Comglasco Corporation/Aguila Glass vs. Santos Car Check Center Corporation

Article 1267 of the Civil Code applies only to personal prestations involving acts of service ("to do"), not to obligations involving the delivery of money or things ("to give") such as the payment of lease rentals. Consequently, a lessee cannot invoke unforeseen economic difficulties or the doctrine of rebus sic stantibus to avoid liability for unpaid rents under a lease contract.

Santos Car Check Center Corporation (Santos) owned a showroom located at 75 Delgado Street, Iloilo City. On August 16, 2000, it entered into a five-year lease contract with Comglasco Corporation (Comglasco), engaged in automobile windshield sales and repair, for monthly rentals of P60,000.00 (first year), P66,000.00 (second year), and P72,600.00 (third to fifth years). Paragraph 15 of the contract permitted pre-termination with cause within the first three years and without cause thereafter.

• The Lease Contract: On August 16, 2000, Santos leased its showroom to Comglasco for five years at progressively increasing monthly rates. Paragraph 15 of the contract allowed pre-termination with cause during the first three years and without cause thereafter.

• Pre-termination and Vacating: On October 4, 2001, Comglasco advised Santos of its intent to pre-terminate the lease effective December 1, 2001, citing business reverses attributed to the 1997 Asian financial crisis. Santos refused, reminding Comglasco of the five-year term. Notwithstanding the refusal, Comglasco vacated the premises on January 15, 2002, and ceased paying rentals.

• Demands and Suit: Santos sent several demand letters between January 2002 and September 15, 2003, all of which Comglasco ignored. On October 20, 2003, Santos instituted suit for breach of contract.

• Procedural Posture: Summons was served on January 21, 2004. Comglasco initially moved to dismiss on the ground of improper service, but the RTC dismissed the motion and ordered new service. Comglasco filed its Answer on June 28, 2004. Santos subsequently moved for judgment on the pleadings.

• The Answer: In its Answer, Comglasco admitted: (a) Santos' absolute title to the showroom; (b) the execution of the five-year lease; (c) the rental rates; (d) its pre-termination of the lease; (e) its vacation of the premises on January 15, 2002; and (f) the validity of the lease contract. The Answer invoked Article 1267 of the Civil Code, claiming that the 1997 Asian financial crisis rendered performance "manifestly beyond the contemplation of the parties."

• Applicability of Article 1267: Comglasco maintained that the 1997 Asian financial crisis constituted a valid "cause" for pre-termination under Paragraph 15 of the lease contract and invoked Article 1267 of the Civil Code. It argued that business reverses from the crisis made compliance with the lease terms so difficult as to be manifestly beyond the parties' contemplation, thereby releasing it from obligation.

• Propriety of Judgment on the Pleadings: Petitioner argued that the RTC erred in granting judgment on the pleadings because its Answer raised a valid defense under Article 1267, thereby tendering a genuine issue requiring reception of evidence. It contended that summary judgment, not judgment on the pleadings, would have been the proper recourse after a hearing on its alleged "cause" for pre-termination.

• Credit for Deposits: Comglasco insisted that its advance rentals and security deposit totaling P309,000.00 should be credited against any amount awarded to Santos.

• Damages: Petitioner asserted that the trial court lacked factual and legal basis for awarding attorney's fees, litigation expenses, and exemplary damages.

• Nature of Obligation: Respondent countered that the obligation to pay rentals constitutes a prestation "to give," not "to do," and thus falls outside the scope of Articles 1266 and 1267. Citing Philippine National Construction Corporation v. CA, respondent argued that mere pecuniary inability does not discharge contractual obligations.

• Admission in the Answer: Respondent argued that Comglasco's Answer admitted all material allegations in the complaint, including the existence and validity of the lease, the pre-termination, and the failure to pay rentals. The invocation of Article 1267 was deemed a sham or fictitious issue because Comglasco entered the lease in August 2000, well after the 1997 crisis, with full knowledge of business risks.

• Attorney's Fees: Respondent maintained that attorney's fees were proper under Article 2208(2) of the Civil Code, as Comglasco's refusal to pay compelled Santos to litigate to protect its interests.

• Scope of Article 1267: Whether Article 1267 applies to the obligation to pay lease rentals under a contract of lease.

• Judgment on the Pleadings: Whether the trial court properly granted judgment on the pleadings under Rule 34 of the Rules of Court.

• Genuine Issue: Whether Comglasco's Answer tendered a genuine issue of fact precluding judgment on the pleadings.

• Advance Rentals: Whether Comglasco may credit advance rentals and deposits against the judgment award.

• Attorney's Fees: Whether attorney's fees may be awarded without proof and legal basis.

