G.R. No. L-23546 August 29, 1974
Laguna Tayabas Bus Company and Batangas Transportation Company, petitioners, vs. Francisco C. Manabat, as assignee of Biñan Transportation Company, Insolvent, respondent.

FACTS

On January 20, 1956, petitioners Laguna Tayabas Bus Company and Batangas Transportation Company leased from Biñan Transportation Company its certificates of public convenience for several bus lines. The Public Service Commission provisionally approved the contract. Biñan Transportation was later declared insolvent, with respondent Francisco C. Manabat appointed as assignee. Petitioners paid rentals until December 1957 but made unauthorized deductions for August 1957, citing strike losses and a court judgment. They subsequently ceased all rental payments from January 1958 onward.
While the assignee demanded payment, petitioners filed separate petitions with the Public Service Commission in February 1958, seeking authority to suspend operations on the leased lines. They cited financial losses due to high costs of spare parts, reduced dollar allocations, and lack of passenger traffic. The Commission granted the petitions. Consequently, the assignee filed a civil case in the Court of First Instance to recover unpaid rentals and secure a writ of preliminary mandatory injunction to compel petitioners to resume operations or return the certificates.

ISSUE

The core issue is whether petitioners, as lessees, are legally justified in suspending rental payments and operations on the leased lines due to alleged financial losses and operational difficulties.

RULING

The Supreme Court affirmed the Court of Appeals’ decision, ruling against the petitioners. The legal logic is anchored on the principle of sanctity of contracts and the specific terms of the lease agreement. The contract did not contain any clause allowing for the suspension of rental payments or operations due to financial hardship, increased operational costs, or business losses. Under Article 1267 of the Civil Code, which was invoked by petitioners, a party may be released from an obligation when the service has become so difficult due to an unforeseen event. However, the Court held this article inapplicable.
The financial setbacks alleged by petitioners—such as high costs of spare parts, reduced dollar allocations, and lack of passenger traffic—are considered ordinary business risks inherent in the transportation industry. They do not constitute the “extraordinary and unforeseeable” events required by law to excuse performance. The Court emphasized that contractual obligations remain binding even if the contract becomes unprofitable or burdensome. By choosing to suspend only the operations on the leased lines and not their own parallel routes, petitioners demonstrated that the suspension was a strategic choice to reduce costs, not an unavoidable necessity. Their failure to pay rentals constituted a clear breach of contract, for which they remained liable.