PNCC vs CA
said article. Besides, petitioner failed to state specifically the
The lessee decided to cancel or discontinue with the lease
contract “due to financial, as well as technical difficulties.’’
Facts: In reply to the lessors’ (private respondents’) letter
requesting payment of the first annual rental in the amount
of P240,000.00 which was due and payable upon the
execution of the contract, lessee (petitioner) argued that
under the contract of lease, payment of rental would
commence on the date of the isuance of “an industrial
clearance’’ by the (defunct) Ministry of Human Settlements
and not from the date of the signing of the contract. The
lessors refused to accede to the lessee’s request for the
pretermination of the contract of lease of the premises to be
used as site for a “rock crushing plant and field office,
sleeping quarters and canteen/mess hall.’’
Issue: Has the lessee the right to refuse to pay the rentals as
stipulated in the contract of lease and to preterminate the
contract?
Held: (1) Suspensive condition fulfilled. — Petitioner was
held estopped from claiming that the Temporary Use Permit
(valid for 2 years) issued by the Ministry of Human
Settlements was not the industrial clearance contemplated
in the contract, having considered the permit as industrial
clearance and recognized its obligation to pay rentals
counted from the date the permit was issued. Moreover, the
reason of petitioner in discontinuing with its project and in
consequently cancelling the lease contract was ‘financial as
well as technical difficulties,’ not the alleged insufficiency of
the Temporary Use Permit.
(2) Article 1266 not applicable. — “Invoking Article 1266 and
the principles of rebus sic stantibus, petitioner asserts that it
should be released from the obligatory force of the contract
of lease because the purpose of the contract did not
materialize due to unforeseen events and causes beyond its
control, i.e., due to the abrupt change in political climate
after the EDSA Revolution and financial difficulties.
It is a fundamental rule that contracts, once perfected, bind
both contracting parties, and obligations arising therefrom
have the force of law between the parties and should be
complied with in good faith. But the law recognizes
exceptions to the principle of the obligatory force of
contracts. One exception is laid down in Article 1266 of the
Civil Code.
Petitioner cannot, however, successfully take refuge in the
said article, since it is applicable only to obligations “to do,’’
and not to obligations “to give.’’ An obligation “to do’’
includes all kinds of work or service; while an obligation “to
give’’ is a prestation which consists in the delivery of a
movable or an immovable thing in order to create a real
right, or for the use of the recipient, or for its simple
possession, or in order to return it to its owner.
The obligation to pay rentals or deliver the thing in a contract
of lease falls within the prestation “to give;’’ hence, it is not
covered within the scope of Article 1266. At any rate, the
unforeseen event and causes mentioned by petitioners are
not the legal or physical impossibilities con- templated in the
circumstances brought about by “the abrupt change in the
political climate in the country except the prevailing
uncertainties in government policies on infrastructure
projects.’’
(3) Article 1267 not applicable. — “The principle of rebus sic
stantibus neither fits in with the facts of the case. Under this
theory, the parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to exist, the
contract also ceases to exist. This theory is said to be the
basis of Article 1267 of the Civil Code.
This article, which enunciates the doctrine of unforeseen
events, is not, however, an absolute application of the
principle of rebus sic stantibus, which would endanger the
security of contractual relations. The parties to the contract
must be presumed to have assumed the risks of unfavorable
developments. It is therefore only in absolutely exceptional
changes of circumstances that equity demands assistance
for the debtor.
In this case, petitioner wants this Court to believe that the
abrupt change in the political climate of the country after the
EDSA Revolution and its poor financial condition “rendered
the performance of the lease
contract impractical and inimical to the corporate survival of
the peti- tioner.
This Court cannot subscribe to this argument. x x x Petitioner
en- tered into a contract with private respondents on
November 18, 1985. Prior thereto, it is of judicial notice that
after the assassination of Senator Aquino on August 21,
1983, the country has experienced political up- heavals,
turmoils, almost daily mass demonstrations, unprecedented
