Carceller vs.

Court of Appeals
G.R. No. 124791, February 10, 1999
In construing a written agreement, the reason behind and the
circumstances surrounding its execution are of paramount
importance.

RECIT-READY \:D/ :D

Respondent SIHI & Petitioner Carceller entered into a lease
contract with an option to purchase said land anytime within
the lease period. Before expiration of contract, SIHI notified
Carceller of impeding termination and period left for exercising
the option. Petitioner requested for an extension of the lease
contract because he still needed to raise funds. SIHI
disapproved petitioners request. Days later, Petitioner notified
SIHI of decision to exercise option to purchase which SIHI
again disapproved, saying period to exercise option already
lapsed. Petitioner filed complaint for specific performance for
SIHI to execute deed of sale. RTC, CA and Supreme Court
ruled in favor of Petitioner. According to the Court, in
construing a written agreement, the reason behind and the
circumstances surrounding its execution are of paramount
importance. To ascertain the intent of the parties in a
contractual relationship, it is imperative that the various
stipulations provided for in the contract be construed together,
consistent with the parties contemporaneous and subsequent
acts as regards the execution of the contract. SIHI, prior to
negotiations with petitioner, was already financially unstable
and had the intent to dispose some assets including subject
property, which is clearly seen when it leased and gave the
option to purchase property to petitioner. Petitioner also made
some permanent improvements in the property, expressing his
intent to acquire dominion over it. Court also found the delay of
Petitioner to exercise option was neither substantial nor
fundamental and did not amount to a breach that would
defeat the intention of the parties.
FACTS
Respondent State Investment Houses, Inc. (SIHI)
owned two parcels of land in Cebu.
Petitioner Carceller & SIHI entered into a lease
agreement with option to purchase said lands anytime
within the lease period until January 30, 1986.
Before expiration of the lease contract, SIHI notified
petitioner of impending termination of the lease
agreement & the short period of time left where he
could still validly exercise the option.
In a letter dated January 15, which SIHI received on
January 29, petitioner requested for 6 months
extension of lease contract because he needed to raise
more funds in order to exercise option.
On February 14, SIHI disapproved petitioners request
but still offered to lease the property. It also informed
the general public of the sale of leased property.
On February 18, petitioner notified SIHI of decision to
exercise option to purchase property. SIHI reiterated
that the period to exercise option had already lapsed. It
asked petitioner to vacate property and pay rentals and
penalty.
Petitioner filed complaint for specific performance for
SIHI to execute deed of sale.
RTC and CA rendered judgment in favor of petitioner.
ISSUE
WON petitioner should be allowed to exercise option to
purchase leased property despite alleged delay in giving the
required notice to SIHI
HELD: YES
RATIO:
Petitioners letter to SIHI on January 15, 1986, was fair
notice of his intent to exercise the option, despite the
request for the extension of the lease contract.
It is well-settled in both law and jurisprudence, that
contracts are the law between the contracting parties
and should be fulfilled, if their terms are clear and leave
no room for doubt as to the intention of the contracting
parties. Further, it is well-settled that in construing a
written agreement, the reason behind and the
circumstances surrounding its execution are of
paramount importance. Sound construction requires
one to be placed mentally in the situation occupied by
the parties concerned at the time the writing was
executed.
To ascertain the intent of the parties in a contractual
relationship, it is imperative that the various stipulations
provided for in the contract be construed together,
consistent with the parties contemporaneous and
subsequent acts as regards the execution of the
contract. And once the intention of the parties has been
ascertained, that element is deemed as an integral part
of the contract as though it has been originally
expressed in unequivocal terms.
Intention of the parties:
o SIHI, prior to its negotiation with petitioner,
already had financial problems. It was in dire
need of liquidating its assets. Thus, SIHI was
compelled to dispose some of its assets,
among which is the subject leased property, to
generate sufficient funds. This then brought
about the execution of the lease contract with
option to purchase between SIHI and the
petitioner.
o SIHIs agreement to enter into a lease contract
with option to purchase with petitioner is a clear
proof of its intent to promptly dispose said
property although the full financial returns may
materialize only in a years time. Furthermore,
its letter reminding the petitioner of the short
period of time left within which to consummate
their agreement, clearly showed its desire to
sell that property.
o Petitioners determination to purchase said
property is equally indubitable. He introduced
permanent improvements on the leased
property, demonstrating his intent to acquire
dominion in a years time.
In SIHIs view, there was already a delay of 18 days in
exercising option, which was fatal to petitioners
cause. But respondent court found the delay neither
substantial nor fundamental and did not amount to a
breach that would defeat the intention of the parties
when they executed the lease contract with option to
purchase.
CA decision AFFIRMED. However the purchase price
should be based on the fair market value of real
property in Bulacao, Cebu City, as of February 1986,
when the contract would have been consummated.
NOTES
(Just in case) Option: a preparatory contract in which
one party grants to the other, for a fixed period and
under specified conditions, the power to decide,
whether or not to enter into a principal contract. It
binds the party who has given the option, not to enter
into the principal contract with any other person during
the period designated, and, within that period, to enter
into such contract with the one to whom the option was
granted, if the latter should decide to use the option. It
is a separate agreement distinct from the contract
which the parties may enter into upon the
consummation of the option
Pineda (page 540) cited doctrine of this case
(Mentioned in the RATIO portion, just to
emphasize):
o The reasons which induced the parties to
enter into the contract and the
circumstances surrounding the execution of
the contract are of paramount importance in
interpreting it
o To ascertain intent of parties in contractual
relationship, it is imperative that the various
stipulations provided for in the contract be
construed together, consistent with the
parties contemporaneous and subsequent
acts as regards the execution of the
contract. And once the intention of parties is
ascertained, that element is deemed an
integral part of the contract as though it has
been originally expressed in unequivocal
terms



