[G.R. No. 137798.

October 4, 2000]

LUCIA R. SINGSON, petitioner, vs. CALTEX (PHILIPPINES), INC. respondent.

DECISION

GONZAGA-REYES, J.:

Petitioner seeks a review on certiorari of the decision of the former Special Second Division of
the Court of Appeals dated November 27, 1998,i[1] affirming the decision of the Regional Trial
Court of Manila, Branch 25ii[2] which dismissed petitioner's action for reformation of contract
and adjustment of rentals.

The facts of the case are undisputed ---

Petitioner and respondent entered into a contract of lease on July 16, 1968 over a parcel of land
in Cubao, Quezon City. The land, which had an area of 1,400 square meters and was covered by
Transfer Certificates of Title No. 43329 and 81636 issued by the Register of Deeds of Quezon
City, was to be used by respondent as a gasoline service station.

The contract of lease provides that the lease shall run for a period of twenty (20) years and shall
abide by the following rental rates:

xxx xxx xxx xxx

Rental. --- The LESSEE agrees to pay the following rental for said premises:

P2.50/sq.m. per month from the 1st to 10th years and P3.00/sq.m. per month from the 11th to
20th years, payable monthly in advance within the 1st 15 days of each month; provided that the
rentals for the 1st 5 years less a discount of eleven (11) percent per annum computed on a
monthly diminishing balance, shall be paid to LESSOR upon compliance of the three (3)
conditions provided in clause (2) above.

LESSEE also agrees to pay lessor, the sum of Six Thousand Pesos (P6,000.00) as demolition
expenses, upon effectivity of this lease.

The rental herein provided for is in any event the maximum rental which LESSOR may collect
during the term of this lease or any renewal or extension thereof. LESSEE further agrees for
thirty (30) days after written notice of such default has actually been delivered to the General
Manager of Caltex (Philippines), Inc. LESSOR shall then have the right to terminate this lease
on thirty (30) days written notice to LESSEE. xxx xxx xxx iii[3]

Thus, based on the foregoing provisions of the lease contract, the monthly rental was fixed at
P3,500.00 for the first ten years, and at P4,200.00 for the succeeding ten years of the lease.
On June 23, 1983, or five years before the expiration of the lease contract, petitioner asked
respondent to adjust or increase the amount of rentals citing that the country was experiencing
extraordinary inflation. In a letter dated August 3, 1983, respondent refused petitioner's request
and declared that the terms of the lease contract are clear as to the rental amounts therein
provided being "the maximum rental which the lessor may collect during the term of the
lease."iv[4]

On September 21, 1983, petitioner instituted a complaint before the RTC praying for, among
other things, the payment by respondent of adjusted rentals based on the value of the Philippine
peso at the time the contract of lease was executed. The complaint invoked Article 1250 of the
Civil Code, stating that since the execution of the contract of lease in 1968 an extraordinary
inflation had supervened resulting from the deterioration of worldwide economic conditions, a
circumstance that was not foreseen and could not have been reasonably foreseen by the parties at
the time they entered into contract.

To substantiate its allegation of extraordinary inflation, petitioner presented as witness Mr.

In a decision rendered on July 15, 1991, the RTC dismissed the complaint for lack of merit. This
judgment was affirmed by the Court of Appeals. Both courts found that petitioner was unable to
prove the existence of extraordinary inflation from 1968 to 1983 (or from the year of the
execution of the contract up to the year of the filing of the complaint before the RTC) as to
justify an adjustment or increase in the rentals based upon the provisions of Article 1250 of the
Civil Code.

The Court of Appeals declared that although, admittedly, there was an economic inflation during
the period in question, it was not such as to call for the application of Article 1250 which is made
to apply only to "violent and sudden changes in the price level or uncommon or unusual decrease
of the value of the currency. (It) does not contemplate of a normal or ordinary decline in the
purchasing power of the peso."vii[7]

The Court of Appeals also found similarly with the trial court that the terms of rental in the
contract of lease dated July 16, 1968 are clear and unequivocal as to the specific amount of the
rental rates and the fact that the rentals therein provided shall be the "maximum rental" which
petitioner as lessor may collect. Absent any showing that such contractual provisions are contrary
to law, morals, good customs, public order or public policy, the Court of Appeals held that there
was no basis for not acknowledging their binding effect upon the parties. It also upheld the
application by the trial court of the ruling in Filipino Pipe and Foundry Corporation vs. National
Waterworks and Sewerage Authority, 161 SCRA 32, where the Court held that although there has
been a decline in the purchasing power of the Philippine peso during the period 1961 to 1971,
such downward fall of the currency could not be considered "extraordinary" and was simply a
universal trend that has not spared the Philippines.