in- flation, peace and order deterioration, the Aquino trial
and many other things that brought about the hatred of
people even against crony corpo- rations. On November 3,
1985, Pres. Marcos, being interviewed live on U.S. television
announced that there would be a snap election scheduled
for February 7, 1986.
On November 18, 1985, notwithstanding the above,
petitioner PNCC entered into the contract of lease with
private respondents with open eyes of the deteriorating
conditions of the country.’’
(4) Pecuniary inability not a defense. — “Anent petitioner’s
alleged poor financial condition, the same will neither
release petitioner from the binding effect of the contract of
lease. As held in Central Bank vs. Court of Appeals (139 SCRA
46 [1992].) cited by private respondents, mere pecuniary
inability to fulfill an engagement does not discharge a
contractual obligation, nor does it constitute a defense to an
action for specific performance.’’
(5) Motive or particular purpose of lessee in entering into the
contract irrelevant. — “With regard to the non-
materialization of petitioner’s particular purpose in entering
into the contract of lease, i.e., to use the leased premises as
a site of a rock crushing plant, the same will not invalidate
the contract. The cause or essential purpose in a contact of
lease is the use or enjoyment of a thing. As a general
principle, the motive or particular purpose of a party in
entering into a contract does not affect the validity nor
existence of the contract; an exception is when the
realization of such motive or particular purpose has been
made a condition upon which the contract is made to
depend. The exception does not apply here.’’ (Philippine
National Construction Corp. vs. Court of Appeals, 272 SCRA
183 [1997].)
Occena vs CA
Modification of contract is demanded because of increase in
prices.
Facts: D (developer) filed a complaint against L (landowner)
for modification of a subdivision contract between D and L
providing a sharing ratio of 60% for the developer and 40%
for the landowner. D cites the worldwide increase in prices.
Issue: Does the complaint allege a sufficient cause of action
for modification of the contract in question.
Held: No. It has no basis in law and must, therefore, be
dismissed for failure to state a cause of action. Article 1267
does not authorize the courts to modify or revise the
subdivision contract between the parties or fix a sharing
ratio different from that contractually stipulated with the
force of law between the parties, so as to substitute its own
terms for those covenanted by the parties themselves.
If D’s complaint were to be released from having to comply
with the subdivision contract, assuming it could show at the
trial that the service undertaken contractually by it had
“become so difficult as to be manifestly beyond the
contemplation of the parties,” then the complaint would be
justifiable under Article 1207. Without said article, D would
remain bound by its contract under the theretofore
prevailing doctrine that performance therewith is not
excused “by the fact that the contract turns out to be hard
and improvident, unjustifiable, or unexpectedly
burdensome” (Reyes vs. Caltex [Phils.], Inc., supra.), since in
case a party desires to be “excused from performance in the
event of such contingencies arising, it is his duty to provide
therefor in the contract.”
But D’s complaint seeks not release from the contract but for
its modification. Under the particular allegation of D’s
complaint and the circumstances therein averred, the courts
cannot even in equity grant the relief sought. (Occeña vs.
Jabson, 73 SCRA 637 [1976].)
Note: In Naga (supra.), the Supreme Court, in holding the
inapplica- bility of Occeña, said:
“In a nutshell, private respondent in the Occeña case filed a
complaint against petitioner before the trial court praying
for modification of the terms and conditions of the contract
that they entered into by fixing the proper shares that should
pertain to them out of the gross proceeds from the sales of
subdivided lots. We ordered the dismissal of the complaint
therein for failure to state a sufficient cause of action. We
rationalized that the Court of Appeals misapplied Article
1267 because:
‘x x x respondent’s complaint seeks not release from the
subdivision contract but that the court ‘render judgment
modifying the terms and conditions of the contract’ . . . by
fixing the proper shares that should pertain to the herein
parties out of the gross proceeds from the sales of
subdivided lots of subject subdivision. The cited article
(Article 1267.) does not grant the courts (the) authority to
remake, modify or revise the contract or to fix the division of
shares between the parties as contractually stipulated with