ALMEDA v. BATHALA MARKETING
542 S 470
Essential to contract construction is the ascertainment of the
intention of the contracting parties, and such determination
must take into account the contemporaneous and subsequent
acts of the parties

RECIT READY \:D/ :D

Respondent Bathala renewed its contract of lease of a portion
of the Almeda Compound with Ponciano Almeda. The contract
stated that in case an extraordinary inflation or DEVALUATION
of the Philippine currency should supervene, the value of
Philippine peso at the time of the establishment of obligation
shall be the basis of payment (NOTE: This is Article 1250 of
the Civil Code, but in the Article it stated extraordinary inflation
or DEFLATION). Ponciano died and respondent dealt with his
wife and son, the petitioners. Respondent received a letter
from petitioners which stated that pursuant to Article 1250,
monthly rental should be increased. Respondent insisted there
was no extraordinary inflation to warrant the application of the
Article. RTC, CA and Supreme Court ruled in favor of
Respondent Bathala. Petitioners contend that Article 1250 of
the Civil Code does not apply to this case because the contract
stipulation speaks of extraordinary inflation or devaluation
while the Code speaks of extraordinary inflation or
deflation. According to the Court, the intention of the parties
was evident because petitioners made explicit reference to and
cited verbatim Article 1250 when they demanded for rental
adjustments. Essential to contract construction is the
ascertainment of the intention of the contracting parties, and
such determination must take into account the
contemporaneous and subsequent acts of the parties. This
intention, once ascertained, is deemed an integral part of the
contract.

FACTS

In May 1997, Respondent Bathala Marketing
Industries, Inc., as lessee, renewed its Contract of
Lease with Ponciano Almeda, as lessor.
Under said contract, Ponciano agreed to lease a
portion of the Almeda Compound for a term of 4 years
from May 1997 unless sooner terminated.
It also stated that:
o The rental rate stipulated is based on the
present rate of assessment on the property,
and in case the assessment should be
increased or any new tax or burden be imposed
by the authorities on the lot, the additional
charge shall be paid by the lessee when the
rental becomes due.
o (CONTRACT CONDITION RELEVANT TO
OUR TOPIC): In case an extraordinary inflation
or devaluation of Philippine Currency should
supervene, the value of Philippine peso at the
time of the establishment of the obligation shall
be the basis of payment (NOTE: This is Article
1250 of the Civil Code, but remember that in
the article it stated extraordinary inflation or
DEFLATION. However, see Courts
explanation about this in the RATIO part.)
During effectivity of contract, Ponciano died, so
respondent dealt with petitioners, his wife and son.
Petitioners advised BATHALA that they will assess and
collect VAT on its monthly rentals.
Respondent contended that VAT may not be imposed
as the rentals fixed in the contract of lease were
supposed to include the VAT.
Respondent received another letter from petitioners
informing the former that its monthly rental should be
increased pursuant to Article 1250 of the Civil Code.
Respondent opposed petitioners demand and insisted
that there was no extraordinary inflation to warrant the
application of Article 1250.
Respondent refused to pay the VAT and adjusted
rentals as demanded by petitioners. It instituted an
action for declaratory relief for purposes of determining
the correct interpretation of the lease contract to
prevent damage and prejudice.
RTC ruled that respondent is not liable for payment of
VAT and for the payment of rental adjustment, there
being no extraordinary inflation or devaluation.
Petitioners appealed to the CA, which affirmed, with
modification, trial courts judgment.

ISSUE(S) + HELD

(1) WON respondent is liable to pay 10% VAT pursuant to
Republic Act (RA) 7716. -----> NO (Just placed this in case,
but the second issue is the one mainly related to our lesson)

*(2) WON the amount of rentals due the petitioners should
be adjusted by reason of extraordinary inflation or
devaluation. -----> NO

RATIO

1) Petitioners are estopped from shifting to respondent the
burden of paying the VAT.

The contract provision clearly states that respondent
can only be held liable for new taxes imposed after the
effectivity of the contract of lease, after May 1997.
Considering that RA 7716 took effect in 1994, the VAT
cannot be considered as a new tax in May 1997.

*2) Petitioners cannot legitimately demand rental adjustment
because of extraordinary inflation or devaluation.

Petitioners contend that Article 1250 of the Civil Code
does not apply to this case because the contract
stipulation speaks of extraordinary inflation or
devaluation while the Code speaks of extraordinary
inflation or deflation.
Essential to contract construction is the ascertainment
of the intention of the contracting parties, and such
determination must take into account the
contemporaneous and subsequent acts of the
parties. This intention, once ascertained, is deemed an
integral part of the contract.
While, indeed, the condition of the contract speaks of
extraordinary inflation or devaluation as compared to
Article 1250s extraordinary inflation or deflation,
when the parties used the term devaluation, they
really did not intend to depart from Article 1250 of the
Civil Code. It should thus, be read in harmony with the
Civil Code provision.
In demanding rental adjustment, the intention of the
parties is evident. Petitioners, in their letter to
respondent, made explicit reference to Article 1250 of
the Civil Code, even quoting the law verbatim.
Downward trend of the peso cannot be considered as
the extraordinary phenomenon contemplated by Article
1250 of the Civil Code. Furthermore, absent an official
pronouncement or declaration by competent authorities
of the existence of extraordinary inflation during a given
period, the effects of extraordinary inflation are not to
be applied.




NOTES (Just In Case)

Inflation: When there is an increase in the volume of
money and credit relative to available goods, resulting
in a substantial and continuing rise in the general price
level
Extraordinary inflation: 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.
Article 1250 of the Civil Code: 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.