Case Digest: Country Bankers Insurance Corp. vs Court of Appeals, G.R. No. 85161

Country Bankers Insurance Corp. vs Court of Appeals, GR. No. 85161, September 11, 1991

Subject: Obligations and Contracts

FACTS

Respondent and petitioner entered into a lease agreement for the term six (6) years over the Avenue, Broadway and Capitol Theaters and the land on which they are situated. After more than two (2) years of operation, the respondent lessor made demands for the repossession of the said leased properties in view of the Sy's arrears in monthly rentals and non-payment of amusement taxes.

In pursuance of their latter agreement, Sy's arrears in rental were reduced. However, the accrued amusement tax liability of the three (3) theaters to the City Government of Cabanatuan City had accumulated despite the fact that Sy had been deducting the amount of P4,000.00 from his monthly rental. Sy filed the present action for reformation of the lease agreement, damages and injunction and prayed for the issuance of a preliminary injunction to enjoin OVEC from entering and taking possession of the three theaters.

OVEC on the other hand, alleged in its answer by way of counterclaims that by reason of Sy's violation of the terms of the subject lease agreement and became authorized to enter and possess the three theaters in question and to terminate said agreement. The trial court arrived at the conclusions that Sy is not entitled to the reformation of the lease agreement and further concluded that Sy was not entitled to the writ of preliminary injunction issued in his favor after the commencement of the action and that the injunction bond filed by Sy is liable for whatever damages OVEC may have suffered by reason of the injunction.

ISSUE 

Whether or not Sy is entitled to reformation of the lease agreement.

RULING 

No, Sy is not entitled to reformation of the lease agreement.

Under the law (Art 1226), in obligations with a penal cause, the penalty shall substitute the indemnity for damages and the payment of the interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

In this case, the repossession of the leased premises by OVEC after the cancellation and termination of the lease was in accordance with the stipulation of the parties in the said agreement and the law applicable thereto and that the consequent forfeiture of Sy's cash deposit in favor of OVEC was clearly agreed upon by them in the lease agreement. The court found no ambiguity in the provisions of the lease agreement. It held that the provisions are fair and reasonable and therefore, should be respected and enforced as the law between the parties. It held that the cancellation or termination of the agreement prior to its expiration period is justified as it was brought about by Sy's own default in his compliance with the terms of the agreement and not motivated by fraud or greed.