PRYCE CORPORATION (FORMERLY PRYCE PROPERTIES CORPORATION), PETITIONER, VS. PHILIPPINE AMUSEMENT AND GAMING CORPORATION, RESPONDENT.

Pryce Corporation versus Philippine Amusement and Gaming Corporation

The Case

This is a petition for review under Rule 45 of the Rules of Court, brought by Pryce Corporation, formerly Pryce Properties Corporation, against the Philippine Amusement and Gaming Corporation, commonly called PAGCOR. The dispute arises from a Contract of Lease over the ballroom and grounds of a hotel in Cagayan de Oro City, which the parties entered into for the purpose of setting up a casino. When the casino operations were suspended and the lease was cut short, both sides sued each other for sums of money. The case matters because it draws a sharp line between two remedies that courts and lawyers often confuse: termination of a contract and rescission of a contract. The Court also treats a stipulation for payment of rentals for the remaining term of the lease as a penal clause, which courts may reduce if it is iniquitous or unconscionable.

Procedural History

Two separate actions for sum of money were filed in the Regional Trial Court of Manila. Pryce filed its complaint first, and PAGCOR filed its own complaint a few days later. The trial court admitted a supplemental complaint by Pryce and later ordered the two cases consolidated and jointly tried. After trial, the court rendered its decision, and both parties appealed to the Court of Appeals.

The Court of Appeals affirmed the trial court's decision in one case with modification, ordering PAGCOR to pay Pryce actual damages representing accrued rentals for the quarter from September to November 1993, with interest and penalty at two percent per month from the filing of the complaint, plus attorney's fees. In the other case, the Court of Appeals reversed and set aside the trial court's decision and rendered a new judgment ordering Pryce to reimburse PAGCOR the amount representing the advanced rental deposits, which amount could be compensated by Pryce's award in the first case. Pryce moved for reconsideration, but the Court of Appeals denied the motion. Pryce then elevated the matter to the Supreme Court by petition for review under Rule 45.

Facts

In the first half of 1992, representatives of Pryce approached PAGCOR about the possibility of setting up a casino in a hotel in Cagayan de Oro City. A series of negotiations followed, and PAGCOR representatives went to the city to determine whether residents would welcome a casino. On November 11, 1992, the parties executed a Contract of Lease covering the hotel ballroom for three years, starting December 1, 1992 and ending November 30, 1995. Two days later, they executed an addendum that included a lease of an additional one thousand square meters of hotel grounds as living quarters and playground for casino personnel. PAGCOR advertised the start of casino operations on December 18, 1992.

Unknown to the parties or despite their arrangements, the Sangguniang Panlungsod of Cagayan de Oro City had already passed a resolution in 1990 declaring it a policy to prohibit the establishment of a gambling casino in the city. A month before the lease was executed, the council passed another resolution reiterating that policy with vigor and vehemence. On December 7, 1992, the council enacted an ordinance prohibiting the issuance of business permits and canceling existing permits for any establishment using its premises for casino operations. On the afternoon of December 18, 1992, hours before the formal opening, a public rally was staged in front of the hotel by local officials, residents, and religious leaders. Barricades prevented casino personnel and hotel guests from entering and exiting, and PAGCOR was constrained to suspend operations. The rally ended on December 20, 1992.

In January 1993, the council passed another ordinance prohibiting casino operations and providing penalties. Pryce filed a petition for prohibition with preliminary injunction before the Court of Appeals, and PAGCOR intervened. The Court of Appeals declared the ordinances unconstitutional and void and permanently enjoined their enforcement. On appeal, the Supreme Court affirmed that decision in 1994. Meanwhile, PAGCOR resumed casino operations in July 1993, but another rally was held, and operations were later indefinitely suspended due to incessant demonstrations. Following verbal advice from the Office of the President, PAGCOR decided to stop its casino operations in the city before September 1993. Pryce sent statements of account and letters demanding full rentals, but PAGCOR refused to pay, citing unforeseen legal and other circumstances, and asked for a refund of rental deposits and expenses. Pryce then filed its complaint, and PAGCOR filed its own. Pryce later informed PAGCOR that it was terminating the contract due to PAGCOR's continuing breach, invoking Article 20 of the Contract of Lease.

