FACTS:

The case involves a contract between the petitioner, Naga Telephone Co., Inc., and the respondent, Camarines Sur II Electric Cooperative, Inc. The contract allowed the petitioner to use the respondent's electric light posts for its telephone service in exchange for installing ten telephone connections for the respondent's use. After more than ten years, the respondent filed a case seeking the reformation of the contract, alleging that it was one-sided and not in compliance with guidelines. The respondent also claimed that the petitioner used additional posts without a contract and failed to provide satisfactory service for the ten telephone units.

The petitioners, National Telephone Company (NATELCO) and Philippine Telephone and Telegraph Company (PT&T), entered into a pole rental agreement with Camarines Norte Electric Cooperative, Inc. (CANORECO) for the use of electric poles. CANORECO filed a complaint claiming that the agreement was unfair due to an increase in subscribers without an increase in telephone connections for CANORECO. CANORECO sought the reformation of the contract and compensation for the use of its poles.

The plaintiff-appellee filed an action for the reformation of a contract, alleging that the contract failed to express the true intention of the parties due to error or mistake. The defendant-appellant argued that there was no sufficient allegation or proof of mistake and that the contract should be the final criterion of the parties' rights and obligations. The trial court ruled in favor of the plaintiff-appellee and ordered the reformation of the contract. The defendant-appellant appealed, but the respondent court affirmed the trial court's decision, noting that there was a lack of sufficient allegations and proof of mistake.

ISSUES:

1. Whether or not the contract should be reformed based on Article 1267 of the New Civil Code.

2. Whether the agreement between the parties has become too one-sided in favor of the appellant.

3. Whether the appellant should pay for the use of the respondent's electric posts at a reasonable monthly rental.

4. Whether the respondent should pay the appellant for the telephones it was using free of charge.

5. Whether the allegations in the complaint and the evidence presented by the private respondent sufficiently made out a cause of action under Article 1267 of the Civil Code.

6. Whether the court can exercise its equity jurisdiction in the present case.

7. Whether or not the court erred in applying Article 1267 of the New Civil Code to the case.

8. Whether or not the court erred in ruling that the action for reformation of contract was not yet prescribed.

9. Whether or not the provision in the contract, which made the continued effectivity dependent solely on the will of one party, is valid.

10. Whether the provision in the contract, stating that the term of the agreement shall be as long as the party of the first part has need for the electric light posts of the party of the second part, is a potestative condition.

11. Whether the contract is subject to mixed conditions.

12. Whether there is a reason to set aside the decision and resolution of the respondent court.

RULING:

1. No, the contract should not be reformed. The court ruled that the reformation of the contract is not proper as there was no allegation or proof of error, mistake, accident, or fraud that would warrant its reformation. The court emphasized that reformation of a contract is an equitable remedy to ensure that the true intention of the parties is expressed, and that the instrument reflects their real agreement. However, in this case, there was no showing that the contract failed to express the true intention of the parties or that there was a mistake on either party's part. The court also noted that there were no complaints from both parties regarding the contract at the time of its execution, and that it was considered fair and equitable by both sides. Therefore, the court held that the plaintiff's remedy is to seek release from the agreement under Article 1267 of the New Civil Code, which provides for the resolution or termination of an obligation when its performance becomes excessively burdensome.

2. Yes, the agreement between the parties has become too one-sided in favor of the appellant. Therefore, the respondent should be released from the agreement to avoid the appellant's unjust enrichment at the respondent's expense.

3. Yes, the appellant should pay for the use of the respondent's electric posts in Naga City at a reasonable monthly rental of P10.00 per post.

4. Yes, the respondent should pay the appellant for the telephones it was using free of charge at the same rate being paid by the general public in Naga City.

5. Yes, the allegations in the complaint and the evidence presented sufficiently made out a cause of action under Article 1267. The court released the parties from their correlative obligations under the contract and required petitioners to pay private respondent for the use of its posts, while private respondent is to pay petitioners the monthly dues of all its telephones.

6. Yes, the court can exercise its equity jurisdiction in the present case. The court found it necessary to exercise its equity jurisdiction in order to avoid disruption of basic and essential services being rendered by both parties to the public and to prevent unjust enrichment by appellant at the expense of the plaintiff.

7. The court did not err in applying Article 1267 of the New Civil Code to the case.

8. The court did not err in ruling that the action for reformation of contract was not yet prescribed.

9. The provision in the contract, which made the continued effectivity dependent solely on the will of one party, is invalid for being purely potestative.

10. Yes, the provision in the contract is a potestative condition.

11. The contract is subject to mixed conditions.

12. No, there is no reason to set aside the decision and resolution of the respondent court.

PRINCIPLES:

• Reformation of a contract is an equitable remedy that aims to ensure that the true intention of the parties is expressed and that the instrument reflects their real agreement. The reformation does not attempt to make a new contract but to make the instrument express the parties' real agreement.

• For an action for reformation of contract to prosper, there must be sufficient allegations and evidence that the contract failed to express the true intention of the parties due to error, mistake, accident, or fraud.

• A written instrument should be the final and inflexible criterion and measure of the rights and obligations of the contracting parties; however, this rule is tempered to forestall the effects of mistake, fraud, inequitable conduct, or accident.

• Article 1267 of the New Civil Code provides for the resolution or termination of an obligation when its performance becomes excessively burdensome.

• Article 1267 of the Civil Code provides relief in a contract when the performance of the obligation has become so difficult.

• The doctrine of unforeseen events states that the disappearance of the basis of a contract gives rise to a right to relief in favor of the party prejudiced.

• Equitable principles demand an economic equilibrium between the prestation and the counter-prestation in a contract to avoid unjust enrichment.

• Under Article 1267 of the Civil Code, the court has the authority to release the parties from their correlative obligations under a contract that has become too inequitable or disadvantageous to one party.

• The court has the discretion to exercise its equity jurisdiction in order to achieve justice and prevent unjust enrichment in the particular circumstances of a case.

• Under our system of pleading, it is the duty of the courts to grant the relief to which the parties are shown to be entitled by the allegations in their pleadings and the facts proven at the trial.

• The court may entertain issues not raised before the trial court if there are strong considerations of substantial justice.

• In determining the period for prescription of an action for reformation of contract, it is irrelevant whether the contract is disadvantageous or not.

• The ten-year period for an action upon a written contract is reckoned from the time the right of action accrues, which is not necessarily the date of execution of the contract.

• A provision in a contract that makes the continued effectivity dependent solely on the will of one party is invalid for being purely potestative.

• A potestative condition is a condition, the fulfillment of which depends solely on the will of the debtor, and a conditional obligation with a potestative condition is void.

• A contract can be subject to mixed conditions, which are conditions that depend partly on the will of the debtor and partly on chance, hazard, or the will of a third person. Such mixed conditions do not invalidate the provisions of the contract.

• The Court will affirm the decision and resolution of the lower court if there is no reason to set them aside.