Almeda v. Bathala Markeeting Industries Inc.

Facts:

Sometime in May 1997, respondent Bathala Marketing Industries, Inc., as lessee, represented by its president Ramon H. Garcia, renewed its Contract of Lease with Ponciano L. Almeda (Ponciano), as lessor, husband of petitioner Eufemia and father of petitioner Romel Almeda. Under the said contract, Ponciano agreed to lease a portion of the Almeda Compound, located at 2208 Pasong Tamo Street, Makati City, consisting of 7,348.25 square meters, for a monthly rental of P1,107,348.69, for a term of four  years from May 1, 1997 unless sooner terminated as provided in the contract. The contract of lease contained the following pertinent provisions which gave rise to the instant case:

SIXTH It is expressly understood by the parties hereto that the rental rate stipulated is based on the present rate of assessment on the property, and that in case the assessment should hereafter be increased or any new tax, charge or burden be imposed by authorities on the lot and building where the leased premises are located, LESSEE shall pay, when the rental herein provided becomes due, the additional rental or charge corresponding to the portion hereby leased; provided, however, that in the event that the present assessment or tax on said property should be reduced, LESSEE shall be entitled to reduction in the stipulated rental, likewise in proportion to the portion leased by him;

SEVENTH 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;

During the effectivity of the contract, Ponciano died. Thereafter, respondent dealt with petitioners. In a letter dated December 29, 1997, petitioners advised respondent that the former shall assess and collect Value Added Tax (VAT) on its monthly rentals. In response, respondent contended that VAT may not be imposed as the rentals fixed in the contract of lease were supposed to include the VAT therein, considering that their contract was executed on May 1, 1997 when the VAT law had long been in effect.

On January 26, 1998, respondent received another letter from petitioners informing the former that its monthly rental should be increased by 73% pursuant to condition No. 7 of the contract and 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 in light of the pronouncement of this Court in various cases.

Respondent refused to pay the VAT and adjusted rentals as demanded by petitioners but continued to pay the stipulated amount set forth in their contract.

On February 18, 1998, respondent instituted an action for declaratory relief for purposes of determining the correct interpretation of condition Nos. 6 and 7 of the lease contract to prevent damage and prejudice.

On March 10, 1998, petitioners in turn filed an action for ejectment, rescission and damages against respondent for failure of the latter to vacate the premises after the demand made by the former. Before respondent could file an answer, petitioners filed a Notice of Dismissal. They subsequently refiled the complaint before the MTC of Makati.

Petitioners later moved for the dismissal of the declaratory relief case for being an improper remedy considering that respondent was already in breach of the obligation and that the case would not end the litigation and settle the rights of the parties. The trial court, however, was not persuaded, and consequently, denied the motion. RTC ruled in favor of respondent.

Petitioners elevated the case the the CA which affirmed RTC.

Issue:

Whether or not the amount of rentals due the petitioners should be adjusted by reason of extraordinary inflation or devaluation.

Held:

Petitioners repeatedly made a demand on respondent for the payment of VAT and for rental adjustment allegedly brought about by extraordinary inflation or devaluation. Both the trial court and the appellate court found no merit in petitioners claim. The Court saw no reason to depart from such findings.

As to the liability of respondent for the payment of VAT, we cite with approval the ratiocination of the appellate court, viz.:

Clearly, the person primarily liable for the payment of VAT is the lessor who may choose to pass it on to the lessee or absorb the same. Beginning January 1, 1996, the lease of real property in the ordinary course of business, whether for commercial or residential use, when the gross annual receipts exceed P500,000.00, is subject to 10% VAT. Notwithstanding the mandatory payment of the 10% VAT by the lessor, the actual shifting of the said tax burden upon the lessee is clearly optional on the part of the lessor, under the terms of the statute. The word may in the statute, generally speaking, denotes that it is directory in nature. It is generally permissive only and operates to confer discretion. In this case, despite the applicability of the rule under Sec. 99 of the NIRC, as amended by R.A. 7716, granting the lessor the option to pass on to the lessee the 10% VAT, to existing contracts of lease as of January 1, 1996, the original lessor, Ponciano L. Almeda did not charge the lessee-appellee the 10% VAT nor provided for its additional imposition when they renewed the contract of lease in May 1997. More significantly, said lessor did not actually collect a 10% VAT on the monthly rental due from the lessee-appellee after the execution of the May 1997 contract of lease. The inevitable implication is that the lessor intended not to avail of the option granted him by law to shift the 10% VAT upon the lessee- appellee. x x x.

In short, petitioners are estopped from shifting to respondent the burden of paying the VAT.

Petitioners reliance on the sixth condition of the contract is, likewise, unavailing. This provision clearly states that respondent can only be held liable for new taxes imposed after the effectivity of the contract of lease, that is, after May 1997, and only if they pertain to the lot and the building where the leased premises are located. Considering that RA 7716 took effect in 1994, the VAT cannot be considered as a new tax in May 1997, as to fall within the coverage of the sixth stipulation.

Neither can petitioners 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. They insist that the doctrine pronounced in Del Rosario v. The Shell Company, Phils. Limited should apply.

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, condition No. 7 of the contract speaks of extraordinary inflation or devaluation as compared to Article 1250s extraordinary inflation or deflation, we find that when the parties used the term devaluation, they really did not intend to depart from Article 1250 of the Civil Code. Condition No. 7 of the contract should, thus, be read in harmony with the Civil Code provision.

That this is the intention of the parties is evident from petitioners letter dated January 26, 1998, where, in demanding rental adjustment ostensibly based on condition No. 7, petitioners made explicit reference to Article 1250 of the Civil Code, even quoting the law verbatim. Thus, the application of Del Rosario is not warranted. Rather, jurisprudential rules on the application of Article 1250 should be considered.

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.

Inflation has been defined as the sharp increase of money or credit, or both, without a corresponding increase in business transaction. There is 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. In a number of cases, this Court had provided a discourse on what constitutes extraordinary inflation, thus:

[E]xtraordinary inflation exists 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.

The factual circumstances obtaining in the present case do not make out a case of extraordinary inflation or devaluation as would justify the application of Article 1250 of the Civil Code. We would like to stress that the erosion of the value of the Philippine peso in the past three or four decades, starting in the mid-sixties, is characteristic of most currencies. And while the Court may take judicial notice of the decline in the purchasing power of the Philippine currency in that span of time, such 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.