11/13/2019 G.R. No.

L-7271

Today is Wednesday, November 13, 2019

Custom Search

Constitution Statutes Executive Issuances Judicial Issuances Other Issuances Jurisprudence Internationa

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-7271 August 30, 1957

PHILIPPINE NATIONAL BANK, plaintiff-appellant,

vs.
JOSE ZULUETA, defendant-appellee.

Natalio M. Balboa and Ramon B. de los Reyes for appellant.

Lorenzo F. Miravite for appellee.

BENGZON, J.:

In the Manila court of first instance, the Philippine National Bank sued the defendant upon a letter of credit and a
draft for the amount of $14,449.15. Although willing to pay the equivalent in pesos of the draft, plus bank charges,
the defendant objected to the 17% excise tax imposed by Republic Act No. 601 which the Bank tried to collect. Both
documents, he contended, had been issued and had matured before the approval of said Act, therefore the excise
tax should not be charged.

After the trial, the court rendered judgment exempting defendant from the 17% excise tax; but ordered him to deliver
to plaintiff the sum of P37,622.11 plus daily interest of P3.9938 on P29,154.55 beginning from January 9, 1953.

The plaintiff appealed, insisting on the right to collect 17% excise or exchange tax. This is the only issue between
the parties now.

For a statement of the facts we may quote from plaintiff's brief. "On October 26, 1948, Defendant-Appellee applied
for a commercial letter of credit with Plaintiff-Appellant, Philippine National Bank (Manila) and was granted L/C No.
35171 (Exhibit "B") on November 6, 1948, in favor of Otis Elevator Co., 260 Eleventh Avenue, New York City,
U.S.A., for $14,449.15 for the purchase of an electric passenger elevator; on May 17, 1949, and under the said
letter of credit (Exhibit "B"), Otis Elevator Co. drew a 90 day sight draft for $14,449.15 (Exhibit "A") which draft was
duly presented to and accepted by Defendant-Appellee on July 6, 1949. Said acceptance matured on October 4,
1949. Upon Defendant-Appellee's signing a 90 day trust receipt (Exhibit "C") on June 3, 1949, Plaintiff-Appellant
released to Defendant-Appellee the covering documents of the shipment. In the meantime, debit advice (Exhibit "G")
was received from Plaintiff-Appellant's New York Agency to the effect that it advanced or paid the draft (Exhibit "A")
to Otis Elevator Co. on May 17, 1949, and charged Plaintiff-Appellant the sum of $14,467.21 representing the face
value of the draft (Exhibit "A") plus $18.06 as 1/8 of 1% commission. After the maturity date (October 4, 1949)
Plaintiff-Appellant presented the draft to Defendant-Appellee for payment but the latter failed, neglected and refused
to pay.

During its special session in January, 1951, Congress passed House Bill No. 1513, now Republic Act No. 601,
approved on March 28, 1951, imposing a 17% special excise tax (otherwise known as foreign exchange tax) on the
value in Philippine peso of foreign exchange sold by the Central Bank of the Philippines or its authorized agents.
Plaintiff-appellant, as any other commercial bank in the Philippines, is an authorized agent of the Central Bank of the
Philippines.

On October 17, 1952, and January 18, 1953, Plaintiff-Appellant sent bills or statements of collection (Exhibits "D"
and "D-1") to Defendant-Appellee but the latter failed and refused to effect payment thereof. In those statements,
the sum of P4,955.74 was included representing the 17% special excise tax on the peso value of the draft for US
$14,449.15 (Exhibit "A"), . . . .

Defendant's application for a letter of credit party read as follows:

Please arrange by cable for the establishment of an Irrevocable Letter of Credit on New York in favor of Otis
Elevator Co., 260 Eleventh Avenue, New York City for account of Ho. Jose C. Zulueta for the sum of
FOURTEEN THOUSAND FOUR HUNDRED FORTY-NINE AND 15/100 ($14,449.15) DOLLARS against
drawn at NINETY DAYS accompanied by shipping documents covering of One COMPLETE ELECTRIC
PASSENGER ELEVATOR . . .

https://lawphil.net/judjuris/juri1957/aug1957/gr_l-7271_1957.html 1/6
11/13/2019 G.R. No. L-7271
Drafts must be drawn and presented or negotiated not later than May 31, 1949.

IN CONSIDERATION THEREOF, I/we promise and agree to pay you at maturity in Philippine Currency, the
equivalent of the above amount or such portion thereof as may be drawn or paid upon the faith of said credit,
together with your usual charges, and I/we authorize you and your respective correspondents to pay or to
accept drafts under this credit, . . .

