Is a contract extinguished or terminated if it is breached by one of the parties? This is the question raised and resolved in this case involving a parcel of land with an area of 2,046 square meters located in Tagaytay City subject of a 90-year lease contract.
The lease contract was entered into on November 5, 1968 by Patsy, Nic and Zeny (original owners), in favor of ESSO Standard Eastern Inc. (ESSO Eastern), a foreign corporation doing business in the country through its subsidiary ESSO Standard Philippines Inc (ESSO Phil.). The lease contract contained an assignment veto clause barring the parties from assigning the lease without prior consent of the other except to Standard Oil Co or any of its subsidiaries.
On December 21, 1977 ESSO Eastern sold its shares of stocks in ESSO Phil. to Philippine National Oil Corporation (PNOC) including the leasehold rights over the land in question. Apparently the original owners were not informed of the sale. But they became aware of the change in the personality of the lessee because of the successive changes in the name of ESSO Phil. to Petrophil Corporation, then to Petron which for lack of their consent was an obvious breach of their contract. Despite such awareness they continued to receive payments of the lease rental.
Then 16 years later, the original owners sold the property in question to Mario who obtained title in his name bearing the annotation of the ESSO Eastern’s lease. On December 21, 1998, Mario sent a notice to vacate to Petron but the latter refused to vacate. So on March 18, 1999, Mario sued Petron for rescission of the Lease Contract and recovery of possession of the property on the ground among others that the said contract was terminated on December 23, 1977 when ESSO Eastern sold ESSO Phil. to PNOC thus assigning to PNOC its lease on the property without the prior consent of the original owners. Was Mario correct?
No. PNOC’s buy out of ESSO Phil. logically carried with it the transfer to PNOC of any proprietary interest ESSO Eastern may hold through ESSO Phil., including ESSO Eastern’s lease over the property. As the original owners gave no prior consent to the said transaction, ESSO Eastern thus violated the contract’s assignment veto clause.
But said breach did not extinguish the contract. It merely gave rise to a cause of action by the original owners to seek the lessee’s ejectment under Article 1673 paragraph 3 of the Civil Code. The continued receipt of lease payments by the original owners and later by Mario himself despite the contractual breach however amounted to a waiver of their option to eject the lessee.
This waiver was compounded by Mario’s long inaction to seek judicial redress. He filed his complaint nearly 22 years after PNOC acquired the leasehold rights and almost six years after he bought the property from the original owners. The more than two decades lapse puts this case well within the territory of the 10-year prescriptive bar to suits based upon a written contract under Article 1144 (1) of the Civil Code (Mariano vs. Petron, G.R. 169438, January 21, 2010).
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