Jardine Davies Inc. vs. Far East Mills Supply Corporation

A contract is perfected upon the offeree's acceptance of an offer, and enumerated "terms and conditions" that prescribe the manner of performance do not constitute conditions on the perfection of the contract. Where a letter confirms the award of a contract and recites conditions relating to performance (such as posting bonds, completion timelines, and warranties), those conditions affect the execution of obligations, not the birth of the contract itself. A party who unilaterally cancels a perfected contract acts in bad faith and is liable for breach.

In 1992, the Philippines experienced a severe power crisis causing disruptions to business operations. Pure Foods Corporation, to mitigate losses from power failures, sought to install two 1,500 KW generator sets at its processed meats plant in Barangay San Roque, Marikina City. The procurement process utilized competitive bidding.

• The Bidding Process: Sometime in November 1992, Pure Foods conducted a bidding for the supply and installation of two 1,500 KW generator sets at its Marikina food processing plant. Eight prospective bidders attended the pre-bidding conference where conditions and specifications were discussed. Only three submitted bid proposals with the required 5% bid bonds: FEMSCO, Monark, and Advance Power.

• The Award to FEMSCO: On 12 December 1992, Pure Foods sent a letter to FEMSCO President Alfonso Po confirming the award of the contract to FEMSCO for a lump sum amount of P6,137,293.00 (VAT included), based on FEMSCO's proposal No. PC 28-92 dated 20 November 1992. The letter enumerated six "basic terms and conditions" covering progress billing and retention, scope of work, requirement for brand new materials, a 20-working-day completion period with a penalty for delay, posting of a performance bond (30% of contract price) and procurement of an all-risk insurance policy, and a one-year warranty. The letter stated that a formal contract would be signed once finalized.

• FEMSCO's Compliance: Immediately upon receiving the award letter, FEMSCO submitted the required performance bond in the amount of P1,841,187.90 and a contractor's all-risk insurance policy in the amount of P6,137,293.00. Pure Foods, through Vice President Benedicto G. Tope, acknowledged receipt of these documents in a letter dated 18 December 1992. FEMSCO also made arrangements with its principal and began purchasing the necessary materials for the project. Pure Foods returned FEMSCO's Bidder's Bond of P1,000,000.00.

• Unilateral Cancellation: On 22 December 1992, Pure Foods, through Senior Vice President Teodoro L. Dimayuga, sent a letter unilaterally canceling the award, stating that "significant factors were uncovered and brought to (their) attention which dictate (the) cancellation and warrant a total review and re-bid of (the) project."

• FEMSCO's Protest and Re-Award to Jardine: FEMSCO protested the cancellation and sought a meeting with Pure Foods. Before the matter could be resolved, on 26 March 1993, Pure Foods awarded the project to Jardine Nell, a division of Jardine Davies Inc., which had not participated in the original bidding. FEMSCO demanded that Pure Foods honor its contract and that Jardine cease and desist from delivering and installing the generators. Both demands went unheeded.

• Trial Court Findings: The trial court found that Pure Foods acted in bad faith by unilaterally canceling the contract and subsequently contracting with Jardine, describing it as "a flagrant violation of the express provisions of the law" contrary to fair and just dealings. The court dismissed the complaint against Jardine, finding no hard evidence of underhanded conduct — "mere suspicions and suppositions would not stand up very well in a court of law."

• Court of Appeals Findings: The appellate court affirmed the trial court's findings against Pure Foods and further reversed the dismissal as to Jardine, concluding that Jardine had induced Pure Foods to violate its contract with FEMSCO, thus warranting an award of moral damages.

• Pure Foods — No Perfected Contract: Pure Foods maintained that its 12 December 1992 letter was not an acceptance of FEMSCO's bid proposal but a "qualified acceptance constituting a counter-offer" that required FEMSCO's express conforme. Since FEMSCO never provided a conforme, Pure Foods was within its right to revoke the counter-offer, and no contract was perfected.

• Pure Foods — Good Faith: Pure Foods argued that it acted in good faith, believing no contract had been perfected, and therefore moral and exemplary damages were unwarranted.