Thus, the dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, in view of the foregoing, the appeal is hereby DISMISSED and the decision
appealed from is hereby AFFIRMED.

SO ORDERED.viii[8]

Petitioner's motion for reconsideration of the above decision was denied by the Court of Appeals
in a resolution dated March 10, 1999.

Aggrieved, petitioner filed this petition for review on certiorari where she assails as erroneous
the decision of the Court of Appeals, specifically, (1) in ruling that Article 1250 of the Civil Code
is inapplicable to the instant case, (2) in not recognizing the applicability of the principle of
rebus sic stantibus, and (3) in applying the ruling in Filipino Pipe and Foundry Corporation vs.
NAWASA.

Petitioner contends that the monthly rental of P3.00 per square meter is patently inequitable.
Based on the inflation rates supplied by NEDA, there was an unusual increase in inflation that
could not have been foreseen by the parties; otherwise, they would not have entered into a
relatively long-term contract of lease. She argued that the rentals in this case should not be
regarded by their quantitative or nominal value, but as "debts of value", that is, the rental rates
should be adjusted to reflect the value of the peso at the time the lease was contracted.ix[9]

Petitioner also insists that the factual milieu of the present case is distinct from that in Filipino
Pipe and Foundry Corporation vs. NAWASA. She pointed out that the inflation experienced by
the country during the period 1961 to 1971 (the pertinent time period in the Filipino Pipe case)
had a lowest of 1.35% in 1969 and a highest of 15.03% in 1971, whereas in the instant case,
involving the period 1968 to 1983, there had been highly abnormal inflation rates like 34.51% in
1974 (triggered by the OPEC oil price increases in 1973) and 50.34% in 1984 (caused by the
assassination of Benigno Aquino, Jr. in 1983). Petitioner argues that the placing of the country
under martial rule in 1972, the OPEC oil price increases in 1973, and the Aquino assassination
which triggered the EDSA revolution, were fortuitous events that drastically affected the
Philippine economy and were beyond the reasonable contemplation of the parties.

To further bolster her arguments, petitioner invokes by analogy the principle of rebus sic
stantibus in public international law, under which a vital change of circumstances justifies a
state's unilateral withdrawal from a treaty. In the herein case, petitioner posits that in pegging the
monthly rental rates of P2.50 and P3.00 per square meter, respectively, the parties were guided
by the economic conditions prevalent in 1968, when the Philippines faced robust economic
prospects. Petitioner contends that between her and respondent, a corporation engaged in high
stakes business and employing economic and business experts, it is the latter who had the
unmistakable advantage to analyze the feasibility of entering into a 20-year lease contract at such
meager rates.
The only issue crucial to the present appeal is whether there existed an extraordinary inflation
during the period 1968 to 1983 that would call for the application of Article 1250 of the Civil
Code and justify an adjustment or increase of the rentals between the parties.

Article 1250 of the Civil Code states:

In case an extraordinary inflation or deflation of the currency stipulated should supervene, the
value of the currency at the time of the establishment of the obligation shall be the basis of
payment, unless there is an agreement to the contrary.

Article 1250 was inserted in the Civil Code of 1950 to abate the uncertainty and confusion that
affected contracts entered into or payments made during World War II, and to help provide a just
solution to future cases.x[10] The Court has, in more than one occasion, been asked to interpret
the provisions of Article 1250, and to expound on the scope and limits of "extraordinary
inflation".

We have held extraordinary inflation to exist when there is a decrease or increase in the
purchasing power of the Philippine currency which is unusual or beyond the common fluctuation
in the value of said currency, and such increase or decrease could not have been reasonably
foreseen or was manifestly beyond the contemplation of the parties at the time of the
establishment of the obligation.xi[11]

An example of extraordinary inflation, as cited by the Court in Filipino Pipe and Foundry
Corporation vs. NAWASA, supra, is that which happened to the deutschmark in 1920. Thus:

"More recently, in the 1920s, Germany experienced a case of hyperinflation. In early 1921, the
value of the German mark was 4.2 to the U.S. dollar. By May of the same year, it had stumbled
to 62 to the U.S. dollar. And as prices went up rapidly, so that by October 1923, it had reached
4.2 trillion to the U.S. dollar!" (Bernardo M. Villegas & Victor R. Abola, Economics, An
Introduction [Third Edition]).

