VOL. '96, MARCH 31, 1980 Disposition of Obligations Under Extraordinary Inflation 843 ANNOTATION r - DISPOSITION OF OBLIGATIONS UNDER EXTRAORDINARY INFLATION By Atty. SEVERIANOS. TABIOS § 1. Introduction, p.843. § 2, Requirements of Law, p. 844. A. Inflation Should Be Extraordinary, p. 844. B. ‘Obligation Should Be Contractual, p. 846. C. ) Currency Stipulated Should Be Philippine Currency,p. 847. 2 3. Evaluation of Inflation, p. 847. A. Agency Concerned with Evaluation of Inflation, p. 847. B. Specific Application, p. 849. $1. Introduction Inflation is an economic situation whereby — of 7 a majority of, goods and services are rising gradually or rapic'y. When the upward’ price movements are gradual, there is : tendency for profits to increase, at least for a time, am businessmen tend to undertake larger investments that create additional jobs. However, a8 inflation gains orca ut rapid, each round of price increases 1s followed almos' immediately by increases in wages and material costs and pro-SUPREME COURT REPORTS ANNOTATED Disposition of Obligations Under Extraordinary Inflation 844 may shrink, if wages and costs rise more rapidly than final prices. On the other hand, a man who borrows money to build a house may find that while he borrowed pesos representing one year earnings he repays in pesos worth, say only six months earnings because in the interval of time between the act of borrowing and repayment all prices have doubled. In this case, the inflation has placed the lender at a disadvantage and has given the borrower a windfall.’ 1n such an economic situation called inflation, the New Civil Code provides an equitable measure as a basis for the disposi- tion of a contractual obligation. In this regard, the New Civil Code provides that in case of an extraordinary inflation or deflation of the currency stipulated supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.” It is in the application of the equitable measure provided by the New Civil Code that the case of Commissioner of Public Highways vs. Burgos, et. al.,’ which is the subject of this an- notation, reached the Supreme Court. fit margins § 2. Requirements of Law A. Inflation Should Be Extraordinary Noteworthy is the language of the law in its description of supervening inflation being extraordinary. However, as the provision itself did not define what it meant by extraordinary inflation or deflation, we may have to resort to other portions of the code as reference in our search for the meaning of the word ‘‘extraordinary”’ in the context of Ww. Under meaning of the phrase has been 1 R.W. Hooley, “M A ae a e * ioney, Prices and Financial System”. Economics and Development GP. Si Press, Quezon City, 1965, pp. 5-1 vont aban Blesh et sho UP, * Article 1250, New Civil Code * 1-36706, March 31, 1980.VOL. 96, MARCH 381, 1980 Disposition of Obligations Under Extraordinary Inflation und erstood to include 845 eee may Si ly strue on the oe e the — definition of extraordinary fortuitous events that an extraordinary infla- tion may mean any uncommon decrease in the purchasing er of currency which the parties could not have reasonably foreseen and which has been due to war, or the effects thereof, orany other unusual force majeure or fortuitous event.‘ 4 In relation to the foregoing, the Supreme Court in the case of Ang Lam vs. Peregrina.’ wherein Peregrina who borrowed 100,000.00 from Ang Lam on December 26, 1944, promising to pay within a period of one year therefrom, was adjudged to pay the latter ?1,000.00, the equivalent of what had been bor- rowed according to the Ballantyne Conversion Table, rejected the contention of Ang Lam that the legal tender on December 25, 1945, or one year from the date of the loan, should be the currency in which the loan should be paid, as both parties sub- jected their rights to’a contingency, and declared that as the loan was payable within:one year from: December 26, 1944, it could be paid the following day or any date before liberation, in Japanese military notes, had the debtor chosen to do so. Fur- thermore; the Supreme Court declared that while it is unfair and unjust that the loan be ceased. or completely wiped out because of a change in currency, it is also unfair and unjust that the loan be paid in'the same amount in which it was con- tracted and at the restored currency; because the-lender would be unduly enriched at the expense of the debtor. The fair and just rule to apply is, therefore, for the debtor to pay the actual value or worth of the loan at the time it was contracted in the currency intexistence at the time of payment.® ‘ Dean Capistrano, Civil Code of the Philippines, Vol. IT], 1950, B.189, 5 L-4871, January 26, 1953. a : * Ang Lam vs. Dibra: 1L-4871, Jan, 26, 1953, citing — Va, Dela Costa, et. al., 46 0.G, 5472, Siriano, vs. Abalos, et. al, ©.G. 168 and Thorington vs. Smith, 19 L. ed. 361.