And the draft issued thereunder (Exhibit A) was negotiable and addressed to herein defendant as the drawee.

From plaintiff's statement of its position it is not clear whether recovery is demanded upon the letter of credit, or
upon the draft Exhibit A. Plaintiff may, undoubtedly, proceed on either cause of action. (See Art. 571 Code of
Commerce; Sec. 51 Negotiable Instruments Law.)

Had the plaintiff elected to recover on said letter of credit, then it would meet with the doctrines in Araneta vs.
Philippine National Bank, 95 Phil., 160, 50 Off. Gaz., (11) 5350), According to the majority opinion in that case,
plaintiff should receive the equivalent in pesos, on May 17, 1949, of what the New York Agency paid to Otis
Elevator, i.e. $14,467.21 (plus bank fees of course.) According to the minority opinion, the equivalent in pesos of the
same amount of dollars on October 4, 1949. No. 17% tax on both dates. In converting dollars into pesos, no 17%
exchange tax would be imposable, since it was created only in March 1951. The plaintiff knows the case, for it was a
party to it; and anticipating, in this appeal, the obvious conclusions, it insists not so much on the letter of credit, as
on the bill of exchange Exhibit A1 . As stated before, such draft was drawn by Otis Elevator Co. in New York. It was
addressed to defendant as drawee, who is due course accepted it. There is no, question that upon accepting it,
defendant became a party primarily liable2; and the holder (Philippine National Bank) may sue him, even if there
had been no presentation for payment on the day of maturity. (Sec. 70 Negotiable Instruments Law.)

Admittedly, defendant's responsibility is for $14,449.15 due in Manila on October 4, 1949 (plus bank fees). He is
under obligation to deliver such amount in pesos as were the equivalent of $14,449.15. At what rate of exchange?
The rate prevailing on the day of issuance, day of acceptance, day of maturity, the day suit is filed, or that prevailing
on the day judgment is rendered requiring him to pay? Herein lies the center of the controversy. Appellant will win
this appeal only if the rate on the last days above mentioned is held to be the legal rate.

The document is negotiable and is governed by the Negotiable Instruments Law. But this statute does not certain
any express provision on the question. We know the draft is a foreign bill of exchange, because, drawn in New York,
it is payable here. (See. 129 Negotiable Instruments Law.) We also know that although the amount payable is
expressed in dollars — not current money here — it is still negotiable, for it may be discharged with pesos of
equivalent amount3. The problem arises when we try to determine the "equivalent amount", because the rate of
exchange fluctuates from day to day.

There are decisions in America to the effect that, "the rate of exchange in effect at the time the bill should have been
paid" controls. (11 C.J.S. p. 264.)

Such decisions agree with the provisions of the Bills of Exchange Act of England4 and could be taken as
enunciating the correct principle, inasmuch as our Negotiable Instruments Law, practically copied the American
Uniform Negotiable Instruments Law which in turn was based largely on the Bills of Exchange Act of England of
1882. In fact we practically followed this rule in Westminster Bank vs. K. Nassor, 58 Phil. 855.

There is one decision applying the rate of exchange at the time judgment is entered. (11 C. J. S. p.264.)5

This decision however seems not to have taken into account the Bills of Exchange Act above mentioned. And we
have rejected its view in the Westminster case, supra. Furthermore it related to a bill expressly made payable in a
foreign currency — which is not the case here. And the theory would probably produce undesirable effects upon
commercial documents, for it would make the amount uncertain, the parties to the bill not being able to foresee the
day judgment would be rendered.6

But the appellant argues, the defendant had promised to pay $14,419.15 in dollars; therefore he must be ordered to
pay the sum in dollars at current rates plus 17%.

The argument rests on a wrong premise. Defendant had not promised to pay in dollars. He agreed to pay the
equivalent of $14,419.15 dollars, in Philippine currency 7.

But if we admit that defendant had agreed to pay in dollars, then we have to apply Republic Act No. 529 and say
that his obligation "shall be discharged in Philippine currency measured at the prevailing rates of exchange at the
time the obligation was incurred."