As reported, "prices were going up every week, then every day, then every hour. Women were
paid several times a day so that they could rush out and exchange their money for something of
value before what little purchasing power was left dissolved in their hands. Some workers tried
to beat the constantly rising prices by throwing their money out of the windows to their waiting
wives, who would rush to unload the nearly worthless paper. A postage stamp cost millions of
marks and a loaf of bread, billions." (Sidney Rutberg, "The Money Balloon", New York: Simon
and Schuster, 1975, p. 19, cited in "Economics, An Introduction" by Villegas & Abola, 3rd Ed.)

The supervening of extraordinary inflation is never assumed.xii[12] The party alleging it must lay
down the factual basis for the application of Article 1250.

Thus, in the Filipino Pipe case, the Court acknowledged that the voluminous records and
statistics submitted by plaintiff-appellant proved that there has been a decline in the purchasing
power of the Philippine peso, but this downward fall cannot be considered "extraordinary" but
was simply a universal trend that has not spared our country.xiii[13] Similarly, in Huibonhoa vs.
Court of Appeals,xiv[14] the Court dismissed plaintiff-appellant's unsubstantiated allegation that
the Aquino assassination in 1983 caused building and construction costs to double during the
period July 1983 to February 1984. In Serra vs. Court of Appeals,xv[15] the Court again did not
consider the decline in the peso's purchasing power from 1983 to 1985 to be so great as to result
in an extraordinary inflation.

Like the Serra and Huibonhoa cases, the instant case also raises as basis for the application of
Article 1250 the Philippine economic crisis in the early 1980s --- when, based on petitioner's
evidence, the inflation rate rose to 50.34% in 1984. We hold that there is no legal or factual basis
to support petitioner's allegation of the existence of extraordinary inflation during this period, or,
for that matter, the entire time frame of 1968 to 1983, to merit the adjustment of the rentals in the
lease contract dated July 16, 1968. Although by petitioner's evidence there was a decided decline
in the purchasing power of the Philippine peso throughout this period, we are hard put to treat
this as an "extraordinary inflation" within the meaning and intent of Article 1250. Rather, we
adopt with approval the following observations of the Court of Appeals on petitioner's evidence,
especially the NEDA certification of inflation rates based on consumer price index:

xxx (a) from the period 1966 to 1986, the official inflation rate never exceeded 100% in any
single year; (b) the highest official inflation rate recorded was in 1984 which reached only
50.34%; (c) over a twenty one (21) year period, the Philippines experienced a single-digit
inflation in ten (10) years (i.e., 1966, 1967, 1968, 1969, 1975, 1976, 1977, 1978, 1983 and
1986); (d) in other years (i.e., 1970, 1971, 1972, 1973, 1974, 1979, 1980, 1981, 1982, 1984 and
1989) when the Philippines experienced double-digit inflation rates, the average of those rates
was only 20.88%; (e) while there was a decline in the purchasing power of the Philippine
currency from the period 1966 to 1986, such cannot be considered as extraordinary; rather, it is a
normal erosion of the value of the Philippine peso which is a characteristic of most currencies.xvi
[16]

"Erosion" is indeed an accurate description of the trend of decline in the value of the peso in the
past three to four decades. Unfortunate as this trend may be, it is certainly distinct from the
phenomenon contemplated by Article 1250.

Moreover, this Court has held that the effects of extraordinary inflation are not to be applied
without an official declaration thereof by competent authorities.xvii[17]

Lastly, the provisions on rentals in the lease contract dated July 16, 1968 between petitioner and
respondent are clear and categorical, and we have no reason to suppose that such lease contract
does not reflect or express their true intention and agreement. The contract is the law between the
parties and if there is indeed reason to adjust the rent, the parties could have by themselves
negotiated the amendment of the contract.xviii[18]

WHEREFORE, the petition seeking the reversal of the decision of the Court of Appeals in CA-
G.R. CV No. 54115 is DENIED.

SO ORDERED.
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