Proving Unilateral Termination in Distribution Agreements: San Miguel Foods v. Fabie

The Supreme Court recently clarified the evidentiary burden on a distributor claiming that its supplier unilaterally terminated their agreement. In San Miguel Foods, Inc. v. Spouses Ramon and Ma. Nelia Fabie and Fresh Link, Inc. (G.R. No. 234849, April 3, 2024), the Court dismissed a breach-of-contract complaint because the distributor failed to prove by preponderance of evidence that the agreement was actually terminated. The ruling is a practical reminder that in civil cases, a party must prove its allegations with credible evidence—not just assert them.

The Dispute

Fresh Link, Inc. was the exclusive distributor of San Miguel Foods, Inc. (SMFI) products in certain Makati territories under a Complementary Distributorship Agreement renewed yearly since 1992. In 1999, the parties renewed the agreement to expire on March 31, 2000. Fresh Link's purchases were secured by a standby letter of credit that expired on May 31, 1999.

In June 1999, after complaints about discounts and product supply, SMFI stopped delivering products to Fresh Link on credit and demanded cash payments. Fresh Link sued for breach of contract and damages, claiming SMFI unilaterally terminated the agreement.

The trial court ruled for Fresh Link, awarding actual, moral, and exemplary damages plus attorney's fees. The Court of Appeals affirmed with modifications, reducing actual damages to temperate damages. SMFI appealed to the Supreme Court.

The Termination Clause

The agreement contained a termination provision allowing SMFI to end the contract for any cause at any time with written notice. The Court of Appeals struck down this clause as violating the mutuality of contracts principle. The Supreme Court disagreed, holding that the clause was not void. Since the law is deemed written into every contract, SMFI could only terminate for a legal cause and with proper written notice. The exact wording of the termination clause is not reproduced here because the full provision is not available in the ASG law library, but the Court's ruling on its validity is clear.

The Critical Question: Was There a Termination?

The Court found that Fresh Link failed to prove SMFI actually terminated the agreement. The complaint itself alleged that SMFI ordered that no more chicken be supplied for sale to Fresh Link's distributorship unless paid in cash. SMFI's officer testified that Fresh Link remained free to purchase on a cash basis. Fresh Link's own witness admitted she could pay in cash anytime.

The Court noted that the denial of credit purchases is not the same as termination. Since Fresh Link's letter of credit had expired on May 31, 1999, and Fresh Link admitted it did not renew the bank guarantee—and never informed SMFI of any extension—SMFI was justified in demanding cash payments.

The Best Evidence Rule

Both parties failed on damages claims because they relied on photocopies. SMFI's counterclaim for unpaid accounts of about PHP 1.9 million rested on photocopied invoices and checks, which are inadmissible under the best evidence rule. Fresh Link's own evidence of a renewed credit line was also a photocopy. Without original documents or proof of an exception, neither party could prove its monetary claims. The best evidence rule is found in the Rules of Court, which requires the original document when the contents of a document are the subject of inquiry.

Practical Takeaways

• Termination must be proven, not assumed. A shift in payment terms—such as demanding cash instead of credit—is not automatically a termination of a distribution agreement.
• Document everything. Keep originals of contracts, invoices, letters of credit, and notices. Photocopies are inadmissible under the best evidence rule unless an exception applies.
• Understand termination clauses. A clause allowing termination "for any cause" is still subject to the legal requirement of a valid cause and proper written notice.
• Notify the other party of renewals. A distributor that fails to inform the supplier of an extended letter of credit cannot later claim the supplier acted in bad faith.
• Corroborate witness testimony. A single witness's account, without supporting documents or other testimony, may not meet the preponderance of evidence standard.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.