GREGORIO ARANETA, INC., PETITIONER, VS. THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO., LTD., RESPONDENT.

Araneta versus Philippine Sugar Estates Development

The Case

This is a petition for certiorari to review a judgment of the Court of Appeals, brought by Gregorio Araneta, Incorporated against Philippine Sugar Estates Development Company, Limited. The respondent buyer sued to compel the seller to finish constructing the streets surrounding a parcel of land it had purchased, and the question that reaches us is a deceptively simple one: when a contract of sale obliges the seller to build streets but fixes no date, may the courts simply supply a period, and if so, how must that period be determined? The case matters because it draws the precise boundaries of judicial power under Article 1197 of the Civil Code, the provision that lets courts fix a period the parties left open. It teaches that the power is narrow, that it is exercised in two distinct steps, and that the period chosen must be the one the parties probably contemplated, never one the judge finds merely reasonable.

Procedural History

Philippine Sugar Estates Development Company, Limited filed a complaint for specific performance and damages in the Court of First Instance of Manila against J.M. Tuason and Company, Incorporated and Gregorio Araneta, Incorporated. After trial, the court dismissed the complaint, upholding the defense that the action was premature because the obligation carried no definite period. The plaintiff moved for reconsideration, praying that the court fix a period for compliance. Over the opposition of Gregorio Araneta, Incorporated, the trial court granted the motion and amended its decision, giving the defendant two years from notice within which to comply with its obligation under the contract. The defendant's motion for reconsideration was denied, and it appealed to the Court of Appeals. The appellate court affirmed with modification, holding that the fixing of a period was within the pleadings and that there was no change of theory, since the defendant itself had raised the matter of reasonable time in its answer. It gave the defendant two years from the finality of its decision to construct the streets. Unsuccessful in obtaining reconsideration, Gregorio Araneta, Incorporated filed a petition for review by certiorari in the Supreme Court, which gave the petition due course.

Facts

J.M. Tuason and Company, Incorporated owned a large tract of land in Quezon City known as the Santa Mesa Heights Subdivision, covered by a Torrens title in its name. On July 28, 1950, through Gregorio Araneta, Incorporated, it sold a portion of about 43,034.4 square meters for 430,514 pesos to Philippine Sugar Estates Development Company, Limited. In the contract of purchase and sale with mortgage, the buyer bound itself to build on the land the Santo Domingo Church and Convent, while the seller bound itself to construct streets on the northeast, northwest, and southwest sides of the land so that it would be a block surrounded by streets on all four sides, with the northeast street to be named Santo Domingo Avenue.

The buyer finished the church and convent. The seller began constructing the streets but could not finish Santo Domingo Avenue on the northeast side because a third party, Manuel Abundo, who had been physically occupying a middle part of it, refused to vacate. On May 7, 1958, the buyer filed its complaint against both Tuason and Araneta, seeking to compel compliance with the obligation and, failing that, to recover damages.

Gregorio Araneta, Incorporated answered, setting up the principal defense that the action was premature because its obligation to construct the streets was without a definite period, which had first to be fixed by the court in a proper suit before an action for specific performance could prosper. The contract itself expressly mentioned that the land was occupied by squatters.

Issues

• Whether or not the Court of Appeals erred in holding that the fixing of a period was within the pleadings, when the complaint never sought the fixing of a period but proceeded on the theory that the period had already elapsed and the contract had been breached.
• Whether or not the courts below could validly fix the period of performance under Article 1197 of the Civil Code on the basis of the defendant's plea that it had reasonable time to comply.
• Whether or not the two-year period fixed by the courts below was validly determined under Article 1197 of the Civil Code.

Applicable Provisions

Article 1197 of the Civil Code of the Philippines provides:

If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof.

This is the source of the judicial power invoked by the respondent, and the Court holds that the power arises only where the parties have fixed no period at all.

The same Article 1197 continues:

The courts shall also fix the duration of the period when it depends upon the will of the debtor.

