The Supreme Court clarified the responsibilities arising from contractual obligations concerning exclusive manufacturing rights. The Court found that S.V. More Pharma Corporation breached its contract with Drugmakers Laboratories, Inc. by contracting a third party to manufacture pharmaceutical products that Drugmakers had the exclusive right to produce. Although the breach was established, the Court adjusted the damages awarded, replacing the initial award for actual damages with temperate damages, due to the speculative nature of the projected losses. This case underscores the importance of adhering to contractual terms and the remedies available when such terms are violated, while also illustrating the need for concrete evidence when claiming damages for lost profits. In essence, the ruling reinforces the principle that exclusivity clauses in contracts must be respected, and breaches will result in liability, though damages must be proven with reasonable certainty.

Pharmaceutical Promises: When Exclusive Rights Meet Contractual Reality

This case centers on a dispute between S.V. More Pharma Corporation (S.V. More) and Drugmakers Laboratories, Inc. (Drugmakers) concerning the exclusive manufacturing rights of certain pharmaceutical products. The core issue revolves around whether S.V. More breached its contractual obligations by engaging another manufacturer, Hizon Laboratories, Inc., to produce products that Drugmakers claimed it had the sole right to manufacture. This dispute arose after a series of agreements, including a Contract Manufacturing Agreement (CMA), an Agreement related to the ownership of E.A. Northam Pharma Corporation, and a Deed of Sale/Assignment, all of which appeared to recognize Drugmakers’ exclusive manufacturing status. The legal question at the heart of the matter is whether S.V. More violated these agreements and, if so, what damages are appropriate.

The series of contracts laid the groundwork for the dispute. A key element was the Contract Manufacturing Agreement (CMA) between Drugmakers and S.V. More, which stipulated that Drugmakers’ written consent was required before S.V. More could contract with another manufacturer. Furthermore, the Agreement concerning E.A. Northam, the distributor of the pharmaceuticals, reinforced Drugmakers’ role as the exclusive manufacturer. This was explicitly stated in the provision that all enumerated products “will continue to be exclusively manufactured by Drugmakers Laboratories, Inc.” as long as Eliezer V. Del Mundo maintained control of Drugmakers. This agreement was further solidified by the Deed of Sale/Assignment, transferring distributorship rights to S.V. More with the explicit obligation to have the products manufactured by Drugmakers.

Despite these agreements, S.V. More entered into a Contract to Manufacture Pharmaceutical Products (CMPP) with Hizon Laboratories without Drugmakers’ consent. This action formed the basis of the breach of contract claim. Drugmakers argued that S.V. More’s decision to contract with Hizon Laboratories directly violated the agreements that guaranteed Drugmakers the exclusive right to manufacture the specified pharmaceutical products. S.V. More, however, contended that the Deed of Sale/Assignment did not reflect the parties’ true intentions and that Drugmakers’ refusal to enter into a new manufacturing agreement justified their actions.

The Regional Trial Court (RTC) initially ruled in favor of Drugmakers, finding that S.V. More had indeed breached its contractual obligations. The RTC highlighted that the agreements explicitly provided Drugmakers with the exclusive right to manufacture the products. Thus, S.V. More’s contract with Hizon Laboratories was a clear violation, making them liable for damages. The RTC also dismissed S.V. More’s claim that certain provisions were surreptitiously inserted into the contracts, citing Alberto’s admission that he had reviewed the documents before signing them.

On appeal, the Court of Appeals (CA) affirmed the RTC’s ruling but with modifications. The CA agreed that S.V. More had breached the contract by engaging Hizon Laboratories. However, it removed the awards for moral and exemplary damages and absolved Hizon Laboratories and its owner from liability. The appellate court reasoned that Drugmakers, as a juridical entity, was not entitled to moral and exemplary damages. Furthermore, Hizon Laboratories could not be faulted for manufacturing the products because their actions were a direct consequence of S.V. More’s breach. The CA maintained the award for actual damages, representing unrealized profits, along with attorney’s fees and costs of the suit.

