The Supreme Court ruled that economic hardship, such as a global economic crisis, does not excuse a lessee from fulfilling their obligations under a lease contract. The Court emphasized that Article 1267 of the Civil Code, which allows for release from an obligation when the service becomes excessively difficult, applies only to obligations “to do,” not obligations “to give,” such as paying rent. This decision reinforces the principle that contractual obligations must be honored, even in times of economic difficulty, and highlights the importance of fulfilling lease agreements.

Lease Obligations Under Pressure: Can Economic Crisis Justify Termination?

In Iloilo Jar Corporation v. Comglasco Corporation/Aguila Glass, the central issue revolved around whether Comglasco, the lessee, could validly pre-terminate a lease contract due to the economic crisis, citing Article 1267 of the Civil Code. Iloilo Jar, the lessor, argued that Comglasco breached the contract by removing its merchandise from the leased premises and failing to pay subsequent rentals. Comglasco countered that the economic crisis made it excessively difficult to comply with the lease obligations, justifying the termination. The Regional Trial Court (RTC) initially ruled in favor of Iloilo Jar, but the Court of Appeals (CA) reversed this decision, leading to the Supreme Court review.

The Supreme Court began by addressing the procedural lapse of Iloilo Jar’s late filing of the petition for review. While emphasizing the importance of adhering to procedural rules for the orderly administration of justice, the Court recognized exceptions to serve the ends of substantial justice. Citing CMTC International Marketing Corporation v. Bhagis International Trading Corporation, the Court reiterated that procedural rules may be relaxed where strong considerations of substantive justice are manifest in the petition. The Court noted that a denial of the petition would cause the remand of the case, unnecessarily delaying the proceedings, so it chose to address the merits of the case directly.

The Court then clarified the distinction between a judgment on the pleadings and a summary judgment. A judgment on the pleadings, governed by Section 1, Rule 34 of the Revised Rules of Court, is appropriate when an answer fails to tender an issue or admits the material allegations of the adverse party’s pleading. In contrast, a summary judgment, under Rule 35, is proper when there are no genuine issues raised. The Court, referencing Basbas v. Sayson, explained that the presence of issues in the Answer to the Complaint distinguishes a summary judgment from a judgment on the pleadings.

In this case, Comglasco’s answer raised an affirmative defense, arguing that the lease contract had been pre-terminated because the consideration thereof had become so difficult to comply with in light of the economic crisis. While this affirmative defense made a judgment on the pleadings improper, the Supreme Court determined that there was no genuine issue for trial. The Court reasoned that a full-blown trial would needlessly prolong the proceedings, and a summary judgment would suffice because there was no question of fact which must be resolved in trial.

The Court then addressed Comglasco’s reliance on Article 1267 of the Civil Code, which states:

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.

The Court clarified that Article 1267 applies only to obligations “to do” and not to obligations “to give.” Citing Philippine National Construction Corporation v. Court of Appeals, the Court explained that an obligation “to do” includes all kinds of work or service, while an obligation “to give” is a prestation which consists in the delivery of a movable or an immovable thing. The Court emphasized that the obligation to pay rentals in a contract of lease falls within the prestation “to give.” Therefore, Comglasco could not rightfully invoke Article 1267 to justify its failure to pay rent.

Even if Article 1267 were applicable, the Court found Comglasco’s position without merit. Financial struggles due to an economic crisis are not enough reason for the courts to grant reprieve from contractual obligations. In COMGLASCO Corporation/Aguila Glass v. Santos Car Check Center Corporation, the Court ruled that the economic crisis which may have caused therein petitioner’s financial problems is not an absolute exceptional change of circumstances that equity demands assistance for the debtor. The Court noted that Comglasco was also the petitioner in that case, where it also invoked Article 1267 to pre-terminate the lease contract.

Thus, the Supreme Court concluded that the RTC was correct in ordering Comglasco to pay the unpaid rentals because the affirmative defense raised by it was insufficient to free it from its obligations under the lease contract. However, the Court modified the RTC’s decision by deleting the award of exemplary damages and litigation expenses. Exemplary damages may be recovered in contractual obligations if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner, and the Court found no evidence of such conduct by Comglasco. While attorney’s fees were deemed appropriate, the Court also modified the interest rate on the monetary awards, aligning it with recent jurisprudence.

The Court also issued a final note, admonishing Iloilo Jar’s counsel for failing to comply with the rules of procedure and court processes, emphasizing that a lawyer, as an officer of the court, is expected to observe utmost respect and deference to the Court. The Court warned that a repetition to strictly comply with procedural rules shall be dealt with more severely.

FAQs

What was the key issue in this case?	The key issue was whether an economic crisis could excuse a lessee from fulfilling their obligations under a lease contract, specifically the obligation to pay rent. Comglasco argued that the economic crisis made it excessively difficult to comply with the lease, but the Supreme Court disagreed.
What is Article 1267 of the Civil Code?	Article 1267 of the Civil Code provides that 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. However, the Supreme Court clarified that this article applies only to obligations “to do,” not obligations “to give.”
What is the difference between a judgment on the pleadings and a summary judgment?	A judgment on the pleadings is appropriate when an answer fails to tender an issue or admits the material allegations of the adverse party’s pleading. In contrast, a summary judgment is proper when there are no genuine issues raised, even if an answer raises affirmative defenses.
Did the Supreme Court find Comglasco liable for breach of contract?	Yes, the Supreme Court found Comglasco liable for breach of contract because it failed to pay rent and could not justify its non-payment based on the economic crisis or Article 1267 of the Civil Code. The Court emphasized that the obligation to pay rent is an obligation “to give,” not an obligation “to do.”
What was the basis for Iloilo Jar’s claim for damages?	Iloilo Jar’s claim for damages was based on Comglasco’s failure to pay rent after removing its merchandise from the leased premises. Iloilo Jar argued that Comglasco breached the lease contract by not fulfilling its payment obligations.
Why did the Supreme Court remove the award of exemplary damages?	The Supreme Court removed the award of exemplary damages because there was no evidence that Comglasco acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Exemplary damages are only awarded in contractual obligations under such circumstances.
What are the implications of this ruling for lessees facing economic hardship?	This ruling clarifies that economic hardship is generally not a valid excuse for breaching a lease contract. Lessees are expected to fulfill their contractual obligations, and Article 1267 of the Civil Code will not automatically provide relief.
What was the outcome of the case?	The Supreme Court reversed the Court of Appeals’ decision and reinstated the Regional Trial Court’s order, with modifications. The Court affirmed that Comglasco was liable for unpaid rentals but deleted the award of exemplary damages and adjusted the interest rate on the monetary awards.

This case underscores the importance of fulfilling contractual obligations, even in the face of economic challenges. It clarifies that Article 1267 of the Civil Code has limited applicability and does not automatically excuse parties from their contractual duties. It reinforces the principle that obligations “to give,” such as paying rent, must be honored, and it serves as a reminder that economic hardship alone is not a sufficient legal basis for breaching a contract.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Iloilo Jar Corporation v. Comglasco Corporation/Aguila Glass, G.R. No. 219509, January 18, 2017