Pryce Corporation v PAGCOR (Obligations and Contracts)

Pryce Corporation v PAGCOR 

GR No. 157480 

May 6, 2005  

RESCISSION OR TERMINATION  

FACTS: PAGCOR set up a casino in Pryce Plaza Hotel for a period of 3 years. However, there has been interruptions in the operations which ultimately caused the operations to cease prematurely upon order of the Office of the President.   

ISSUE: 

(1) Whether or not Pryce is entitled to future rentals as provided in the contract even if PAGCOR contends, as the CA ruled, that Article 1659 of the Civil Code governs; hence, PPC is allegedly no longer entitled to future rentals, because it chose to rescind the Contract. 

(2) Whether or not PAGCOR should be exempt from complying with its contractual obligations due to fortuitous events 

(3) Whether or not the future rentals constitute a penalty clause  

CA: The CA ruled that the PAGCOR'S pretermination of the Contract of Lease was unjustified. The appellate court explained that public demonstrations and rallies could not be considered as fortuitous events that would exempt the gaming corporation from complying with the latter's contractual obligations. Therefore, the Contract continued to be effective until PPC elected to terminate it on November 25, 1993.  

Regarding the contentions of PPC, the CA held that under Article 1659 of the Civil Code, PPC had the right to ask for (1) rescission of the Contract and indemnification for damages; or (2) only indemnification plus the continuation of the Contract. These two remedies were alternative, not cumulative, ruled the CA.  

As PAGCOR had admitted its failure to pay the rentals for September to November 1993, PPC correctly exercised the option to terminate the lease agreement.  

--------------------------------------------------------------------------------------------------------------- APPLICABLE LAW/S: • Art. 1659. If the lessor or the lessee should not comply with the obligations set forth in Articles 1654 and 1657, the aggrieved party may ask for the rescission of the contract and indemnification for damages, or only the latter, allowing the contract to remain in force. (1556)  

• Art. 1654. The lessor is obliged:     (1) To deliver the thing which is the object of the contract in such a condition as to render it fit for the use intended;     (2) To make on the same during the lease all the necessary repairs in order to keep it suitable for the use to which it has been devoted, unless there is a stipulation to the contrary;     (3) To maintain the lessee in the peaceful and adequate enjoyment of the lease for the entire duration of the contract. (1554a)  

• Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. (1091a)  

• Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.  

The penalty may be enforced only when it is demandable in accordance with the provisions of this Code. (1152a)  

• Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.  

• Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.  

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HELD: (1) Pryce is entitled to future rentals as the provisions are not contrary to law, morals, public order, or public policy.  

The above provisions leave no doubt that the parties have covenanted 1) to give PPC the right to terminate and cancel the Contract in the event of a default or breach by the lessee; and 2) to make PAGCOR fully liable for rentals for the remaining term of the lease, despite the exercise of such right to terminate. Plainly, the parties have voluntarily bound themselves to require strict compliance with the provisions of the Contract by stipulating that a default or breach, among others, shall give the lessee the termination option, coupled with the lessor's liability for rentals for the remaining term of the lease. Article XX (c) provides that, aside from the payment of the rentals corresponding to the remaining term of the lease, the lessee shall also be liable "for any and all damages, actual or consequential, resulting from such default and termination of this contract." Having entered into the Contract voluntarily and with full knowledge of its provisions, PAGCOR must be held bound to its obligations. It cannot evade further liability for liquidated damages.  

(2) PAGCOR is not exempt from complying with the provisions as rallies and demonstrations are not considered fortuitous events.  

In this case, PAGCOR's breach was occasioned by events that, although not fortuitous in law, were in fact real and pressing. From the CA's factual findings, which are not contested by either party, we find that PAGCOR conducted a series of negotiations and consultations before entering into the Contract. It did so not only with the PPC, but also with local government officials, who assured it that the problems were surmountable. Likewise, PAGCOR took pains to contest the ordinances before the courts, which consequently declared them unconstitutional. On top of these developments, the gaming corporation was advised by the Office of the President to stop the games in Cagayan de Oro City, prompting the former to cease operations prior to September 1993.  

