Case Summary (G.R. No. 147324)
Factual Background
For several years prior to 1991, Globe coordinated communications facilities for United States military bases at Clark Air Base and Subic Naval Base at Cubi Point. Those facilities served the exclusive use of the United States Defense Communications Agency (USDCA) and were operated by USDCA personnel or American contractors. Globe contracted with local providers, including Philcomsat, which installed and operated an IBS Standard B earth station at Cubi Point under a written Agreement of 07 May 1991 for a term of sixty months. Globe agreed to pay monthly rentals for leased circuits.
Contractual Provisions
The Agreement expressly defined instances of force majeure in Section 8 to include “any law, order, regulation, direction or request of the Government of the Philippines,” strikes, insurrection, riots, national emergencies, war, acts of public enemies, fire, floods, typhoons, other catastrophes, acts of God, and other circumstances beyond the parties’ control. Section 7 governed discontinuance of service and provided that, notwithstanding non-use, Globe would continue to pay rentals for the actual number of T1 circuits in use, but not less than the first two circuits for the remaining life of the Agreement, subject to certain adjustments if Philcomsat resold or used the facility.
Events Leading to Termination
Both parties knew the RP-US Military Bases Agreement was to expire in 1991. On 16 September 1991 the Senate adopted Resolution No. 141 expressing non-concurrence in ratification of the proposed Treaty of Friendship, Cooperation and Security. The Philippine Government sent a Note Verbale on 31 December 1991 notifying the US Government that the RP-US Military Bases Agreement would terminate on 31 December 1992 and that withdrawal of US forces from Subic should be completed by that date. In mid-1992 formal orders and notices were issued reflecting the planned withdrawal and the USDCA’s cessation of use; Globe informed Philcomsat on 06 August 1992 that it would discontinue use effective 08 November 1992, invoking Section 8 (Default) of the Agreement.
Trial Court Proceedings
After Philcomsat demanded payment of US$4,910,136.00 plus interest and attorneys fees and Globe refused, Philcomsat filed suit on 27 January 1995. The Regional Trial Court rendered judgment on 05 January 1999 ordering Globe to pay US$92,238.00 (rentals for December 1992) with legal interest from December 1992, awarding attorneys fees of P300,000, dismissing Globe’s counterclaim, and taxing costs against Globe.
Court of Appeals Decision
On appeal, the Court of Appeals affirmed the trial court in part and reversed in part. The appellate court found that the Senate’s non-concurrence, the Philippine Note Verbale, the formal order from the US Navy commander, the ATT notification, and the complete withdrawal of US forces constituted acts or directions of the Philippine Government and circumstances beyond the parties’ control, thus falling within the Agreement’s Section 8 definition of force majeure. The Court of Appeals held that these events made performance of the Agreement impossible and therefore exempted Globe from paying rentals for the remainder of the five-year term. The court nevertheless affirmed the award of rent for December 1992, reasoning that the USDCA retained control of the earth station until the complete withdrawal on 31 December 1992.
Issues Presented on Review
The Supreme Court identified the principal issues as: whether the termination of the RP-US Military Bases Agreement, the Senate’s non-ratification of the proposed treaty, and the withdrawal of US forces constituted force majeure excusing Globe from rental obligations; whether Globe remained liable for December 1992 rentals; and whether Philcomsat was entitled to attorneys fees and exemplary damages.
Parties' Contentions
Philcomsat contended that Section 8 improperly expanded the civil law concept of fortuitous events under Article 1174 because the parties could foresee expiration of the Bases Agreement, and therefore Globe remained liable for the entire contractual term, including rentals for the balance of the five years. Philcomsat also argued for attorneys fees and exemplary damages. Globe maintained that contractual freedom allowed the parties to define force majeure, that the governmental acts and the withdrawal constituted force majeure, and that it was exempt from further rental obligations; Globe disputed liability for December 1992 but justified termination effective 08 November 1992.
Legal Analysis by the Supreme Court
The Court rejected Philcomsat’s contention that Section 8 contravened Article 1174. It noted that Article 1174 contemplates events that are either unforeseeable or foreseeable but inevitable, and that the enumerated items in Section 8 plainly fall within that scope. The Court emphasized Article 1306 and Article 1159 of the Civil Code recognizing parties’ freedom to stipulate contract terms so long as they do not contravene law, morals, good customs, public order, or public policy. The Court stated the applicable requisites for exemption by force majeure: an event independent of human will; impossibility of normal performance; and absence of participation or aggravation by the obligor. The Court found those requisites satisfied here because the Senate’s non-concurrence and the Note Verbale were beyond the parties’ control, the withdrawal of US forces rendered continuation of the earth station service impossible for the USDCA, and neither party participated in those governmental acts.