- SUPREME COURT REPORTS. ANNOTATED Disposition of Obligations Under Extraordinary Inflation 846 B. Obligation Should Be Contractual me Court, it can be seen from the According to the Supre' ; a 3 t employment of the words “extraordinary inflation or deflation of the currency stipulated” that the legal rule envisages con- tractual obligations where a specific currency is selected by the parties as the medium of payment; hence, it is inapplicable to obligations arising from tort and not from contract. Similarly, it does not apply where the obligation to pay arises from law, independent of contract.* Appropriately, the taking of private property by the Government in the exercise of its power of emi- nent domain does not give rise to a contractual obligation.’ While the Supreme Court in the case of People vs. Pantoja,’° in considering the award of compensatory damages for death caused by crime or quasi-delict, declared that it is common knowledge from 1948 to 1968, due to economic circumstances beyond governmental control, the purchasing power of the Philippine peso has declined such that the rate of exchange in the free market was U.S. $1.00 to almost P4.00 Philippine Pesos, meaning that the purchasing power of the Philippine peso was one-fourth of its pre-war purchasing power, and for oe reason the court was of the considered opinion to award a Sarno: pes for death caused by a crime moreover, the Su i Watts vs Mal Bosc Conga ee a ancl ta the regard paid to the decreasing purchase of the peso j Pantoja ruling was co: eee purchase of the peso in the demnity due for loss of life eo : factor in estimating the in- dkcurétegatimatiog'tie ich in itself is not susceptible of 7 Velasco vs. Mani i _ scna ae lanila Electric Co., et. al., L-18390, Dec. 20, 1971. Commissioner of ic Hi ee Public Highways vs. Burgos, et. al., L-36706, . Ibid. “ elo a 11, 1968, 25 SCRA 468. ‘eople vs. Pantoja, L-19) : 8300, Dee. 20,1971, <2SCRA 686. 7 oe vs. 3) . 5 = soa ee nila Electric Co., et. al., 1-18390, Dec. 20, 1971,VOL. 96, MARCH 31, 1980 Disposition of Obligations Under Extraordinary Inflation 847 ¢. “Currency Stipulated Should Be Philippine Currency While the New Civil Code did not specify that the curren stipulated should be Philippine currency;"* the provisions ‘of Republic Act No. 529 should be read into the law. In this regard, the special law declared as contrary to public policy and therefore null, void and of no effect every provision con- tained in, or made with respect to, any obligation which provi- sion purports to give the obligee the right to require payment in gold or in a particular kind of coin or dollars is declared as null and void and of no effect, it does not defeat a creditor’s claim for payment, as a contrary rule would allow a person to profit or enrich himself inequitably at another's expense."® Ap- propriately, measured at the time obligation was incurred.’’ On the other hand, @fithélobligation ‘the obligation shall be paid in Philippine currency at the rate of exchange prevailing at the time of payment." § 3. Evaluation of Inflation A. Agency Concerned with Evaluation of Inflation Under the Charter of the Central Bank, the Bank is charged with the duty to ‘administer the monetary and banking System of the Republic; to maintain monetary stability in the Philippines; to preserve the international value of the peso; Ny ee - Article 1250, New Civil Code. 'S Sec. 1, Republic Act No. 529, approved June 16,1950. Ponce, et, al vs! /Afable, et. al, L-49494, May 31, 1979. = moe! 7, 353. 1, Kalalo vs. Luz, L-27782, July 31, 1970, 34 SCRA 337, ae Kalalo vs, Luz, L-27782, July 31, 1970, 34 SCRA 387, 39%848 SUPREME COURT REPORTS ANNOTATED fannie eT ae Disposition of Obligations Under Extraordinary Inflation promote the rising of production, employment and anew in caarinina ne Te Bank is also given the duty to “control any expansion or contraction in the money supply, or any rise or fall in prices, which, in the opinion of the Monetary Board is prejudicial..to the attainment or maintenance of a high level of production, employment and real income”. In thisregard, the Monetary Board shall have due regard ‘‘for their effects (measures) on the availability and cost of money to particular sectors of the economy as a whole, and their effects on the relationship of domestic prices and costs to world prices and costs”.”' Under its charter the Central Bank is empowered to take remedial measures as are appropriate and within the powers granted whenever the international reserve falls ‘‘to an amount which the Monetary Board considers inadequate to meet the prospective net demands on the Central