Iloilo Jar Corporation vs. Comglasco Corporation/Aguila Glass

Article 1267 of the Civil Code, which releases an obligor when service becomes so difficult as to be manifestly beyond the contemplation of the parties, applies only to obligations "to do" and not to obligations "to give"; consequently, it cannot be invoked to pre-terminate lease contracts which involve the obligation to pay rentals (an obligation to give), and a summary judgment is proper when the affirmative defense raised is legally inapplicable and no genuine issue of fact exists.

Iloilo Jar Corporation entered into a three-year lease contract with Comglasco Corporation/Aguila Glass over a warehouse portion in Iloilo City. Comglasco requested pre-termination of the lease in December 2001 due to economic crisis, which Iloilo Jar rejected. Despite the rejection, Comglasco removed its stocks and equipment in January 2002 and ceased paying rentals. Iloilo Jar sent demand letters which were ignored, prompting the filing of a civil action for breach of contract and damages before the Regional Trial Court.

• On August 16, 2000, petitioner Iloilo Jar Corporation and respondent Comglasco Corporation/Aguila Glass entered into a lease contract for a portion of a warehouse building with an estimated floor area of 450 square meters located in Barangay Lapuz, La Paz District, Iloilo City, for a term of three years until August 15, 2003.
• On December 1, 2001, Comglasco requested the pre-termination of the lease effective the same date, citing financial difficulties due to the global and regional economic crisis.
• Iloilo Jar rejected the request for pre-termination on the ground that the lease contract did not contain a stipulation allowing pre-termination.
• Despite the denial, Comglasco removed all its stock, merchandise, and equipment from the leased premises on January 15, 2002, and ceased paying rentals from that date.
• Iloilo Jar sent several demand letters to Comglasco, including a final demand letter on September 14, 2003, which were ignored.
• On October 10, 2003, Iloilo Jar filed a civil action for breach of contract and damages before the Regional Trial Court.
• In its Answer filed on June 28, 2004, Comglasco admitted removing its stocks and merchandise and receiving the demand letters, but claimed that the lease contract was deemed terminated by virtue of Article 1267 of the Civil Code due to the economic crisis making performance difficult.
• The RTC granted Iloilo Jar's Motion for Judgment on the Pleadings on August 18, 2004, ruling that Comglasco's answer admitted the material allegations and that Article 1267 was inapplicable to lease contracts.
• The RTC subsequently issued an Amended Order on February 17, 2005, modifying the amounts awarded for unpaid rentals, attorney's fees, litigation expenses, and exemplary damages.
• The Court of Appeals reversed the RTC orders on January 30, 2015, finding that judgment on the pleadings was improper because Comglasco's answer tendered an issue by specifically denying material allegations and raising affirmative defenses.
• Iloilo Jar received notice of the Court of Appeals' resolution denying reconsideration on July 9, 2015, and filed its petition for review on September 24, 2015, one day after the twice-extended deadline of September 23, 2015.

• Iloilo Jar argued that Comglasco's answer materially admitted all allegations in the complaint, particularly the removal of merchandise from the leased premises and the failure to pay subsequent rentals after receiving demand letters.
• It contended that Comglasco's affirmative defense based on Article 1267 of the Civil Code was unavailing because said provision does not apply to lease contracts, which involve obligations "to give" rather than obligations "to do."
• It maintained that Comglasco's answer failed to tender an issue because the defense raised was legally inapplicable to the cause of action stated in the complaint.
• It asserted that the petition for review, though filed one day late, should be entertained in the interest of substantial justice to prevent unnecessary delay in the proceedings.

• Comglasco argued that its answer raised material defenses which rendered judgment on the pleadings improper, as judgment on the pleadings is only available when the answer fails to tender an issue or admits material allegations.
• It asserted that even if the allegations in the complaint were deemed admitted, the affirmative defenses raised could give rise to factual controversies requiring trial.
• It maintained that Article 1267 applied to release it from its obligations under the lease contract due to the economic crisis constituting a change of circumstances beyond contemplation.
• It contended that the petition for review should be dismissed for being filed out of time, emphasizing that procedural rules must be strictly complied with as the right to appeal is merely a statutory privilege.