Now then, Zulueta's obligation having been incurred8 before the creation of the 17% tax, it may not be validly
burdened with such tax, because the law imposing it could not be deemed to have impaired obligations already
existing at the time of its approval..

https://lawphil.net/judjuris/juri1957/aug1957/gr_l-7271_1957.html 2/6
11/13/2019 G.R. No. L-7271
The plaintiff's theory seems to be that in remitting dollars to its New York Agency, after it collects from the defendant,
it has to pay for the said excise tax.9 The trial judge expressed the belief that such amount had been remitted before
the enactment of Republic Act 601, because considering the practice of banks of replenishing their agencies abroad
with necessary funds, he deemed it improbable that the Manila Office of the Bank — in two years had not reimburse
its New York Agency for the amount advanced on account of the draft Exhibit A. This belief most probably accorded
with reality; because as early as May 17, 1949 (Exhibit G) the New York Agency had "charged" the amount of this
draft against the account of the Manila office there, — which means the Agency had reimbursed itself the amount of
the draft out of the funds of the Manila Office then in its possession (in New York) or coming to its possession
afterwards. And it is unbelievable that in two years the Manila office never had in New York sufficient funds to effect
the reimbursement.

In fact, the statement of account rendered by plaintiff to defendant on October 17, 1952, (Exhibit D) enumerated
these charges:

To your acceptance amounting to $14,449.15

Plus: Remitter's Commission 18.06
$14,567.21
Converted at 3/4 % P29,151.43
5% int. 5/17/49-10/19/52-1251 da. 4,995.68
P34,147.11
10% comm. on $14,449.15 2,911.51
Documentary stamps 8.70
Air Mail 2.00
17% Excise Tax on P29,151.43 4,955.74
Other charges
3.00

From the above it may be deduced that the amount of the draft had been remitted or paid to the New York Agency in
May 1949, for the reason that Zulueta is charged with remitter's commission" and 5% interest on the amount of the
draft (and such commission) beginning from May 17, 1949. This necessarily impllies that in accordance with Exhibit
G, the New York Agency had been reimbursed of the draft's amount (or such amount was remitted) on May 17,
1949.10 Now, in May 1949 no 17% exchange tax was payable upon such remittance; and the Manila office did not
pay it. Therefore Zulueta should not pay it too.

In view of the foregoing the judgment will be affirmed, with costs against appellant. So ordered.

Paras, C.J., Padilla, Montemayor and Bautista Angelo, JJ., concur.

Separate Opinions

REYES, A., J., concurring:

Plaintiff in this case seeks reimbursement in Philippine currency for the amount in dollars advanced by it through its
New York agency to meet a draft drawn against defendant and accepted by the latter for a valuable consideration.
Plaintiff's to such reimbursement is not questioned. What is disputed is its pretended right to add to the amount of
the draft the excise tax of 17 % which plaintiff would had to pay to the Government if it were to remit now to New
York the necessary amount of dollars that its agency there had paid on the draft.

I cannot bring myself to believe that it is only now that plaintiff has thought of sending dollars to New York to replace
the amount advanced by its agency. As intimated in the majority opinion and in consonance with good banking
practice, the necessary remittance must have been effected long ago, that is, long before the creation of the excise
tax on foreign exchange in March, 1951. Plaintiff, therefore, could not have paid such tax, and not having done so it
has no right to get reimbursement therefore from defendant.

I do not think that defendant could be legally made to pay more than what plaintiff had actually advanced for him,
aside from commission and other charges, on the theory that the Philippine peso has depreciated in value with
respect to the American dollar. Legally, it has not. The legal rate of exchange between the two currencies is still two
to one. What happened is that with the creation of the excise tax in 1951, it would now be more costly to remit
dollars abroad. But why should plaintiff make that remittance now when, as already stated, it must have already
done so long before the creation of the excise tax on foreign exchange?

Lastly, a debtor cannot be charged with bad faith for refusing to pay that which he should not pay.

https://lawphil.net/judjuris/juri1957/aug1957/gr_l-7271_1957.html 3/6
11/13/2019 G.R. No. L-7271
FELIX, J., concurring:

The decision rendered in this case, penned by Mr. Justice Cezar Bengzon, perfectly reflects and delivers the opinion
of the majority of this Court and I subscribe to each and every statement made and argument adduced therein. This
being so, it would seem that any concurring or supporting opinion is quite superfluous and I would not have taken
the task of writing further in the matter were it not for the fact that in the dissenting opinion it is stated that:

It cannot be justly contended that if a debtor had borrowed, say $10,000, the lender should be satisfied with
eight or nine thousand. Yet that is what the majority's decision actually amounts to.

The writer further says that:

the majority opinion has the merit of giving the bank a costly lesson on the advantages of not considering
political influence in the making and collecting of its loans; but I am afraid the experience will be too quickly
forgotten to even palliate the sacrifice of fundamental justice to technical considerations.

I, certainly, cannot leave these statements pass unanswered.