Application to December 1992 Rent
On the discrete question of rent for December 1992, the Court affirmed the Court of Appeals and the trial court. It found that the date when use of the earth station actually ceased was not established at trial and that the RTC had duly found the complete withdrawal occurred on 31 December 1992. Until that date the USDCA retained control and the facility could not be removed or rendered ineffective because Cubi Point access remained restricted to US naval personnel. Consequently Globe remained liable for rentals through December 1992
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Case Syllabus (G.R. No. 147324)
Parties and Procedural Posture
- Philippine Communications Satellite Corporation filed the complaint in the Regional Trial Court of Makati, Branch 59, against Globe Telecom, Inc. for unpaid rentals and damages under their lease Agreement.
- The trial court rendered judgment on 05 January 1999 awarding Philcomsat US$92,238.00 for December 1992 rentals and P300,000.00 as attorneys fees while dismissing Globe’s counterclaim.
- Both parties appealed to the Court of Appeals which rendered its Decision on 27 February 2001 largely affirming that force majeure excused Globe from paying rentals for the remainder of the contract but held Globe liable for December 1992 rentals.
- Both parties filed separate petitions for review with the Supreme Court: Philcomsat in G.R. No. 147324 and Globe in G.R. No. 147334, and the Supreme Court required memoranda and consolidated the issues for decision.
- The Supreme Court denied both petitions and affirmed the Court of Appeals Decision in the judgment now under study.
Key Factual Allegations
- The parties executed an Agreement on 07 May 1991 whereby Philcomsat agreed to establish and operate an IBS Standard B earth station at Cubi Point for the exclusive use of the US Defense Communications Agency (USDCA) for a term of sixty months.
- The contract chain involved the USDCA contracting American companies, the American companies contracting Globe, and Globe contracting Philcomsat for the earth station services.
- The parties knew at contract signing that the RP-US Military Bases Agreement was to expire in 1991 and that any renewal required Senate concurrence under Section 25, Article XVIII, 1987 Constitution.
- On 16 September 1991 the Senate adopted Senate Resolution No. 141 expressing its decision not to concur in ratification of the proposed treaty extending US presence.
- On 31 December 1991 the Philippine Government transmitted a Note Verbale to the US notifying termination of the RP-US Military Bases Agreement effective 31 December 1992 and directing withdrawal of US forces by that date.
- Globe notified Philcomsat by letter dated 06 August 1992 of its intention to discontinue use effective 08 November 1992 and expressly invoked Section 8 (force majeure) of the Agreement.
- Philcomsat replied on 10 August 1992 invoking Section 7 (discontinuance) and demanded payment of rentals for the remaining term, and later on 24 November 1993 demanded US$4,910,136.00 plus interest and fees.
- Philcomsat filed suit on 27 January 1995 seeking liquidated damages, interest, exemplary damages, attorneys fees and costs.
Contract Terms
- Section 8 of the Agreement defined force majeure to include expressly “any law, order, regulation, direction or request of the Government of the Philippines,” strikes, insurrections, national emergencies, war, acts of public enemies, natural catastrophes, and “other circumstances beyond the control of the parties.”
- Section 7 provided that upon discontinuance Globe must give at least sixty days written notice and must continue to pay rentals for the actual number of T1 circuits in use but in no case less than the first two T1 circuits for the remaining life of the Agreement, subject to reduction if Philcomsat re-used or re-sold the facility.
- Section 4.1 set out monthly rental rates and required payment timing for the leased T1 circuits.
- Section 11 fixed the term of the lease at sixty months.
Procedural History
- The RTC heard evidence and ruled on 05 January 1999 in favor of Philcomsat for December 1992 rentals and attorneys fees while dismissing Globe’s counterclaim.
- Both parties appealed to the Court of Appeals which rendered its Decision on 27 February 2001 finding force majeure and exempting Globe from rental obligations for the balance of the lease but holding Globe liable for December 1992 rentals.
- Philcomsat filed the petition in G.R. No. 147324 and Globe filed the petition in G.R. No. 147334 to the Supreme Court which gave due course to both petitions and required consolidated memoranda.
- The Supreme Court issued its decision affirming the Court of Appeals and denying both petitions for lack of merit.
Issues Presented
- Whether the termination of the RP-US Military Bases Agreement, the non-ratification under Senate Resolution No. 141, and