• Article 1267 Inapplicable to Lease Rentals: Article 1267 applies only to personal prestations involving acts of service ("to do"), not to obligations involving the payment of money or delivery of things ("to give"). The obligation to pay lease rentals falls within the latter category. Citing Philippine National Construction Corporation v. CA, the Court held that unforeseen events and financial difficulties do not excuse the lessee from contractual obligations unless performance becomes legally or physically impossible, not merely economically burdensome.

• No Absolutely Exceptional Change of Circumstances: The doctrine of rebus sic stantibus, underlying Article 1267, does not apply absolutely and requires "absolutely exceptional changes of circumstances" before equity will assist the debtor. Comglasco entered the lease contract on August 16, 2000, more than three years after the 1997 Asian financial crisis began, and thus assumed the risk of unfavorable business conditions with open eyes.

• Judgment on the Pleadings Proper: The grant of judgment on the pleadings was proper under Section 1, Rule 34. Comglasco's Answer admitted the material allegations regarding the lease contract, the pre-termination, the vacation of premises, and the failure to pay rents. The defense based on Article 1267 constituted a sham or fictitious issue because it lacked legal merit regarding the nature of the obligation.

• Advance Rentals Not Properly Raised: The claim for credit of advance rentals and deposits totaling P309,000.00 cannot be entertained where it was never raised in the Answer before the trial court nor in the appeal to the CA. Issues not raised below cannot be raised for the first time on appeal to the Supreme Court.

• Attorney's Fees Proper but Reduced: Attorney's fees are recoverable under Article 2208(2) of the Civil Code where the defendant's act or omission has compelled the plaintiff to incur expenses to protect his interest. Comglasco's pre-termination and refusal to respond to demands necessitated litigation. However, the reduction by the CA from P200,000.00 to P100,000.00 was affirmed as more reasonable.

• Article 1267 Limitation — Article 1267 of the Civil Code applies exclusively to obligations involving personal service or acts of performance ("to do"). It does not cover obligations involving the delivery of money or things ("to give"), such as the payment of lease rentals. The doctrine of rebus sic stantibus, while underlying Article 1267, is not absolutely applied to avoid endangering the security of contractual relations; parties are presumed to have assumed ordinary business risks.

• Judgment on the Pleadings — Under Section 1, Rule 34 of the Rules of Court, judgment on the pleadings is proper when the answer fails to tender a genuine issue of fact or otherwise admits the material allegations of the adverse party's pleading. A genuine issue requires the presentation of evidence, as distinguished from a sham, fictitious, contrived, or false issue.

• Pecuniary Inability — Mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation nor constitute a defense to an action for specific performance.

• "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 petitioner are not the legal or physical impossibilities contemplated in said article."

• "This article [1267], 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."

• "A judgment on the pleadings is a judgment on the facts as pleaded, and is based exclusively upon the allegations appearing in the pleadings of the parties and the accompanying annexes."

• Philippine National Construction Corporation v. Court of Appeals, 338 Phil. 691 (1997) — Controlling precedent holding that Article 1267 does not apply to lease contracts for payment of rentals; established that obligation to pay rentals is a prestation "to give" not covered by Articles 1266 and 1267.

• Central Bank v. Court of Appeals — Cited for the principle that mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation.

• Narra Integrated Corporation v. Court of Appeals, 398 Phil. 733 (2000) — Cited for the definition of judgment on the pleadings as a judgment on the facts as pleaded.

• Sunbanun v. Go, 625 Phil. 159 (2010) — Cited for the principle that judgment on the pleadings is based exclusively upon allegations in the pleadings.

• Sps. Hontiveros v. RTC, Br. 25, Iloilo City, 368 Phil. 653 (1999) — Cited for the trial court's discretion to grant judgment on the pleadings when no controverted matter exists.

• Manufacturers Hanover Trust Co. v. Guerrero, 445 Phil. 770 (2003) — Cited for the distinction between genuine issues (requiring evidence) and sham or fictitious issues.

• Article 1267, Civil Code — Provides that when service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may be released. Applied to limit scope to "to do" obligations only.

• Article 2208(2), Civil Code — Allows recovery of attorney's fees in the absence of stipulation when the defendant's act or omission has compelled the plaintiff to incur expenses to protect his interest.

• Section 1, Rule 34, Rules of Court — Governs judgment on the pleadings when an answer fails to tender an issue or admits material allegations.

• Section 2, Rule 35, Rules of Court — Governs summary judgment for defending party; noted as the proper remedy Comglasco failed to avail when it had the opportunity to present evidence by affidavit.

Presbitero J. Velasco, Jr. (Chairperson), Diosdado M. Peralta, Martin S. Villarama, Jr., and Francis H. Jardeleza.