Philippine National Construction Corporation vs. Court of Appeals

A lessee is estopped from denying that a Temporary Use Permit is the industrial clearance contemplated in a lease where its own letters recognized the permit as such and sought mutual termination of the already-operative contract. The obligation to pay rentals under a lease is an obligation "to give," not "to do," and is therefore outside Article 1266 of the Civil Code; mere pecuniary inability and unfavorable political developments do not release the obligor under the doctrine of rebus sic stantibus. Procedural due process requires only an opportunity to be heard, which may be through pleadings as well as oral arguments.

Private respondents owned a parcel of land in Rodriguez (formerly Montalban), Rizal. Petitioner Philippine National Construction Corporation leased an undivided 30,000-square-meter portion of that land for use as a rock crushing plant, field office, sleeping quarters, and canteen or mess hall under a five-year contract executed on 18 November 1985. The contract fixed monthly rent at P20,000, increased yearly by five percent, payable yearly in advance, and provided that the lease term commenced on the date of issuance of an industrial clearance by the Ministry of Human Settlements.

Private respondents Ma. Teresa S. Raymundo-Abarra, Jose S. Raymundo, Antonio S. Raymundo, Rene S. Raymundo, and Amador S. Raymundo owned a parcel of land in Rodriguez (formerly Montalban), Rizal. On 18 November 1985, they entered into a contract of lease with petitioner Philippine National Construction Corporation over an undivided portion of 30,000 square meters of that land. The lease was for five years, commencing on the date of issuance of an industrial clearance by the Ministry of Human Settlements, and renewable for a like or other period at the lessee's option under the same terms. Rent was P20,000 monthly, increased yearly by five percent to P21,000 in the second year, P22,000 in the third, P23,000 in the fourth, and P24,000 in the fifth. Rent was payable yearly in advance, with the first annual rent of P240,000 due upon execution of the agreement and succeeding annual rents payable every twelve months. The property was to be used as the site, grounds, and premises of a rock crushing plant and field office, sleeping quarters, and canteen or mess hall, and the lessors granted the lessee the right to erect necessary structures. The contract could be terminated by mutual agreement, and upon termination or expiration without renewal, the lessee was to vacate the property at its expense.

On 7 January 1986, petitioner obtained from the Ministry of Human Settlements a Temporary Use Permit for the proposed rock crushing project. The permit was valid for two years unless sooner revoked by the Ministry. On 16 January 1986, private respondents wrote petitioner requesting payment of the first annual rental of P240,000, which was due and payable upon execution of the contract. They also assured petitioner that they had already stopped considering proposals of other aggregates plants to lease the property because of the existing contract.

In its reply, petitioner argued that under paragraph 1 of the lease contract, payment of rental would commence on the date of issuance of an industrial clearance by the Ministry of Human Settlements, not from the date of signing of the contract. Petitioner then expressed its intention to terminate the contract because it had decided to cancel or discontinue the rock crushing project due to financial as well as technical difficulties. Private respondents refused to accede to the request for pretermination, insisted on performance of petitioner's obligation, and reiterated their demand for the first annual rental. Petitioner objected and argued that it was only obligated to pay P20,000 as rental for the one-month period of lease counted from 7 January 1986, when the Industrial Permit was issued by the Ministry of Human Settlements, up to 7 February 1986, when the Notice of Termination was served on private respondents.

On 19 May 1986, private respondents instituted an action for Specific Performance with Damages before the Regional Trial Court of Pasig, docketed as Civil Case No. 53444 at Branch 160. After petitioner filed its Answer with Counterclaim, the case was set for trial on the merits. Private respondents rested their case on 7 September 1987. Petitioner repeatedly sought postponements. On 26 September 1988, petitioner's counsel filed an urgent motion for postponement on the ground that he was afflicted with conjunctivitis or sore eyes; private respondents objected, and the trial court deemed terminated and waived the presentation of petitioner's evidence. The court required the parties to submit memoranda, but petitioner failed to comply, while private respondents filed theirs on 26 October 1988. Petitioner's motion for reconsideration was denied, and its second motion for reconsideration was deemed abandoned.

The trial court rendered its decision on 12 April 1989, ordering petitioner to pay private respondents P492,000 representing rentals for two years, with legal interest from 7 January 1986 until fully paid, plus P20,000 attorney's fees and costs. The Court of Appeals affirmed the trial court's decision, and petitioner came to the Supreme Court ascribing the same alleged errors. The temporary permit was valid for two years but was automatically revoked because of its non-use within one year from issuance; the non-use of the permit and the non-entry into the leased property were both imputable to petitioner. Private respondents suffered pecuniary losses because of their inability to use the leased premises.