Also worth mentioning is the CA's finding that PAGCOR's casino operations had to be suspended for days on end since their start in December 1992; and indefinitely from July 15, 1993, upon the advice of the Office of President, until the formal cessation of operations in September 1993. Needless to say, these interruptions and stoppages meant that PAGCOR suffered a tremendous loss of expected revenues, not to mention the fact that it had fully operated under the Contract only for a limited time.  

(3) Pryce's right to penalty is affirmed but proved iniquitous.  

While petitioner's right to a stipulated penalty is affirmed, we consider the claim for future rentals to the tune of P7,037,835.40 to be highly iniquitous. The amount should be equitably reduced. Under the circumstances, the advanced rental deposits in the sum of P687,289.50 should be sufficient penalty for respondent's breach.  

Accordingly, respondent is ordered to pay petitioner the additional amount of P687,289.50 as penalty, which may be set off or applied against the former's advanced rental deposits.    

OTHER NOTES: 

In legal contemplation, the termination of a contract is not equivalent to its rescission. When an agreement is terminated, it is deemed valid at inception. Prior to termination, the contract binds the parties, who are thus obliged to observe its provisions. However, when it is rescinded, it is deemed inexistent, and the parties are returned to their status quo ante. Hence, there is mutual restitution of benefits received. The consequences of termination may be anticipated and provided for by the contract. As long as the terms of the contract are not contrary to law, morals, good customs, public order or public policy, they shall be respected by courts. The judiciary is not authorized to make or modify contracts; neither may it rescue parties from disadvantageous stipulations. Courts, however, are empowered to reduce iniquitous or unconscionable liquidated damages, indemnities and penalties agreed upon by the parties.  

DIFFERENCE BETWEEN RESCISSION & TERMINATION RESCISSION (OR RESOLUTION)

 • Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.  

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.  

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.  

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. (1124)  

• Art. 1659. If the lessor or the lessee should not comply with the obligations set forth in Articles 1654 and 1657, the aggrieved party may ask for the rescission of the contract and indemnification for damages, or only the latter, allowing the contract to remain in force. (1556)  

• To rescind is to declare a contract void in its inception and to put an end to it as though it never were. It is not merely to terminate it and release parties from further obligations to each other but to abrogate it from the beginning and restore the parties to relative positions which they would have occupied had no contract ever been made.  

• Rescission has likewise been defined as the "unmaking of a contract, or its undoing from the beginning, and not merely its termination." Rescission may be effected by both parties by mutual agreement; or unilaterally by one of them declaring a rescission of contract without the consent of the other, if a legally sufficient ground exists or if a decree of rescission is applied for before the courts  

TERMINATION (OR CANCELLATION) 

• The termination or cancellation of a contract would necessarily entail enforcement of its terms prior to the declaration of its cancellation in the same way that before a lessee is ejected under a lease contract, he has to fulfill his obligations thereunder that had accrued prior to his ejectment. However, termination of a contract need not undergo judicial intervention.

 •  "end in time or existence; a close, cessation or conclusion." With respect to a lease or contract, it means an ending, usually before the end of the anticipated term of such lease or contract, that may be effected by mutual agreement or by one party exercising one of its remedies as a consequence of the default of the other

Lalicon v National Housing Authority (Obligations and Contracts)

Lalicon v National Housing Authority 

GR No. 185440 

July 13, 2011

RESCISSION & PRESCRIPTION  

FACTS:  

(1)  On November 25, 1980 the National Housing Authority (NHA) executed a Deed of Sale with Mortgage over a Quezon City lot in favor of the spouses Isidro and Flaviana Alfaro (the Alfaros). The deed of sale provided, among others, that the Alfaros could sell the land within five years from the date of its release from mortgage without NHA's prior written consent.  Thus: 

 x x x.  5.  Except by hereditary succession, the lot herein sold and conveyed, or any part thereof, cannot be alienated, transferred or encumbered within five (5) years from the date of release of herein mortgage without the prior written consent and authority from the VENDOR-MORTGAGEE (NHA). x x x  

The mortgage and the restriction on sale were annotated on the Alfaros' title on April 14, 1981.  

