract. Where the object is a generic commodity such as 600 piculs of sugar and no particular lot has been set apart, the parties have not agreed upon a specific thing; the contract is merely an executory agreement or promise of sale. Because no perfected sale existed, the provisions on loss of the thing due (Articles 1452, 1096, and 1182) did not apply, and the seller remained liable for the advance.

• Parol Evidence Rule — A written contract is presumed to contain all the essential conditions agreed upon by the parties. Parol evidence may be admitted to explain the meaning of a written contract, but it cannot be used to incorporate additional contemporaneous conditions not mentioned in the writing, unless there has been fraud or mistake. The Court applied this rule to reject Gonzales's attempt to show that the sugar was to come exclusively from his own plantation, since the written contract contained no such limitation.

• Liquidated Damages — A stipulated sum that the parties agree to pay upon breach may be recovered as liquidated damages when the contract plainly expresses that intention. Under Article 1255 of the Civil Code, contracting parties are free to execute contracts they consider suitable, provided they do not contravene law, morals, or public order. The Court held that the P1,200 clause was not a mere limitation on damages but a valid liquidated damages stipulation, and it was recoverable upon Gonzales's failure to deliver the sugar.

• "We conclude that the contract in the case at bar was merely an executory agreement; a promise of sale and not a sale." — This is the Court's core conclusion on the nature of the contract, distinguishing a perfected sale from an executory sale.
• "There is not the slightest intimation in the contract that the sugar was to be raised by the defendant. Parties are presumed to have reduced to writing all the essential conditions of their contract." — This states the parol evidence rationale for rejecting Gonzales's attempt to add a condition not found in the writing.
• "This court has consistently held that there is a perfected sale with regard to the "thing" whenever the article of sale has been physically segregated from all other articles" — This articulates the segregation or appropriation test for determining whether a sale of a thing has been perfected.
• "The contract plainly states that if the defendant fails to deliver the 600 piculs of sugar within the time agreed on, the contract will be rescinded and he will be obliged to return the P3,000 and pay the sum of P1,200 by way of indemnity for loss and damages." — This supports the holding that the P1,200 clause was enforceable as liquidated damages.

• Pastor vs. Gaspar, 2 Phil. Rep., 592 — Cited for the parol evidence rule; the Court declined to allow parol evidence showing that a party to a written contract was to become a partner instead of a creditor.
• Eveland vs. Eastern Mining Co., 14 Phil. Rep., 509 — Cited for the parol evidence rule; the Court declined to receive parol evidence that salary payment was contingent upon the plaintiff's employment benefiting the defendant company.
• McCullough vs. Aenlle and Co., 3 Phil. Rep., 295 — Cited for the rule that a perfected sale exists where the article sold has been physically segregated; a particular tobacco factory with its contents was held sold.
• Barretto vs. Santa Marina, 26 Phil. Rep., 200 — Cited as an example of a perfected sale where specified shares of stock in a tobacco factory were held sold by a contract deferring delivery until appraisal.
• Borromeo vs. Franco, 5 Phil. Rep., 49 — Cited as an example of a perfected sale of a specific house although delivery of the price was withheld until documents of ownership were prepared.
• Tan Leonco vs. Go Inqui, 8 Phil. Rep., 531 — Cited for the rule that where hemp had been delivered into a warehouse and a bill drawn for the price, title had passed and the loss was the vendee's.
• Witt Shoe Co. vs. Seegars and Co., 122 La., 145; 47 Sou., 444 — Cited as a Louisiana case holding that a contract by sample for shoes not yet manufactured or still in stock was an executory contract of sale; title passed only when specific goods were appropriated.
• State vs. Shields, et al., 110 La., 547, 34 Sou., 673 — Cited in Witt Shoe Co. for the rule that an order for goods from a general stock is an executory contract and title passes only when specific goods are appropriated.
• Larue and Prevost vs. Rugely, Blair and Co., 10 La. Ann., 242 — Cited as a Louisiana case holding that cotton destroyed before it was weighed remained at the seller's risk, and the buyer was entitled to recover the amount paid.

• Article 1450, Civil Code — Defines a perfected sale as one binding on both parties if they have agreed upon the thing which is the object of the contract and upon the price, even when neither has been delivered. The Court used this provision to test whether there was agreement upon a specific thing; it held the requirement was not satisfied because no particular lot of sugar had been segregated or appropriated.
• Article 1452, Civil Code — Provides that injury to or profit of the thing sold shall, after the contract has been perfected, be governed by articles 1096 and 1182. The Court held it inapplicable because there was no perfected sale.
• Article 1096, Civil Code — Cited by Gonzales as a basis for relief by loss of the thing due. The Court held it inapplicable because there was no perfected sale.
• Article 1182, Civil Code — Cited by Gonzales as a basis for relief by loss of the thing due. The Court held it inapplicable because there was no perfected sale.
• Article 1255, Civil Code — Provides that contracting parties are free to execute the contracts they may consider suitable, provided they are not in contravention of law, morals, or public order. The Court used this provision to uphold the P1,200 liquidated damages clause.

Arellano, C.J., Torres, Carson, and Araullo, JJ.

• Johnson, J. — The provided text records only that Johnson, J., dissented; it does not state the grounds or reasoning for the dissent.