Conditional Obligations
(1) (Javier v. Court of Appeals, G.R. No. 48194, March 15, 1990)
(5) (Naga Telephone Co., Inc. v. Court of Appeals, G.R. No. 107112, February 24, 1994)
(Javier v. Court of Appeals, G.R. No. 48194, March
15, 1990)
SECOND DIVISION
[G.R. No. 48194. March 15, 1990.]
JOSE M. JAVIER and ESTRELLA F. JAVIER, petitioners,
vs. COURT OF APPEALS and LEONARDO TIRO,
respondents.
Eddie Tamondong for petitioners.
Lope Adriano and Emmanuel Pelaez, Jr. for private
respondent.
SYLLABUS
1. REMEDIAL LAW; RULES OF PROCEDURE; MUST BE
APPLIED WITH LIBERALITY TO PROMOTE SUBSTANTIAL
JUSTICE. The one (1) day delay in the filing of the
said motion for extension can justifiably be excused,
considering that aside from the change of counsel,
the last day for filing the said motion fell on a
holiday following another holiday, hence, under
such circumstances, an outright dismissal of the
petition would be too harsh. Litigations should, as
much as possible, be decided on their merits and
not on technicalities. In a number of cases, this
Court, in the exercise of equity jurisdiction, has
relaxed the stringent application of technical rules
in order to resolve the case on its merits. Rules of
procedure are intended to promote, not to defeat,
substantial justice and, therefore, they should not
be applied in a very rigid and technical sense.
2. CIVIL LAW; CONTRACTS; PREVIOUS,
SIMULTANEOUS AND SUBSEQUENT ACTS OF THE
PARTIES; INDICATIVE OF PARTIES' TRUE INTENTION
WHICH MAY BE CONSIDERED BY THE COURT IN
CONSTRUING THE CONTRACT. The
contemporaneous and subsequent acts of
petitioners and private respondent reveal that the
cause stated in the questioned deed of assignment
is false. It is settled that the previous and
simultaneous and subsequent acts of the parties
are properly cognizable indicia of their true
intention. Where the parties to a contract have
given it a practical construction by their conduct as
by acts in partial performance, such construction
may be considered by the court in construing the
contract, determining its meaning and ascertaining
the mutual intention of the parties at the time of
contracting. The parties' practical construction of
their contract has been characterized as a clue or
index to, or as evidence of, their intention or
meaning and as an important, significant,
convincing, persuasive, or influential factor in
determining the proper construction of the
agreement.
3. ID.; ID.; WITH FALSE CAUSE OR CONSIDERATION;
NOT CONSIDERED NULL AND VOID PER SE. The
deed of assignment of February 15, 1966 is a
relatively simulated contract which states a false
cause or consideration, or one where the parties
conceal their true agreement. (Art. 1345 of the Civil
1|OBLICON_Chapter 3_Conditional Obligations
Code). A contract with a false consideration is not
null and void per se. [Concepcion vs. Sta. Ana, 87
Phil. 787 (1950)] Under Article 1346 of the Civil Code,
a relatively simulated contract, when it does not
prejudice a third person and is not intended for any
purpose contrary to law, morals, good customs,
public order or public policy binds the parties to
their real agreement.
4. ID.; ID.; BILATERAL CONTRACT; GIVES RISE TO
RECIPROCAL OBLIGATION. The agreement is a
bilateral contract which gave rise to reciprocal
obligations, that is, the obligation of private
respondent to transfer his rights in the forest
concession over the additional area and, on the
other hand, the obligation of petitioners to pay
P30,000.00. The demandability of the obligation of
one party depends upon the fulfillment of the
obligation of the other. In this case, the failure of
private respondent to comply with his obligation
negates his right to demand performance from
petitioners. Delivery and payment in a contract of
sale, are so interrelated and intertwined with each
other that without delivery of the goods there is no
corresponding obligation to pay. The two
complement each other.
5. ID.; OBLIGATIONS; WITH SUSPENSIVE CONDITION;
EFFECT. As to the alleged nullity of the
agreement dated February 28, 1966, we agree with
petitioners that they cannot be held liable thereon.
The efficacy of said deed of assignment is subject
to the condition that the application of private
respondent for an additional area for forest
concession be approved by the Bureau of Forestry.
Since private respondent did not obtain that
approval, said deed produces no effect. When a
contract is subject to a suspensive condition, its
birth or effectivity can take place only if and when
the event which constitutes the condition happens
or is fulfilled. If the suspensive condition does not
take place, the parties would stand as if the
conditional obligation had never existed.
6. ID.; SALE OF A MERE HOPE OR EXPECTANCY;
EFFICACY THEREOF DEEMED SUBJECT TO THE
CONDITION THAT THE THING WILL COME INTO
EXISTENCE. Under the second paragraph of
Article 1461 of the Civil Code, the efficacy of the
sale of a mere hope or expectancy is deemed
subject to the condition that the thing will come
into existence. In this case, since private respondent
never acquired any right over the additional area
for failure to secure the approval of the Bureau of
Forestry, the agreement executed therefor, which
had for its object the transfer of said right to
petitioners, never became effective or
enforceable.
DECISION
REGALADO, J p:
Petitioners pray for the reversal of the decision of
respondent Court of Appeals in CA-G.R. No. 52296-
R, dated March 6, 1978, 1 the dispositive portion
whereof decrees:
"WHEREFORE, the judgment appealed from is
hereby set aside and another one entered ordering
the defendants-appellees, jointly and solidarily, to
pay plaintiff-appellant the sum of P79,338.15 with
legal interest thereon from the filing of the
complaint, plus attorney's fees in the amount of
P8,000.00. Costs against defendants-appellees." 2
As found by respondent court or disclosed by the
records, 3 this case was generated by the following
antecedent facts. cdphil
Private respondent is a holder of an ordinary timber
license issued by the Bureau of Forestry covering
2,535 hectares in the town of Medina, Misamis
Oriental. On February 15, 1966 he executed a
"Deed of Assignment" 4 in favor of herein petitioners
the material parts of which read as follows:
xxx xxx xxx
"I, LEONARDO A. TIRO, of legal age, married and a
resident of Medina, Misamis Oriental, for and in
consideration of the sum of ONE HUNDRED TWENTY
THOUSAND PESOS (P120,000.00), Philippine
Currency, do by these presents, ASSIGN, TRANSFER
AND CONVEY, absolutely and forever unto JOSE M.
JAVIER and ESTRELLA F. JAVIER, spouses, of legal
age and a resident (sic) of 2897 F.B. Harrison, Pasay
City, my shares of stocks in the TIMBERWEALTH
CORPORATION in the total amount of P120,000.00,
payment of which shall be made in the following
manner:
1. Twenty thousand (P20,000.00) Pesos upon
signing of this contract;
2. The balance of P100,000.00 shall be paid
P10,000,00 every shipment of export logs actually
produced from the forest concession of
Timberwealth Corporation.