the force of law between the parties, so as to substitute its
own terms for those covenanted by the parties themselves.
Respondent’s complaint for modification of contract
manifestly has no basis in law and therefore states no cause
of action. Under the particular allegations of respondent’s
complaint and the circumstances therein averred, the courts
cannot even in equity grant the relief sought.’
The ruling in the Occeña case is not applicable because we
agree with respondent court that the allegations in private
respondent’s complaint and the evidence it has presented
sufficiently made out a cause of action under Article 1267.
We, therefore, release the parties from their correlative
obligations under the contract.
However, our disposition of the present controversy does
not end here. We have to take into account the possible
consequences of merely releasing the parties therefrom;
petitioners will remove the telephone wires/cables in the
posts of private respondent, resulting in disrupting of their
essential service to the public; while private respondent, in
consonance with the contract will return all the telephone
units to petitioners, causing prejudice to its business. We
shall not allow such eventuality. Rather, we require, as
ordered by the trial court: 1) petitioners to pay private
respondent for the use of its posts in Naga City and in the
towns of Milaor, Canaman, Magarao and Pili, Camarines Sur
and in other places where petitioners use private
respondent’s posts, the sum of Ten (P10.00) pesos per post,
per month, beginning January 1989; and 2) private
respondent to pay petitioner the monthly dues of all its
telephones at the same rate being paid by the public
beginning January 1989.
The peculiar circumstances of the present case, as
distinguished further from the Occeña case, necessitates
exercise of our equity jurisdiction. By way of emphasis, we
reiterate the rationalization of respondent court that:
‘x x x In affirming said ruling, we are not making a new
contract for the parties herein, but we find it necessary to do
so in order not to disrupt the basic and essential services
being rendered by both parties herein to the public and to
avoid unjust enrichment by appellant at the expense of
plaintiff x x x.’’’3
Naga Telephone Company vs CA
Facts: Petitioner N is a telephone company rendering local
as well as long distance telephone services in Naga City while
private respondent C is a private corporation established for
the purpose of operating an electric power service in the
same city.
On November 1, 1977, the parties entered into a contract for
the use by N in the operation of its telephone service the
electric light posts of C in Naga City. In consideration
therefor, N agreed to install, free of charge, ten (10)
telephone connections for the use by C in specified places.
Said contract also provided:
“(a) That the term or period of this contract shall be as long
as the party of the first part [N] has need for the electric
posts of the party of the second part [C] it being understood
that this contract shall terminate when for any reason
whatsoever, the party of the second part is forced to stop,
abandoned [sic] its operation as a public service and it
becomes necessary to remove the electric lightpost (sic);’’
After the contract had been enforced for over ten (10) years,
C filed on January 2, 1989 with the Regional Trial Court of
Naga City against N for reformation of the contract with
damages, on the ground that it is too one-sided in favor of
petitioners; that it is not in conformity with the guidelines of
the National Electrification Administration (NEA) which
direct that the reasonable compensation for the use of the
posts is P10.00 per post, per month; that after eleven (11)
years of petitioners’ use of the posts, the telephone cables
strung by them thereon have become much heavier with the
increase in the volume of their subscribers, worsened by the
fact that their linemen bore holes through the posts at which
points those posts were broken during typhoons; that a post
now costs as much as P2,630.00; so that justice and equity
demand that the contract be reformed to abolish the
inequities thereon.
In N’s answer, it averred, among others, its utilization of C’s
post could not have caused their deterioration because they
have already been in use for eleven (11) years; and that the
value of their expenses for the ten (10) telephone lines long
enjoyed by C free of charge are far in excess of the amounts
claimed by the latter for the use of the posts, so that if there
was any inequity, it was suffered by N.
On the basis of the countervailing evidence of the parties,
the trial court found, as regards C’s first cause of action, that
while the contract appeared to be fair to both parties when