To begin with, I might say that if any lesson has been given by the majority of this court to the plaintiff bank, it is not
in this case but in the case of Araneta vs. The Philippine National Bank (G.R. No. L-4633, May 31, 1954), cited in
the majority decision, where the latter was a party to that case and a similar doctrine was laid down. Coming now to
the bone of contention, I notice that the dissenting Justice views the matter involved in the controversy as a loan and
submits that the question really at issue can be boiled down to the proposition of "whether it is the lender or the
borrower who should bear the added cost of the depreciation of the peso in relation to the dollar".

In this connection, I might say that defendant's obligation to the plaintiff would have been settled some years ago
were it not for the fact that the Bank insisted in collecting the special excise tax of 17 per cent on foreign exchange
transactions imposed by Republic Act No. 601 which entered into effect on March 28, 1951, and was not yet in force
at the time the obligation of the defendant matured on October 4, 1948. And even if we look at the case as a loan
and apply to the transaction the provisions of Article 312, paragraph 1, of the Code of Commerce, cited by the
dissenting Justice, yet We could not, under the facts and circumstances of the case that cannot be denied, logically
arrive at the same conclusion that he has come to.

And the reason is obvious. In the first place, We have to take into account that the New York agency of Philippine
National Bank and its central office in Manila are not separate and independent entities. That is why it is the
Philippine National Bank (Manila office) and not the New York agency of said Bank that is the plaintiff in this case.
Consequently, any payment made to plaintiffs central office in Manila for obligations that any debtor may have
contracted with said New York agency is and has to be considered as a payment or settlement of said obligations,
there being no need to attain this result that the plaintiff would adjust is accounts with its agency, or transmit to the
latter the amounts received from the debtor.

In the second place, the obligation contracted by the defendant was not to pay $14,419.15 in dollars, but the
equivalent of $14,419.15 dollars, in Philippine currency. So, when defendant's obligation matured on October 4,
1949, the defendant had to pay to the Bank not the sum of $14,467.21 representing the face value of the draft
Exhibit A, plus $18.06 as 1/8 of 1 per cent commission, but its equivalent in pesos at the time of such maturity, and
had the defendant failed to satisfy then his obligation, he could be held liable to pay in addition thereof, the
corresponding interests for the period of default and nothing else. And that is precisely what defendant is willing to
pay.

From the foregoing, I hope to have made clear my stand on the matter.

REYES, J.B.L., dissenting:

As I view it, the question before this court is whether it is the lender or the defaulting borrower who should bear the
added cost of the depreciation of the peso in relation to the dollar.

When in 1949 the Philippine National Bank remitted to the Otis Elevator Co. the $14,449.15 for the account of
Zulueta, the Bank, in effect, loaned to Zulueta said amount on the strength of his express engagement to "pay at
maturity in Philippine Currency, the equivalent of the above amount," which was a promise to pay such amount in
Philippine pesos as could be converted into $14,449.15. There is no question that Zulueta failed to do so, and has
refused to do so up to the present. In the meantime, in 1951, the Legislature enacted Rep. Act No. 601, imposing a
17% special excise tax on foreign exchange transactions, so that thereafter one had to pay 234 pesos for every
$100, instead of P200 as heretofore. Should Zulueta be required to pay for the dollars at the new rate?

Since Zulueta's obligation is measured in terms of U.S. dollars that have increased in value vis-a-vis the peso, Art.
312, par. 1, of the Code of Commerce, which was the law then in force, must be read into the contract. It provides:

If the loan consists of money, the debtor shall pay it by returning an amount equal to that received, in
accordance with the legal value which the money may have at the time of the return, unless the kind of
https://lawphil.net/judjuris/juri1957/aug1957/gr_l-7271_1957.html 4/6
11/13/2019 G.R. No. L-7271
money in which the payment is to be made has been stipulated, in which case the change which its value
may suffer shall be to the detriment or for the benefit of the lender. (Emphasis supplied)

The majority decision, in upholding the contention that Zulueta is not chargeable with the 17% tax, virtually
authorizes just the contrary; and permits the defaulting borrower to repay an amount in pesos that, in violation of the
law and his engagement, can not be converted into the same amount of dollars loaned to him. I believe it is contrary
to all elemental justice and good faith to enable a borrower to return to his creditor less than the amount borrowed,
specially taking into account that Zulueta, by his obdurate refusal to pay a just debt, is a debtor in bad faith who is
responsible for any subsequent damages suffered by his creditor, even if due to fortuitous event.

