Abstract

In Philippine commercial practice, a buyer often sources goods from a supplier only after the buyer has its own customer order. When that downstream customer cancels, the buyer may attempt to cancel upstream—sometimes after the goods have already been produced, shipped, or are being held by a third party such as a forwarder, broker, carrier, warehouse, consolidator, or platform fulfillment center (the “middleman”). Liability then turns on (1) whether a binding contract exists, (2) what the parties agreed on cancellation and allocation of risk, (3) whether delivery (actual or constructive) has legally occurred, (4) whether ownership and/or risk of loss has shifted, (5) the middleman’s role (agent, depositary, carrier, independent contractor), and (6) the remedies and damages available under the Civil Code and relevant special laws. This article provides a structured, Philippine-law analysis of those issues, with practical contracting and dispute-handling guidance.

I. The Typical Fact Patterns

A. The “downstream cancellation” chain

Customer (end-buyer) places order with Buyer/Reseller.
Buyer places matching order with Supplier/Manufacturer/Importer.
Supplier ships goods; goods are now with a middleman:
- Carrier (sea/air/land), courier, trucking company
- Freight forwarder / customs broker
- Warehouse operator / fulfillment center / cold storage
- Consolidator / distributor
Customer cancels; Buyer wants to cancel with Supplier or refuses to accept delivery/payment.
Goods are “in limbo”—still in transit or stored with the middleman.

B. Why this becomes legally thorny

Even if “common sense” says cancellation should flow upstream, Philippine contract law starts from privity and agreed allocation of risk. A buyer’s problem with its own customer is not automatically a legal excuse to cancel a separate buyer–supplier contract, unless the buyer–supplier contract or the law provides a basis.

II. Core Philippine Legal Building Blocks

A. Contract formation: when does an “order” become binding?

Under the Civil Code, a contract requires consent, object, and cause (consideration). In sales, the contract is perfected upon the meeting of minds on the determinate thing and the price (Civil Code, Art. 1475). From perfection, each party may demand performance (subject to terms).

Practical implication: A “purchase order” (PO), pro-forma invoice, order confirmation, email acceptance, marketplace checkout, or signed quotation can be enough to prove perfection—especially when the supplier confirms acceptance or begins performance consistent with acceptance.

Cancellation before acceptance vs. after acceptance

Before acceptance/perfection: A buyer who withdraws an offer generally incurs no contractual liability (though there can be exceptions if there is a binding option contract or detrimental reliance theories are provable in context).
After acceptance/perfection: “Cancellation” is legally breach unless justified by (i) contract terms, (ii) mutual rescission, or (iii) a legal ground (e.g., impossibility/fortuitous event affecting the obligation in a legally relevant way).

B. Sale vs. contract for a piece of work (custom manufacture)

A crucial Philippine doctrine (Civil Code, Art. 1467) distinguishes:

Contract of sale: supplier ordinarily manufactures/procures for the general market.
Contract for a piece of work: goods are manufactured specially for the buyer and are not suitable for sale to others.

Why it matters: Cancellation exposure tends to be higher where goods are custom-made or specially configured, because the supplier’s measurable loss (materials, labor, opportunity cost) is more direct and resale mitigation is harder.

C. Delivery, transfer of ownership, and risk of loss

Ownership transfer in Philippine sales generally occurs upon delivery (tradition), unless there is a stipulation reserving ownership (Civil Code, Art. 1477; delivery concepts are detailed around Art. 1496 onward).
Delivery can be constructive, not only physical. If the parties agree that handing goods to a carrier/warehouse counts as delivery, or if the legal rules deem it so, ownership and/or risk may shift earlier than the buyer expects.
Risk of loss rules for goods: the Civil Code contains default rules generally aligning risk with ownership unless otherwise agreed (commonly discussed around Art. 1504 and related provisions), but parties may allocate risk by contract.

Key question when goods are with a middleman: Is the middleman holding the goods for the seller (seller’s agent/depositary), or for the buyer (buyer’s agent/carrier designated by buyer), or as an independent carrier where delivery-to-carrier is treated as delivery-to-buyer?

D. Agency and who the middleman “belongs” to

Under the Civil Code on agency (starting at Art. 1868), an agent’s acts and receipt can bind the principal. If the middleman is the buyer’s agent, then the buyer may be treated as having received delivery when the middleman receives the goods. If the middleman is the seller’s agent, risk and control often remain with the seller longer.