it was entered into by them during the first year of C’s
operation and when its Board of Directors did not yet have
any experience in that business, it had become
disadvantageous and unfair to C because of subsequent
events and conditions, particularly the increase in the
volume of the subscribers of N for more than ten (10)
years without the corresponding increase in the number of
telephone connections to C free of charge.
The trial court concluded that while in an action for
reformation of contract, it cannot make another contract for
the parties, it can, however, for reasons of justice and equity,
order that the contract be reformed to abolish the inequities
therein. Thus, said court ruled that the contract should be
reformed by ordering N to pay C compensation for the use
of its posts in Naga City, while C should also be ordered to
pay the monthly bills for the use of the telephones also in
Naga City. And taking into consideration the guidelines of
the NEA on the rental of posts by telephone companies and
the increase in the costs of such posts, the trial court opined
that a monthly rental of P10.00 for each post of C used by N
is reasonable, which rental it should pay from the filing of
the complaint in this case on January 2, 1989. And in like
manner, C should pay N from the same date its monthly bills
for the use and transfers of its telephones in Naga City at the
same rate that the public are paying.
Disagreeing with the foregoing judgment, N appealed to
respondent Court of Appeals. In the decision dated May 28,
1992, respondent court affirmed the decision of the trial
court, but based on different grounds to wit: (1) that Article
1267 of the New Civil Code is applicable and (2) that the
contract was subject to a potestative condition which
rendered said condition void.
N asserts that Article 1267 of the New Civil Code is not
applicable primarily because the contract does not involve
the rendition of service or a personal prestation and it is not
for future service with future unusual change. Instead, the
ruling in the case of Occeña vs. Jabson (73 SCRA 637 [1976].)
which interpreted the article, should be followed in resolving
this case.
Issues: (1) Does Article 1267 apply to obligations to do?
(2) Is Article 1267 applicable to the case at bar?
Held: (1) Former rule on liability for non-performance
modified. — The case of Reyes vs. Caltex (Philippines), Inc.
(84 Phil. 654 [1949].), enunciated the doctrine that where a
person by his contract charges himself with an obligation
possible to be performed, he must perform it, unless its
performance is rendered impossible by the act of God, by
the law, or by the other party, it being the rule that in case
the party desires to be excused from performance in the
event of contingencies arising thereto, it is his duty to
provide the basis therefor in his contract.
With the enactment of the New Civil Code, a new provision
was included therein, namely, Article 1267 which provides: x
xx
‘In the report of the Code Commission, the rationale behind
this innovation was explained, thus:
‘The general rule is that impossibility of performance
releases the obligor. However, it is submitted that when the
service has become so difficult as to be manifestly beyond
the contemplation of the parties, the court should be
authorized to release the obligor in whole or in part. The
intention of the parties should govern and if it appears that
the service turns out to be so difficult as to have been
beyond their contemplation, it would be doing violence to
that intention to hold the obligor still responsible.’ (p. 133
thereof.)
In other words, fair and square consideration underscores
the legal precept therein.’’
(2) Term “service’’ refers to performance. — “Article 1267
speaks of ‘service’ which has become so difficult. Taking into
consideration the rationale behind this provision, the term
‘service’ should be understood as referring to the
‘performance’ of the obligation. In the present case, the
obligation of private respondent consists in allowing
petitioners to use its posts in Naga City, which is the service
contemplated in said article. Furthermore, a bare reading of
this article reveals that it is not a requirement thereunder
that the contract be for future service with future unusual
change.
According to Senator Arturo M. Tolentino (Commentaries
and Jurisprudence on the Civil Code of the Philippines, 1991
Ed., p. 347.), Article 1267 states in our law the doctrine of
unforeseen events. This is said to be based on the discredited
theory of rebus sic stantibus in public international law;
under this theory, the parties stipulate in the light of certain
prevailing conditions, and once these conditions cease to
exist the contract also ceases to exist. Considering practical
