G.R. No. 116896.

May 5, 1997
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION vs CA
Facts:

 PNCC, debtor, executed a lease contract on November 18, 1985 with herein private respondents.
Under the Agreement, the term of lease shall be for 5 years, commencing on the date of issuance
of the industrial clearance by the Ministry of Human Settlements (par 1). PNCC will pay 20,000
pesos monthly (par 2). It will pay yearly and the first annual rent shall be due and payable upon the
execution of the Agreement (par 3).

 PNCC obtained from the Ministry of Human Settlements a Temporary Use Permit (valid for 2 years)
for the proposed rock crushing business

 Respondents demanded payment from PNCC.

 PNCC refused to pay arguing that under par 1 of the lease contract, payment would commence
form the date of issuance of industrial clearance and not from the date of signing the contract. They
also expressed intention to terminate the contract, as it had decided to cancel or discontinue with
the rock crushing project due to financial, as well as technical, difficulties.

 Respondents refused and insisted on the performance of petitioner’s obligation. They filed an action
against petitioner for Specific Performance with damages. Trial court rendered judgment in favor
of the respondent and ordered PNCC to pay the private respondents.

 Petitioner PNCC appealed. Contentions:

1. That the issuance of industrial clearance is a suspensive condition without which the rights
under contract would not be acquired. Temporary Use Permit – not the industrial clearance
referred in the contract (not the main issue. Court’s answer: Petitioner is estopped from
claiming that the Temporary Use Permit was not the industrial clearance referred to in the
contract. In its letter, it can be gleaned that they considered the permit as the industrial
clearance)
2. That Article 1266 and the principle of rebus sic stantibus should apply. PNCC should be
released from the obligatory force of the contract of lease because the purpose of the contract
did not materialize due to unforeseen events and causes beyond its control (i.e. abrupt change
in political climate after the EDSA revolution and financial difficulties)

Issue: WON Article 1266 and the principle of rebus sic stantibus should be applied in the case, thus,
releasing PNCC from its obligation?

Ruling: No. As a general rule, contracts, once perfected, bind both parties, and have the force of law. But
the law recognizes exceptions to the principle of the obligatory force of contracts. One exception is laid
down in Article 1266 of the Civil Code, which reads:
The debtor in obligations to do shall also be released when the prestation becomes legally or
physically impossible without the fault of the obligor.
Petitioner cannot successfully take refuge in the provision since it is applicable only to obligations
"to do", and not to obligations "to give". 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 obligation to pay rentals or deliver the thing in a contract of lease falls within the prestation to
give; hence, it is not covered within Article 1266.
At any rate, the unforeseen event and causes mentioned by petitioner are not the legal or physical
impossibilities contemplated in said article. Besides, petitioner failed to state specifically the
circumstances brought about by the abrupt change in the political climate in the country except the alleged
prevailing uncertainties in government policies on infrastructure projects.
The principle of rebus sic stantibus neither fits in with the facts of the case. Under this theory, the parties
stipulate in the light of certain prevailing conditions, and once these conditions cease to exist the
contract also ceases to exist. This theory is said to be the basis of Article 1267 of the Civil Code, which
provides:
ART. 1267. When the service has become so difficult as to be manifestly beyond the contemplation
of the parties, the obligor may also be released therefrom, in whole or in part.
This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute application
of the principle of rebus sic stantibus. The parties to the contract must be presumed to have assumed the
risks of unfavorable developments. It is therefore only in absolutely exceptional changes of
circumstances that equity demands assistance for the debtor.
In this case, petitioner wants this Court to believe that the abrupt change in the political climate of the
country after the EDSA Revolution and its poor financial condition rendered the performance of the lease
contract impractical and inimical to the corporate survival of the petitioner.
This Court cannot subscribe to this argument.
1983 – Aquino was assassinated; country has experienced political upheavals, turmoils, almost
daily mass demonstrations, unprecedented, inflation, peace and order deterioration
November 3, 1985 – Marcos announced that there’d be snap election
November 18, 1985 – notwithstanding the above, PNCC entered into contract of lease with private
respondents with open eyes of the deteriorating conditions of the country
Petitioner alleged poor financial condition
The same will neither release petitioner from the binding effect of the contract of lease. Mere pecuniary
inability to fulfill an engagement does not discharge a contractual obligation, nor does it constitute a defense
to an action for specific performance.
Non-materialization of petitioner’s rock crushing plant
Non-materialization will not invalidate the contract. The cause or essential purpose in a contract of lease is
the use or enjoyment of a thing. As a general principle, the motive or particular purpose of a party in
entering into a contract does not affect the validity or existence of the contract; an exception is when
the realization of such motive or particular purpose has been made a condition upon which the contract is
made to depend. The exception is not applicable here.