Issues

• Whether or not the provisions of Sections 20(a) and 20(c) of the Contract of Lease, giving Pryce the right to terminate the contract for cause and to collect rentals corresponding to the remaining term of the lease, are valid and binding.
• Whether or not Article 1659 of the Civil Code supersedes those contractual provisions, such that Pryce, having rescinded the contract, is no longer entitled to future rentals.
• Whether or not the collection by Pryce of future rentals would give rise to unjust enrichment.

Applicable Provisions

Article 1159 of the Civil Code provides:

Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

This provision anchors the Court's ruling that the contract is the primary law between the parties and must be enforced as written.

Article 1659 of the Civil Code provides:

If one of the parties to a contract of lease fails to perform any of the obligations incumbent upon him, the other party may ask for the rescission of the contract and indemnification for damages, or only the latter, allowing the contract to remain in force.

This provision is the alternative remedy of rescission in lease contracts, which the Court distinguishes from the contractual remedy of termination invoked by Pryce.

Article 1226 of the Civil Code provides:

In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

This provision governs the penal clause in the contract, allowing the Court to treat the stipulation for future rentals as a penalty and to reduce it if it is iniquitous or unconscionable.

Ruling

On the first issue, the Court held that the provisions of Sections 20(a) and 20(c) of the Contract of Lease are valid and binding. The parties had covenanted to give Pryce the right to terminate and cancel the contract upon default or breach by the lessee, and to make PAGCOR fully liable for rentals for the remaining term of the lease despite the exercise of that right. These stipulations are not contrary to law, morals, good customs, public order, or public policy. The Court stressed that the contract is the primary law between the parties, and a court has no alternative but to enforce the stipulations in the manner they were agreed upon and written. Courts have no power to make or modify contracts, nor to save parties from disadvantageous provisions.

On the second issue, the Court held that Article 1659 of the Civil Code does not supersede the contractual provisions. The Court distinguished termination from rescission. In legal contemplation, the termination of a contract is not equivalent to its rescission. When an agreement is terminated, it is deemed valid at inception, and prior to termination the contract binds the parties, who are obliged to observe its provisions. When it is rescinded, it is deemed inexistent, and the parties are returned to their status quo ante, with mutual restitution of benefits received. The Court found that Pryce never intended to rescind the contract from the beginning, as shown by its demand for accrued rentals, which was an enforcement of the contract prior to termination. Thus, Pryce's abrogation of the contract was termination, not rescission under Article 1659.

On the third issue, the Court held that future rentals cannot be claimed as compensation for the use or enjoyment of another's property after the termination of a contract. By abrogating the contract, Pryce released PAGCOR from its future obligations, including the payment of rentals. To grant that right to Pryce would unjustly enrich it at PAGCOR's expense. However, the Court found that Section 20(c) was intended to be a penal clause, an accessory obligation attached to a principal obligation to insure its performance by imposing a special prestation in case of nonfulfillment. The Court noted that the first exception to the general rule on penal clauses applies because the contract provided that, aside from payment of rentals for the remaining term, the lessee shall also be liable for any and all damages, actual or consequential. The Court held that courts are empowered to reduce iniquitous or unconscionable liquidated damages, indemnities, and penalties agreed upon by the parties.

Doctrine

A Bar candidate must retain that termination and rescission are distinct remedies with different consequences. Termination treats the contract as valid at inception and releases the parties from further obligations only after cancellation, while rescission treats the contract as inexistent from the beginning and requires mutual restitution to restore the parties to their status quo ante. The contract is the primary law between the parties under Article 1159 of the Civil Code, and courts must enforce its stipulations as written, without power to make or modify contracts or to rescue parties from disadvantageous provisions. A stipulation for payment of rentals for the remaining term of a lease is a penal clause, which courts may reduce if it is iniquitous or unconscionable, consistent with Article 1226 of the Civil Code.

Disposition

The petition was partly granted, with the Court affirming the validity of the contractual provisions but reducing the award of future rentals as a penal clause, and the case was remanded for further proceedings consistent with the ruling.

Remember This

Memorize this line: termination treats the contract as valid at inception and releases the parties from future obligations, while rescission treats it as inexistent and requires mutual restitution. Examiners use this case to test the distinction between termination and rescission under Article 1659 of the Civil Code, and the power of courts to reduce iniquitous penal clauses under Article 1226.