"That I hereby agree to sign and endorse the stock
certificate in favor of Mr. & Mrs. Jose M. Javier, as
soon as stock certificates are issued."
xxx xxx xxx
At the time the said deed of assignment was
executed, private respondent had a pending
application, dated October 21, 1965, for an
additional forest concession covering an area of
2,000 hectares southwest of and adjoining the area
of the concession subject of the deed of
assignment. Hence, on February 28, 1966, private
respondent and petitioners entered into another
"Agreement" 5 with the following stipulations:
xxx xxx xxx
"1. That LEONARDO TIRO hereby agrees and
binds himself to transfer, cede and convey
whatever rights he may acquire, absolutely and
2|OBLICON_Chapter 3_Conditional Obligations
forever, to TIMBERWEALTH CORPORATION, a
corporation duly organized and existing under the
laws of the Philippines, over a forest concession
which is now pending application and approval as
additional area to his existing licensed area under
O.T. License No 391-103166, situated at Medina,
Misamis Oriental;
"2. That for and in consideration of the
aforementioned transfer of rights over said
additional area to TIMBERWEALTH CORPORATION,
ESTRELLA F. JAVIER and JOSE M. JAVIER, both
directors and stockholders of said corporation, do
hereby undertake to pay LEONARDO TIRO, as soon
as said additional area is approved and transferred
to TIMBERWEALTH CORPORATION the sum of THIRTY
THOUSAND PESOS (P30,000.00), which amount of
money shall form part of their paid up capital stock
in TIMBERWEALTH CORPORATION; llcd
"3. That this Agreement is subject to the approval
of the members of the Board of Directors of the
TIMBERWEALTH CORPORATION."
xxx xxx xxx
On November 18, 1966, the Acting Director of
Forestry wrote private respondent that his forest
concession was renewed up to May 12, 1967 under
O.T.L. No. 391-51267, but since the concession
consisted of only 2,535 hectares, he was therein
informed that:
"In pursuance of the Presidential directive of May
13, 1966, you are hereby given until May 12, 1967 to
form an organization such as a cooperative,
partnership or corporation with other adjoining
licensees so as to have a total holding area of not
less than 20,000 hectares of contiguous and
compact territory and an aggregate allowable
annual cut of not less than 25,000 cubic meters,
otherwise, your license will not be further renewed."
6
Consequently, petitioners, now acting as timber
license holders by virtue of the deed of assignment
executed by private respondent in their favor,
entered into a Forest Consolidation Agreement 7 on
April 10, 1967 with other ordinary timber license
holders in Misamis Oriental, namely, Vicente L. De
Lara, Jr., Salustiano R. Oca and Sanggaya Logging
Company. Under this consolidation agreement,
they all agreed to pool together and merge their
respective forest concessions into a working unit, as
envisioned by the aforementioned directives. This
consolidation agreement was approved by the
Director of Forestry on May 10, 1967. 8 The working
unit was subsequently incorporated as the North
Mindanao Timber Corporation, with the petitioners
and the other signatories of the aforesaid Forest
Consolidation Agreement as incorporators. 9
On July 16, 1968, for failure of petitioners to pay the
balance due under the two deeds of assignment,
private respondent filed an action against
petitioners, based on the said contracts, for the
payment of the amount of P83,138.15 with interest
at 6% per annum from April 10, 1967 until full
payment, plus P12,000.00 for attorney's fees and
costs.
On September 23, 1968, petitioners filed their
answer admitting the due execution of the
contracts but interposing the special defense of
nullity thereof since private respondent failed to
comply with his contractual obligations and, further,
that the conditions for the enforceability of the
obligations of the parties failed to materialize. As a
counterclaim, petitioners sought the return of
P55,586.00 which private respondent had received
from them pursuant to an alleged management
agreement, plus attorney's fees and costs. prLL
On October 7, 1968, private respondent filed his
reply refuting the defense of nullity of the contracts
in this wise:
"What were actually transferred and assigned to
the defendants were plaintiffs rights and interest in
a logging concession described in the deed of
assignment, attached to the complaint and
marked as Annex A, and agreement Annex E; that
the 'shares of stocks' referred to in paragraph II of
the complaint are terms used therein merely to
designate or identify those rights and interests in
said logging concession. The defendants actually
made use of or enjoyed not the 'shares of stocks'
but the logging concession itself; that since the
proposed Timberwealth Corporation was owned
solely and entirely by defendants, the personalities
of the former and the latter are one and the same.
Besides, before the logging concession of the
plaintiff or the latter's rights and interests therein
were assigned or transferred to defendants, they
never became the property or assets of the
Timberwealth Corporation which is at most only an
association of persons composed of the
defendants." 10
and contending that the counterclaim of
petitioners in the amount of P55,586.39 is actually
only a part of the sum of P69,661.85 paid by the
latter to the former in partial satisfaction of the
latter's claim. 11
After trial, the lower court rendered judgment
dismissing private respondent's complaint and
ordering him to pay petitioners the sum of
P33,161.85 with legal interest at six percent per
annum from the date of the filing of the answer until
complete payment. 12
As earlier stated, an appeal was interposed by
private respondent to the Court of Appeals which
reversed the decision of the court of a quo.
On March 28, 1978, petitioners filed a motion in
respondent court for extension of time to file a
motion for reconsideration, for the reason that they
needed to change counsel. 13 Respondent court,
in its resolution dated March 31, 1978, gave
3|OBLICON_Chapter 3_Conditional Obligations
petitioners fifteen (15) days from March 28, 1978
within which to file said motion for reconsideration,
provided that the subject motion for extension was
filed on time. 14 On April 11, 1978, petitioners filed
their motion for reconsideration in the Court of
Appeals. 15 On April 21, 1978, private respondent
filed a consolidated opposition to said motion for
reconsideration on the ground that the decision of
respondent court had become final on March 27,
1978, hence the motion for extension filed on March
28, 1978 was filed out of time and there was no
more period to extend. However, this was not
acted upon by the Court of Appeals for the reason
that on April 20, 1978, prior to its receipt of said
opposition, a resolution was issued denying
petitioners' motion for reconsideration, thus:
"The motion for reconsideration filed on April 11,
1978 by counsel for defendants-appellees is
denied. They did not file any brief in this case. As a
matter of fact this case was submitted for decision
without appellees' brief. In their said motion, they
merely tried to refute the rationale of the Court in
deciding to reverse the appealed judgment." 16
Petitioners then sought relief in this Court in the
present petition for review on certiorari. Private
respondent filed his comment, reiterating his stand
that the decision of the Court of Appeals under
review is already final and executory. cdphil
Petitioners countered in their reply that their petition
for review presents substantive and fundamental
questions of law that fully merit judicial
determination, instead of being suppressed on
technical and insubstantial reasons. Moreover, the
aforesaid one (1) day delay in the filing of their
motion for extension is excusable, considering that
petitioners had to change their former counsel who
failed to file their brief in the appellate court, which
substitution of counsel took place at a time when
there were many successive intervening holidays.
On July 26, 1978, we resolved to give due course to
the petition.
The one (1) day delay in the filing of the said motion
for extension can justifiably be excused, considering
that aside from the change of counsel, the last day
for filing the said motion fell on a holiday following
another holiday, hence, under such circumstances,
an outright dismissal of the petition would be too
harsh. Litigations should, as much as possible, be
decided on their merits and not on technicalities. In
a number of cases, this Court, in the exercise of
equity jurisdiction, has relaxed the stringent
application of technical rules in order to resolve the
case on its merits. 17 Rules of procedure are
intended to promote, not to defeat, substantial
justice and, therefore, they should not be applied in
a very rigid and technical sense.
We now proceed to the resolution of this case on
the merits.
The assignment of errors of petitioners hinges on the
central issue of whether the deed of assignment
dated February 15, 1966 and the agreement of
February 28, 1966 are null and void, the former for
total absence of consideration and the latter for
non-fulfillment of the conditions stated therein.
Petitioners contend that the deed of assignment
conveyed to them the shares of stocks of private
respondent in Timberwealth Corporation, as stated
in the deed itself. Since said corporation never
came into existence, no share of stocks was ever
transferred to them, hence the said deed is null and
void for lack of cause or consideration.
We do not agree. As found by the Court of
Appeals, the true cause or consideration of said
deed was the transfer of the forest concession of
private respondent to petitioners for P120,000.00.
This finding is supported by the following
considerations, viz: LLjur
1. Both parties, at the time of the execution of the
deed of assignment knew that the Timberwealth
Corporation stated therein was non-existent. 18
2. In their subsequent agreement, private
respondent conveyed to petitioners his inchoate
right over a forest concession covering an
additional area for his existing forest concession,
which area he had applied for, and his application
was then pending in the Bureau of Forestry for
approval.
