NON-IMPAIRMENT CLAUSE

1. Philippine Rural Electric Cooperatives Association, Inc v. Secretary of DILG

G.R. No. 143076

June 10, 2003

PHILIPPINE RURAL ELECTRIC COOPERATIVES ASSOCIATION, INC. (PHILRECA); AGUSAN

DEL NORTE ELECTRIC COOPERATIVE, INC. (ANECO); ILOILO I ELECTRIC COOPERATIVE,
INC. (ILECO I); and ISABELA I ELECTRIC COOPERATIVE, INC. (ISELCO I), Petitioners,
vs.
THE SECRETARY, DEPARTMENT OF INTERIOR AND LOCAL GOVERNMENT, and THE
SECRETARY, DEPARTMENT OF FINANCE, Respondents.
DECISION
PUNO, J.:
This is a petition for Prohibition under Rule 65 of the Rules of Court with prayer for the issuance of a
temporary restraining order seeking to annul as unconstitutional sections 193 and 234 of R.A. No.
7160 otherwise known as the Local Government Code.
On May 23, 2000, a class suit was filed by petitioners in their own behalf and in behalf of other
electric cooperatives organized and existing under P.D. No. 269 who are members of petitioner
Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA). Petitioner PHILRECA is an
association of 119 electric cooperatives throughout the country. Petitioners Agusan del Norte
Electric Cooperative, Inc. (ANECO), Iloilo I Electric Cooperative, Inc. (ILECO I) and Isabela I
Electric Cooperative, Inc. (ISELCO I) are non-stock, non-profit electric cooperatives organized and
existing under P.D. No. 269, as amended, and registered with the National Electrification
Administration (NEA).
Under P.D. No. 269, as amended, or the National Electrification Administration Decree, it is the
declared policy of the State to provide "the total electrification of the Philippines on an area coverage
basis" the same "being vital to the people and the sound development of the nation." 1 Pursuant to
this policy, P.D. No. 269 aims to "promote, encourage and assist all public service entities engaged
in supplying electric service, particularly electric cooperatives" by "giving every tenable support and
assistance" to the electric cooperatives coming within the purview of the law.2 Accordingly, Section
39 of P.D. No. 269 provides for the following tax incentives to electric cooperatives:
SECTION 39. Assistance to Cooperatives; Exemption from Taxes, Imposts, Duties, Fees;
Assistance from the National Power Corporation. Pursuant to the national policy declared in
Section 2, the Congress hereby finds and declares that the following assistance to cooperative is
necessary and appropriate:
(a) Provided that it operates in conformity with the purposes and provisions of this
Decree, cooperatives (1) shall be permanently exempt from paying income taxes, and (2) for a
period ending on December 31 of the thirtieth full calendar year after the date of a cooperative's

organization or conversion hereunder, or until it shall become completely free of indebtedness

incurred by borrowing, whichever event first occurs, shall be exempt from the payment (a) of all
National Government, local government and municipal taxes and fees, including franchise,
filing, recordation, license or permit fees or taxes and any fees, charges, or costs involved in
any court or administrative proceeding in which it may be a party, and (b) of all duties or
imposts on foreign goods acquired for its operations, the period of such exemption for a new
cooperative formed by consolidation, as provided for in Section 29, to begin from as of the date of
the beginning of such period for the constituent consolidating cooperative which was most recently
organized or converted under this Decree: Provided, That the Board of Administrators shall, after
consultation with the Bureau of Internal Revenue, promulgate rules and regulations for the proper
implementation of the tax exemptions provided for in this Decree.
.3
From 1971 to 1978, in order to finance the electrification projects envisioned by P.D. No. 269, as
amended, the Philippine Government, acting through the National Economic Council (now National
Economic Development Authority) and the NEA, entered into six (6) loan agreements with the
government of the United States of America through the United States Agency for International
Development (USAID) with electric cooperatives, including petitioners ANECO, ILECO I and ISELCO
I, as beneficiaries. The six (6) loan agreements involved a total amount of approximately
US$86,000,000.00. These loan agreements are existing until today.
The loan agreements contain similarly worded provisions on the tax application of the loan and any
property or commodity acquired through the proceeds of the loan. Thus, Section 6.5 of A.I.D. Loan
No. 492-H-027 dated November 15, 1971 provides:
Section 6.5. Taxes and Duties. The Borrower covenants and agrees that this Loan Agreement and
the Loan provided for herein shall be free from, and the Principal and interest shall be paid to A.I.D.
without deduction for and free from, any taxation or fees imposed under any laws or decrees in
effect within the Republic of the Philippines or any such taxes or fees so imposed or payable shall be
reimbursed by the Borrower with funds other than those provided under the Loan. To the extent that
(a) any contractor, including any consulting firm, any personnel of such contractor financed
hereunder, and any property or transactions relating to such contracts and (b) any commodity
procurement transactions financed hereunder, are not exempt from identifiable taxes, tariffs, duties
and other levies imposed under laws in effect in the country of the Borrower, the Borrower and/or
Beneficiary shall pay or reimburse the same with funds other than those provided under the Loan. 4
Petitioners contend that pursuant to the provisions of P.D. No. 269, as amended, and the abovementioned provision in the loan agreements, they are exempt from payment of local taxes, including
payment of real property tax. With the passage of the Local Government Code, however, they allege
that their tax exemptions have been invalidly withdrawn. In particular, petitioners assail Sections 193
and 234 of the Local Government Code on the ground that the said provisions discriminate against
them, in violation of the equal protection clause. Further, they submit that the said provisions are
unconstitutional because they impair the obligation of contracts between the Philippine Government
and the United States Government.

