When Can You Change a Contract? Understanding Reformation and Fortuitous Events in Philippine Law

TLDR: Philippine Supreme Court clarifies that unforeseen events like economic downturns following a national tragedy do not automatically justify changing a contract’s terms unless the contract itself explicitly allows for such adjustments or extraordinary inflation makes the original terms fundamentally unfair. Parties are generally bound by their agreements, even if circumstances change.

G.R. No. 95897 & 102604, December 14, 1999

INTRODUCTION

Imagine you sign a lease agreement to build a commercial building, planning for a fixed monthly rental. Suddenly, a major national event throws the economy into turmoil, causing construction costs to skyrocket. Can you legally demand to change the rental terms of your contract because of these unforeseen circumstances? This is the core issue addressed in the Supreme Court case of Huibonhoa v. Court of Appeals, a case that highlights the principles of contract reformation and the legal concept of fortuitous events in the Philippines. The case revolves around a lease agreement gone awry due to unexpected economic shifts, forcing the Court to clarify when and how contracts can be altered in the face of adversity.

LEGAL CONTEXT: REFORMATION OF CONTRACTS AND FORTUITOUS EVENTS

Philippine contract law, primarily governed by the Civil Code, operates on the principle of pacta sunt servanda – agreements must be kept. However, the law also recognizes that there are instances where the literal interpretation of a written contract may not reflect the true intentions of the parties, or when unforeseen events fundamentally alter the contractual landscape. Two key legal concepts come into play here: reformation of contracts and fortuitous events.

Reformation of contracts, as outlined in Article 1359 of the Civil Code, is a remedy that allows courts to modify a written agreement to reflect the true intention of the parties when, due to mistake, fraud, inequitable conduct, or accident, the document fails to express their actual agreement. The goal is not to create a new contract, but to rectify the written instrument so that it accurately represents what the parties originally intended.

Article 1359 of the Civil Code states:

“When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed.”

On the other hand, fortuitous events, defined under Article 1174 of the Civil Code, refer to events that could not be foreseen, or if foreseen, were inevitable. These “acts of God” or force majeure can excuse a party from fulfilling their contractual obligations if they meet specific criteria. However, the law is stringent in applying this exemption, requiring a strict concurrence of conditions.

Article 1174 of the Civil Code provides:

“Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable.”

Crucially, the burden of proof lies with the party seeking reformation or exemption due to a fortuitous event. They must present clear and convincing evidence to support their claims.

CASE BREAKDOWN: HUIBONHOA VS. COURT OF APPEALS

The Huibonhoa case involved a contract of lease between Florencia Huibonhoa (lessee) and the Gojocco siblings (lessors). In 1983, Huibonhoa agreed to lease land in Manila from the Gojoccos for 15 years to construct a four-story commercial building. A key term was that rental payments of P45,000 per month would begin upon completion of the building, or at the latest, eight months after the contract signing, regardless of completion. Huibonhoa paid a significant “goodwill money” of P900,000 upon signing.

However, the assassination of Senator Benigno Aquino Jr. in August 1983 triggered political and economic instability. Huibonhoa claimed this event, an unforeseen “accident,” caused construction delays and a doubling of costs. She completed the building seven months late and failed to pay rent starting March 1984 as stipulated in the contract.

The Gojoccos demanded payment and eventually sought to terminate the lease and eject Huibonhoa. In response, Huibonhoa filed a case for reformation of contract in the Regional Trial Court (RTC) of Makati, arguing:

1. The contract should be reformed to reflect the “true intention” that rent would only accrue after actual building completion.
2. The “accident” of the Aquino assassination and its economic fallout justified reducing the monthly rent and extending the lease term.

Eleven days later, the Gojoccos filed an ejectment case in the Metropolitan Trial Court (MTC) of Manila. The MTC initially favored Huibonhoa but was reversed by the RTC of Manila, which ruled it lacked jurisdiction, deeming the case as one for contract cancellation, which falls under the RTC’s purview. The Makati RTC, in the reformation case, dismissed Huibonhoa’s complaint, finding insufficient evidence for reformation and rejecting the “Aquino assassination” as a valid reason for contract alteration.

Both cases reached the Court of Appeals (CA). The CA affirmed both RTC decisions, upholding the dismissal of the reformation case and the RTC of Manila’s ruling that the MTC lacked jurisdiction over the ejectment case due to the complexity of the issues. The CA reasoned that the ejectment case was intertwined with issues beyond simple possession, including the ownership of the building constructed by Huibonhoa.

The Supreme Court consolidated the two cases and ultimately reversed parts of the CA’s decision. In G.R. No. 95897 (reformation case), the Supreme Court affirmed the dismissal of Huibonhoa’s petition. The Court held that Huibonhoa failed to prove that the written lease contract did not reflect the true intention of the parties regarding rent accrual. It emphasized that the contract clearly stipulated rent accrual after eight months, even if construction was incomplete.

Regarding the “fortuitous event” argument, the Supreme Court stated:

“In the case under scrutiny, the assassination of Senator Aquino may indeed be considered a fortuitous event. However, the said incident per se could not have caused the delay in the construction of the building. What might have caused the delay was the resulting escalation of prices of commodities including construction materials.”