3. Petitioners, after the execution of the deed of
assignment, assumed the operation of the logging
concessions of private respondent. 19
4. The statement of advances to respondent
prepared by petitioners stated: "P55,186.39
advances to L.A. Tiro be applied to succeeding
shipments. Based on the agreement, we pay
P10,000.00 every after (sic) shipment. We had only 2
shipments." 20
5. Petitioners entered into a Forest Consolidation
Agreement with other holders of forest concessions
on the strength of the questioned deed of
assignment. 21
The aforesaid contemporaneous and subsequent
acts of petitioners and private respondent reveal
that the cause stated in the questioned deed of
assignment is false. It is settled that the previous and
simultaneous and subsequent acts of the parties
are properly cognizable indicia of their true
intention. 22 Where the parties to a contract have
given it a practical construction by their conduct as
by acts in partial performance, such construction
may be considered by the court in construing the
contract, determining its meaning and ascertaining
the mutual intention of the parties at the time of
contracting. 23 The parties' practical construction
of their contract has been characterized as a clue
or index to, or as evidence of, their intention or
meaning and as an important, significant,
4|OBLICON_Chapter 3_Conditional Obligations
convincing, persuasive, or influential factor in
determining the proper construction of the
agreement. 24
The deed of assignment of February 15, 1966 is a
relatively simulated contract which states a false
cause or consideration, or one where the parties
conceal their true agreement. 25 A contract with a
false consideration is not null and void per se. 26
Under Article 1346 of the Civil Code, a relatively
simulated contract, when it does not prejudice a
third person and is not intended for any purpose
contrary to law, morals, good customs, public order
or public policy binds the parties to their real
agreement. prcd
The Court of Appeals, therefore, did not err in
holding petitioners liable under the said deed and
in ruling that
". . . In view of the analysis of the first and second
assignment of errors, the defendants-appellees are
liable to the plaintiff-appellant for the sale and
transfer in their favor of the latter's forest
concessions. Under the terms of the contract, the
parties agreed on a consideration of P120,000.00.
P20,000.00 of which was paid, upon the signing of
the contract and the balance of P100,000.00 to be
paid at the rate of P10,000.00 for every shipment of
export logs actually produced from the forest
concessions of the appellant sold to the appellees.
Since plaintiff-appellant's forest concessions were
consolidated or merged with those of the other
timber license holders by appellees' voluntary act
under the Forest Consolidation Agreement (Exhibit
D), approved by the Bureau of Forestry (Exhibit D-3),
then the unpaid balance of P49,338.15 (the amount
of P70,661.85 having been received by the plaintiff-
appellant from the defendants-appellees) became
due and demandable." 27
As to the alleged nullity of the agreement dated
February 28, 1966, we agree with petitioners that
they cannot be held liable thereon. The efficacy of
said deed of assignment is subject to the condition
that the application of private respondent for an
additional area for forest concession be approved
by the Bureau of Forestry. Since private respondent
did not obtain that approval, said deed produces
no effect. When a contract is subject to a
suspensive condition, its birth or effectivity can take
place only if and when the event which constitutes
the condition happens or is fulfilled. 28 If the
suspensive condition does not take place, the
parties would stand as if the conditional obligation
had never existed. 29
The said agreement is a bilateral contract which
gave rise to reciprocal obligations, that is, the
obligation of private respondent to transfer his rights
in the forest concession over the additional area
and, on the other hand, the obligation of
petitioners to pay P30,000.00. The demandability of
the obligation of one party depends upon the
fulfillment of the obligation of the other. In this case,
the failure of private respondent to comply with his
obligation negates his right to demand
performance from petitioners. Delivery and
payment in a contract of sale, are so interrelated
and intertwined with each other that without
delivery of the goods there is no corresponding
obligation to pay. The two complement each
other. 30
Moreover, under the second paragraph of Article
1461 of the Civil Code, the efficacy of the sale of a
mere hope or expectancy is deemed subject to the
condition that the thing will come into existence. In
this case, since private respondent never acquired
any right over the additional area for failure to
secure the approval of the Bureau of Forestry, the
agreement executed therefor, which had for its
object the transfer of said right to petitioners, never
became effective or enforceable. prLL
WHEREFORE, the decision of respondent Court of
Appeals is hereby MODIFIED. The agreement of the
parties dated February 28, 1966 is declared without
force and effect and the amount of P30,000.00 is
hereby ordered to be deducted from the sum
awarded by respondent court to private
respondent. In all other respects, said decision of
respondent court is affirmed.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Sarmiento, JJ.,
concur.
(Naga Telephone Co., Inc. v. Court of Appeals, G.R.
No. 107112, February 24, 1994)
SECOND DIVISION
[G.R. No. 107112. February 24, 1994.]
NAGA TELEPHONE CO., INC. (NATELCO) AND
LUCIANO M. MAGGAY, petitioners, vs. THE COURT
OF APPEALS AND CAMARINES SUR II ELECTRIC
COOPERATIVE, INC. (CASURECO II), respondents.
SYLLABUS
1. CIVIL LAW; OBLIGATION AND CONTRACTS; RULE
WHERE A PERSON BY HIS CONTRACT CHARGES
HIMSELF WITH AN OBLIGATION POSSIBLE TO BE
PERFORMED. The case of Reyes v. Caltex
(Philippines), Inc. enunciated the doctrine that
where a person by his contract charges himself with
an obligation possible to be performed, he must
perform it, unless its performance is rendered
impossible by the act of God, by the law, or by the
other party, it being the rule that in case the party
desires to be excused from performance in the
event of contingencies arising thereto, it is his duty
to provide the basis therefor in his contract. With the
enactment of the New Civil Code, a new provision
was included therein namely, Article 1267 which
provides: "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." In the report of the
Code Commission, the rationale behind this
5|OBLICON_Chapter 3_Conditional Obligations
innovation was explained, thus: "The general rule is
that impossibility of performance releases the
obligor. However, it is submitted that when the
service has become so difficult as to be manifestly
beyond the contemplation of the parties, the court
should be authorized to release the obligor in whole
or in part. The intention of the parties should govern
and if it appears that the service turns out to be so
difficult as to have been beyond their
contemplation, it would be doing violence to that
intention to hold the obligor still responsible." In
other words, fair and square consideration
underscores the legal precept therein.
2. ID.; ID.; "SERVICE" UNDER ART. 1267 REFERS TO THE
PERFORMANCE OF AN OBLIGATION; CASE AT BAR.
Petitioners assert earnestly that Article 1267 of the
New Civil Code is not applicable primarily because
the contract does not involve the rendition of
service or a personal prestation and it is not for
future service with future unusual change. Instead,
the ruling in the case Occea, et al. v. Jabson, etc,
et al., (G.R. No. L-44349, October 29, 1976, 73 SCRA
637) which interpreted the article, should be
followed in resolving this case. Besides, said article
was never raised by the parties in their pleadings
and was never the subject of trial and evidence.
Article 1267 speaks of "service" which has become
so difficult. Taking into consideration the rationale
behind this provision, the term "service" should be
understood as referring to the "performance" of the
obligation. In the present case, the obligation of
private respondent consists in allowing petitioners to
use its posts in Naga City, which is the service
contemplated in said article. Furthermore, a bare
reading of this article reveals that it is not a
requirement thereunder that the contract be for
future service with future unusual change.
According to Senator Arturo M. Tolentino, Article
1267 states in our law the doctrine of unforeseen
events. This is said to be based on the discredited
theory of rebus sic stantibus in public international
law; 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. Considering practical needs and
the demands of equity and good faith, the
disappearance of the basis of a contract gives rise
to a right to relief in favor of the party prejudiced.
