Rebus Sic Stantibus vs Pacta Sunt Servanda and Contract-Price Adjustment under Philippine Law (A doctrinal, jurisprudential, and practical survey)

Executive Summary

Philippine contract law is built on the bedrock rule pacta sunt servanda—agreements have the force of law between the parties (Civil Code, Art. 1159). A narrow escape hatch exists in the doctrine of rebus sic stantibus (“things thus standing”), recognized in Art. 1267 and related provisions. Rebus allows an onerous contract to be judicially readjusted or even terminated when supervening events, neither foreseen nor assumed, make performance extraordinarily difficult or manifestly inequitable.

In real-world practice the tension between the two principles is most visible in price-adjustment claims—especially in infrastructure, energy, and public procurement. The Supreme Court has repeatedly insisted that pacta remains the default and rebus the exception; yet it has also shown a growing willingness to grant equitable relief where economic shocks (oil-price spikes, pandemic supply-chain collapse, runaway inflation) have upset the original bargain.

1. Conceptual Foundations

Principle	Essence	Source in Phil. Law
Pacta Sunt Servanda	Contractual undertakings must be kept; courts may not relieve a party from a bad bargain merely because it becomes onerous.	Civil Code Art. 1159; Art. 1306 on autonomy of contracts
Rebus Sic Stantibus	“Contracts are binding while the circumstances contemplated by the parties remain.” If an unforeseen and unavoidable change destroys the equilibrium of the prestation, courts may adapt or end the contract.	Civil Code Art. 1267 (excessive difficulty), Art. 1266 (impossibility), Art. 1174 (fortuitous events), Art. 1250 (extraordinary inflation or deflation)

Key Requirements for Rebus Relief

Unforeseeability – The event could not reasonably have been predicted at the time of contracting.
Externality – The disadvantaged party did not cause or assume the risk.
Radical Alteration – Performance becomes impossible or so difficult/expensive that enforcing the literal terms would be “obviously beyond the contemplation” of the parties.
Prompt Invocation & Good-Faith Negotiation – The party must promptly seek renegotiation before resorting to litigation or unilateral suspension.

2. Doctrinal Anchors in the Civil Code

Art. 1159 – Pacta sunt servanda.
Art. 1266 – Extinguishment where prestation becomes impossible without the obligor’s fault.
Art. 1267 – “When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released…”
Art. 1174 – Fortuitous events exempt the obligor unless otherwise stipulated.
Art. 1250 – Extraordinary inflation or deflation authorizes courts to appropriate value if “supervening” and “unnamed.”
Art. 1306 – Parties may establish stipulations “not contrary to law, morals, good customs, public order, or public policy.”

3. Supreme Court Treatment

Case	G.R. No. / Date	Holding on Rebus / Price Adjustment
Traders Royal Bank v. Rojas	L-47393 (Aug 1986)	Art. 1250 applies only when extraordinary, not merely high, inflation exists; Central Bank certificates were adequate to show inflation was not extraordinary.
BF Corp. v. CA	128732 (Mar 25 1999)	Construction cost overruns caused by contractor’s mismanagement are self-induced; rebus inapplicable.
Asia Brewery, Inc. v. Equitable PCI Bank	165037 (July 8 2013)	Increased peso cost of yen-denominated loan foreseeable; doctrine rejected.
Sta. Clara Int’l Corp. v. DPWH	145822 (June 16 2006)	Government approved price-escalation formula; DPWH liable for unpaid escalation. Rebus avoided because contract itself allocated the risk via escalation clause.
Taisei Shimizu Joint Venture v. Commission on Audit	227045-46 (Jan 27 2021)	COA cannot disallow price adjustments granted under contract’s escalation clause unless evidence shows collusion or fraud.
Benedicto v. Villaflores	172610 (Jan 20 2009)	Agricultural tenancy lease price increases struck down; landlord failed to prove “extraordinary inflation” within Art. 1250.

Takeaway: The Court applies a two-step filter: (1) Did the parties allocate the risk (escalation clause, CPI indexation, fixed price)? (2) If silent, do the strict requisites of Art. 1267/1250 exist? Only a handful of cases have actually granted rebus-based relief, and almost always with strong equitable overtones (e.g., wartime or post-war currency collapse).

4. Contract-Price Adjustment in Private Agreements

Escalation Clauses Formula-based (labor-materials indices), percentage triggers, or CPI linkages. A well-drafted clause forecloses the need to invoke rebus because the parties have expressly agreed on how to share price risk.
Change-in-Law & Force-Majeure Clauses Drafted to capture tax changes, new safety standards, import bans, etc. Depending on wording, a change in law may trigger either cost pass-through or termination for convenience.
Currency Adjustment Clauses Typical in EPC (engineering-procurement-construction) or power-purchase agreements:

$$ \text{Adjusted Price}=P_o \left[ 0.2+0.4\frac{US$}{US${o}}+0.4\frac{\text{CPI}}{\text{CPI}{o}}\right] $$
Material-Adverse-Change (MAC) Clauses Common in M&A; allow walk-away if events erode asset value or regulatory landscape. Philippine courts read MAC narrowly and will compare against the rigorous requisites of Art. 1267 if litigated.