However, the Court clarified that inflation, even if triggered by a fortuitous event, is generally not unforeseeable in the Philippine context and does not automatically warrant contract modification unless it reaches the level of “extraordinary inflation,” which was not proven in this case.

In G.R. No. 102604 (ejectment case), the Supreme Court reversed the CA and reinstated the MTC’s jurisdiction. The Court clarified that despite being labeled “cancellation of lease, ejectment, and collection,” the core issue was unlawful detainer, which falls under the MTC’s jurisdiction. The additional claims did not change the essential nature of the ejectment suit. The Supreme Court ultimately upheld the order for Huibonhoa to vacate the portions of land owned by two of the three lessors, although it acknowledged the practical complexities given the indivisible nature of the building.

PRACTICAL IMPLICATIONS: LESSONS FOR CONTRACTING PARTIES

The Huibonhoa case offers several crucial takeaways for businesses and individuals entering into contracts in the Philippines, particularly lease agreements and construction contracts:

1. Clarity in Contractual Terms is Paramount: The Court emphasized the importance of clear and unambiguous language in contracts. The lease agreement explicitly stated when rental payments would commence. Huibonhoa’s claim for reformation failed because she couldn’t prove the written contract deviated from the parties’ true intent.
2. Fortuitous Events are Narrowly Construed: While unforeseen events can impact contracts, they don’t automatically excuse performance. The Aquino assassination, though a major event, was not deemed a sufficient legal basis to alter the rental terms. Parties must prove that the event made performance absolutely impossible, not just more difficult or expensive.
3. Inflation is Generally Foreseeable: The Court recognized that inflation is a recurring economic reality in the Philippines. Unless inflation is “extraordinary” and unforeseen to an extreme degree, it’s not a valid reason to modify contractual obligations. Businesses should factor in potential economic fluctuations when drafting long-term contracts.
4. Remedies Must be Properly Chosen: Huibonhoa’s attempt at contract reformation was deemed the wrong remedy. The Court suggested that if a fortuitous event truly made her obligation impossible, rescission (cancellation) might have been a more appropriate legal avenue.
5. Jurisdiction is Determined by the Nature of the Action: The Supreme Court clarified that the MTC had jurisdiction over the ejectment case despite its complex elements. The court looks at the primary cause of action as pleaded in the complaint, not just the labels or additional prayers for relief.

Key Lessons:

• Be Explicit: Ensure your contracts clearly and precisely reflect your intentions, especially regarding payment terms, timelines, and potential adjustments for unforeseen circumstances.
• Consider Contingencies: Think about potential risks and economic changes that could impact your contract. Include clauses that address these possibilities, such as price escalation clauses or force majeure provisions that specifically outline what events will excuse performance and what adjustments will be made.
• Seek Legal Advice: Consult with a lawyer when drafting or entering into significant contracts. Legal professionals can help ensure your contracts are clear, legally sound, and protect your interests in various scenarios.

FREQUENTLY ASKED QUESTIONS (FAQs)

Q1: What is “reformation of contract” in Philippine law?

A: Reformation of contract is a legal remedy to correct a written contract that doesn’t accurately reflect the true agreement between parties due to mistake, fraud, accident, or inequitable conduct. It aims to make the written document align with their original intentions.

Q2: What is considered a “fortuitous event” or “force majeure” in contracts?

A: A fortuitous event is an unforeseen and unavoidable event, like a natural disaster or war, that is beyond human control. It can excuse a party from contractual obligations if it makes performance impossible, not just difficult.

Q3: Can economic inflation be considered a fortuitous event?

A: Generally, no. Philippine courts consider inflation a foreseeable economic trend. Only “extraordinary inflation,” which is highly unusual and beyond normal fluctuations, might be considered a basis for relief, but it’s very difficult to prove.

Q4: If an unforeseen event makes fulfilling my contract more expensive, can I change the contract terms?

A: Not automatically. Unless your contract has clauses allowing for adjustments due to such events, or you can prove grounds for reformation, you are generally bound by the original terms. Difficulty or increased cost is usually not sufficient to excuse performance.

Q5: What is the difference between contract reformation and contract rescission?

A: Reformation corrects a written contract to reflect the true original agreement. Rescission, on the other hand, cancels the contract entirely, as if it never existed, and aims to restore parties to their pre-contractual positions.

Q6: What court has jurisdiction over ejectment cases in the Philippines?

A: Generally, Metropolitan Trial Courts (MTCs), Municipal Trial Courts (MTCs), and Municipal Circuit Trial Courts (MCTCs) have jurisdiction over ejectment cases, specifically unlawful detainer and forcible entry cases.

Q7: What should I do if I believe my contract doesn’t reflect our true agreement?

A: Consult with a lawyer immediately. They can assess your situation, advise you on your legal options, and help you pursue a case for reformation of contract if grounds exist.

ASG Law specializes in Contract Law and Real Estate Litigation. Contact us or email hello@asglawpartners.com to schedule a consultation.