G.R. No. 120851 May 14, 1997
Ninoy Aquino International Airport Authority and Eduardo Carrascoso, petitioners, vs. Court of Appeals, Hon. Leonardo M. Rivera and Salem Investment Corporation, respondents.

FACTS

In 1967, the Civil Aeronautics Administration (CAA), predecessor of petitioner NAIA Authority (NAIAA), entered into a 25-year lease with respondent Salem Investment Corporation for a parcel of land fronting the Manila Domestic Airport. The contract obligated Salem to construct a hotel and other improvements, with the lease renewable for another 25 years under the same terms. Salem complied with preliminary obligations, including ejecting squatters and preparing and submitting building plans, which were approved by CAA officials. However, construction was withheld by previous government officials, allegedly to avoid displeasing the Marcos administration, which was building a competing hotel nearby. Salem was instead allowed to construct ancillary structures.
Decades later, in 1989, Salem requested a permit to construct offices and stores on the vacant leased area. NAIAA denied the request, citing the low rental rate and a disadvantageous renewal clause, and demanded a renegotiation of the contract terms as a precondition for any permit. Salem filed an action for specific performance with damages and mandatory injunction, arguing that NAIAA’s refusal to issue the permit and its demand for a rental increase constituted a unilateral and bad faith violation of the subsisting lease agreement.

ISSUE

Whether petitioners NAIAA and Carrascoso acted in bad faith and violated the lease contract by unilaterally refusing to issue the required building permit and demanding a rental increase as a precondition.

RULING

The Supreme Court affirmed the lower courts’ rulings, holding petitioners liable for breach of contract and bad faith. The Court emphasized that the lease contract was valid and subsisting, granting Salem an absolute right to construct the stipulated improvements upon submission of approved plans. NAIAA’s refusal to issue the permit unless Salem agreed to a rental increase was a unilateral alteration of the contract’s terms, done without legal basis and in evident bad faith. The government’ change in policy or its desire to update a master plan does not justify disregarding a binding contractual obligation.
The legal logic is anchored on the principle that the government, when entering into contracts, is bound by the same rules as private entities. The State cannot invoke jura regalia or a change in policy to renege on its contractual commitments. Petitioners’ actions constituted a clear violation of the agreement’s terms, warranting an order for specific performance. The Court modified the award of compensatory damages, ordering it to be reckoned from the date Salem formally amended its complaint to include an alternative prayer for the hotel permit (February 14, 1991), rather than an earlier arbitrary date, as this amendment constituted the proper judicial demand. The award of attorney’s fees was deemed reasonable given the protracted litigation and petitioners’ evident bad faith.