Case Summary (G.R. No. 223125)
Contractual Provisions
Article XX of the Lease Contract provides:
(a) Lessee’s breach entitles lessor to terminate upon 15‐day notice and lock premises.
(c) Upon termination, Lessee “shall be fully liable … for the rentals corresponding to the remaining term of the lease as well as for any and all damages, actual or consequential … resulting from such default and termination.”
Issue
Whether Pryce, having terminated the Contract for cause, may collect rentals for the unexpired lease term as stipulated in Article XX(c), or whether the remedy of rescission under Civil Code Article 1659 bars recovery of future rentals.
Court of Appeals Ruling
The CA held that PAGCOR’s pre‐termination was unjustified and that Pryce’s remedy was rescission under Article 1659, not termination under the Contract. Consequently, Pryce could recover only accrued rentals up to its election to terminate (November 25, 1993), plus interest and attorney’s fees. Future rentals were disallowed; moral damages and parking improvement costs were denied.
Supreme Court Analysis
- Contract as Primary Law: Under Articles 1159, 1306 and 1370, the parties’ stipulations have the force of law if not contrary to public policy. Courts may not alter or rescue parties from agreed terms.
- Termination vs. Rescission:
- Rescission (Articles 1191, 1659, 1380) annuls a contract ab initio with mutual restitution.
- Termination ends the contract prospectively, enforcing accrued obligations up to cancellation. Pryce elected termination under Article XX; it never sought to rescind from inception.
- Inapplicability of Rios: Rios v. Jacinto involved pure rescission under Article 1659, so its bar on future rentals does not apply when parties validly contract for termination plus penalty.
Penalty Clause and Equitable Reduction
The provision in Article XX(c) is a penal clause imposing liquidated damages (future rentals plus actual/consequential damages). Under Articles 1226, 1228, 1229 and 2227, penalties substitute for damages unless the clause is unconscionable. Courts may reduce penalties equitably considering the breach’s nature, parties’ conduct and surrounding circumstances. PAGCOR’s breach arose from gen
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Facts of the Case
- In early 1992, Pryce Properties Corporation (PPC) and PAGCOR negotiated the lease of the ballroom and adjacent grounds of Pryce Plaza Hotel in Cagayan de Oro for casino operations.
- On November 11, 1992, the parties executed a three-year Lease Contract (Dec 1, 1992–Nov 30, 1995); an addendum two days later added 1,000 sqm for personnel quarters and playground.
- Local ordinances (Res. 2295, Res. 2673, Ord. 3353) forbade casino operations in the city; PAGCOR brought petitions and won on appeal, but the Supreme Court later denied relief.
- Casino operations began Dec 18, 1992, but public rallies forced suspension; operations resumed July 15, 1993 but were again halted on advice of the Office of the President before September 1993.
- PPC sent statements of account for unpaid rent (Sept–Nov 1993) and letters asserting its right to full rentals on pre-termination; PAGCOR pre-terminated the lease, sought refund of deposits and improvements.
- PPC filed Civil Case No. 93-68266 for unpaid rentals; PAGCOR filed Civil Case No. 93-68337 for refund of deposits; the cases were consolidated and tried together.
Procedural History
- The RTC rendered judgment awarding PPC partial relief and denying PAGCOR’s counterclaim.
- Both parties appealed to the Court of Appeals (CA-GR CV No. 51629); PPC invoked actual and moral damages, full rentals, and interest; PAGCOR asserted justifiable pre-termination and reimbursement rights.
- On May 22, 2002, the Court of Appeals issued its Decision, modifying and affirming parts of the RTC: it awarded PPC accrued rentals for Sept–Nov 1993 plus interest and attorney’s fees, and granted PAGCOR reimbursement of advanced deposits.
- PPC’s Motion for Reconsideration was denied by CA resolution on March 4, 2003.
- PPC filed a Petition for Review under Rule 45 before the Supreme Court (G.R. No. 157480).
Issues Presented
- Whether PPC was entitled to collec