• Suspensive Condition / Industrial Clearance: Petitioner argued that under paragraph 1 of the lease contract, the lease term commenced only upon issuance of an industrial clearance by the Ministry of Human Settlements, and that the Temporary Use Permit was not the industrial clearance contemplated because it required a clearance from the National Production Control Commission and stated that the proposed project did not conform to the Zoning Ordinance of Rodriguez, Rizal; without the industrial clearance, the lease contract could not become effective and petitioner could not be compelled to perform its obligations.
• Release from Contract / Article 1266 and Rebus Sic Stantibus: Petitioner invoked Article 1266 and the principle of rebus sic stantibus, asserting that it should be released from the obligatory force of the lease because the purpose of the contract did not materialize due to unforeseen events and causes beyond its control, namely the abrupt change in political climate after the EDSA Revolution and financial difficulties.
• Excessive Award: Petitioner claimed that the award of P492,000 representing rent for two years was excessive because it did not benefit from the property and because the temporary permit was deemed automatically revoked for failure to use it within one year from issuance, so rent should only be for one year.
• Denial of Right to be Heard: Petitioner submitted that the trial court gravely abused its discretion in denying petitioner the right to be heard.

• Performance of Lease / Refusal to Terminate: Private respondents refused to accede to petitioner's request for pretermination of the lease contract, insisted on the performance of petitioner's obligation, and reiterated their demand for payment of the first annual rental.
• Rebus Sic Stantibus / Financial Inability: Private respondents pointed out that petitioner entered into the contract on 18 November 1985 despite the political upheavals, turmoil, demonstrations, inflation, peace and order deterioration, and other conditions that followed the assassination of Senator Aquino on 21 August 1983 and the announcement of a snap election for February 7, 1986; petitioner thus entered the contract with open eyes, and its alleged poor financial condition would not release it because mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation nor constitute a defense to an action for specific performance.
• Purpose / Cause of Lease: Private respondents maintained that the non-materialization of petitioner's particular purpose in entering the lease, namely to use the premises as a site of a rock crushing plant, would not invalidate the contract, because the cause or essential purpose in a contract of lease is the use or enjoyment of a thing and the motive or particular purpose of a party does not affect the validity or existence of the contract unless made a condition upon which the contract depends.

• Effectivity of Lease / Suspensive Condition: Whether the Temporary Use Permit issued by the Ministry of Human Settlements was the industrial clearance contemplated in the lease contract, such that the lease became effective and petitioner was obligated to pay rentals from 7 January 1986.
• Release from Contract / Article 1266 and Rebus Sic Stantibus: Whether petitioner may be released from the lease under Article 1266 of the Civil Code or the principle of rebus sic stantibus because of the abrupt change in political climate after the EDSA Revolution and its financial difficulties.
• Excessiveness of Award: Whether the award of P492,000 representing rentals for two years was excessive considering that petitioner did not benefit from the property and the temporary permit was automatically revoked for non-use within one year.
• Due Process / Right to be Heard: Whether the trial court gravely abused its discretion in denying petitioner the right to be heard.

• Effectivity of Lease / Suspensive Condition: Yes. The Temporary Use Permit was the industrial clearance contemplated in the contract, and petitioner was estopped from claiming otherwise because its own letters recognized the permit as such and sought mutual termination of the already-operative lease.
• Release from Contract / Article 1266 and Rebus Sic Stantibus: No. Article 1266 applies only to obligations "to do," not to obligations "to give," and the obligation to pay rentals under a lease is an obligation "to give"; rebus sic stantibus likewise did not apply, and mere pecuniary inability does not discharge a contractual obligation.
• Excessiveness of Award: No. The award of P492,000 was fair and just because the non-use of the permit and non-entry into the property were imputable to petitioner, and private respondents were entitled to indemnification for damages under Article 1659 of the Civil Code.
• Due Process / Right to be Heard: No. Petitioner was not deprived of its day in court; the essence of due process is an opportunity to be heard, which may be through pleadings as well as oral arguments.