3. ID.; ID.; POTESTATIVE CONDITION; MEANING
THEREOF; APPLICATION IN CASE AT BAR. A
potestative condition is a condition, the fulfillment
of which depends upon the sole will of the debtor,
in which case, the conditional obligation is void.
Based on this definition, respondent court's finding
that the provision in the contract, to wit: "(a) That
the term or period of this contract shall be as long
as the party of the first part (petitioner) has need for
the electric light posts of the party of the second
part (private respondent) . . ." is a potestative
condition, is correct. However, it must have
overlooked the other conditions in the same
provision, to wit: ". . . it being understood that this
contract shall terminate when for any reason
whatsoever, the party of the second part (private
respondent) is forced to stop, abandoned (sic) its
operation as a public service and it becomes
necessary to remove the electric light post (sic);"
which are casual conditions since they depend on
chance, hazard, or the will of a third person. In sum,
the contract is subject to mixed conditions, that is,
they depend partly on the will of the debtor and
partly on chance, hazard or the will of a third
person, which do not invalidate the
aforementioned provision.
4. ID.; PRESCRIPTION OF ACTIONS; RULE ON WRITTEN
CONTRACT. Article 1144 of the New Civil Code
provides, inter alia, that an action upon a written
contract must be brought within ten (10) years from
the time the right of the action accrues. Clearly, the
ten (10) year period is to be reckoned from the time
the right of action accrues which is not necessarily
the date of execution of the contract. As correctly
ruled by respondent court, private respondent's
right of action arose "sometime during the latter
part of 1982 or in 1983 when according to Atty. Luis
General, Jr. . . ., he was asked by (private
respondent's) Board of Directors to study said
contract as it already appeared disadvantageous
to (private respondent). (Private respondent's)
cause of action to ask for reformation of said
contract should thus be considered to have arisen
only in 1982 or 1983, and from 1982 to January 2,
1989 when the complaint in this case was filed, ten
(10) years had not yet elapsed."
DECISION
NOCON, J p:
The case of Reyes v. Caltex (Philippines), Inc. 1
enunciated the doctrine that where a person by his
contract charges himself with an obligation possible
to be performed, he must perform it, unless its
performance is rendered impossible by the act of
God, by the law, or by the other party, it being the
rule that in case the party desires to be excused
from performance in the event of contingencies
arising thereto, it is his duty to provide the basis
therefor in his contract. LibLex
With the enactment of the New Civil Code, a new
provision was included therein namely, Article 1267
which provides:
"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."
In the report of the Code Commission, the rationale
behind this innovation was explained, thus:
"The general rule is that impossibility of performance
releases the obligor. However, it is submitted that
when the service has become so difficult as to be
manifestly beyond the contemplation of the
parties, the court should be authorized to release
the obligor in whole or in part. The intention of the
parties should govern and if it appears that the
6|OBLICON_Chapter 3_Conditional Obligations
service turns out to be so difficult as to have been
beyond their contemplation, it would be doing
violence to that intention to hold the obligor still
responsible." 2
In other words, fair and square consideration
underscores the legal precept therein.
Naga Telephone Co., Inc. remonstrates mainly
against the application by the Court of Appeals of
Article 1267 in favor of Camarines Sur II Electric
Cooperative, Inc. in the case before us. Stated
differently, the former insists that the complaint
should have been dismissed for failure to state a
cause of action. prLL
The antecedent facts, as narrated by respondent
Court of Appeals are, as follows:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a
telephone company rendering local as well as long
distance service in Naga City while private
respondent Camarines Sur II Electric Cooperative,
Inc. (CASURECO II) is a private corporation
established for the purpose of operating an electric
power service in the same city.
On November 1, 1977, the parties entered into a
contract (Exh. "A") for the use by petitioners in the
operation of its telephone service the electric light
posts of private respondent in Naga City. In
consideration therefor, petitioners agreed to install,
free of charge, ten (10) telephone connections for
the use by private respondent in the following
places:
"(a) 3 units The Main Office of (private
respondent);
(b) 2 Units The Warehouse of (private
respondent);
(c) 1 Unit The Sub-Station of (private respondent)
at Concepcion Pequea;
(d) 1 Unit The Residence of (private respondent's)
President;
(e) 1 Unit The Residence of (private respondent's)
Acting General Manager; &
(f) 2 Units To be determined by the General
Manager. 3
Said contract also provided:
"(a) That the term or period of this contract shall be
as long as the party of the first part has need for the
electric light posts of the party of the second part it
being understood that this contract shall terminate
when for any reason whatsoever, the party of the
second part is forced to stop, abandoned [sic] its
operation as a public service and it becomes
necessary to remove the electric lightpost;" (sic) 4
It was prepared by or with the assistance of the
other petitioner, Atty. Luciano M. Maggay, then a
member of the Board of Directors of private
respondent and at the same time the legal counsel
of petitioner.
After the contract had been enforced for over ten
(10) years, private respondent filed on January 2,
1989 with the Regional Trial Court of Naga City (Br.
28) C.C. No. 89-1642 against petitioners for
reformation of the contract with damages, on the
ground that it is too one-sided in favor of
petitioners; that it is not in conformity with the
guidelines of the National Electrification
Administration (NEA) which direct that the
reasonable compensation for the use of the posts is
P10.00 per post, per month; that after eleven (11)
years of petitioners' use of the posts, the telephone
cables strung by them thereon have become much
heavier with the increase in the volume of their
subscribers, worsened by the fact that their linemen
bore holes through the posts at which points those
posts were broken during typhoons; that a post now
costs as much as P2,630.00; so that justice and
equity demand that the contract be reformed to
abolish the inequities thereon. prLL
As second cause of action, private respondent
alleged that starting with the year 1981, petitioners
have used 319 posts in the towns of Pili, Canaman,
Magarao and Milaor, Camarines Sur, all outside
Naga City, without any contract with it; that at the
rate of P10.00 per post, petitioners should pay
private respondent for the use thereof the total
amount of P267,960.00 from 1981 up to the filing of
its complaint; and that petitioners had refused to
pay private respondent said amount despite
demands.
And as third cause of action, private respondent
complained about the poor servicing by petitioners
of the ten (10) telephone units which had caused it
great inconvenience and damages to the tune of
not less than P100,000.00
In petitioners' answer to the first cause of action,
they averred that it should be dismissed because
(1) it does not sufficiently state a cause of action for
reformation of contract; (2) it is barred by
prescription, the same having been filed more than
ten (10) years after the execution of the contract;
and (3) it is barred by estoppel, since private
respondent seeks to enforce the contract in the
same action. Petitioners further alleged that their
utilization of private respondent's post could not
have caused their deterioration because they have
already been in use for eleven (11) years; and that
the value of their expenses for the ten (10)
telephone lines long enjoyed by private respondent
free of charge are far in excess of the amounts
claimed by the latter for the use of the posts, so
that if there was any inequity, it was suffered by
them.
Regarding the second cause of action, petitioners
claimed that private respondent had asked for
telephone lines in areas outside Naga City for which
its posts were used by them; and that if petitioners
7|OBLICON_Chapter 3_Conditional Obligations
had refused to comply with private respondent's
demands for payment for the use of the posts
outside Naga City, it was probably because what is
due to them from private respondent is more than
its claim against them.
And with respect to the third cause of action,
petitioners claimed, inter alia, that their telephone
service had been categorized by the National
Telecommunication Corporation (NTC) as "very
high" and of "superior quality."
