Mariano vs. Petron Corporation

A lessor's continued acceptance of rental payments despite knowledge of circumstances indicating an unconsented assignment of the lease constitutes a waiver of the right to judicially eject the lessee under Article 1673(3) of the Civil Code, and an action based on a written contract, including one seeking rescission for breach, prescribes in ten years from the accrual of the right of action under Article 1144(1).

In 1968, the Aure Group, owners of a 2,064-square-meter parcel of land in Tagaytay City, leased the property to ESSO Standard Eastern, Inc., a foreign corporation doing business in the Philippines through its subsidiary ESSO Standard Philippines, Inc. The lease period was 90 years, ending in 2058. The contract contained an assignment veto clause prohibiting assignment without prior written consent, except to specified corporations controlled by Standard Oil Company. In 1977, ESSO Eastern sold ESSO Philippines to the Philippine National Oil Corporation. The Aure Group was not informed of the sale. ESSO Philippines, later renamed Petrophil Corporation and subsequently Petron Corporation, continued possessing the property and paying rent. In 1993, Romeo D. Mariano purchased the property from the Aure Group with full knowledge of the annotated lease. In 1998, Mariano sent a notice to vacate, invoking PD 471's reduction of alien lease periods to 25 years, and later sued for rescission and recovery of possession.

The Lease Contract:

On 5 November 1968, the Aure Group (Pacita V. Aure, Nicomedes Aure Bundac, and Zeny Abundo), owners of a 2,064-square-meter parcel of land in Tagaytay City covered by TCT No. T-6190, leased the property to ESSO Standard Eastern, Inc., a Delaware corporation licensed to do business in the Philippines under the name "Esso Standard Philippines." The lease period was 90 years, ending on 5 November 2058, with rent at ₱740 monthly for the first ten years and ₱1 annually thereafter. The contract contained an assignment veto clause requiring prior written consent for any assignment, except that ESSO Eastern could unilaterally assign its rights to Standard Oil Company (a New Jersey corporation) or any company 50% or more of whose capital stock was owned or controlled by Standard Oil Company. ESSO Philippines took possession of the property as ESSO Eastern's Philippine operating arm.

The Sale to PNOC:

On 23 December 1977, ESSO Eastern sold ESSO Philippines to the Philippine National Oil Corporation, a government-owned corporation. The Aure Group was not formally notified of this transaction. In the Joint Motion for Judgment subsequently filed by the parties in the trial court, Petron admitted that "PNOC, a corporation wholly owned by the Philippine Government, acquired ownership of ESSO Standard Philippines, Inc., including its leasehold right over the land in question, through the acquisition of its shares of stocks." ESSO Philippines' corporate name was successively changed to Petrophil Corporation and then to Petron Corporation. Throughout these changes, the lessee continued possessing the property and paying rent, which the Aure Group continued accepting.

Petitioner's Acquisition and Demand to Vacate:

On 18 November 1993, Romeo D. Mariano purchased the property from the Aure Group and obtained TCT No. T-29178 in his name, bearing the annotation of ESSO Eastern's lease. On 17 December 1998, Mariano sent Petron a notice to vacate, asserting that PD 471 had reduced the lease term from 90 to 25 years, ending on 13 November 1993. Petron received the notice on 21 December 1998 but refused to vacate.

The Complaint:

On 18 March 1999, Mariano filed suit in the RTC of Tagaytay City, Branch 18, seeking rescission of the lease contract and recovery of possession. He invoked two grounds: (1) PD 471 reduced the lease to 25 years, which had expired; and (2) the sale of ESSO Philippines to PNOC constituted an unconsented assignment of the lease, breaching the assignment veto clause and terminating the contract. Petron answered that PNOC merely acquired shares in ESSO Philippines, a separate corporate entity, and that the suit was barred by prescription under Article 1389 (four years for rescission of voidable contracts) and Article 1146(1) (four years for actions upon an injury to rights), computed from 23 December 1977. Petron also argued PD 471 could not be applied retroactively without violating constitutional prohibitions on ex post facto laws and impairment of contracts.

• Breach of Assignment Veto Clause: Petitioner argued that ESSO Eastern's sale of ESSO Philippines to PNOC, including the leasehold right over the property as admitted in the Joint Motion, constituted an unconsented assignment in violation of the contract's assignment veto clause. This breach extinguished the lease contract and gave rise to an implied new lease terminable at will.

• PD 471 Reduced the Lease Term: Petitioner maintained that Presidential Decree No. 471, fixing a maximum period of 25 years for leases of private lands to aliens, reduced the contract's duration to 25 years, ending on 13 November 1993.