• Effectivity of Lease / Suspensive Condition: The lease provided that its term commenced on issuance of an industrial clearance by the Ministry of Human Settlements. Petitioner obtained a Temporary Use Permit from that Ministry on 7 January 1986. In its letter dated 24 April 1986, petitioner stated that it was obligated to pay P20,000 as rental for the one-month period of lease counted from 7 January 1986 when the Industrial Permit was issued by the Ministry of Human Settlements up to 7 February 1986 when the Notice of Termination was served. The "Industrial Permit" mentioned could only refer to the Temporary Use Permit issued on 7 January 1986, and petitioner thereby recognized its obligation to pay rentals counted from the date the permit was issued. Petitioner's earlier letter soliciting private respondents' conformity to the mutual termination of the lease also showed that the suspensive condition had been fulfilled and the lease had become operative; otherwise, no juridical relation existed to terminate. Petitioner's reason for discontinuing the project and cancelling the lease was financial and technical difficulties, not the alleged insufficiency of the Temporary Use Permit. Petitioner was therefore estopped from claiming that the Temporary Use Permit was not the industrial clearance contemplated in the contract.
• Release from Contract / Article 1266 and Rebus Sic Stantibus: Contracts, once perfected, bind both contracting parties, and obligations arising therefrom have the force of law and should be complied with in good faith. Article 1266 of the Civil Code releases the debtor in obligations "to do" when the prestation becomes legally or physically impossible without the obligor's fault. It does not apply to obligations "to give," which include the delivery of a movable or immovable thing for use or possession. The obligation to pay rentals and to deliver the thing in a contract of lease falls within the prestation "to give," so Article 1266 did not cover petitioner's obligation. The unforeseen events and causes petitioner mentioned were not the legal or physical impossibilities contemplated by Article 1266, and petitioner failed to state specifically the circumstances brought about by the abrupt change in political climate except alleged uncertainties in government policies on infrastructure projects. The principle of rebus sic stantibus, said to be the basis of Article 1267, is not an absolute application that would endanger the security of contractual relations; parties are presumed to have assumed the risks of unfavorable developments, and only absolutely exceptional changes of circumstances justify assistance for the debtor. Petitioner entered into the lease on 18 November 1985 despite the political upheavals and deteriorating conditions that had existed before that date, and it did so with open eyes. Its alleged poor financial condition did not release it, because mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation nor constitute a defense to an action for specific performance. The non-materialization of petitioner's particular purpose of using the premises as a rock crushing plant did not invalidate the lease, because the cause or essential purpose in a contract of lease is the use or enjoyment of a thing, and the motive or particular purpose of a party does not affect the validity or existence of the contract unless made a condition upon which the contract depends; that exception did not apply.
• Excessiveness of Award: The temporary permit was valid for two years but was automatically revoked because of its non-use within one year from issuance. The non-use of the permit and the non-entry into the property subject of the lease were both imputable to petitioner and could not be taken advantage of to evade or lessen its monetary obligation. The damage or prejudice to private respondents was beyond dispute; they suffered pecuniary losses because of their inability to use the leased premises. Under Article 1659 of the Civil Code, they were entitled to indemnification for damages, and the award of P492,000 was fair and just under the circumstances.
• Due Process / Right to be Heard: The trial court was liberal in granting several postponements to petitioner before it deemed terminated and waived the presentation of petitioner's evidence. Private respondents rested their case on 7 September 1987. Almost a year later, on 10 August 1988, petitioner's counsel asked for postponement to 25 August 1988 due to conflict of schedules, which was granted. At the rescheduled hearing, petitioner's counsel, through a representative, moved anew for postponement because he was allegedly indisposed, and the case was reset intransferable to 15 and 26 September 1988. On 2 September 1988, the Office of the Government Corporate Counsel entered its appearance for petitioner, and the original counsel later withdrew. On 15 September 1988, Atty. Vega requested postponement to enable him to go over the records, and with his conformity the hearing was reset intransferable to 26 September and 17 October 1988. On the morning of 26 September 1988, the court received Atty. Vega's urgent motion for postponement on the ground that he was afflicted with conjunctivitis or sore eyes. Private respondents objected, and upon their motion the court deemed terminated and waived the presentation of evidence for petitioner. Nevertheless, before considering the case submitted for decision, the court required the parties to submit memoranda within thirty days, but petitioner failed to comply. The court was also liberal with petitioner's motion for reconsideration: despite the lack of request for hearing and proof of notice and service to private respondents, it set the hearing on 29 November 1988. Upon denial of that motion for lack of merit, petitioner filed a second motion for reconsideration, but during the hearing on a date selected by petitioner's counsel, Atty. Vega was absent for no reason at all despite due notice. From these procedural antecedents, petitioner was not deprived of its day in court. The essence of due process is simply an opportunity to be heard; to be heard does not only mean oral arguments in court, as one may be heard also through pleadings. Where opportunity to be heard, either through oral arguments or pleadings, is accorded, there is no denial of procedural due process.