needs and the demands of equity and good faith, the
disappearance of the basis of a contract gives rise to a right
to relief in favor of the party prejudiced.’’
(3) Contract in question has manifestly become too
disadvantageous in favor of C manifestly beyond the
contemplation of the parties. — “In applying Article 1267,
respondent court rationalized:
‘x x x x x x x x x
That the aforesaid contract has become inequitous or
unfavorable or disadvantageous to the plaintiff with the
expansion of the business of appellant and the increase in
the volume of its subscribers in Naga City and environs
through the years, necessitating the stringing of more and
bigger telephone cable wires by appellant to plaintiff’s
electric posts without a corresponding increase in the ten
(10) telephone connections given by appellant to plaintiff
free of charge in the agreement Exh. ‘A’ as
consideration for its use of the latter’s electric posts in Naga
City, appear, however, undisputed from the totality of the
evidence on record and the lower court so found. And it was
for this reason that in the later (sic) part of 1982 or 1983 (or
five or six years after the subject agreement was entered
into by the parties), plaintiff’s Board of Directors already
asked Atty. Luis General who had become their legal counsel
in 1982, to study said agreement which they believed had
become disadvantageous to their company and to make the
proper recommendation, which study Atty. General did, and
thereafter, he already recommended to the Board the filing
of a court action to reform said contract, but no action was
taken on Atty. General’s recommendation because the
former general managers of plaintiff wanted to adopt a soft
approach in discussing the matter with appellant, until,
during the term of General Manager Henry Pascual, the
latter, after failing to settle the problem with Atty. Luciano
Maggay who had become the president and general
manager of appellant, already agreed for Atty. General’s
filing of the present action.
The fact that said contract has become inequitous or
disadvantageous to plaintiff as the years went by did not,
however, give plaintiff a cause of action for reformation of
said contract, for the reasons already pointed out earlier. But
this does not mean that plaintiff is completely without a
remedy, for we believe that the allegations of its complaint
herein and the evidence it has presented sufficiently make
out a cause of action under Art. 1267 of the New Civil Code
for its release from the agreement in question.
x x x x x x x x x’
In truth, as also correctly found by the lower court, despite
the increase in the volume of appellant’s subscribers and the
corresponding increase in the telephone cables and wires
strung by it to plaintiff’s electric posts in Naga City for the
more than 10 years that the agreement Exh. ‘A’ of the parties
has been in effect, there has been no corresponding increase
in the ten (10) telephone units connected by appellant free
of charge to plaintiff’s offices and other places chosen by
plaintiff’s general manager which was the only consideration
provided for in said agreement for appellant’s electric posts
outside Naga City although this was not provided for in the
agreement Exh. ‘A’ as it extended and expanded its
telephone services to towns outside said city. Hence, while
very few of plaintiff’s electric posts were being used by
appellant in 1977 and they were all in the City of Naga, the
number of plaintiff’s electric posts that appellant was using
in 1989 had jumped to 1,403,192 which are outside Naga
City. (Exh. ‘B.’)
Add to this, the destruction of some of plaintiff’s poles
during typhoons like the strong typhoon Sisang in 1987
because of the heavy telephone cables attached thereto,
and the escalation of the costs of electric
poles from 1977 to 1989, and the conclusion is indeed
ineluctable that the agreement Exh. ‘A’ has already become
too one-sided in favor of appellant to the great disadvantage
of plaintiff, in short, the continued enforcement of said
contract has manifestly gone far beyond the contemplation
of plaintiff, so much so that it should now be released
therefrom under Art. 1267 of the New Civil Code to avoid
appellant’s unjust enrichment at its (plaintiff’s) expense.
As stated by Tolentino in his commentaries on the Civil Code
citing foreign civilist Ruggiero, equity demands a certain
economic equilibrium between the prestation and the
counter-prestation, and does not permit the unlimited
impoverishment of one party for the benefit of the other by
the excessive rigidity of the principle of the obligatory force
of contract. (IV Tolentino, Civil Code of the Philippines, 1986
Ed., pp. 247-248.)’’ (Naga Telephone Co., Inc. vs. Court of
Appeals, 230 SCRA 351 [1994].)