• Right to Recover Possession: Petitioner asserted that Petron's continued possession after the lease's termination was unlawful, entitling him to rescission and recovery of the property.

• Separate Corporate Personality: Petron countered that PNOC merely acquired ESSO Eastern's shares in ESSO Philippines, a separate corporate entity, and therefore no assignment of the lease occurred. Petron distanced itself from its admission in the Joint Motion and invoked the doctrine of separate corporate personality to distinguish its rights from those of PNOC.

• Prescription: Petron argued that the action for rescission was barred by the four-year prescriptive period under Article 1389 (rescission of voidable contracts) and Article 1146(1) (actions upon an injury to the rights of the plaintiff) of the Civil Code, computed from PNOC's acquisition of ESSO Philippines on 23 December 1977.

• Non-Retroactivity of PD 471: Petron contended that applying PD 471 retroactively to shorten an existing lease contract would violate the constitutional prohibition against ex post facto laws and the impairment of contractual obligations.

• Assignment of Lease: Whether ESSO Eastern's sale of ESSO Philippines to PNOC constituted an unconsented assignment of the leasehold right in violation of the contract's assignment veto clause.

• Waiver of Right to Eject: Whether the Aure Group's and petitioner's continued acceptance of lease payments despite knowledge of the change in the lessee's identity constituted a waiver of the right to seek ejectment under Article 1673(3) of the Civil Code.

• Prescription of Action: Whether petitioner's suit, filed nearly 22 years after PNOC's acquisition of ESSO Philippines and almost six years after petitioner purchased the property, was barred by prescription.

• Assignment of Lease: The sale of ESSO Philippines to PNOC constituted an unconsented assignment of ESSO Eastern's leasehold right over the property, breaching the contract's assignment veto clause. Petron's admission in the Joint Motion — that PNOC "acquired ownership of ESSO Standard Philippines, Inc., including its leasehold right over the land in question, through the acquisition of its shares of stocks" — was controlling. PNOC's buy-out was total and unconditional, leaving ESSO Eastern with no residual rights. The change of ownership carried with it the transfer of any proprietary interest ESSO Eastern held through ESSO Philippines. Petron's reliance on its separate corporate personality was misplaced. ESSO Philippines was a mere alter ego of ESSO Eastern: ESSO Eastern itself admitted in the contract that it was doing business in the Philippines "under the business name and style of 'Esso Standard Philippines,'" the contract was executed by ESSO Eastern as lessee, and ESSO Philippines merely took possession as ESSO Eastern's operating branch. Where a subsidiary is wholly or almost wholly owned by its parent, the structural and systems overlap often renders the subsidiary a mere local branch, agency, or adjunct. The fiction of corporate personality yields when invoked to justify wrong or defeat the ends of justice.

• Waiver of Right to Eject: Despite the breach, the lease contract subsisted. ESSO Eastern's violation of the assignment veto clause merely gave rise to a cause of action for the lessor to seek the lessee's ejectment under Article 1673, paragraph 3 of the Civil Code. The breach did not automatically extinguish the contract or create an implied new lease, as the trial court erroneously concluded. The successive changes in the lessee's name — from ESSO Philippines to Petrophil Corporation to Petron — sufficed to alert the Aure Group of a likely change in the lessee's personality, which, for lack of prior consent, was in obvious breach of the contract. By continuing to receive lease payments despite such notice, the Aure Group, and later petitioner Mariano who purchased the property with full knowledge of the annotated lease, waived their option to eject the lessee. Waiver resulted from the lessors' conduct in accepting benefits under the contract while aware of the breach.

• Prescription of Action: Petitioner's suit was barred by the ten-year prescriptive period under Article 1144(1) of the Civil Code for actions based upon a written contract. Petitioner filed his complaint nearly 22 years after PNOC acquired the leasehold rights (1977) and almost six years after he purchased the property (1993). The more than two decades' lapse placed the case well beyond the prescriptive period. The Court of Appeals erred in applying the four-year period under Article 1389 or Article 1146(1), but the error was immaterial; the action was barred under the correct provision — Article 1144(1) — which provided a ten-year period that had long expired.

• Doctrine of Waiver by Acceptance of Benefits — A party who, with knowledge of a breach of contract, continues to accept benefits under the contract waives the right to rescind or to seek enforcement of the penalty for such breach. In the context of lease contracts, a lessor's continued acceptance of rental payments despite awareness of circumstances indicating an unconsented assignment constitutes waiver of the right to judicially eject the lessee under Article 1673(3) of the Civil Code. The Court applied this principle to hold that the Aure Group and petitioner, by accepting lease payments for more than two decades while the lessee's corporate name repeatedly changed, waived the right to eject Petron for the unconsented assignment to PNOC.