The Supreme Court, in its review, partly affirmed the CA’s decision but significantly altered the award for damages. The Court agreed that a breach of contract had occurred. However, it found that the CA’s award of actual damages was based on an improper factual basis. The Court noted that the breach occurred only for a period of seven days, from October 23, 1993, until October 30, 1993, when the initial CMA expired. The sales projection used to calculate the loss of profits covered a much longer period and was based on speculative figures. The Supreme Court emphasized that actual damages must be proven with a reasonable degree of certainty.

In light of the lack of concrete evidence for the actual damages, the Supreme Court awarded temperate damages instead. Article 2224 of the Civil Code provides that temperate damages may be recovered when pecuniary loss has been suffered but its amount cannot be proven with certainty. The Court deemed this appropriate, recognizing that Drugmakers had suffered some form of pecuniary loss due to S.V. More’s breach, even if the exact amount could not be precisely calculated. The Court cited jurisprudence supporting the use of temperate damages in such cases. As noted in Sime Darby Pilipinas, Inc. v. Mendoza, G.R. No. 202247, June 19, 2013, 699 SCRA 290, 301-302, temperate damages are more than nominal but less than compensatory, serving to acknowledge a real but unquantifiable loss.

The decision highlights the importance of clear and enforceable contractual terms. The exclusivity clauses in the agreements between S.V. More and Drugmakers were central to the Court’s finding of a breach. These clauses explicitly reserved the manufacturing rights to Drugmakers, and S.V. More’s decision to contract with Hizon Laboratories directly contravened these provisions. This underscores the principle that parties must adhere to the terms they have agreed upon in a contract, and violations will carry legal consequences. The Court recognized that:

NOW, THEREFORE, for and in consideration of the foregoing premises, [E.A. Northam] do by these presents hereby convey, transfer, and assign all its rights, title, and interests over the above-stated pharmaceutical products in favor of [S.V. More] who shall henceforth have the right to have the same sold, distributed and marketed in its name with the obligation to have the same manufactured by DRUGMAKERS LABORATORIES, INC. pursuant to the existing Manufacturing Agreement thereunder.

This obligation was the cornerstone of Drugmakers’ claim. Building on this principle, the Court’s decision also underscores the need for precise and reliable evidence when claiming damages for breach of contract. While Drugmakers successfully proved that S.V. More had violated the contractual terms, their claim for actual damages fell short due to the speculative nature of the sales projections. The Supreme Court’s decision to award temperate damages instead reflects a pragmatic approach, acknowledging the loss suffered by Drugmakers without relying on unsubstantiated financial figures. This approach contrasts with cases where actual damages can be definitively proven through documented financial records and sales figures.

This case is instructive for businesses entering into exclusive manufacturing or distribution agreements. It illustrates the necessity of drafting clear and unambiguous clauses that delineate the rights and responsibilities of each party. Furthermore, it highlights the importance of conducting due diligence and gathering solid evidence when seeking damages for breach of contract. While courts are willing to provide remedies for contractual violations, they require a reasonable degree of certainty in proving the extent of the loss suffered. In situations where precise calculations are impossible, temperate damages offer a viable alternative, but they are typically lower than the potential actual damages that could be awarded with stronger evidence.

FAQs

In conclusion, the Supreme Court’s decision in S.V. More Pharma Corporation v. Drugmakers Laboratories reinforces the significance of contractual obligations and the potential liabilities arising from their breach. While the Court upheld the finding of a breach, it also underscored the importance of providing concrete evidence when claiming damages, particularly for lost profits. This case serves as a reminder to businesses to carefully draft and adhere to contractual terms and to ensure that any claims for damages are supported by reliable and verifiable evidence.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: S.V. MORE PHARMA CORPORATION VS. DRUGMAKERS LABORATORIES, INC., G.R. No. 200416, November 12, 2014