YAM v. CA
G.R. No. 104726, 11 February 1999
FACTS:The parties herein entered into a Loan Agreement
with Assumption of Solidary Liability in the amount of
Php500,000 with 12% annual interest, 2% monthly
penalty, 1.5% monthly service charge and 10% attorney’s
fees and was secured by a chattel mortage on the printing
machines. Petitioner Victor Yam and Yek Sun
subsequently obtained a second Industrial Guarantee and
Loan Fund. The petitioner had paid the first debt, it so
happened that the private respondent was placed under
receivership. The petitioner made a partial payment to
the second loan and the private respondent sent an
answer letter to the that their penalty charges will
decreased provided that they can pay on or before July
30, 1986. Because of the failure of the petitioner to pay
the specific amount (266,146.88++) totaled private
respondent filed a complaint against the petitioner. The
petitioner now contending that they had fully paid their
obligation (410,854.47) where before July 2, 1986, Yam
and his wife the president of the respondent’s
corporation agreed to waive the penalties and services
charge provided petitioners paid the principal and
interest.
ISSUE:Whether or not there was a condonation on
petitioner’s loan.
Petitioners Victor Yam and Yek Sun obtained an IGLF loan
from respondent Manphil Invest Corporation in the amount
of Php 300,000 with interest. It was secured by chattel
mortgage. On April 2, 1985, respondent was placed under
receivership of Central Bank. Petitioners paid on July 31,
1986 which was received by Central Bank. It contained a
notation on the voucher that there was already a full
payment of IGLF loan. However, respondent filed a
collection case against petitioner after it failed to pay the
remaining balance. Petitioner contended that through
respondent’s president, Carlos Sobrepeñas, it was agreed to
condone or waive the penalties and service charges as well
as a voucher showing the full payment of the petitioners.
The trial court rendered a decision in favor of respondents
which was sustained by CA.
ISSUE:
Whether or not there was condonation on petitioner’s loan
HELD:
NO. The appointment of a receiver operates to suspend the
authority of a corporation and of its directors and officers
over its property and effects, such authority being reposed
in the receiver. Sobrepeñas has no authority to condone the
debt. The notation on the voucher covering the check
payment that a “full payment of IGLF loan” was made does
not bind respondent. It would have been different if the
notated appeared in the receipt issued by the corporation
through its receiver, which would be an admission against
interest. Express condonation must comply the forms of
donation. Where the value exceeds Php 5,000, the donation
and acceptance must be made in writing; otherwise, void.