Indicators the middleman is buyer-side:

Buyer chose/appointed the forwarder/courier/warehouse
Freight billed to buyer’s account
Shipping terms place transport responsibility on buyer
Documents of title consigned to buyer or buyer’s nominee
Middleman instructions come primarily from buyer

Indicators the middleman is seller-side:

Seller selected and controls the carrier/warehouse
Seller pays freight and merely “passes on” cost
Shipment remains consigned to seller or “to order” with seller retaining disposal rights
Seller can redirect/stop without buyer’s consent (contractually)

E. Reciprocal obligations, breach, and rescission

A buyer–supplier sale is typically a reciprocal obligation: seller delivers; buyer pays. Under Civil Code Art. 1191, the injured party may seek rescission (resolution) for substantial breach, plus damages, or insist on fulfillment.

“Cancellation” in business speech can mean:

Mutual rescission (valid if both agree)
Unilateral refusal (usually breach)
Exercise of a contractual termination right (valid if conditions met)
Rescission under Art. 1191 (requires legal basis and typically judicial action unless there’s a valid automatic rescission clause plus proper demand/notice practice)

F. Damages, penalty clauses, deposits

Philippine law allows:

Actual damages (proved loss)
Lost profits (with proof/foreseeability)
Liquidated damages / penalty clauses (Civil Code rules on penalties; courts may reduce unconscionable penalties—commonly discussed under Arts. 1226–1229 and damages provisions on liquidated damages)
Attorney’s fees only when justified under Civil Code rules and/or stipulation, and still subject to reasonableness.

Deposits: earnest money vs. option money

Earnest money (commonly associated with proof of perfected sale; Civil Code Art. 1482 is often cited) is generally part of the price and evidences perfection.
Option money is separate consideration for keeping an offer open (Civil Code Art. 1479 requires distinct consideration for a binding option).

Practical point: Businesses often label any downpayment “non-refundable deposit.” Enforceability depends on whether it is truly a penalty/liquidated damages and whether it is reasonable under the circumstances.

G. Special regimes that may matter

Sales of personal property payable in installments (Recto Law) (Civil Code Arts. 1484–1486): limits seller’s remedies and affects deficiency recovery if foreclosure occurs.
Common carriers (Civil Code Arts. 1732 onward): extraordinary diligence; presumption of fault for loss/damage, subject to defenses.
Warehouse Receipts Law (Act No. 2137): governs negotiable/non-negotiable warehouse receipts, rights to goods, and obligations of warehousemen.
Carriage of Goods by Sea Act (COGSA) (as applied in Philippine jurisprudence): often governs international sea carriage claims, including limitation periods and carrier defenses.
E-commerce evidence (Electronic Commerce Act, RA 8792): electronic data messages and signatures can be admissible and binding if legal requirements are met.

III. The Decision Tree: Who Is Liable When the Customer Cancels?

Step 1: Identify the contracts and privity

There are usually two distinct contracts:

Contract A: Customer ↔ Buyer
Contract B: Buyer ↔ Supplier

A cancellation under Contract A does not automatically cancel Contract B. Contract B must be analyzed on its own terms.

Step 2: Pin down the “stage” when cancellation happened

Liability shifts dramatically depending on timing:

Stage 1 — Before the buyer–supplier contract is perfected

If the supplier never accepted the buyer’s offer (no confirmation, no shipment, no conduct indicating acceptance), the buyer may withdraw with minimal risk.

But watch:

If supplier acceptance was sent but missed/ignored, or
Supplier started production in a way that can be legally treated as acceptance, or
The parties’ course of dealing treats POs as binding upon issuance, then perfection may be found.

Stage 2 — After perfection but before production/shipment

Buyer cancellation is typically breach, but damages may be lower (supplier can often mitigate by reallocating inventory or canceling upstream inputs).

Possible outcomes:

Supplier agrees to cancel with a fee (mutual rescission + liquidated damages)
Supplier insists on performance
Supplier claims proven damages (e.g., procurement costs already incurred)

Stage 3 — After shipment; goods are with a middleman (in transit or stored)

This is the high-friction scenario.

Key questions:

Did “delivery” legally occur by delivery to carrier/forwarder/warehouse?
Who bears risk and incidental expenses (freight, storage, demurrage, return costs)?
Does the supplier retain the right of disposal (control over the goods) through documents of title?
Does the buyer have a right to reject (for non-conformity) versus mere cancellation for convenience?

