Title
Mariano vs. Petron Corporation
Case
G.R. No. 169438
Decision Date
Jan 21, 2010
Aure Group leased land to ESSO Eastern; leasehold rights transferred to PNOC without consent, breaching contract. Lessor’s acceptance of rent waived breach; petitioner’s suit barred by prescription. Lease upheld.
lease contract
termination
assignment veto clause

Case Summary (G.R. No. 169438)

Factual Background

On 5 November 1968, the Aure Group leased a parcel of land in Tagaytay City (the Property) to ESSO Eastern, with ESSO Philippines as the entity for whose use the lease was essentially arranged. The lease term was ninety years, and the rent structure was set at P740 monthly for the first ten years and P1 annual for the succeeding years. The contract included an assignment veto clause barring assignment without the other party’s prior written consent, but it excluded from the prohibition certain transfers that ESSO Eastern could make unilaterally to specified corporations.

On 23 December 1977, ESSO Eastern sold ESSO Philippines to PNOC, apparently without informing the Aure Group. After the sale, ESSO Philippines, whose corporate name was later changed to Petrophil Corporation and subsequently to Petron Corporation, took and kept possession of the Property.

On 18 March 1999, petitioner Romeo D. Mariano filed a complaint in the Regional Trial Court of Tagaytay City, Branch 18 to rescind the lease contract and recover possession. Mariano anchored his case on Presidential Decree No. 471, which he asserted reduced the contract’s duration from ninety years to twenty-five years, ending on 13 November 1993. He also alternatively argued that the lease was terminated on 23 December 1977 because ESSO Eastern’s sale of ESSO Philippines to PNOC was effectively an assignment of the leasehold right to PNOC without the Aure Group’s prior consent, in violation of the assignment veto clause.

Trial Court Proceedings

In its Decision dated 30 May 2000, the trial court ruled for petitioner. It ordered rescission of the Contract, directed Petron to vacate, and cancelled the lease annotation on petitioner’s title. The trial court found that ESSO Eastern’s sale to PNOC encompassed the transfer to PNOC of the leasehold right over the Property and that such transfer, done without the lessors’ consent, breached the Contract and resulted in its termination.

The trial court, however, treated the continued acceptance of rent by the Aure Group—and later by petitioner after he purchased the Property—from the lessee as warranting the application of law on implied new lease. On that footing, the trial court characterized the relationship as forming an implied new lease which, in its view, terminated on 21 December 1998 when petitioner’s notice to vacate was received by Petron.

The Parties’ Contentions

On appeal, Petron challenged the trial court’s conclusions. It relied on the separate corporate personality between PNOC and the acquired corporation, insisting that PNOC’s purchase was merely of shares in ESSO Philippines, a distinct corporate entity. Petron also distanced itself from its own admission in a Joint Motion for Judgment stating that PNOC acquired ESSO Philippines “including its leasehold right over the land in question.”

Petron further raised a prescription defense. It argued that petitioner’s action was time-barred because rescission, or the assertion of rights arising from the alleged breach, had to be pursued within the four-year period contemplated by Article 1389 and the four-year period referenced in Article 1146(1), reckoned either from PNOC’s acquisition of ESSO Philippines on 23 December 1977 or from the contract’s execution on 13 November 1968.

Petitioner, for his part, maintained that the lease had been shortened by PD 471 and that the unconsented transaction in 1977 effectively assigned the leasehold right, thereby triggering contractual termination and allowing rescission.

Ruling of the Court of Appeals

In its Decision dated 29 October 2004, the Court of Appeals reversed the trial court. It declared the lease Contract subsisting and ordered petitioner to pay P300,000 as attorney’s fees. The Court of Appeals held that there was no sufficient basis to pierce the corporate veil and that PNOC’s acquisition should be treated as a change in ESSO Philippines’ stockholding, not as a direct transfer of ESSO Eastern’s leasehold interests to PNOC that would violate the assignment veto clause.

The Court of Appeals alternatively found the action barred by prescription, holding that petitioner’s suit filed on 18 March 1999 exceeded the four-year period under Article 1389 and Article 1146(1). Petitioner’s motion for reconsideration was denied by Resolution dated 26 August 2005, prompting the present petition.

Issue

The principal issue was whether the lease Contract subsisted between petitioner and Petron, considering (a) the effect of the 1977 sale and the assignment veto clause, (b) the legal consequences of continued rent acceptance after the alleged breach, and (c) the existence of prescription.

Legal Basis and Reasoning

The Court held that the Contract subsisted. It first treated PNOC’s purchase of ESSO Philippines as a transaction that was total and unconditional, leaving no residual rights in ESSO Eastern. The Court reasoned that such a complete buy-out logically carried with it the transfer of whatever proprietary interest ESSO Eastern held through ESSO Philippines, including the leasehold interest over the Property. This was tied to Petron’s own admission in the Joint Motion: PNOC acquired ESSO Philippines, “including its leasehold right over the land in question,” through acquisition of its shares. Because the Aure Group had not given prior consent to the transaction between ESSO Eastern and PNOC, the Court concluded that ESSO Eastern violated the assignment veto clause.

The Court, however, rejected Petron’s efforts to escape the consequence of that breach by invoking separate corporate personality. The Court recognized the general doctrine that courts are “loathe” to pierce the corporate veil, given the distinct legal personality of corporations from their shareholders or related entities. It nevertheless stated that corporate fiction yields to reality when it is used to justify wrong or thwart justice. The Court emphasized that the principle has lesser sway in situations involving subsidiary corporations whose shares are wholly, or almost wholly, owned by the parent.

Applying these principles, the Court found the facts compelled the conclusion that ESSO Philippines was a mere branch or alter ego of ESSO Eastern for the relevant contractual relationship. It noted that the contract itself described ESSO Eastern as a foreign corporation organized in Delaware, licensed to transact business in the Philippines, and doing business under the business name “Esso Standard Philippines.” It further held that the lease was executed by ESSO Eastern, not by ESSO Philippines, as lessee, while the lease was for the use of ESSO Philippines, and possession was taken by ESSO Philippines after execution. Thus, the Court treated ESSO Philippines, for purposes of the Contract, as ESSO Eastern’s branch, rendering Petron’s insistence on corporate separateness insufficient to defeat the conclusion that the assignment veto was violated.

Waiver and Continued Rent Acceptance

Despite the breach, the Court held the Contract continued to subsist. The Court corrected the trial court’s approach that the breach automatically extinguished the Contract and replaced it with an implied new lease of a monthly term. Instead, it held that the breach gave rise to a cause of action for the lessors to seek ejectment under Article 1673, paragraph 3 of the Civil Code, which permits judicial ejectment for violation of conditions agreed upon in the contract.

Although the records did not show formal notice to the Aure Group of ESSO Philippines’ sale to PNOC, the Court found that the successive changes in the lessee’s name—from ESSO Philippines to Petrophil Corporation, and later to Petron—were enough to alert the lessors to a likely change in the lessee’s identity. The Court treated this as significant because the assignment veto clause required prior consent; the change in the lessee’s personali

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