RULING:No, it is to be noted that the alleged agreement

to condone the amount in question was supposedly
entered into by the parties sometime in July 1986, that is,
after respondent corporation had been placed under
receivership on November 4, 1985. As held in. Thus,
Sobrepeas had no authority to condone the debt. The
appointment of a receiver operates to suspend the
authority of a corporation and of its directors and officers
over its property and effects, such authority being
reposed in the receiver. SOBROPENAS has no authority to
condone the debt. The notation of the voucher covering
the check payment that a “full payment of IGLF Loan” was
made does not bind the respondent.

In the case at bar, it is undisputed that the alleged

agreement to condone P266,146.88 of the second IGLF
loan was not reduced in writing. Art. 1270, par. 2 of the
Civil Code provides that express condonation must
comply with the forms of donation. Art. 748, par. 3
provides that the donation and acceptance of a movable,
the value of which exceeds P5,000.00, must be made in
writing, otherwise the same shall be void.

FACTS:
OCCENA vs. CA
“The Civil Code authorizes the release of an obligor when the service
has become so difficult as to be manifestly beyond the
contemplation of the parties but does not authorize the courts to
modify or revise the subdivision contract between the parties or fix
a different sharing ratio from that contractually stipulated with the
force of law between the parties”,
FACTS: On February 25, 1975 Tropical Homes, Inc. filed a complaint
for modification of the terms and conditions of its subdivision
contract with petitioners (landowners of a 55,330 square meter
parcel of land in Davao City), making the following allegations:
"That due to the increase in price of oil and its derivatives and the
concomitant worldwide spiralling of prices, which are not within
the control of plaintiff, of all commodities including basis raw
materials required for such development work, the cost of
development has risen to levels which are unanticipated,
unimagined and not within the remotest contemplation of the
parties at the time said agreement was entered into and to such a
degree that the conditions and factors which formed the original
basis of said contract, have been totally changed; 'That further
performance by the plaintiff under the contract.
beyond their contemplation, it would be doing violence to that
intention to hold the obligor still responsible.
If respondent's complaint were to be released from having to
comply with the subdivision contract, assuming it could show at the
trial that the service undertaken contractually by it had "become so
difficult as to be manifestly beyond the contemplation of the
parties", then respondent court's upholding of respondent's
complaint and dismissal of the petition would be justifiable under
the cited codal article. Without said article, respondent would
remain bound by its contract under the theretofore prevailing
doctrine that performance therewith is to excused "by the fact that
the contract turns out to be hard and improvident, unprofitable, or
unexpectedly burdensome", since in case a party desires to be
excuse from performance in the event of such contingencies
arising, it is his duty to provide therefor in the contract.
Respondent's complaint for modification of contract manifestly
has no basis in law and therefore states no cause of action. Under
the particular allegations of respondent's complaint and the
circumstances therein averred, the courts cannot even in equity
grant the relief sought.

That further performance by the plaintiff under the contract, will

result in situation where defendants would be unjustly enriched at
the expense of the plaintiff; will cause an inequitous distribution of
proceeds from the sales of subdivided lots in manifest actually
result in the unjust and intolerable exposure of plaintiff to
implacable losses, all such situations resulting in an
unconscionable, unjust and immoral situation contrary to and in
violation of the primordial concepts of good faith, fairness and
equity which should pervade all human relations.

Under the subdivision contract, respondent "guaranteed

(petitioners as landowners) as the latter's fixed and sole share and
participation an amount equivalent to forty (40%) percent of all
cash receifpts fromthe sale of the subdivision lots"

ISSUE: WON the CA is correct in ruling that the obligor (Tropical

Homes Inc) may be released of its obligation due to the difficulties
for the fulfillment of the obligations stipulated in the contract?

HELD: No, for failure to state a cause of action. Although Article

1267 of the Civil Code provides that:

ART. 1267. When the service has become so

difficult as to be manifestly beyond the
contemplation of the parties, the obligor may
also be released therefrom, in whole or in
part. 1

... a positive right is created in favor of the

obligor to be released from the performance of
an obligation in full or in part when its
performance 'has become so difficult as to be
manifestly beyond the contemplation of the
parties.

The general rule is that impossibility of performance releases the

obligor. However, it is submitted that when the service has become
so difficult as to be manifestly beyond the contemplation of the
parties, the court should be authorized to release the obligor in
whole or in part. The intention of the parties should govern and if
it appears that the service turns out to be so difficult as have been