Stage 4 — After buyer (or buyer’s agent) received goods

Buyer cancellation is ordinarily ineffective; buyer must pay, subject to defenses like breach of warranty or non-conformity, and subject to any return policy agreed.

Step 3: Classify the middleman’s legal role

A. Middleman as buyer’s agent / buyer-designated carrier

If the buyer chose the forwarder/courier or the contract says shipment via buyer’s carrier constitutes delivery, then risk and responsibility may already be with the buyer, even if the buyer hasn’t physically touched the goods.

Consequences:

Buyer may be liable for the price (or at least for damages) if it refuses acceptance/payment.
Storage/demurrage while awaiting instructions may fall on buyer.
Supplier may have fewer duties to take back, unless contract allows return.

B. Middleman as supplier’s agent / supplier-controlled logistics

If supplier retains control and the middleman is effectively holding for supplier, the supplier may still bear risk and may have a practical ability (and sometimes a legal duty, depending on circumstances) to mitigate by redirecting or reselling.

Consequences:

Supplier may still sue buyer for breach, but supplier may also have clearer mitigation obligations.
Return logistics may be easier to manage by supplier, but costs allocation depends on contract and fault.

C. Middleman as independent common carrier / warehouse operator

Often the middleman is neither party’s agent in a pure sense but an independent contractor with statutory duties (e.g., common carrier or warehouseman). Even then, for buyer–supplier liability, the key remains: was delivery to that carrier/warehouse legally treated as delivery to the buyer, and who assumed transport risk?

IV. When Is the Buyer Excused From Liability After Customer Cancellation?

Customer cancellation alone is typically not a legal excuse. The buyer needs a recognized basis:

A. Contractual cancellation right (the cleanest path)

Many supply contracts provide cancellation windows:

Free cancellation before production cut-off
Cancellation fee after cut-off (percentage of price or cost-plus)
No cancellation after shipment
Return rights subject to restocking fee and condition of goods

If these clauses are clear and reasonable, Philippine courts generally respect freedom to contract (Civil Code Art. 1306), subject to law, morals, public order, and public policy.

B. Mutual rescission / novation

Buyer and supplier may agree to unwind or modify obligations (e.g., convert to consignment, postpone delivery, substitute goods, partial take-up). This is often the most commercially sensible resolution.

C. Supplier breach / non-conformity (rightful rejection, not “cancellation”)

If goods do not conform to specifications, quantity, quality, labeling, regulatory compliance, or agreed delivery terms, the buyer may have remedies:

Rejection (if timely and in accordance with contract/law principles)
Repair/replacement
Price reduction
Damages

Important distinction: A buyer who simply says “my customer cancelled” is in a different posture than a buyer who says “your goods are non-conforming.”

D. Fortuitous event / impossibility (limited and fact-specific)

Under Civil Code Art. 1174 (and related provisions on impossibility), a party is not liable for fortuitous events unless:

the law or contract states otherwise, or
the nature of the obligation requires assumption of risk, or
the party is in delay, or
the event is not truly fortuitous or is foreseeable/avoidable.

Downstream cancellation is rarely fortuitous. Market demand shifts, customer backing out, or budget changes are usually business risks. However, genuine legal impossibility can occur (e.g., government ban rendering import/delivery illegal), and the outcome depends on allocation of regulatory risk in the contract.

E. Commercial impracticability / difficulty (rarely successful without clause)

Philippine law recognizes that extraordinary difficulty may affect obligations in narrow contexts (often associated with Civil Code Art. 1267 doctrine in jurisprudence), but it is not a general escape hatch for ordinary business reversals.

V. Supplier’s Typical Remedies When Buyer Cancels and Goods Are With a Middleman

A. Demand performance or payment

After perfection, seller can generally demand buyer to pay the price upon delivery per terms. If delivery is already legally accomplished (including delivery to buyer’s agent), seller may sue for the price, subject to defenses.

B. Rescission (resolution) under Art. 1191 + damages

If buyer’s refusal is substantial breach, supplier may seek rescission and recover damages (including incidental expenses and lost profits if proven).