• Pure Foods — Absence of Purchase Order: Pure Foods contended that the absence of a purchase order (PO) indicated that no binding contract had been concluded.

• Jardine — Lack of Prior Knowledge or Inducement: Jardine asserted that the records contained no evidence showing it had prior knowledge of a contract between Pure Foods and FEMSCO, nor that it induced Pure Foods to violate any such contract.

• Jardine — Moral Damages Improper: Jardine argued that FEMSCO, as an artificial person, is not entitled to moral damages. Alternatively, the award of P2,000,000.00 was extremely excessive.

• FEMSCO — Perfected Contract: Respondent FEMSCO argued that Pure Foods' 12 December 1992 letter constituted an unequivocal acceptance of its bid proposal, and its submission of the performance bond and all-risk insurance demonstrated its consent and compliance, thereby perfecting the contract.

• FEMSCO — Bad Faith and Damages: FEMSCO maintained that Pure Foods' unilateral cancellation and subsequent award to a non-bidder constituted bad faith, entitling it to actual, moral, and exemplary damages.

• FEMSCO — Jardine's Tortious Interference: FEMSCO argued that Jardine induced Pure Foods to breach its contract with FEMSCO, pointing to the similarity in the design submitted by Jardine and the lower quotation tendered as circumstantial evidence.

• Perfection of Contract: Whether a perfected contract existed between Pure Foods and FEMSCO, given the language of the 12 December 1992 letter and the absence of a formal signed contract or conforme.

• Bad Faith and Damages Against Pure Foods: Whether Pure Foods acted in bad faith in unilaterally canceling the award, and whether the award of actual, moral, and exemplary damages was proper.

• Tortious Interference by Jardine: Whether there was sufficient evidence to hold Jardine liable for inducing Pure Foods to violate its contract with FEMSCO.

• Perfection of Contract: A perfected contract existed between Pure Foods and FEMSCO. The 12 December 1992 letter, with its categorical language — "This will confirm that Pure Foods has awarded to your firm (FEMSCO) the project" — constituted an unconditional acceptance of FEMSCO's offer. The six "basic terms and conditions" enumerated in the letter were not conditions on the perfection of the contract but rather prescriptions on the performance of the obligation. They related to payment schemes, scope of work, timelines, and bonding requirements — matters of execution, not consent. The distinction between a condition imposed on perfection (failure of which prevents a contract from arising) and a condition imposed on performance (failure of which gives the other party remedies) was applied, citing Babasa v. Court of Appeals. Even assuming the letter were a conditional counter-offer, FEMSCO's submission of the performance bond and all-risk insurance — acts expressly called for in the letter — constituted implied acceptance. Pure Foods' acknowledgment of these documents and its return of the bidder's bond manifested its knowledge of FEMSCO's consent. The subsequent execution of a formal contract or conforme would have been a mere surplusage. The cancellation letter's own language — "canceling the award" — presupposed the existence of an award to cancel.

• Bad Faith and Damages Against Pure Foods: Pure Foods acted in bad faith. Its unilateral cancellation of a perfected contract and subsequent award of the project to a non-bidder, Jardine, constituted a flagrant violation of law and fair dealing. The discussion of price two months after the award letter was merely pressure to renegotiate downward. The award of moral damages to a corporation was sustained, as FEMSCO's reputation was tarnished when it had already ordered equipment from suppliers on account of the urgency of the project. However, the moral damages were reduced from P2,000,000.00 to P1,000,000.00, and exemplary damages from P1,000,000.00 (as awarded by the Court of Appeals) to P100,000.00, on the principle that damages must not unjustly enrich the recipient. The trial court's awards of P2,300,000.00 for engineering services, US$14,000.00 or its peso equivalent, and P900,000.00 as contractor's mark-up, plus 20% attorney's fees, were affirmed.