This second paragraph confirms that the court acts only in default of a period agreed upon or where the period is left to the debtor's will.

And the last paragraph of Article 1197 provides:

In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them except when there is a change in the circumstances.

This is the controlling standard, and the Court holds that the period may not be set arbitrarily, but must be the one the parties probably contemplated.

Ruling

On the first issue, the Court agrees with the petitioner that the decisions below are legally untenable. The complaint did not seek the fixing of a period; it proceeded on the theory that the period for performance had already elapsed, that the contract had been breached, and that the defendant was already answerable in damages. The trial court's amended decision nowhere declared that no reasonable time or no period at all had been fixed. The Court holds that the complaint not having sought the setting of a period, the court could not proceed to do so unless the complaint was first amended.

On the second issue, the Court rejects the reasoning that the defendant's own answer opened the door to judicial fixing. The answer pleaded that the contract gave the petitioner reasonable time within which to comply. What that plea put in issue was not whether the court should fix the time of performance, but whether the parties had agreed that the petitioner should have reasonable time to perform. If the contract so provided, then a period was fixed, namely a reasonable time, and all the court had to do was determine whether that reasonable time had already elapsed when suit was filed. If it had passed, the court should declare a breach and fix the resulting damages; if it had not, the court was bound to dismiss the action as premature. The Court states the governing principle plainly: Article 1197 is precisely predicated on the absence of any period fixed by the parties.

On the third issue, even granting that the court had power to fix the period, the amended decision is defective because no basis is stated for setting the period at two years after finality of judgment. The Court explains that Article 1197 involves a two-step process. The Court must first determine that the obligation does not fix a period, or that the period is made to depend upon the will of the debtor, but that from the nature and the circumstances it can be inferred that a period was intended. That preliminary point settled, the Court must then decide what period was probably contemplated by the parties. The Court holds that it cannot fix a period merely because in its opinion it is or should be reasonable, but must set the time that the parties are shown to have intended. The trial court's statement that the proven facts precisely warrant the fixing of such a period is manifestly insufficient, and the two-year period appears to have been pulled out of thin air.

The Court then examines what the parties actually intended. The contract expressly mentioned that the land was occupied by squatters. Since the parties must have known that they could not take the law into their own hands but must resort to legal processes in evicting the squatters, they must have realized that the duration of the suits would not be under their control nor could it be determined in advance. The conclusion is thus forced that the parties intended to defer performance until the squatters were duly evicted. The Court of Appeals objected that this would render the date of performance indefinite, but the Court answers that the circumstances admit no other reasonable view, and this very indefiniteness explains why the agreement specified no exact periods or dates of performance.

Doctrine

Under Article 1197 of the Civil Code, the power of the courts to fix a period arises only where the obligation fixes no period, or where the period depends upon the will of the debtor. Where the parties have agreed on a reasonable time, a period is already fixed, and the court's task is merely to determine whether that time has elapsed, not to supply a new one. The fixing of a period is a two-step process: first, the court must determine that no period was fixed but that one was intended from the nature and circumstances of the obligation; second, the court must determine the period probably contemplated by the parties. The court may not fix a period merely because it considers it reasonable, for the law commands that the period be the one probably contemplated by the parties. Finally, a court cannot grant the relief of fixing a period where the complaint never prayed for it, unless the complaint is first amended.

Disposition

The decision appealed from was reversed, and the time for the performance of the obligations of Gregorio Araneta, Incorporated was fixed at the date that all the squatters on the affected areas are finally evicted therefrom, with costs against Philippine Sugar Estates Development Company, Limited.

Remember This

The single line to memorize is that Article 1197 is predicated on the absence of any period fixed by the parties, and the period the court supplies must be the one probably contemplated by the parties, never one pulled out of thin air. Examiners use this case to test the two-step process in fixing a period and the rule that a court cannot award a relief, such as the fixing of a period, that the complaint never prayed for.