• Procedural Issues:
  • Whether the Supreme Court should entertain the petition for review on certiorari filed one day after the extended reglementary period.
• Substantive Issues:
  • Whether a defense raised in the answer that is not applicable to the case can be considered as appropriately tendering an issue that needs to be tried by the trial court.
  • Whether a judgment on the pleadings is appropriate and valid when the defense interposed by the defendant is not applicable as a defense to the cause of action as stated in the complaint.
  • Whether Article 1267 of the Civil Code applies to lease contracts involving the obligation to pay rentals.

• Procedural:
  • The Supreme Court relaxed the strict application of procedural rules and entertained the petition despite being filed one day late, citing the need to serve the ends of substantial justice and prevent unnecessary delay in the proceedings.
  • The Court cited precedent establishing that where strong considerations of substantive justice are manifest, strict application of rules of procedure may be relaxed in the exercise of equity jurisdiction.
  • The Court admonished petitioner's counsel, Atty. Raleigh Silvino L. Manikan, for repeated failures to comply with procedural rules, including the belated filing of the petition and failure to file a reply within the allotted time, warning that repetition would be dealt with more severely.
• Substantive:
  • The Court held that while judgment on the pleadings was technically improper because Comglasco's answer raised an affirmative defense, the proper remedy was summary judgment under Rule 35 of the Rules of Court.
  • The Court ruled that Comglasco's affirmative defense based on Article 1267 of the Civil Code did not raise a genuine issue requiring trial because Article 1267 applies only to obligations "to do" and not to obligations "to give."
  • The obligation to pay rentals in a lease contract constitutes an obligation "to give" (specifically, to give money), not an obligation "to do," rendering Article 1267 inapplicable.
  • The Court rejected Comglasco's invocation of the principle of rebus sic stantibus, ruling that financial struggles due to an economic crisis do not constitute an absolutely exceptional change of circumstances that equity demands assistance for the debtor.
  • The Court cited Comglasco's prior case (G.R. No. 202989) where it similarly unsuccessfully invoked Article 1267 in a similar lease termination case, establishing that economic crisis is not an exceptional change of circumstances justifying release from contractual obligations.
  • The Court affirmed the RTC's order for Comglasco to pay unpaid rentals and attorney's fees, but deleted the awards for exemplary damages and litigation expenses because Comglasco's default was based on an erroneous belief of pre-termination, not wanton, fraudulent, reckless, oppressive, or malevolent conduct.
  • The Court modified the interest rate to 12% per annum until June 30, 2013, and 6% per annum from July 1, 2013 until fully satisfied, pursuant to Nacar v. Gallery Frames.

• Judgment on the Pleadings vs. Summary Judgment — Judgment on the pleadings is proper when the answer fails to tender any issue or admits material allegations, while summary judgment is proper when the answer raises issues but no genuine issues exist; a "genuine issue" means an issue of fact requiring presentation of evidence, not one that is fictitious or contrived.
• Article 1267 of the Civil Code (Doctrine of Unforeseen Events/Rebus Sic Stantibus) — This provision applies only to obligations "to do" (work or service) and not to obligations "to give" (delivery of movable or immovable things); the obligation to pay rentals in a lease contract is an obligation "to give" and thus outside the scope of Article 1267.
• Relaxation of Procedural Rules for Substantial Justice — The strict application of procedural rules may be relaxed when strong considerations of substantive justice are manifest, particularly to prevent needless delay and where the merits of the petition warrant swift resolution; however, this is an exception and lawyers remain bound to comply with procedural rules as officers of the court.
• Exemplary Damages in Contractual Obligations — Exemplary damages may be recovered in contractual obligations only if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner; mere erroneous belief regarding contractual rights does not justify such award.