C. Rights relating to goods in transit (commercially critical)

Even without perfect recall of statutory numbering, Philippine sales law recognizes classical seller protections widely discussed in commercial law:

Lien / retention: keep possession until paid (if seller still has possession/control)
Stoppage in transitu: stop delivery while goods are with a carrier when buyer is insolvent (classically tied to insolvency; contract may expand this right)
Resale: resell to mitigate losses in appropriate cases and recover difference and expenses (subject to notice and good faith)

Practical reality: Whether these are usable depends on control over documents of title (bill of lading/warehouse receipt), shipment consignment (“to order” vs named consignee), and contractual rights to reroute.

D. Recovery of incidental costs

When goods are stuck with a middleman, costs accumulate:

Storage fees, warehouse rent
Demurrage, detention, port charges
Rebooking/rehandling
Return freight
Insurance extensions
Customs penalties (in import contexts)

Allocation depends on:

contract terms (who pays logistics and ancillary charges), and
who caused the situation (buyer breach vs supplier delay vs carrier fault)

Supplier can claim these as actual damages if adequately documented and causally linked.

VI. Buyer’s Possible Claims Against Supplier (Even if Customer Cancelled)

A buyer’s best legal posture typically requires anchoring the dispute in supplier-side fault or an agreed cancellation regime.

A. Supplier delay

If supplier’s late delivery caused buyer’s customer to cancel, buyer may claim damages if:

delay is established (Civil Code rules on delay, typically Art. 1169),
buyer gave proper demand when required, and
damages are proven and not too remote/speculative.

B. Non-conforming goods

Buyer may reject or demand remedies depending on the contract and commercial norms:

Wrong specs, defective goods, short shipment, wrong labeling/packaging
Regulatory non-compliance (FDA, BPS/DTI standards, etc.) if these were part of supplier obligations

C. Breach of warranty or misrepresentation

Express warranties (in quotation/spec sheet) and implied warranties (as applicable) can ground buyer remedies. Evidence quality matters.

D. Refund claims and unjust enrichment arguments

If buyer paid in advance and there is no valid forfeiture/penalty clause, buyer may seek refund, subject to supplier’s right to set off proven damages and incurred costs.

VII. The Middleman’s Liability and Leverage

The middleman is not just “holding” goods; it often has statutory duties, contractual rights, and its own remedies.

A. If the middleman is a common carrier

Common carriers are held to extraordinary diligence under the Civil Code. They may be liable for loss/damage in transit unless they prove recognized defenses. But for “cancellation” issues, the carrier’s main role is:

Deliver per instructions/documentation
Charge fees per contract
Assert lien rights where applicable
Require clear authority for reconsignment/return

B. If the middleman is a warehouse operator / depositary

The warehouseman must exercise required diligence and release goods only to the proper party (often determined by warehouse receipt terms). Warehouse receipts can shift practical control; negotiable receipts can be transferred, which complicates who can direct release.

C. If the middleman is a freight forwarder / customs broker

Forwarders often contract as agents for shipment arrangements but may also assume principal-like responsibilities depending on contract. They can hold cargo for unpaid charges and may require written authorizations before rerouting or returning.

D. Who pays the middleman while parties fight?

In practice, the middleman is paid by whoever has the contractual account, but liens and withholding of goods are common until charges are settled. This frequently pressures buyer and supplier to resolve quickly.

VIII. High-Impact Clauses That Decide These Disputes

A. Cancellation clause with “points of no return”

Well-drafted supply terms specify:

Order acceptance moment
Cancellation window and how to notify
Cut-off milestones (procurement start, production start, packing, dispatch)
Fees tied to actual stage (cost reimbursement + reasonable margin)
Treatment of custom goods (no cancellation or cost-plus)
Return rules (RMA process, restocking fee, condition inspection)

B. Risk of loss and delivery terms (including Incoterms where used)

State clearly:

When risk transfers (upon dispatch, upon handover to carrier, upon arrival, upon acceptance)
Who pays freight, insurance, duties, storage, demurrage
What happens if buyer refuses/doesn’t pick up (storage at buyer cost, deemed acceptance, resale rights)

C. Title retention / reservation of ownership

Suppliers often protect themselves by reserving ownership until full payment, supported by documentation control. The enforceability and practical success depend on drafting, delivery structure, and third-party rights.

D. Liquidated damages / penalty reasonableness

If “non-refundable deposit” or “25% cancellation fee” is used, tie it to:

expected administrative and logistics costs,
expected profit margin,
difficulty of proving actual damages,
mitigation realities (especially for custom goods)

Courts may reduce unconscionable penalties; reasonableness and documentation help.