During the trial, private respondent presented the
following witnesses:
(1) Dioscoro Ragragio, one of the two officials who
signed the contract in its behalf, declared that it
was petitioner Maggay who prepared the contract;
that the understanding between private
respondent and petitioners was that the latter
would only use the posts in Naga City because at
that time, petitioners' capability was very limited
and they had no expectation of expansion
because of legal squabbles within the company;
that private respondent agreed to allow petitioners
to use its posts in Naga City because there were
many subscribers therein who could not be served
by them because of lack of facilities; and that while
the telephone lines strung to the posts were very
light in 1977, said posts have become heavily
loaded in 1989. LLphil
(2) Engr. Antonio Borja, Chief of private
respondent's Line Operation and Maintenance
Department, declared that the posts being used by
petitioners totalled 1,403 as of April 17, 1989, 192 of
which were in the towns of Pili, Canaman, and
Magarao, all outside Naga City (Exhs. "B" and "B-1");
that petitioners' cables strung to the posts in 1989
are much bigger than those in November, 1977;
that in 1987, almost 100 posts were destroyed by
typhoon Sisang: around 20 posts were located
between Naga City and the town of Pili while the
posts in barangay Concepcion, Naga City were
broken at the middle which had been bored by
petitioner's linemen to enable them to string bigger
telephone lines; that while the cost per post in 1977
was only from P700.00 to P1,000.00, their costs in
1989 went up from P1,500.00 to P2,000.00,
depending on the size; that some lines that were
strung to the posts did not follow the minimum
vertical clearance required by the National Building
Code, so that there were cases in 1988 where,
because of the low clearance of the cables,
passing trucks would accidentally touch said cables
causing the posts to fall and resulting in brown-outs
until the electric lines were repaired.
(3) Dario Bernardez, Project Supervisor and Acting
General Manager of private respondent and
Manager of Region V of NEA, declared that
according to NEA guidelines in 1985 (Exh. "C"), for
the use by private telephone systems of electric
cooperatives' posts, they should pay a minimum
monthly rental of P4.00 per post, and considering
the escalation of prices since 1985, electric
cooperatives have been charging from P10.00 to
P15.00 per post, which is what petitioners should
pay for the use of the posts.
(4) Engineer Antonio Macandog, Department Head
of the Office of Services of private respondent,
testified on the poor service rendered by
petitioners' telephone lines, like the telephone in
their Complaints Section which was usually out of
order such that they could not respond to the calls
of their customers. In case of disruption of their
telephone lines, it would take two to three hours for
petitioners to reactivate them notwithstanding their
calls on the emergency line.
(5) Finally, Atty. Luis General, Jr., private
respondent's counsel, testified that the Board of
Directors asked him to study the contract sometime
during the latter part of 1982 or in 1983, as it had
appeared very disadvantageous to private
respondent. Notwithstanding his recommendation
for the filing of a court action to reform the
contract, the former general managers of private
respondent wanted to adopt a soft approach with
petitioners about the matter until the term of
General Manager Henry Pascual who, after failing
to settle the matter amicably with petitioners, finally
agreed for him to file the present action for
reformation of contract.
On the other hand, petitioner Maggay testified to
the following effect:
(1) It is true that he was a member of the Board of
Directors of private respondent and at the same
time the lawyer of petitioner when the contract was
executed, but Atty. Gaudioso Tena, who was also a
member of the Board of Directors of private
respondent, was the one who saw to it that the
contract was fair to both parties.
(2) With regard to the first cause of action:
(a) Private respondent has the right under the
contract to use ten (10) telephone units of
petitioners for as long as it wishes without paying
anything therefor except for long distance calls
through PLDT out of which the latter get only 10% of
the charges. LLpr
(b) In most cases, only drop wires and not
telephone cables have been strung to the posts,
which posts have remained erect up to present;
(c) Petitioners' linemen have strung only small
messenger wires to many of the posts and they
need only small holes to pass through; and
(d) Documents existing in the NTC show that the
stringing of petitioners' cables in Naga City are
according to standard and comparable to those of
PLDT. The accidents mentioned by private
respondent involved trucks that were either
overloaded or had loads that protruded upwards,
causing them to hit the cables.
8|OBLICON_Chapter 3_Conditional Obligations
(3) Concerning the second cause of action, the
intention of the parties when they entered into the
contract was that the coverage thereof would
include the whole area serviced by petitioners
because at that time, they already had subscribers
outside Naga City. Private respondent, in fact, had
asked for telephone connections outside Naga City
for its officers and employees residing there in
addition to the ten (10) telephone units mentioned
in the contract. Petitioners have not been charging
private respondent for the installation, transfers and
re-connections of said telephones so that naturally,
they use the posts for those telephone lines.
(4) With respect to the third cause of action, the
NTC has found petitioners cable installations to be
in accordance with engineering standards and
practice and comparable to the best in the
country.
On the basis of the foregoing countervailing
evidence of the parties, the trial court found, as
regards private respondents first cause of action,
that while the contract appeared to be fair to both
parties when it was entered into by them during the
first year of private respondents operation and
when its Board of Directors did not yet have any
experience in that business, it had become
disadvantageous and unfair to private respondent
because of subsequent events and conditions,
particularly the increase in the volume of the
subscribers of petitioners for more than ten (10)
years without the corresponding increase in the
number of telephone connections to private
respondent free of charge. The trial court
concluded that while in an action for reformation of
contract, it cannot make another contract for the
parties, it can, however, for reasons of justice and
equity, order that the contract be reformed to
abolish the inequities therein. Thus, said court ruled
that the contract should be reformed by ordering
petitioners to pay private respondent
compensation for the use of their posts in Naga
City, while private respondent should also be
ordered to pay the monthly bills for the use of the
telephones also in Naga City. And taking into
consideration the guidelines of the NEA on the
rental of posts by telephone companies and the
increase in the costs of such posts, the trial court
opined that a monthly rental of P10.00 for each
post of private respondent used by petitioners is
reasonable, which rental it should pay from the
filing of the complaint in this case on January 2,
1989. And in like manner, private respondent should
pay petitioners from the same date its monthly bills
for the use and transfers of its telephones in Naga
City at the same rate that the public are paying.
cdll
On private respondent's second cause of action,
the trial court found that the contract does not
mention anything about the use by petitioners of
private respondent's posts outside Naga City.
Therefore, the trial court held that for reason of
equity, the contract should be reformed by
including therein the provision that for the use of
private respondent's posts outside Naga City,
petitioners should pay a monthly rental of P10.00
per post, the payment to start on the date this case
was filed, or on January 2, 1989, and private
respondent should also pay petitioners the monthly
dues on its telephone connections located outside
Naga City beginning January, 1989.
And with respect to private respondent's third
cause of action, the trial court found the claim not
sufficiently proved.
Thus, the following decretal portion of the trial
court's decision dated July 20, 1990:
"WHEREFORE, in view of all the foregoing, decision is
hereby rendered ordering the reformation of the
agreement (Exh. A); ordering the defendants to
pay plaintiff's electric poles in Naga City and in the
towns of Milaor, Canaman, Maragao and Pili,
Camarines Sur and in other places where
defendant NATELCO uses plaintiff's electric poles,
the sum of TEN (P10.00) PESOS per plaintiff's pole,
per month beginning January, 1989 and ordering
also the plaintiff to pay defendant NATELCO the
monthly dues of all its telephones including those
installed at the residence of its officers, namely;
Engr. Joventino Cruz, Engr. Antonio Borja, Engr.
Antonio Macandog, Mr. Jesus Opiana and Atty. Luis
General, Jr. beginning January, 1989. Plaintiff's
claim for attorney's fees and expenses of litigation
and defendants' counterclaim are both hereby
ordered dismissed. Without pronouncement as to
costs." llcd
Disagreeing with the foregoing judgment,
petitioners appealed to respondent Court of
Appeals. In the decision dated May 28, 1992,
respondent court affirmed the decision of the trial
court, 5 but based on different grounds to wit: (1)
that Article 1267 of the New Civil Code is
applicable and (2) that the contract was subject to
a potestative condition which rendered said
condition void. The motion for reconsideration was
denied in the resolution dated September 10, 1992.