5. Government Procurement and Public-Private Projects

Framework	Clause / Rule	Key Points on Price Adjustment
RA 9184 (Gov’t Procurement Reform Act) & 2022 IRR	§61.1 & §61.2	Variation Orders up to ±10 % at original bid rates; beyond that, re-price using prevailing indices. Extraordinary Circumstances may justify price escalation with DBM-NEDA concurrence.
DPWH Standard Bidding Docs (2016, 2020)	GCC §39	Built-in Price Escalation Clause activated by “extraordinary increase” in fuel, bitumen, or steel > 15 %.
Build-Operate-Transfer (BOT) Law, RA 6957 as amended by RA 7718	Concession Agreements	Allows Periodic Rate Re-setting or “Automatic Adjustment Mechanism” for tolls, tariffs, or fees based on cost-of-capital, inflation, FX. Subject to regulatory approval (TRB, ERC, LTFRB).
GPPB Resolution 07-2005, 13-2018	Guidelines on Price Escalation	Requires (a) NEDA-certified extraordinary circumstances, (b) proof costs are not covered by contingencies, (c) prior DBM concurrence if MOA with LGU/national agency.

Procedural Steps to Claim Escalation (Typical DPWH Project)

Contractor submits Notice of Claim within 28 days of becoming aware.
Engineer validates quantities and cost indices (Philippine Construction Materials Price Index, PCMPI).
Agency endorses to DBM for funding release; larger claims must go to NEDA-ICC.
Disputes may proceed to CIAC arbitration under E.O. 1008.

6. Extraordinary Inflation or Deflation (Art. 1250)

Threshold: Jurisprudence sets no fixed percentage but requires proof that the peso’s purchasing power has “collapsed.” Evidence may include BSP price indices, PSA CPI, or expert testimony from economists. Ordinary, even double-digit, inflation seldom suffices (Traders Royal Bank case).

7. Comparative and Soft-Law References

Instrument	Parallel to Phil. Rebus
UNIDROIT Principles 6.2.2-6.2.3	Allows a party to request renegotiation when performance becomes “more onerous”; very similar to Art. 1267.
FIDIC Red Book Sub-cl. 13.7	“Adjustment for Changes in Cost” gives contractor automatic compensation linked to published indices.
ICC Hardship Clause 2020	Global model clause popular among Philippine energy sector drafters.

8. Drafting Tips for Practitioners

Define the Trigger – Specify percentage change, reference index, or force-majeure list.
Provide a Formula – Avoid ad-hoc renegotiation by fixing computational mechanics.
Allocate Forex Risk – Split currencies (e.g., 40 % peso, 60 % USD) to track supply-chain realities.
Build a Negotiation Window – Require parties to meet within X days; litigation or arbitration only after failure to settle.
Cap Adjustments – Government contracts often limit cumulative upward variation (e.g., 20 % of original price).

9. Emerging Issues (2020-2025)

COVID-19 Disruptions – SC in Taisei Shimizu acknowledged pandemic as possible extraordinary circumstance but remanded for evidence.
Energy-Price Shock (2022-2023) – ERC allowed provisional adjustments in power-supply agreements where coal prices quintupled.
Climate-Resilience Projects – PPPs now include “carbon price” adjustment riders.
Digital Construction Indices – DPWH exploring blockchain-logged price indices for transparent escalation validation.

10. Conclusion

Philippine law strongly favors the sanctity of contracts but tempers it through narrowly channeled doctrines of hardship and extraordinary change. Whether in private agreements or public procurement, the safest course is front-loaded risk allocation—explicit escalation formulas, force-majeure matrices, and renegotiation protocols. Where contracts are silent or poorly drafted, rebus sic stantibus (via Arts. 1267 or 1250) offers an equitable, though uncertain, judicial safety valve. Practitioners should treat rebus as a last resort; courts will deploy it sparingly and only on compelling proof that “things no longer stand as they once did.”

Annex A. Snapshot of Major Rebus/Price-Escalation Decisions

Year	Case	Rebus Invoked?	Outcome on Price
1986	Traders Royal Bank v. Rojas	Art. 1250	Denied – inflation not “extraordinary.”
1999	BF Corp. v. CA	Art. 1267	Denied – self-induced overruns.
2006	Sta. Clara v. DPWH	Contract clause, not Art. 1267	Granted – escalation clause enforced.
2013	Asia Brewery v. Equitable	Art. 1267	Denied – forex risk foreseeable.
2021	Taisei Shimizu JV v. COA	Contract clause	Escalation validated, case remanded for computation.

(All citations to Phil. Supreme Court Reports or G.R. numbers as indicated above.)