Bank for foreign currencies, or whenever the international reserve ap- pears to be in imminent danger of falling to such a level, or whenever the international reserve is falling as a result of payments or remittances abroad. which, in the opinion of the Monetary Board, are contrary to the national welfare”.” Moreover, the Central Bank does not have the power to change the par value of the peso as this can be done only by the Presi- dent upon proposal of the Monetary Board and with the ap- proval of Congress (now National Assembly)* In relation to the foregoing, a special law Congress authorizing the Central Bank “‘to tnnnanae margin of not more than forty percent over the banks’ selli anne Board under section 79 of the ct” and the Monetary Board to “‘fix the margin + Section 2, Republic Act No:'265, as s , 48 amended. " Bocolod Murcls Miling Go aes tsemended. lurcia Milli: os 1963, 9 SCRA 268, 23, 7” Nt YS Central Bank, 1-12610, Section 70, Republic Act No. 265, > ; }, a8 amended, Bacolod-Murcia Milling Co., Inc. vs. Central Bank, L-12610, Oct. 25, 1963, 9 SCRA No. 265. 268, 283-284 citing section 49 of Republic Act& VOL. 96, MARCH 31, 1980 Disposition of Obligations Under Extraordinary Inflation 849 of such rate as it may deem necessary to effectively curtail any excessive demand upon the international reserve’. Thus, under the Act the Central Bank fixed the rate of exchange between the peso and the dollar at P3.20 to $1.00. B,. Specific Application In a case wherein the collective bargaining agreement pro- vided that if during the life of the agreement a law diminishing the value of Philippine currency is enacted and as a result thereof the Company is granted the necessary authority to in- crease its rates, either party may upon written notice to the other reopen the Agreement for negotiation of wage rates, the Union sought to renegotiate the Agreement when the Central Bank in a letter. to the Chairman of the Civil Aeronautics Board authorized the sale of airline tickets at P3.20 to a dollar plus 9% surcharge. On the other hand, the airline company in refusing to renegotiate alleged that as there had been no law passe by Congress diminishing the value of the Philippine currency the basis for renegotiation did not exist. In resolving the issue, the Supreme Court declared that the purchasing power or value of money or currency does not depend upon, cannot come into being, be created or brought about by, a law enacted by the legislative department of the Government. If by law or treaty the rate of exchange between two currencies should be fixed or stipulated, such law or treaty could not give the money or currency the purchasing power or value fixed or stipulated but would bind the Government enacting the law or the contracting parties to a treaty to pay or supply the dif- ference between the value fixed or stipulated and the real value of the currency should the latter be lower than the fixed or stipulated rate of exchange between the two currencies. The result is that if the real value or actual purchasing power of money or currency brought about by the export and import of goods or commodities and services rendered should be lower than that fixed or stipulated, the Government would have to oe 24 Pan American World Airways VS. PAA Employees’ Associa- tion, et. al, L-18345, January 30, 1964, 10 SCRA 21, 25.850 SUPREME COURT REPORTS ANNOTATED Disposition of Obligations Under Extraordinary Inflation pay or supply the difference by drawing upon its reserves. To prevent the depletion of its reserve the Government could im- pose restrictions to discourage payment at the value fixed or rate of exchange stipulated which would drain its reserve. So that when the parties agreed to negotiate on wage rates during the term of the Agreement, should a law be passed diminishing the value of the Philippine currency, they did not literally mean a law enacted by Congress which, as already explained, would not really diminish the purchasing power or value of the currency but would just confirm the real value or actual pur- chasing power of the currency.” In another case, the Supreme Court declared that consider- ing the high cost of living that has been prevailing, which cost of living had tended to increase rather than to decrease, and considering further the low buying power of the Philippine cur- rency, this Court has, in recent decisions, adopted a higher standard of determining whether a petitioner for Philippine citizenship has a lucrative income as would qualify him for ad- mission to Philippine citizenship.” ———o00——— © Pan American World Airw Par ays vs. PAA EMPLOYEES’ Association, et. al, 118345, January 30,1964, 10 SCRA 21, 24-25. Yap vs. Republic, L-19649, April 30, 1965, 13 SCRA 669, 672.