(2) About nine years later or on November 30, 1990, while the mortgage on the land subsisted, the Alfaros sold the same to their son, Victor Alfaro.   

(3) After full payment of the loan or on March 21, 1991 the NHA released the mortgage.  

(4) Six days later or on March 27 Victor transferred ownership of the land to his illegitimate daughters. (5) On December 14, 1995 Victor mortgaged the land to Marcela Lao Chua, Rosa Sy, Amparo Ong, and Ida See.   

(6) Subsequently, on February 14, 1997 Victor sold the property to Chua, one of the mortgagees.  

RTC:  1990 sale of the land to their son Victor, and the subsequent sale of the same to Chua, made in violation of NHA rules and regulations.  It ruled that, although the Alfaros clearly violated the five-year prohibition, the NHA could no longer rescind its sale to them since its right to do so had already prescribed, applying Article 1389 of the New Civil Code.  The NHA and the Lalicons, who intervened, filed their respective appeals to the Court of Appeals (CA).  

CA:  CA reversed the RTC decision and found the NHA entitled to rescission.  The CA declared TCT 277321 in the name of the Alfaros and all subsequent titles and deeds of sale null and void.  It ordered Chua to reconvey the subject land to the NHA but the latter must pay the Lalicons the full amount of their amortization, plus interest, and the value of the improvements they constructed on the property.  

ISSUE: Whether or not the subsequent sales constituted breach in the obligation and may give rise to rescission  

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APPLICABLE LAW/S:  

• Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.  

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.  

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. 

• This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. (1124)  

• Art. 1381. The following contracts are rescissible:  

(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof;    

(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; 

(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; 

(4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority; 

(5) All other contracts specially declared by law to be subject to rescission. (1291a)  

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HELD: (1)   Lalicons' request for exemption from the five-year restriction was not granted. Resale without NHA's consent is a substantial breach.  

The five-year restriction against resale, counted from the release of the property from the NHA mortgage, measures out the desired hold that the government felt it needed to ensure that its objective of providing cheap housing for the homeless is not defeated by wily entrepreneurs.   The restriction clause is more of a condition on the sale of the property to the Alfaros rather than a condition on the mortgage constituted on it.           The Lalicons claim that the NHA unreasonably ignored their letters that asked for consent to the resale of the subject property.   They also claim that their failure to get NHA's prior written consent was not such a substantial breach that warranted rescission.   But the NHA had no obligation to grant the Lalicons' request for exemption from the five-year restriction as to warrant their proceeding with the sale when such consent was not immediately forthcoming.  And the resale without the NHA's consent is a substantial breach.  The essence of the government's socialized housing program is to preserve the beneficiary's ownerships for a reasonable length of time, here at least within five years from the time he acquired it free from any encumbrance.  

(2) Action has not prescribed.   

NHA sought annulment of the Alfaros' sale to Victor because they violated the five-year restriction against such sale provided in their contract.  Thus, the CA correctly ruled that such violation comes under Article 1191 where the applicable prescriptive period is that provided in Article 1144 which is 10 years from the time the right of action accrues.  The NHA's right of action accrued on February 18, 1992 when it learned of the Alfaros' forbidden sale of the property to Victor.  Since the NHA filed its action for annulment of sale on April 10, 1998, it did so well within the 10-year prescriptive period.         

(3) Lalicons and Chua were not buyers in good faith.

Since the five-year prohibition against alienation without the NHA's written consent was annotated on the property's title, the Lalicons very well knew that the Alfaros' sale of the property to their father, Victor, even before the release of the mortgage violated that prohibition.    

(4) Lastly, since mutual restitution is required in cases involving rescission under Article 1191, the NHA must return the full amount of the amortizations it received for the property, plus the value of the improvements introduced on the same, with 6% interest per annum from the time of the finality of this judgment.