G.R. No. 116896. May 5, 1997
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION vs
CA
Facts:
 PNCC, debtor, executed a lease contract on
November 18, 1985 with herein private
respondents. Under the Agreement, the term of
lease shall be for 5 years, commencing on the date
of issuance of the industrial clearance by the
Ministry of Human Settlements (par 1). PNCC will
pay 20,000 pesos monthly (par 2). It will pay yearly
and the first annual rent shall be due and payable
upon the execution of the Agreement (par 3).
 PNCC obtained from the Ministry of Human
Settlements a Temporary Use Permit (valid for 2
years) for the proposed rock crushing business
 Respondents demanded payment from PNCC.
 PNCC refused to pay arguing that under par 1 of the
lease contract, payment would commence form the
date of issuance of industrial clearance and not
from the date of signing the contract. They also
expressed intention to terminate the contract, as it
had decided to cancel or discontinue with the rock
crushing project due to financial, as well as
technical, difficulties.
 Respondents refused and insisted on the
performance of petitioner’s obligation. They filed
an action against petitioner for Specific
Performance with damages. Trial court rendered
judgment in favor of the respondent and ordered
PNCC to pay the private respondents.
 Petitioner PNCC appealed. Contentions:
1. That the issuance of industrial clearance is a
suspensive condition without which the rights
under contract would not be acquired.
Temporary Use Permit – not the industrial
clearance referred in the contract (not the
main issue. Court’s answer: Petitioner is
estopped from claiming that the Temporary
Use Permit was not the industrial clearance
referred to in the contract. In its letter, it can
be gleaned that they considered the permit as
the industrial clearance)
2. That Article 1266 and the principle of rebus sic
stantibus should apply. PNCC should be
released from the obligatory force of the
contract of lease because the purpose of the
contract did not materialize due to unforeseen
events and causes beyond its control (i.e.
abrupt change in political climate after the
EDSA revolution and financial difficulties)
Issue: WON Article 1266 and the principle of rebus sic
stantibus should be applied in the case, thus, releasing PNCC
from its obligation?
Ruling: No. As a general rule, contracts, once perfected, bind
both parties, and have the force of law. But the law
recognizes exceptions to the principle of the obligatory force
of contracts. One exception is laid down in Article 1266 of
the Civil Code, which reads:
The debtor in obligations to do shall also be
released when the prestation becomes legally or
physically impossible without the fault of the
obligor.
Petitioner cannot successfully take refuge in the provision
since it is applicable only to obligations "to do", and not to
obligations "to give". An obligation "to do" includes all kinds
of work or service; while an obligation "to give" is a
prestation which consists in the delivery of a movable or an
immovable thing. The obligation to pay rentals or deliver
the thing in a contract of lease falls within the prestation to
give; hence, it is not covered within Article 1266.
At any rate, the unforeseen event and causes mentioned by
petitioner are not the legal or physical impossibilities
contemplated in said article. Besides, petitioner failed to
state specifically the circumstances brought about by the
abrupt change in the political climate in the country except
the alleged prevailing uncertainties in government policies
on infrastructure projects.
The principle of rebus sic stantibus neither fits in with the
facts of the case. Under this theory, the parties stipulate in
the light of certain prevailing conditions, and once these
conditions cease to exist the contract also ceases to
exist. This theory is said to be the basis of Article 1267 of the
Civil Code, which provides:
ART. 1267. When the service has become so
difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also
be released therefrom, in whole or in part.
This article, which enunciates the doctrine of unforeseen
events, is not, however, an absolute application of the
principle of rebus sic stantibus. The parties to the contract
must be presumed to have assumed the risks of
unfavorable developments. It is therefore only in
absolutely exceptional changes of circumstances that
equity demands assistance for the debtor.
In this case, petitioner wants this Court to believe that the
abrupt change in the political climate of the country after the
EDSA Revolution and its poor financial condition rendered
the performance of the lease contract impractical and
inimical to the corporate survival of the petitioner.
This Court cannot subscribe to this argument.
1983 – Aquino was assassinated; country has
experienced political upheavals, turmoils, almost
daily mass demonstrations, unprecedented,
inflation, peace and order deterioration
November 3, 1985 – Marcos announced that
there’d be snap election
 November 18, 1985 – notwithstanding the above,
PNCC entered into contract of lease with private
respondents with open eyes of the deteriorating
conditions of the country

Petitioner alleged poor financial condition

The same will neither release petitioner from the binding

effect of the contract of lease. Mere pecuniary inability to
fulfill an engagement does not discharge a contractual
obligation, nor does it constitute a defense to an action for
specific performance.

Non-materialization of petitioner’s rock crushing plant

Non-materialization will not invalidate the contract. The

cause or essential purpose in a contract of lease is the use or
enjoyment of a thing. As a general principle, the motive or
particular purpose of a party in entering into a contract
does not affect the validity or existence of the contract; an
exception is when the realization of such motive or
particular purpose has been made a condition upon which
the contract is made to depend. The exception is not
applicable here.