Applicable here are the considerations in Hawes vs. Woolcock (26 Wis. 629, 635), quoted with approval in Engel vs.
Mariano Velasco & Co., 47 Phil. 115, 143:

In Hawes vs. Woolcock (26 Wis., 629, 635), the court said:

"Perhaps a strict application of logical reasoning to the question would lead to the result that the premium
should be estimated at the rate when the note fell due. That was when the money should have been paid,
and when the default in performing the contract occurred. This conclusion would be supported by the analogy
derived from the rule of damages on contracts to deliver specific articles, fixing the market price at the time
when they ought to have been delivered as the criterion. This rule might sometimes be to the advantage of
the holder of the note, as in the present case. In other cases, where the premium was less at the time the
note became due than at the time of trial, it would be to his detriment. And in view of these uncertainties and
fluctuations in the rate, upon grounds of policy as well as for its tendency to do as complete justice between
the parties as is possible, we have come to the conclusion that the true rule in such cases is to give judgment
for such an amount as will, at the time of the judgment, purchase the amount due on the note in the funds or
currency in which it is payable.

The crucial point is that the Bank's action is not for damages, but for specific performance of Zulueta's obligation.
While payable in Philippine pesos, it was actually one to pay a definite sum in United States dollars, since he
promised to pay an equivalent amount. The failure to specify any fixed number of pesos, and the omission of any
reference to any rate of exchange, is proof that the parties had in mind the restoration to the Bank of the value of the
dollars it had advanced. In other words, Zulueta engaged to return to the Bank so many Philippine pesos as could
be converted into $14,449.15; and that is what the Bank asks him to do. It can not be justly contended that if a
debtor had borrowed, say, ten thousand dollars, the lender should be satisfied with eight or nine thousand. Yet that
is what the majority's decision actually amounts to.

I see no point in determining the rate of dollar-peso exchange at the date of maturity or of the constitution of the
obligation, since Zulueta did not engage to pay any definite amount of pesos, but so many as would be needed to
make up $14,449.15. And as Zulueta is being required to comply with a specific promise, there is no relevancy in
whether or not the main office of the Bank has or has not remitted the dollars to its American agency; after all, the
two part are of the same institution. Anyway, if the dollars have not been remitted, the amount that Zulueta is now
sentenced to pay will not permit a remittance of the same number of dollars that the Bank advanced for his account.
If they were heretofore remitted, the funds of the Bank in Manila have been diminished pro tanto, and they can not
be replenished to their original level in terms of dollars unless Zulueta is required to pay the exchange tax.

Of course, the majority opinion has the merit of giving the Bank a costly lesson on the advantages of not considering
political influence in the making and collecting of its loans; but I am afraid the experience will be too quickly forgotten
to even palliate the sacrifice of fundamental justice to technical considerations.

For the foregoing reasons, I dissent.

Labrador, Concepcion and Endencia, JJ., concur.

Footnotes

1 Yet it is charging defendant interest on the amount beginning from May 17, 1949 i.e., from the time the New
York Agency advanced money on the draft. If recovery were based on the draft, interest should run only from
the day following its maturity i. e. on October 5, 1949.
2 Sec. 62 Negotiable Instruments Law. Union Guarantee vs. Jing Kee, 44 Phil. 533.

3 Hogue vs. Williamson, 22 S.W. Rep p. 580.

4 72. Rules Where Laws Conflict. ... (4) Where a bill is drawn out but payable in the United Kingdom and the
sum payable is not expressed in the currency of the United Kingdom the amount shall, in the absence of
some express stipulation, be calculated according to the rate of exchange for sight drafts at the place of
payment on the day the bill is payable.

https://lawphil.net/judjuris/juri1957/aug1957/gr_l-7271_1957.html 5/6
11/13/2019 G.R. No. L-7271
5 Liberty National Bank vs. Burr, 270 Fed. 251.

6 Amount payable on negotiable instrument should be certain or ascertainable.

7 See hogue vs. Williamson, supra.

8 "Incurred" may mean either the day he accepted the draft or the day such draft matured; we need not
decide. Certainly it does not mean the day of judgment.

9 If, as we assume in this part of the decision, the suit is on the draft, the drawee has nothing to do with such
remission to New York. His duty is only to pay the holder. What the latter does with the money, is none of his
business. Now, if plaintiff should point to the letter of credit which gave rise to the draft, then it will be bound
by our views in the Araneta case, supra.
10 Interest on the cost of remission may be collected only after the Manila Office had remitted.

The Lawphil Project - Arellano Law Foundation

https://lawphil.net/judjuris/juri1957/aug1957/gr_l-7271_1957.html 6/6