• Estoppel and Fulfillment of Suspensive Condition — A party whose own letters recognized a Temporary Use Permit as the industrial clearance contemplated in a lease, and who sought mutual termination of the lease, is estopped from later denying that the suspensive condition was fulfilled. The lease becomes operative, and the lessee cannot avoid its obligations by asserting that no juridical relation was created.
• Obligations "To Give" versus Obligations "To Do" under Article 1266 — Article 1266 of the Civil Code releases the debtor in obligations "to do" when the prestation becomes legally or physically impossible without the obligor's fault. It does not apply to obligations "to give," which consist in the delivery of a movable or immovable thing to create a real right, for the use of the recipient, for its simple possession, or to return it to its owner. The obligation to pay rentals and to deliver the thing in a contract of lease is an obligation "to give," so Article 1266 cannot release the lessee.
• Rebus Sic Stantibus and Article 1267 — The doctrine of rebus sic stantibus, said to be the basis of Article 1267 of the Civil Code, allows release when the service has become so difficult as to be manifestly beyond the contemplation of the parties. It is not an absolute application that would endanger the security of contractual relations; parties are presumed to have assumed the risks of unfavorable developments, and only absolutely exceptional changes of circumstances justify assistance for the debtor. It did not apply where the political upheavals existed before the contract and the lessee entered with open eyes.
• Mere 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. Petitioner's alleged poor financial condition therefore did not release it from the lease.
• Motive or Particular Purpose in Contracts — The motive or particular purpose of a party in entering into a contract does not affect the validity or existence of the contract, except when the realization of such motive or particular purpose has been made a condition upon which the contract is made to depend. In a contract of lease, the cause or essential purpose is the use or enjoyment of a thing; the non-materialization of petitioner's particular purpose of using the premises as a rock crushing plant did not invalidate the lease.
• Procedural Due Process as Opportunity to be Heard — The essence of due process is an opportunity to be heard. To be heard does not only mean oral arguments in court; one may also be heard through pleadings. Where an opportunity to be heard, either through oral arguments or pleadings, is accorded, there is no denial of procedural due process.

• "Petitioner is now estopped from claiming that the Temporary Use Permit was not the industrial clearance contemplated in the contract." — This states the threshold ruling on the effectivity of the lease and the fulfillment of the suspensive condition, based on petitioner's own letters recognizing the permit as the industrial clearance.
• "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.'" — This is the ratio decidendi for rejecting petitioner's reliance on Article 1266 of the Civil Code, distinguishing obligations to do from obligations to give.
• "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." — This articulates the limiting construction of rebus sic stantibus and Article 1267, explaining why petitioner's political and financial difficulties did not release it from the lease.
• "The essence of due process is simply an opportunity to be heard. To be heard does not only mean oral arguments in court; one may be heard also through pleadings. Where opportunity to be heard, either through oral arguments or pleadings, is accorded, there is no denial of procedural due process." — This is the canonical formulation of procedural due process in the context of petitioner's claim that it was denied the right to be heard.

• Central Bank vs. Court of Appeals, 139 SCRA 46 [1985] — Cited by private respondents and relied on for the rule that mere pecuniary inability to fulfill an engagement does not discharge a contractual obligation nor constitute a defense to an action for specific performance.
• Repide vs. Afzelius, 39 Phil. 190 [1918] — Cited in Central Bank vs. Court of Appeals for the same rule on pecuniary inability and contractual obligation.
• Naga Telephone Co. vs. Court of Appeals, 230 SCRA 351, 365 [1994] — Cited in connection with the principle of rebus sic stantibus and the theory that parties stipulate in light of prevailing conditions, which serves as the basis of Article 1267 of the Civil Code.
• Ocampo vs. Arboleda, 153 SCRA 374, 381 [1987] — Cited in support of the trial court's liberality in granting several postponements to petitioner before deeming its evidence waived.
• Roces vs. Aportadera, 243 SCRA 108, 114 [1995] — Cited for the rule that the essence of due process is an opportunity to be heard.
• Vallende vs. NLRC, 245 SCRA 662, 666-667 [1995] — Cited with Roces vs. Aportadera and Navarro III vs. Damasco for the rule that due process is satisfied by an opportunity to be heard.
• Navarro III vs. Damasco, 246 SCRA 260, 265 [1995] — Cited for the same procedural due process principle.
• Mutuc vs. Court of Appeals, 190 SCRA 43, 49 [1990] — Cited for the rule that where an opportunity to be heard, either through oral arguments or pleadings, is accorded, there is no denial of procedural due process.

• Article 1266, Civil Code — Provides that the debtor in obligations "to do" shall be released when the prestation becomes legally or physically impossible without the obligor's fault. It was held inapplicable because the obligation to pay rentals and to deliver the thing in a lease is an obligation "to give," not "to do."
• Article 1267, Civil Code — Provides that when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may be released therefrom, in whole or in part. This provision was held not to apply because parties are presumed to assume the risks of unfavorable developments and only absolutely exceptional changes justify release.
• Article 1659, Civil Code — Provides that if the lessor or lessee fails to comply with the obligations set forth in Articles 1654 and 1657, the aggrieved party may ask for rescission of the contract and indemnification for damages, or only the latter, allowing the contract to remain in force. The award of P492,000 was upheld as indemnification for private respondents' pecuniary losses.
• Articles 1159, 1308, 1315, and 1356, Civil Code — Cited for the 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.

Narvasa, C.J.; Melo; Francisco; and Panganiban, JJ., concur.