• Doctrine of Piercing the Corporate Veil / Alter Ego Doctrine — The fiction of separate corporate personality yields to reality when the corporate form is used to justify wrong, protect fraud, or defend crime. The doctrine applies with lesser force to subsidiary corporations wholly or almost wholly owned by a parent company, where structural and systems overlap often renders the subsidiary a mere local branch, agency, or adjunct of the foreign parent. The Court applied this doctrine to treat ESSO Philippines as the alter ego of ESSO Eastern, enabling the conclusion that the sale of ESSO Philippines' shares to PNOC effected an assignment of ESSO Eastern's leasehold right.

• Assignment of Lease under Article 1649 — A lessee cannot assign the lease without the consent of the lessor, unless there is a stipulation to the contrary. The assignment veto clause in the contract modified this general rule by additionally prohibiting the lessor from assigning without the lessee's consent, while carving out exceptions for specified entities related to Standard Oil Company.

• Article 1673(3) — Grounds for Judicial Ejectment — Violation of any of the conditions agreed upon in the lease contract constitutes a ground for the lessor to judicially eject the lessee. The breach does not automatically extinguish the contract; it merely vests the lessor with a cause of action for ejectment.

• Prescription of Actions Based on Written Contracts — Article 1144(1) — Actions based upon a written contract must be brought within ten years from the time the right of action accrues. The Court applied this provision to bar petitioner's suit, the right of action having accrued upon the Aure Group's discovery of the unconsented assignment in 1977 or shortly thereafter.

• "Courts are loathe to pierce the fictive veil of corporate personality, cognizant of the core doctrine in corporation law vesting on corporations legal personality distinct from their shareholders (individual or corporate) thus facilitating the conduct of corporate business. However, fiction gives way to reality when the corporate personality is foisted to justify wrong, protect fraud, or defend crime, thwarting the ends of justice." — This passage articulates the general rule on corporate personality alongside its principal exception, grounding the Court's alter ego analysis.

• "The fiction even holds lesser sway for subsidiary corporations whose shares are wholly if not almost wholly owned by its parent company. The structural and systems overlap inherent in parent and subsidiary relations often render the subsidiary as mere local branch, agency or adjunct of the foreign parent corporation." — This excerpt establishes the lowered threshold for piercing the corporate veil in parent-subsidiary relationships, directly applicable to ESSO Eastern and ESSO Philippines.

• "Thus, the continued receipt of lease payments by the Aure Group (and later by petitioner) despite the contractual breach amounted to a waiver of their option to eject the lessee." — This encapsulates the waiver doctrine central to the Court's resolution.

• Koppel (Phils.), Inc. v. Yatco, 77 Phil. 496 (1946) — Cited as controlling authority on the doctrine of piercing the corporate veil, establishing that corporate personality must yield when used to justify wrong, protect fraud, or defeat the ends of justice, and that the doctrine applies with particular force to wholly-owned subsidiaries functioning as mere adjuncts of parent corporations.

• Lim Tay v. Court of Appeals, 355 Phil. 381 (1998) — Cited for the requisites of novation: novation occurs only (1) by express agreement, or (2) when the old and new obligations are incompatible on every point. The Court used this to reject the trial court's conclusion that the unconsented assignment novated the lease contract.

• Article 1649, Civil Code — Provides that the lessee cannot assign the lease without the consent of the lessor, unless there is a stipulation to the contrary. The contract's assignment veto clause was a modification expanding this prohibition to both parties while creating exceptions for Standard Oil-affiliated entities.

• Article 1673(3), Civil Code — Enumerates the grounds for judicial ejectment, including violation of conditions agreed upon in the contract. The Court relied on this provision to hold that the unconsented assignment merely gave the lessor a cause of action for ejectment rather than automatically extinguishing the lease.

• Article 1144(1), Civil Code — Prescribes a ten-year period for actions based upon a written contract, counted from the accrual of the right of action. Applied to bar petitioner's complaint filed nearly 22 years after the breach.

• Presidential Decree No. 471 (1974) — Fixed a maximum period of 25 years for the lease of private lands to aliens. Invoked by petitioner but not ruled upon by the Court, the issue having been rendered moot by the waiver and prescription holdings.

• Justice Arturo D. Brion
• Justice Diosdado M. Peralta (designated additional member per Raffle dated 18 January 2010)
• Justice Mariano C. Del Castillo
• Justice Jose P. Perez

N/A — The decision was unanimous among the participating justices.