• "Time and again, this Court has emphasized that procedural rules should be treated with utmost respect and due regard, since they are designed to facilitate the adjudication of cases to remedy the worsening problem of delay in the resolution of rival claims and in the administration of justice. From time to time, however, we have recognized exceptions to the Rules, but only for the most compelling reasons where stubborn obedience to the Rules would defeat rather than serve the ends of justice."
• "Simply stated, what distinguishes a judgment on the pleadings from a summary judgment is the presence of issues in the Answer to the Complaint. When the Answer fails to tender any issue, that is, if it does not deny the material allegations in the complaint or admits said material allegations of the adverse party's pleadings by admitting the truthfulness thereof and/or omitting to deal with them at all, a judgment on the pleadings is appropriate. On the other hand, when the Answer specifically denies the material averments of the complaint or asserts affirmative defenses, or in other words raises an issue, a summary judgment is proper provided that the issue raised is not genuine."
• "The obligation to pay rentals or deliver the thing in a contract of lease falls within the prestation 'to give'... 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."

• CMTC International Marketing Corporation v. Bhagis International Trading Corporation — Cited for the principle that procedural rules may be relaxed where strong considerations of substantive justice are manifest, allowing the Court to exercise equity jurisdiction.
• Basbas v. Sayson — Cited to distinguish judgment on the pleadings from summary judgment, establishing that the former is proper when the answer fails to tender issues while the latter applies when issues raised are not genuine.
• Wood Technology Corporation v. Equitable Banking Corporation — Cited for the rule that summary judgment is proper when no genuine issue for trial is raised, and that the crucial inquiry is whether affirmative defenses constitute genuine issues of fact requiring full-blown trial.
• Philippine National Construction Corporation v. Court of Appeals — Cited for the interpretation that Article 1267 applies only to obligations "to do" and not to obligations "to give," distinguishing between work/service and delivery of things.
• COMGLASCO Corporation/Aguila Glass v. Santos Car Check Center Corporation — Cited to show that Comglasco had previously unsuccessfully invoked Article 1267 in a similar lease termination case, establishing that economic crisis is not an exceptional change of circumstances justifying release from contractual obligations.
• Ramos v. China Southern Airlines Co. Ltd — Cited for the rule that exemplary damages require proof of wanton, fraudulent, reckless, oppressive, or malevolent conduct.
• Nacar v. Gallery Frames (cited through Oyster Plaza Hotel v. Melivo) — Cited for the modified interest rate of 12% per annum until June 30, 2013 and 6% per annum from July 1, 2013 until full satisfaction.
• Magsino v. de Ocampo — Cited for the principle that the right to appeal is a statutory privilege requiring strict compliance with procedural requirements.
• Montajes v. People — Cited for the rule that procedural rules may be relaxed to serve substantial justice.

• Article 1267 of the 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; held inapplicable to lease contracts involving obligations "to give."
• Article 2208(2) of the Civil Code — Provides for the recovery of exemplary damages in contractual obligations when the defendant acts in a wanton, fraudulent, reckless, oppressive, or malevolent manner; applied to justify deletion of exemplary damages award.
• Section 1, Rule 34 of the Rules of Court — Governs judgment on the pleadings; applied to determine that such judgment was improper because the answer raised an affirmative defense.
• Rule 35 of the Rules of Court — Governs summary judgment; applied as the proper procedure where the answer raises an affirmative defense but no genuine issue of fact exists.
• Section 2, Rule 45 of the Rules of Court — Prescribes the 15-day period to file petition for review on certiorari and allows one 30-day extension; cited regarding the procedural lapse in filing the petition.
• Canons 1 and 12, Rules 10.03, 12.03, 18.02, and 18.03 of the Code of Professional Responsibility — Cited in admonishing counsel for failure to comply with procedural rules and court processes.