PNCC vs CA not the legal or physical impossibilities con- templated in the

said article. Besides, petitioner failed to state specifically the

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

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

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