RUTTER VS. ESTEBAN demandable under the law. He raised the constitutionality of R.A. No.
342
May 18, 1953 | Bautista-Angelo, J. | Impairment of Contracts
PETITIONER: Royal R. Rutter
RESPONDENTS: Placido J. Esteban
SUMMARY: Esteban owed Rutter an unpaid balance of P4,800 for two parcels
of land he bought in 1941. In 1949, Rutter instituted an action to collect. The
court ruled in favor of Esteban, who cited R.A. No. 342, which suspended his
obligation to pay for 8 years until his claim with the Philippine War Damage
Commission for losses he sustained during WW2 would be settled. Rutter
questioned the constitutionality of the RA 342, which is a moratorium law
(suspends the fulfillment of obligations). The Supreme Court cited Home
Building and Loan Association and held that laws impairing obligations do not
violate the constitutional proscription if they are reasonable in light of the
circumstances. In this case, the 8-year period was considered unreasonable, since
creditors like Rutter who contracted the obligation would be made to wait for at
least 12 years to enforce the obligation and the fact that the country’s economic
conditions have returned to its normal state.
DOCTRINE:
The test of the constitutionality of a moratorium law lies in the determination of
the period of suspension of the remedy. It is required that the suspension be
definite and reasonable, otherwise it would be violative of the constitution.
Laws altering existing contracts will constitute an impairment of the contract
clause of the Constitution only if they are unreasonable in the light of the
circumstances occasioning their enactment.
FACTS:
1. On August 1941, Rutter sold two parcels of land in Manila to Esteban for
P9,600. The first P4,800 was paid outright while the balance was payable in
two installments: P2,400 in 1942 and P2,400 in 1943. A mortgage was
executed over the parcels of land to secure the balance.
2. He failed to pay the installments. In 1949, Rutter instituted an action before
the CFI to recover the balance.
3. Esteban admitted the averments, but invoked the moratorium clause in R.A.
No. 342 as defense.
a. He claimed that such was a prewar obligation. Since he suffered
during the war, he filed a claim with the Philippine War Damage
Commission for the losses he sustained.
b. Under R.A. No. 342, payment of his obligation cannot be enforced
until after the lapse of 8 years from the settlement of his claim by
the Commission, and the period has not yet expired.
4. The CFI dismissed the complaint, holding that the obligation was not yet
on reconsideration but was denied.
.
RULING: Esteban is ordered to pay Rutter P4,800.
ISSUE/S + RATIO:
WoN the R.A. No. 342 is unconstitutional for being violative of the
constitutional provision forbidding the impairment of contracts – YES
1. Discussion on R.A. 342 (enacted July 1948)
a. Section 2: all debts and other monetary obligations contracted
before Dec. 8, 1941 shall not be due and demandable for a
period of 8 years from and after settlement of the war damage
claim of the debtor by the Philippine War Damage Commission
b. Section 3: nullification of Section 2 would revive EO No. 25 and
EO No. 32 (earlier EOs relating to debt moratorium)
2. Discussion on moratorium laws (like RA No. 342)
a. A moratorium is a postponement of fulfillment of obligations
decreed by the state through the medium of the courts or the
legislature. Its essence is the application of the sovereign power.
b. They are usually enacted during times of financial distress
especially when caused by a war.
c. The test of the constitutionality of a moratorium law lies in the
determination of the period of suspension of the remedy. It is
required that the suspension be definite and reasonable,
otherwise it would be violative of the constitution.
3. The fact that a moratorium law impairs the obligation of contracts does
not mean it is invalid. It may be justified if it is a valid exercise of the
State’s police power. The court cited Home Building and Loan Association
vs. Bleisdell as the leading case on impairment of contracts.
a. The economic interests of the State may justify its exercise of
its continuing and dominant protective power notwithstanding
interference with contracts.
b. The question is not whether the legislative action affects contracts
incidentally, or directly or directly, but whether the legislation is
addressed to a legitimate end AND the measures taken are
reasonable and appropriate to that end.
c. Laws altering existing contracts will constitute an impairment
of the contract clause of the Constitution only if they are
unreasonable in the light of the circumstances occasioning
their enactment. The protective power (police power) may only
be invoked and justified by an emergency, temporary in nature,
and can only be exercised upon reasonable conditions.
4. When can the exercise be unreasonable?
a. The impairment should only refer to the remedy and not to a
substantive right. The State may postpone the enforcement of the
1
 obligation but cannot destroy it by making the remedy futile.
b. The alteration or change… must not be burdened with
restrictions and conditions that would make the remedy hardly
pursuing.
5. WoN the period of 8 years under R.A. No. 342 is reasonable under the
present circumstances – NO
a. The law affords prewar debtors an opportunity to rehabilitate
themselves by giving them a reasonable time to pay their debts.
b. These obligations had been pending since 1945 because of EO
Nos. 25 and 32 and at the present, their enforcement is still
inhibited because of the enactment of RA No. 342 AND would
continue to be unenforceable during the 8-year period.
Creditors would then have to wait for at least 12 years before they
could liquidate their investment dating as far back as 1941. This
period seems to the Court unreasonable, if not oppressive.
Their hope to collect becomes extremely remote, more so if the
credits are unsecured.
c. Moreover, the financial condition of the country has
practically returned to normal. President Quirino has even made
statements that: “the [country] has progressed and prospered far
beyond what they ever dreamed of before the war”, “our peso is
one of the most stable currencies in the world today”, etc.
6. R.A. No 342 is null and void for being unreasonable and oppressive. EO
Nos. 25 and 32 is also null and void (Note: because nullifying RA No 342
would revive them by virtue of Section 3, and I think those EOs suspended
the obligations as well in 1945 until RA No. 342 was enacted, which was in
July 1948).