E. Mitigation and resale protocol

Include:

right to resell after buyer refusal,
notice method,
application of proceeds (costs, fees, balance),
deficiency recovery rules,
handling of perishables/time-sensitive inventory

IX. Evidence and Litigation Realities (Philippine Practice)

A. What documents typically win the case

PO and supplier acceptance/confirmation
Quotation with T&Cs + buyer acknowledgment
Invoices, delivery receipts, packing lists
Waybills, bills of lading, airway bills
Warehouse receipts and gate passes
Email/chat logs showing agreement, changes, cancellation timing
Proof of costs incurred: supplier purchase invoices, production logs, storage and demurrage bills
Inspection reports for non-conformity claims

B. Demand and notice

Proper written demand matters for placing a party in delay where required and clarifying whether a party is treating the contract as breached/rescinded. Also important for establishing attorney’s fees and damages narratives.

C. Venue and procedure

Pure money claims may fall under simplified procedures depending on amount and current rules.
Complex disputes often proceed as ordinary civil actions, sometimes with provisional remedies (e.g., replevin in appropriate contexts) if possession is contested and legal requirements are met.

X. Practical Application: Common Scenarios and Likely Outcomes

Scenario 1: Buyer’s customer cancels; supplier already shipped FOB (buyer chose forwarder)

If terms and practice indicate delivery/risk passed when goods were turned over to buyer’s forwarder, buyer’s cancellation is typically breach.
Buyer may still try to negotiate return/resale, but supplier can claim price/damages and buyer may bear storage/return costs unless supplier agrees otherwise.

Scenario 2: Supplier shipped late; buyer’s customer cancels; goods with carrier

Buyer has a stronger argument if the downstream cancellation is a foreseeable consequence of supplier’s delay and buyer can prove causation and damages.
Outcome depends heavily on delivery date commitments (“firm delivery date” vs “estimated”), demand/notice, and limitation clauses.

Scenario 3: Custom-made goods; customer cancels; goods at warehouse pending pickup

Buyer’s exposure is high. Supplier can argue damages equal to incurred costs plus expected margin, less any resale salvage.
Return-to-stock mitigation may be impossible, strengthening supplier’s claim.

Scenario 4: Goods non-conforming; buyer rejects while goods are with middleman

Buyer must act consistently: timely notice, clear rejection, preserve evidence, and follow agreed inspection/claims process.
If rejection is valid, buyer may recover payments and resist charges for goods, but logistics costs can still be contested based on fault and contract.

Scenario 5: No clear written terms; parties rely on past dealings

Courts may look at course of dealing, trade usage, and conduct.
This is where documentary evidence and consistent business practice become decisive.

XI. Drafting Blueprint: A “Middleman-In-Limbo” Clause Set

A robust buyer–supplier agreement for Philippine operations typically includes:

Order acceptance: what counts as acceptance (written confirmation, dispatch, invoice issuance)
Cancellation: time limits; staged fees; custom goods treatment
Delivery and risk: explicit transfer point; who appoints carrier; deemed delivery rules
Title and documents: who holds bill of lading/warehouse receipt; release conditions
Refusal/failed delivery: storage at buyer cost; deemed acceptance; right to resell
Returns: RMA, inspection, restocking fees, condition standards
Damages: liquidated damages and caps; exclusions for consequential damages (careful: enforceability depends on drafting and fairness)
Force majeure: include regulatory changes, port closures, embargoes; specify consequences (suspension vs termination)
Dispute resolution: governing law (Philippines), venue, arbitration (if used), and escalation steps
Evidence and notices: email validity; authorized representatives; time bars for claims

XII. Conclusion

In Philippine law, the buyer–supplier relationship is governed primarily by the Civil Code rules on obligations, contracts, and sales, shaped by party stipulations and the legal characterization of delivery and the middleman’s role. When a customer cancels, the buyer’s ability to cancel upstream depends far less on the downstream event and far more on (1) whether the buyer–supplier contract is already perfected, (2) whether cancellation rights were contractually granted, (3) whether the supplier is at fault (delay or non-conformity), (4) whether delivery and/or risk has shifted through the middleman, and (5) whether damages, deposits, and logistics costs are properly allocated and documented. In disputes where goods are with a middleman, control over documents of title, clear shipping terms, and staged cancellation frameworks typically determine the economic outcome more than abstract legal argument.