Naga Telephone Co., Inc. vs. Court of Appeals, 230 SCRA 351(1994) Petitioner Naga Telephone Co., Inc.

(NATELCO) is a telephone company rendering local as well as long distance telephone 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, petitioner and private respondent into a contract 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. After the contract had been enforced for over 10 years, private respondent filed with the RTC of Naga City reformation of the contract with damages against petitioners, on the ground that it is too one-sided in favor of latter; 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, and that a post now costs as much as P2,630.00. In its answer, petitioner averred that the petition 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. The trial court ordered the reformation of the contract. Petitioners appealed to respondent CA which affirmed the decision of the trial court, but based on different grounds: (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. Hence, this recourse by the petitioners. Issue: Whether or not Article 1267 applies to the instant case Ruling: Yes. Taking into consideration the rationale behind Article 1267, 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. Article 1267 states in our law the doctrine of unforseen 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 the case at bar, 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 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 plaintiffs 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 as it extended and expanded its telephone services to towns outside said city. 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.

Daniel T. So vs. Food Fest Land, Inc.,

617 SCRA 541(2010)

Facts: Food Fest Land Inc. (Food Fest) entered into a September 14, 1999 Contract of Lease with Daniel T. So (So) over a commercial space in San Antonio Village, Makati City for a period of three years (1999-2002) on which Food Fest intended to operate a Kentucky Fried Chicken carry out branch. Before forging the lease contract, the parties entered into a preliminary agreement stating that the lease shall not become binding upon them unless and until the government agencies concerned shall authorize, permit or licensed the operation of the said business. They further agree that they will notify each if in case there is a failure in the processing of the permits and licenses, and in such case, the agreement may be cancelled and all rights and obligations hereunder shall cease. While Food Fest was able to secure the necessary licenses and permits for the year 1999, it failed to commence business operations. For the year 2000, Food Fests application for renewal of barangay business clearance was held in abeyance until further study of its kitchen facilities. As a result, Food Fest informed So of its intent to terminate the lease, and it in fact stopped paying rent. But So ignored the notification of Food Fest, instead pursue and insist in helping out with the processing of the barangay clearance which happen to be a prerequisite of other permits and licenses. Subsequently, So demanded payment of rental arrearages from Food Fest but to no avail, with Food Fest denying liability contending that failure to secure authority to commence business resulted in the termination of its contractual obligation including the obligation to pay rent. This prompted So to file a complaint for ejectment and damages against Food Fest before the MeTC, Makati City. It ruled in favor of So, but RTC reversed and ordered So to reimbursed the rental payment in favor of Food Fest. However, CA upheld trial courts decision, declaring that Food Fest obligation to pay rental is not extinguished. Hence this petition arise. Issue: Whether or not the contract of lease is terminated due to the failure of securing its business permit and license. WON 1267 as invoked by Food Fest is applicable. Held: No. Food Fests invocation of the principle of rebus sic stantibus as enunciated in Article 1267 of the Civil Code to render the lease contract functus officio, and

consequently release it from responsibility to pay rentals, because of the failure in securing necessary permit and license is non-meritorious. Such failure does not suffice to declare the lease contract functus officio, nor can it be construed as an unforeseen event to warrant the application of Article 1267 in the Civil Code. Therefore, Art 1267 does not apply in this case, rendering Food Fest Land liable for damages incurred and obligated to settle rental payments with Daniel So.

Iloilo Traders Finance, Inc. vs. Heirs of Oscar Soriano, Jr.,

404 SCRA 67 (2003)

FACTS: Spouses Oscar Soriano and Marta Soriano executed two promissory notes, secured by real property mortgages, in favor of petitioner Iloilo Traders Finance. The respondents defaulted and petitioner moved for extra-judicial foreclosure of the mortgages. Respondent filed a complaint for Declaration of a Void Contract, Injunction and Damages to which the trail court suspended the public sale of the said property through the issuance of writ of preliminary injunction. The parties later entered into amicable settlement and submitted it to the trial court for approval. The trial court required the parties to give some clarifications on several issues that were not complied however the parties failed to comply. The amicable settlement was disapproved and the court proceeded to pre-trial. Respondents withdrew the case. Subsequently after seven years, filed anew case for novation and specific performance, judged in favour for the respondents and affirmed by the Court of Appeals. ISSUE: Whether or not the amicable settlement entered into between parties has novated the original obligation. RULING: NO. Article 2041 of the Civil Code provides, If one of the parties fails or refuses to abide by the compromise, the other party may either enforce the compromise or regard it as rescinded and insist upon his original demand. The parties entered into the agreement basically to put an end to Civil Case No. 14007 then pending before the Regional Trial Court. Concededly, the provisions of the settlement were beneficial to the respondent couple. The compromise extended the terms of payment and implicitly deferred the extrajudicial foreclosure of the mortgaged property. It was well to the interest of respondent spouses to ensure its judicial approval; instead, they went to ignore the order of the trial court and virtually failed to make any further appearance in court. This conduct on the part of respondent spouses gave petitioner the correct impression that the Sorianos did not intend to be bound by the compromise settlement, and its non-materialization negated the very purpose for which it was executed.
NOTE: Novation may either be extinctive or modificatory, much being dependent on the nature of the change and the intention of the parties. Extinctive novation is never presumed; there must be an express intention to novate; in cases where it is implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of the new

one. Implied novation necessitates that the incompatibility between the old and new obligation be total on every point such that the old obligation is completely superseded by the new one. The test of incompatibility is whether they can stand together, each one having an independent existence; if they cannot and are irreconciliable, the subsequent obligation would also extinguish the first. An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second, creating a new one in its stead. This kind of novation presupposes a confluence of four essential requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation. Novation is merely modificatory where the change brought about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay); in this instance, the new agreement will not have the effect of extinguishing the first but would merely supplement it or supplant some but not all of its provisions.