• Tortious Interference by Jardine: The evidence was insufficient to hold Jardine liable for inducing breach of contract. The finding that Jardine and Pure Foods "connived to deceive" FEMSCO was not supported by specific evidence. The similarity in design between the Jardine and FEMSCO proposals and Jardine's lower quotation were insufficient to prove inducement or prior knowledge of the FEMSCO contract. The trial court's dismissal of the complaint against Jardine on demurrer to evidence was therefore correct; the Court of Appeals' reversal on this point was set aside.

• Condition on Perfection vs. Condition on Performance — A condition imposed on the perfection of a contract is one without which the contract does not arise; its non-fulfillment prevents the contract from coming into existence. A condition imposed on the performance of an obligation relates to the manner, time, or circumstances of execution; its non-fulfillment gives the aggrieved party options or remedies (such as specific performance, rescission, or damages) but does not negate the contract's existence. The Court distinguished these by examining whether the enumerated terms in the acceptance letter related to the birth of the contractual tie (consent, object, cause) or to the implementation of obligations already born.

• Perfection of Contracts by Consent (Art. 1315, 1318, 1319, Civil Code) — Contracts are perfected by mere consent, from which moment the parties are bound to the fulfillment of what has been expressly stipulated and all consequences in keeping with good faith, usage, and law. The acceptance must be absolute and unqualified. Acceptance may be express or implied (Art. 1320). An advertisement for bidders is merely an invitation to make proposals (Art. 1326); the bids are offers, and the reply to bids constitutes acceptance or rejection.

• Moral Damages to a Corporation — A corporation may recover moral damages where its reputation has been besmirched. Citing Asset Privatization Trust v. Court of Appeals and Mambulao Lumber Co. v. Philippine National Bank, the Court recognized that a corporate entity's business reputation, when tarnished by a breach committed in bad faith, warrants moral damages. The award, however, must not enrich the recipient.

• "The tenor of the letter, i.e., 'This will confirm that Pure Foods has awarded to your firm (FEMSCO) the project,' could not be more categorical. While the same letter enumerated certain 'basic terms and conditions,' these conditions were imposed on the performance of the obligation rather than on the perfection of the contract."

• "In Babasa v. Court of Appeals we distinguished between a condition imposed on the perfection of a contract and a condition imposed merely on the performance of an obligation. While failure to comply with the first condition results in the failure of a contract, failure to comply with the second merely gives the other party options and/or remedies to protect his interests."

• "For, there can be no cancellation if the contract was not perfected in the first place."

• "This, to the Court's mind, is a flagrant violation of the express provisions of the law and is contrary to fair and just dealings to which every man is due."

• Babasa v. Court of Appeals, G.R. No. 124045, 21 May 1998, 290 SCRA 532 — The controlling precedent that distinguishes between conditions imposed on the perfection of a contract and those imposed on the performance of an obligation. The Court relied on this doctrine to classify the enumerated terms in Pure Foods' acceptance letter as performance conditions.

• Asset Privatization Trust v. Court of Appeals, G.R. No. 121171, 29 December 1998, 300 SCRA 579 — Cited as authority for the proposition that a corporation may be awarded moral damages where its business reputation has been tarnished, supporting the award to FEMSCO.

• Article 1315, Civil Code — Contracts bind both contracting parties and have the force of law between them; they must be complied with in good faith. Applied to hold Pure Foods bound to the contract with FEMSCO.

• Article 1318, Civil Code — Enumerates the requisites of a valid contract: consent, object certain, and cause. The issue centered on consent; the other requisites were undisputed.

• Article 1319, Civil Code — Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause. Acceptance must be absolute. Applied in determining that Pure Foods' letter was an absolute acceptance.

• Article 1320, Civil Code — Acceptance may be express or implied. Applied to treat FEMSCO's submission of the performance bond and all-risk insurance as implied acceptance.

• Article 1326, Civil Code — Advertisements for bidders are simply invitations to make proposals. Applied to classify Pure Foods' bidding terms as the invitation, FEMSCO's bid as the offer, and Pure Foods' reply as the acceptance.

Mendoza, Quisumbing, Buena, and De Leon, Jr., JJ., concurred. No separate concurring opinions were written.

N/A — The decision was unanimous among the participating justices of the Second Division.