6 Hence, the present petition.
Petitioners assign the following pertinent errors
committed by respondent court:
1) in making a contract for the parties by invoking
Article 1267 of the New Civil Code;
2) in ruling that prescription of the action for
reformation of the contract in this case
commenced from the time it became
disadvantageous to private respondent; and
3) in ruling that the contract was subject to a
potestative condition in favor of petitioners.
Petitioners assert earnestly that Article 1267 of the
New Civil Code is not applicable primarily because
the contract does not involve the rendition of
service or a personal prestation and it is not for
9|OBLICON_Chapter 3_Conditional Obligations
future service with future unusual change. Instead,
the ruling in the case Occea, et al. v. Jabson, etc,
et al., 7 which interpreted the article, should be
followed in resolving this case. Besides, said article
was never raised by the parties in their pleadings
and was never the subject of trial and evidence.
In applying Article 1267, respondent court
rationalized:
"We agree with appellant that in order that an
action for reformation of contract would lie and
may prosper, there must be sufficient allegations as
well as proof that the contract in question failed to
express the true intention of the parties due to error
or mistake, accident, or fraud. Indeed, in
embodying the equitable remedy of reformation of
instruments in the New Civil Code, the Code
Commission gave its reasons as follows:
'Equity dictates the reformation of an instrument in
order that the true intention of the contracting
parties may be expressed. The courts by the
reformation do not attempt to make a new
contract for the parties, but to make the instrument
express their real agreement. The rationale of the
doctrine is that it would be unjust and inequitable
to allow the enforcement of a written instrument
which does not reflect or disclose the real meeting
of the minds of the parties. The rigor of the legalistic
rule that a written instrument should be the final
and inflexible criterion and measure of the rights
and obligations of the contracting parties is thus
tempered to forestall the effects of mistake, fraud,
inequitable conduct, or accident.' (pp. 55-56,
Report of Code Commission)
Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the
New Civil Code provide in essence that where
through mistake or accident on the part of either or
both of the parties or mistake or fraud on the part of
the clerk or typist who prepared the instrument, the
true intention of the parties is not expressed therein,
then the instrument may be reformed at the
instance of either party if there was mutual mistake
on their part, or by the injured party if only he was
mistaken. cdphil
Here, plaintiff-appellee did not allege in its
complaint, nor does its evidence prove, that there
was a mistake on its part or mutual mistake on the
part of both parties when they entered into the
agreement Exh. "A", and that because of this
mistake, said agreement failed to express their true
intention. Rather, plaintiff's evidence shows that said
agreement was prepared by Atty. Luciano
Maggay, then a member of plaintiff's Board of
Directors and its legal counsel at that time, who was
also the legal counsel for defendant-appellant, so
that as legal counsel for both companies and
presumably with the interests of both companies in
mind when he prepared the aforesaid agreement,
Atty. Maggay must have considered the same fair
and equitable to both sides, and this was affirmed
by the lower court when it found said contract to
have been fair to both parties at the time of its
execution. In fact, there were no complaints on the
part of both sides at the time of and after the
execution of said contract, and according to 73-
year old Justino de Jesus, Vice President and
General manager of appellant at the time who
signed the agreement Exh. "A" in its behalf and who
was one of the witnesses for the plaintiff (sic), both
parties complied with said contract 'from the very
beginning' (p. 5, tsn, April 17, 1989).
That the aforesaid contract has become iniquitous
or unfavorable or disadvantageous to the plaintiff
with the expansion of the business of appellant and
the increase in the volume of its subscribers in Naga
City and environs through the years, necessitating
the stringing of more and bigger telephone cable
wires by appellant to plaintiff's electric posts without
a corresponding increase in the ten (10) telephone
connections given by appellant to plaintiff free of
charge in the agreement Exh. "A" as consideration
for its use of the latter's electric posts in Naga City,
appear, however, undisputed from the totality of
the evidence on record and the lower court so
found. And it was for this reason that in the later
(sic) part of 1982 or 1983 (or five or six years after the
subject agreement was entered into by the
parties), plaintiff's Board of Directors already asked
Atty. Luis General who had become their legal
counsel in 1982, to study said agreement which
they believed had become disadvantageous to
their company and to make the proper
recommendation, which study Atty. General did,
and thereafter, he already recommended to the
Board the filing of a court action to reform said
contract, but no action was taken on Atty.
General's recommendation because the former
general managers of plaintiff wanted to adopt a
soft approach in discussing the matter with
appellant, until, during the term of General
Manager Henry Pascual, the latter, after failing to
settle the problem with Atty. Luciano Maggay who
had become the president and general manager
of appellant, already agreed for Atty. General's
filing of the present action. The fact that said
contract has become iniquitous or
disadvantageous to plaintiff as the years went by
did not, however, give plaintiff a cause of action for
reformation of said contract, for the reasons
already pointed out earlier. But this does not mean
that plaintiff is completely without a remedy, for we
believe that the allegations of its complaint herein
and the evidence it has presented sufficiently make
out a cause of action under Art. 1267 of the New
Civil Code for its release from the agreement in
question. LibLex
xxx xxx xxx
The understanding of the parties when they entered
into the Agreement Exh. "A" on November 1, 1977
and the prevailing circumstances and conditions at
the time, were described by Dioscoro Ragragio, the
President of plaintiff in 1977 and one of its two
officials who signed said agreement in its behalf, as
follows:
10 | O B L I C O N _ C h a p t e r 3 _ C o n d i t i o n a l O b l i g a t i o n s
'Our understanding at that time is that we will allow
NATELCO to utilize the posts of CASURECO II only in
the City of Naga because at that time the
capability of NATELCO was very limited, as a matter
of fact we do [sic] not expect to be able to expand
because of the legal squabbles going on in the
NATELCO. So, even at that time there were so many
subscribers in Naga City that cannot be served by
the NATELCO, so as a matter of public service we
allowed them to sue (sic) our posts within the Naga
City.' (p. 8, tsn April 3, 1989)
Ragragio also declared that while the telephone
wires strung to the electric posts of plaintiff were
very light and that very few telephone lines were
attached to the posts of CASURECO II in 1977, said
posts have become 'heavily loaded' in 1989 (tsn,
id.).
In truth, as also correctly found by the lower court,
despite the increase in the volume of appellant's
subscribers and the corresponding increase in the
telephone cables and wires strung by it to plaintiff's
electric posts in Naga City for the more 10 years
that the agreement Exh. "A" of the parties has been
in effect, there has been no corresponding
increase in the ten (10) telephone units connected
by appellant free of charge to plaintiff's offices and
other places chosen by plaintiff's general manager
which was the only consideration provided for in
said agreement for appellant's use of plaintiff's
electric posts. Not only that, appellant even started
using plaintiff's electric posts outside Naga City
although this was not provided for in the
agreement Exh. "A" as it extended and expanded
its telephone services to towns outside said city.
