Title
Naga Telephone Co., Inc. vs. Court of Appeals
Case
G.R. No. 107112
Decision Date
Feb 24, 1994
NATELCO and CASURECO II's 1977 contract for post usage became inequitable due to NATELCO's expansion, leading to CASURECO II's reformation claim under Article 1267, upheld by courts.
contract reformation
unfair contract
disadvantageous contract
A

Case Summary (G.R. No. 107112)

Contract Terms

On November 1, 1977, the parties executed a written agreement permitting NATELCO to use CASURECO II’s electric light posts in Naga City. In consideration, NATELCO agreed to install, without charge, ten telephone connections for CASURECO II at enumerated locations (main office, warehouse, sub-station, residences of certain officers, and two locations to be determined by the general manager). The contract declared its term to continue “as long as” NATELCO had need for CASURECO II’s posts and contained a termination proviso tied to CASURECO II’s cessation of public service and removal of posts.

Facts Giving Rise to Litigation

By 1989 CASURECO II alleged the contract had become grossly one-sided: NATELCO’s subscriber growth produced heavier and more numerous cables on CASURECO II’s posts, causing breakage during typhoons, increased costs of posts, and use of many posts outside Naga City without contract. CASURECO II filed suit on January 2, 1989, seeking reformation and damages for inequity; a second claim sought compensation for use of posts outside Naga City (alleging 319 posts used from 1981 onward); a third claim alleged poor telephone service by NATELCO. NATELCO pleaded that reformation was unsupported, barred by prescription and estoppel, asserted compliance with engineering standards, and maintained that the parties intended broader territorial coverage.

Trial Court Findings and Relief

The Regional Trial Court found that, although the 1977 agreement appeared fair at execution, subsequent events (expansion of NATELCO’s service, heavier cables, post destruction, increased post costs, and use outside Naga City) rendered the contract inequitable to CASURECO II. The trial court concluded it could not make a new contract but could reform the instrument to rectify inequities. It ordered mutual financial adjustments effective January 1989: NATELCO to pay CASURECO II P10.00 per post per month for posts used in Naga City and specified towns; CASURECO II to pay NATELCO the monthly dues for the telephone units (at public rates). The trial court dismissed CASURECO II’s claim for attorneys’ fees and NATELCO’s counterclaim; the claim for poor service was not sufficiently proven.

Court of Appeals Ruling and Grounds

The Court of Appeals affirmed the trial court’s judgment but on different legal grounds: (1) that Article 1267 of the New Civil Code was applicable, permitting release of an obligor when the service has become so difficult as to be manifestly beyond the parties’ contemplation; and (2) that the contract contained a potestative element rendering parts of it void. The appellate court reasoned that the factual showing — significant increase in posts used, use outside Naga, destruction of posts in typhoons, and escalation of costs — demonstrated that continued enforcement of the agreement had gone beyond CASURECO II’s contemplation, justifying relief under Article 1267. The court distinguished Occena v. Jabson as inapposite, concluding that Article 1267 authorized relief here. To prevent disruption of essential services and unjust enrichment, the Court of Appeals sustained the interim mutual-payment arrangement until the parties could renegotiate.

Supreme Court: Application of Article 1267

The Supreme Court agreed with the Court of Appeals that Article 1267 applied. It explained Article 1267’s purpose as authorizing judicial relief where performance has become manifestly beyond the parties’ contemplation and where equity and the intention of the parties justify release (citing the Code Commission report and commentators). The Court held that the “service” in Article 1267 should be read to mean the obligor’s performance under the contract; here CASURECO II’s obligation was the allowance of NATELCO’s use of posts. Given the proven factual changes (massive increase in posts used, expansion outside agreed area, damage from heavier cables, and escalation of post prices), the Court found the contract had become so inequitable that release and equitable relief were warranted. The Court emphasized that Article 1267 does not permit courts to rewrite contracts at will, but it does permit relief where the basis of the bargain has disappeared or become manifestly beyond contemplation.

Distinguishing Occena v. Jabson

The Court expressly distinguished the Occena decision, noting that Occena involved a request to modify contractual division of proceeds — a form of judicial remaking of contractual terms — and thus was not within Article 1267’s remedial scope. In contrast, the present case involved a factual evolution that rendered continuation of the agreed exchange unjust; Article 1267 permitted relief to avoid unjust enrichment and to preserve the parties’ essential services.

Interim Relief to Avoid Disruption

While the Court released the parties from their correlative obligations under Article 1267, it recognized the practical consequences of an immediate release (disruption of telephone service and prejudice to both utilities). Consequently, the Court endorsed the trial court’s and Court of Appeals’ pragmatic arrangement: (a) NATELCO to pay CASURECO II P10.00 per post per month for posts used in Naga City and specified nearby towns and other posts used by NATELCO, and (b) CASURECO II to pay NATELCO the monthly dues of its telephone units at public rates — both obligations to commence January 1989 — as temporary measures until the parties reach a new agreement.

Prescription and Accrual of Cause of Action

The Court addressed the prescription issue under Article 1144 (ten-year period for actions on written contracts). It held CASURECO II’s right to seek relief accrued not necessarily at contract execution (1977) but when the contract became disadvantageous and beyond the party’s contemplation — specifically when the board instructed counsel (in 1982–1983) to study the contract. Because the action was filed January 2, 1989, less than ten years from accrual, the claim was not prescribed.

Potestative Condition Issue

The Court examined the clause making the contract’s term depend “as long as” NATELCO had need for the posts. While recognizing that a purely potestative condition (dependent solely on one party’s will) is void, the Court found that this clause also contained casual conditions (termination when CASURECO II is forced to stop service and remove posts). Thus, the provision is mixed — partly potestative, partly casual — and such mixed conditions do not invalidate the provision. The Supreme Court nevertheless affirmed relief on other grounds and declined to set aside t

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