7. PNCC vs.

CA
GR 116896
May 5, 1997
By: Madrid
________________________________________________________________________________________________________
Topic: Rebus sic Stantibus; Article 1266; 1267
Petitioner: Philippine National Construction Corporation
Respondent: CA, Ma. Teresa Raymundo-Abarra, Jose Raymundo, Antonio Raymundo, etc.

Summary: Petitioner and Respondent entered in to a contract of lease. Respondent, yung nag pa rent ng land, nag singil. Ayaw
mag bayad ni petitioner and gusto niya na iterminate yung contract kasi invoking the principle of rebus sic stantibus na pag
umiba na daw yung panahon since nung pag gawa ng contract compared sa present conditions, hindi na valid yung contract.
Sabi ng SC hindi raw impressive yung argument ni petitioner kasi yung changes raw hindi naman daw siya “absolutely
exceptional changes of circumstance”

Doctrine: “Only absolutely exceptional changes of circumstances that equity demands the release of obligation on the
part of the debtor”

Facts:
- Private respondent and petitioner entered into a contract of lease of a parcel of land of private repsondent.
- The terms and conditions of the contract are:
a) the lease shall be for a period of five (5) years which begins upon the issuance of
permit by the Ministry of Human Settlement and renewable at the option of the
lessee under the terms and conditions
b) the monthly rent is P20, 000.00 which shall be increased yearly by 5% based on
the monthly rate
c) the rent shall be paid yearly in advance, and the first annual rent in the amount of P240,000 which is payable upon
execution of the agreement
d) the property shall be used as premises of a rock crushing plan
- Petitioner then obtained a permit from the Ministry to build.
- Later, private respondent requested the payment of the first annual rental.
- But petitioner alleged that the payment of rental should commence on the date of the issuance of the industrial clearance not
on the date of signing of the contract. Petitioner then expressed its intention to terminate the contract because of financial and
technical difficulties.
- Private respondent didn’t want and instead, reiterated their demand of payment.
- But petitioner argued that it was only obligated to pay P20, 000.00 as rental for one month.
- Private respondent then filed a case for specific performance in the RTC of Pasig. RTC ruled in favor of private respondents and
ordering the petitioner to pay P492,000 which was the rentals for 2 years.
- Petitioner appealed to the CA. But CA affirmed.
- Petitioner contends that he should be released from the obligation since by virtue of Art. 1266 and 1267, or the principle of
Rebus sic Stantibus, petitioner asserts that it should be released from the obligatory force of the contract of lease because the
purpose of the contract did not materialize due to unforeseen events and causes beyond its control, i.e., due to the abrupt
change in political climate after the EDSA Revolution and financial difficulties.

Issue:
WON petitioner could be released from his obligation.

Held:
No. He cannot.

Ratio:
- It is a 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. But there are exceptions: 1. One exception is
laid down in Article 1266, which reads: "The debtor in obligations to do shall also be released when the prestation becomes
legally or physically impossible without the fault of the obligor."
- 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."
- 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 the said article. Besides, petitioner failed to state specifically the
circumstances brought about by "the abrupt change in the political climate in the country" except the alleged prevailing
uncertainties in government policies on infrastructure projects.
- The principle of rebus sic stantibus neither fits in with the facts of the case. Under this theory, the parties stipulate in the light
of certain prevailing conditions, and once these conditions cease to exist, the contract also ceases to exist.
This theory is said to be the basis of Article 1267 of the Civil Code, which provides:
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.
-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.
-In this case, petitioner wants this Court to believe that the abrupt change in the political climate of the country after the EDSA
Revolution and its poor financial condition "rendered the performance of the lease contract impractical and inimical to the
corporate survival of the petitioner."
- This Court cannot subscribe to this argument. As pointed out by private respondents:
It is a matter of record that petitioner PNCC entered into a contract with private respondents on November 18, 1985. Prior
thereto, it is of judicial notice that after the assassination of Senator Aquino on August 21, 1983, the country has experienced
political upheavals, turmoils, almost daily mass demonstrations, unprecedented, inflation, peace and order deterioration, the
Aquino trial and many other things that brought about the hatred of people even against crony corporations. On November 3,
1985, Pres. Marcos, being interviewed live on U.S. television announced that there would be a snap election scheduled for
February 7, 1986.
-On November 18, 1985, notwithstanding the above, petitioner PNCC entered into the contract of lease with private
respondents with open eyes of the deteriorating conditions of the country.
-Anent petitioner's alleged poor financial condition, the same will neither release petitioner from the binding effect of the
contract of lease. As held in Central Bank v. Court of Appeals, 22 cited by private respondents, 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.

Decision:
Private Respondents won. Yehey.

Notes:
Rebus sic stantibus – a treaty or agreement remains valid only if the same conditions
prevailing at the time of contracting continue to exist at the time of performance

REQUISITES OF ARTICLE 1267:

1. Service must become so difficult that it was manifestly beyond the contemplation of
both parties
2. One of the parties must ask for relief
3. The object must be a future service with future unusual change in conditions