Hence, while very few of plaintiff's electric posts
were being used by appellant in 1977 and they
were all in the City of Naga, the number of plaintiff's
electric posts that appellant was using in 1989 had
jumped to 1,403,192 of which are outside Naga City
(Exh. "B"). Add to this the destruction of some of
plaintiff's poles during typhoons like the strong
typhoon Sisang in 1987 because of the heavy
telephone cables attached thereto, and the
escalation of the costs of electric poles from 1977 to
1989, and the conclusion is indeed ineluctable that
the agreement Exh. "A" has already become too
one-sided in favor of appellant to the great
disadvantage of plaintiff, in short, the continued
enforcement of said contract has manifestly gone
far beyond the contemplation of plaintiff, so much
so that it should now be released therefrom under
Art. 1267 of the New Civil Code to avoid appellant's
unjust enrichment at its (plaintiff's) expense. As
stated by Tolentino in his commentaries on the Civil
Code citing foreign civilist Ruggiero, 'equity
demands a certain economic equilibrium between
the prestation and the counter-prestation, and
does not permit the unlimited impoverishment of
one party for the benefit of the other by the
excessive rigidity of the principle of the obligatory
force of contracts (IV Tolentino, Civil Code of the
Philippines, 1986 ed., pp. 247-248). LexLib

We therefore, find nothing wrong with the ruling of
the trial court, although based on a different and
wrong premise (i.e., reformation of contract), that
from the date of the filing of this case, appellant
must pay for the use of plaintiff's electric posts in
Naga City at the reasonable monthly rental of
P10.00 per post, while plaintiff should pay appellant
for the telephones in the same City that it was
formerly using free of charge under the terms of the
agreement Exh. "A" at the same rate being paid by
the general public. In affirming said ruling, we are
not making a new contract for the parties herein,
but we find it necessary to do so in order not to
disrupt the basic and essential services being
rendered by both parties herein to the public and
to avoid unjust enrichment by appellant at the
expense of plaintiff, said arrangement to continue
only until such time as said parties can re-negotiate
another agreement over the same subject-matter
covered by the agreement Exh. "A". Once said
agreement is reached and executed by the
parties, the aforesaid ruling of the lower court and
affirmed by us shall cease to exist and shall be
substituted and superseded by their new
agreement. . . ." 8
Article 1267 speaks of "service" which has become
so difficult. Taking into consideration the rationale
behind this provision, 9 the term "service" should be
understood as referring to the "performance" of the
obligation. In the present case, the obligation of
private respondent consists in allowing petitioners to
use its posts in Naga City, which is the service
contemplated in said article. Furthermore, a bare
reading of this article reveals that it is not a
requirement thereunder that the contract be for
future service with future unusual change.
According to Senator Arturo M. Tolentino, 10 Article
1267 states in our law the doctrine of unforeseen
events. This is said to be based on the discredited
theory of rebus sic stantibus in public international
law; 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. Considering practical needs and
the demands of equity and good faith, the
disappearance of the basis of a contract gives rise
to a right to relief in favor of the party prejudiced.
In a nutshell, private respondent in the Occea
case filed a complaint against petitioner before the
trial court praying for modification of the terms and
conditions of the contract that they entered into by
fixing the proper shares that should pertain to them
out of the gross proceeds from the sales of
subdivided lots. We ordered the dismissal of the
complaint therein for failure to state a sufficient
cause of action. We rationalized that the Court of
Appeals misapplied Article 1267 because:
". . . respondent's complaint seeks not release from
the subdivision contract but that the court 'render
judgment modifying the terms and conditions of
the contract . . . by fixing the proper shares that
should pertain to the herein parties out of the gross
11 | O B L I C O N _ C h a p t e r 3 _ C o n d i t i o n a l O b l i g a t i o n s
proceeds from the sales of subdivided lots of
subject subdivision'. The cited article (Article 1267)
does not grant the courts (the) authority to remake,
modify or revise the contract or to fix the division of
shares between the parties as contractually
stipulated with the force of law between the
parties, so as to substitute its own terms for those
covenanted by the parties themselves.
Respondent's complaint for modification of
contract manifestly has no basis in law and
therefore states no cause of action. Under the
particular allegations of respondent's complaint
and the circumstances therein averred, the courts
cannot even in equity the relief sought." 11
The ruling in the Occea case is not applicable
because we agree with respondent court that the
allegations in private respondent's complaint and
the evidence it has presented sufficiently made out
a cause of action under Article 1267. We, therefore,
release the parties from their correlative obligations
under the contract. However, our disposition of the
present controversy does not end here. We have to
take into account the possible consequences of
merely releasing the parties therefrom: petitioners
will remove the telephone wires/cables in the posts
of private respondent, resulting in disruption of their
essential service to the public; while private
respondent, in consonance with the contract 12 will
return all the telephone units to petitioners, causing
prejudice to its business. We shall not allow such
eventuality. Rather, we require, as ordered by the
trial court: 1) petitioners to pay private respondent
for the use of its posts in Naga City and in the towns
of Milaor, Canaman, Magarao and Pili, Camarines
Sur and in other places where petitioners use
private respondent's posts, the sum of ten (P10.00)
pesos per post, per month, beginning January,
1989; and 2) private respondent to pay petitioner
the monthly dues of all its telephones at the same
rate being paid by the public beginning January,
1989. The peculiar circumstances of the present
case, as distinguished further from the Occea
case, necessitates exercise of our equity jurisdiction.
13 By way of emphasis, we reiterate the
rationalization of respondent court that: cdll
". . . In affirming said ruling, we are not making a
new contract for the parties herein, but we find it
necessary to do so in order not to disrupt the basic
and essential services being rendered by both
parties herein to the public and to avoid unjust
enrichment by appellant at the expense of plaintiff
. . . ." 1 4
Petitioners' assertion that Article 1267 was never
raised by the parties in their pleadings and was
never the subject of trial and evidence has been
passed upon by respondent court in its well
reasoned resolution, which we hereunder quote as
our own:
"First, we do not agree with defendant-appellant
that in applying Art. 1267 of the New Civil Code to
this case, we have changed its theory and decided
the same on an issue not invoked by plaintiff in the
lower court. For basically, the main and pivotal issue
in this case is whether the continued enforcement
of the contract Exh. "A" between the parties has,
through the years (since 1977), become too
iniquitous or disadvantageous to the plaintiff and
too one-sided in favor of defendant-appellant, so
that a solution must be found to relieve plaintiff
from the continued operation of said agreement
and to prevent defendant-appellant from further
unjustly enriching itself at plaintiff's expense. It is
indeed unfortunate that defendant had turned
deaf ears to plaintiff's requests for renegotiation,
constraining the latter to go to court. But although
plaintiff cannot, as we have held, correctly invoke
reformation of contract as a proper remedy (there
having been no showing of a mistake or error in
said contract on the part of any of the parties so as
to result in its failure to express their true intent), this
does not mean that plaintiff is absolutely without a
remedy in order to relieve itself from a contract that
has gone far beyond its contemplation and has
become highly iniquitous and disadvantageous to it
through the years because of the expansion of
defendant-appellant's business and the increase in
the volume of its subscribers. And as it is the duty of
the Court to administer justice, it must do so in this
case in the best way and manner it can in the light
of the proven facts and the law or laws applicable
thereto. cdphil
It is settled that when the trial court decides a case
in favor of a party on a certain ground, the
appellate court may uphold the decision below
upon some other point which was ignored or
erroneously decided by the trial court (Garcia
Valdez v. Tuazon, 40 Phil. 943; Relativo v. Castro, 76
Phil. 563; Carillo v. Salak de Paz, 18 SCRA 467).
Furthermore, the appellate court has the discretion
to consider an unassigned error that is closely
related to an error properly assigned (Paterno v.
Jao Yan, 1 SCRA 631; Hernandez v. Andal, 78 Phil.
196). It has also been held that the Supreme Court
(and this Court as well) has the authority to review
matters, even if they are not assigned as errors in
the appeal, if it is found that their consideration is
necessary in arriving at a just decision of the case
(Saura Import & Export Co., Inc. v. Phil. International
Surety Co. and PNB, 8 SCRA 143). For it is the
material allegations of fact in the complaint, not
the legal conclusion made therein or the prayer,
that determines the relief to which the plaintiff is
entitled, and the plaintiff is entitled to as much relief
as the facts warrant although that relief is not
specifically prayed for in the complaint (Rosales v.
Reyes and Ordoveza, 25 Phil. 495; Cabigao v. Lim,
50 Phil. 844; Baguioro v. Barrios, 77 Phil. 120). To
quote an old but very illuminating decision of our
Supreme Court through the pen of American jurist
Adam C. Carson:
'Under our system of pleading it is the duty of the
courts to grant the relief to which the parties are
shown to be entitled by the allegations in their
pleadings and the facts proven at the trial, and the
mere fact that they themselves misconstrue the
legal effects of the facts thus alleged and proven
will not prevent the court from placing the just
12 | O B L I C O N _ C h a p t e r 3 _ C o n d i t i o n a l O b l i g a t i o n s
construction thereon and adjudicating the issues
accordingly.' (Alzua v. Johnson, 21 Phil. 308)
And in the fairly recent case of Caltex Phil. Inc. v.
IAC, 176 SCRA 741, the Honorable Supreme Court
also held:
'We rule that the respondent court did not commit
any error in taking cognizance of the aforesaid
issues, although not raised before the trial court. The
presence of strong consideration of substantial
justice has led this Court to relax the well-
entrenched rule that, except questions on
jurisdiction, no question will be entertained on
appeal unless it has been raised in the court below
and it is within the issues made by the parties in their
pleadings (Cordero v. Cabral, L-36789, July 25, 1983,
123 SCRA 532). . . .'
We believe that the above authorities suffice to
show that this Court did not err in applying Art. 1267
of the New Civil Code to this case. Defendant-
appellant stresses that the applicability of said
provision is a question of fact, and that it should
have been given the opportunity to present
evidence on said question. But defendant-
appellant cannot honestly and truthfully claim that
it (did) not (have) the opportunity to present
evidence on the issue of whether the continued
operation of the contract Exh. "A" has now become
too one-sided in its favor and too iniquitous, unfair,
and disadvantageous to plaintiff. As held in our
decision, the abundant and copious evidence
presented by both parties in this case and
summarized in said decision established the
following essential and vital facts which led us to
apply Art. 1267 of the New Civil Code to this case:
Cdpr
xxx xxx xxx." 15
On the issue of prescription of private respondent's
action for reformation of contract, petitioners
allege that respondent court's ruling that the right of
action "arose only after said contract had already
become disadvantageous and unfair to it due to
subsequent events and conditions, which must be
sometime during the latter part of 1982 or in 1983 . .
." 16 is erroneous. In reformation of contracts, what
is reformed is not the contract itself, but the
instrument embodying the contract. It follows that
whether the contract is disadvantageous or not
irrelevant to reformation and therefore, cannot be
an element in the determination of the period for
prescription of the action to reform.
Article 1144 of the New Civil Code provides, inter
alia, that an action upon a written contract must
be brought within ten (10) years from the time the
right of the action accrues. Clearly, the ten (10)
year period is to be reckoned from the time the
right of action accrues which is not necessarily the
date of execution of the contract. As correctly
ruled by respondent court, private respondent's
right of action arose "sometime during the latter
part of 1982 or in 1983 when according to Atty. Luis
General, Jr. . . ., he was asked by (private
respondent's) Board of Directors to study said
contract as it already appeared disadvantageous
to (private respondent) (p. 31, tsn, May 8, 1989).
(Private respondent's) cause of action to ask for
reformation of said contract should thus be
considered to have arisen only in 1982 or 1983, and
from 1982 to January 2, 1989 when the complaint in
this case was filed, ten (10) years had not yet
elapsed." 17
Regarding the last issue, petitioners allege that
there is nothing purely potestative about the
prestations of either party because petitioner's
permission for free use of telephones is not made to
depend purely on their will, neither is private
respondent's permission for free use of its posts
dependent purely on its will. llcd
Apart from applying Article 1267, respondent court
cited another legal remedy available to private
respondent under the allegations of its complaint
and the preponderant evidence presented by it:
". . . we believe that the provision in said agreement
respondent court's finding that the provision in the
'(a) That the term or period of this contract shall be
as long as the party of the first part [herein
appellant] has need for the electric light posts of
the party of the second part [herein plaintiff] it
being understood that this contract shall terminate
when for any reason whatsoever, the party of the
second part is forced to stop, abandoned [sic] its
operation as a public service and it becomes
necessary to remove the electric light post [sic]';
(Emphasis supplied)
is invalid for being purely potestative on the part of
appellant as it leaves the continued effectivity of
the aforesaid agreement to the latter's sole and
exclusive will as long as plaintiffs is in operation. A
similar provision in a contract of lease wherein the
parties agreed that the lessee could stay on the
leased premises 'for as long as the defendant
needed the premises and can meet and pay said
increases' was recently held by the Supreme Court
in Lim v. C.A., 191 SCRA 150, citing the much earlier
case of Encarnacion v. Baldomar, 77 Phil. 470, as
invalid for being 'a purely potestative condition
because it leaves the effectivity and enjoyment of
leasehold rights to the sole and exclusive will of the
lessee.' Further held the High Court in the Lim case:
llcd
'The continuance, effectivity and fulfillment of a
contract of lease cannot be made to depend
exclusively upon the free and uncontrolled choice
of the lessee between continuing the payment of
the rentals or not, completely depriving the owner
of any say in the matter. Mutuality does not obtain
in such a contract of lease of no equality exists
between the lessor and the lessee since the life of
the contract is dictated solely by the lessee.'
13 | O B L I C O N _ C h a p t e r 3 _ C o n d i t i o n a l O b l i g a t i o n s
The above can also be said of the agreement Exh.
"A" between the parties in this case. There is no
mutuality and equality between them under the
afore-quoted provision thereof since the life and
continuity of said agreement is made to depend as
long as appellant needs plaintiff's electric posts.
And this is precisely why, since 1977 when said
agreement was executed and up to 1989 when this
case was finally filed by plaintiff, it could do nothing
to be released from or terminate said agreement
notwithstanding that its continued effectivity has
become very disadvantageous and iniquitous to it
due to the expansion and increase of appellant's
telephone services within Naga City and even
outside the same, without a corresponding increase
in the ten (10) telephone units being used by
plaintiff free of charge, as well as the bad and
inefficient service of said telephones to the
prejudice and inconvenience of plaintiff and its
customers. . . ." 18
Petitioners' allegations must be upheld in this
regard. A potestative condition is a condition, the
fulfillment of which depends upon the sole will of
the debtor, in which case, the conditional
obligation is void. 19 Based on this definition,
contract, to wit:
"(a) That the term or period of this contract shall be
as long as the party of the first part (petitioner) has
need for the electric light posts of the party of the
second part (private respondent) . . ." LLjur
is a potestative condition, is correct. However, it
must have overlooked the other conditions in the
same provision, to wit:
". . . it being understood that this contract shall
terminate when for any reason whatsoever, the
party of the second part (private respondent) is
forced to stop, abandoned (sic) its operation as a
public service and it becomes necessary to remove
the electric light post (sic);"
which are casual conditions since they depend on
chance, hazard, or the will of a third person. 20 In
sum, the contract is subject to mixed conditions,
that is, they depend partly on the will of the debtor
and partly on chance, hazard or the will of a third
person, which do not invalidate the
aforementioned provision. 21 Nevertheless, in view
of our discussions under the first and second issues
raised by petitioners, there is no reason to set aside
the questioned decision and resolution of
respondent court.
WHEREFORE, the petition is hereby DENIED. The
decision of the Court of Appeals dated May 28,
1992 and its resolution dated September 10, 1992
are AFFIRMED.
SO ORDERED.
Narvasa, C .J ., Padilla, Regalado and Puno, JJ .,
concur.