On July 25, 2000 we issued a Temporary Restraining Order.5

We note that the instant action was filed directly to this Court, in disregard of the rule on hierarchy of
courts. However, we opt to take primary jurisdiction over the present petition and decide the same on
its merits in view of the significant constitutional issues raised by the parties dealing with the tax
treatment of cooperatives under existing laws and in the interest of speedy justice and prompt
disposition of the matter.
I
There is No Violation of the Equal Protection Clause
The pertinent parts of Sections 193 and 234 of the Local Government Code provide:
Section 193. Withdrawal of Tax Exemption Privileges.Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned and controlled corporations, except local water districts, cooperatives
duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of this Code.
.
Section 234. Exemptions from real property tax.The following are exempted from payment of the
real property tax:
.
(d) All real property owned by duly registered cooperatives as provided for under R.A. No.
6938; and
.
Except as provided herein, any exemption from payment of real property tax previously granted to,
or presently enjoyed by, all persons whether natural or juridical, including all government-owned and
controlled corporations are hereby withdrawn upon effectivity of this Code. 6
Petitioners argue that the above provisions of the Local Government Code are unconstitutional for
violating the equal protection clause. Allegedly, said provisions unduly discriminate against
petitioners who are duly registered cooperatives under P.D. No. 269, as amended, and not under
R.A. No. 6938 or the Cooperative Code of the Philippines. They stress that cooperatives registered
under R.A. No. 6938 are singled out for tax exemption privileges under the Local Government Code.
They maintain that electric cooperatives registered with the NEA under P.D. No. 269, as amended,
and electric cooperatives registered with the Cooperative Development Authority (CDA) under R.A.
No. 6938 are similarly situated for the following reasons: a) petitioners are registered with the NEA
which is a government agency like the CDA; b) petitioners, like CDA-registered cooperatives,
operate for service to their member-consumers; and c) prior to the enactment of the Local

Government Code, petitioners, like CDA-registered cooperatives, were already tax-exempt. 7 Thus,
petitioners contend that to grant tax exemptions from local government taxes, including real property
tax under Sections 193 and 234 of the Local Government Code only to registered cooperatives
under R.A. No. 6938 is a violation of the equal protection clause.
We are not persuaded. The equal protection clause under the Constitution means that "no person or
class of persons shall be deprived of the same protection of laws which is enjoyed by other persons
or other classes in the same place and in like circumstances."8 Thus, the guaranty of the equal
protection of the laws is not violated by a law based on reasonable classification. Classification, to
be reasonable, must (1) rest on substantial distinctions; (2) be germane to the purposes of the law;
(3) not be limited to existing conditions only; and (4) apply equally to all members of the same class. 9
We hold that there is reasonable classification under the Local Government Code to justify the
different tax treatment between electric cooperatives covered by P.D. No. 269, as amended, and
electric cooperatives under R.A. No. 6938.
First, substantial distinctions exist between cooperatives under P.D. No. 269, as amended, and
cooperatives under R.A. No. 6938. These distinctions are manifest in at least two material respects
which go into the nature of cooperatives envisioned by R.A. No. 6938 and which characteristics are
not present in the type of cooperative associations created under P.D. No. 269, as amended.
a. Capital Contributions by Members
A cooperative under R.A. No. 6938 is defined as:
[A] duly registered association of persons with a common bond of interest, who have voluntarily
joined together to achieve a lawful common or social economic end, making equitable contributions
to the capital required and accepting a fair share of the risks and benefits of the undertaking in
accordance with universally accepted cooperative principles.10
The above definition provides for the following elements of a cooperative: a) association of persons;
b) common bond of interest; c) voluntary association; d) lawful common social or economic end; e)
capital contributions; f) fair share of risks and benefits; g) adherence to cooperative values; and g)
registration with the appropriate government authority.11
The importance of capital contributions by members of a cooperative under R.A. No. 6938 was
emphasized during the Senate deliberations as one of the key factors which distinguished electric
cooperatives under P.D. No. 269, as amended, from electric cooperatives under the Cooperative
Code. Thus:
Senator Osmea. Will this Code, Mr. President, cover electric cooperatives as they exist in the
country today and are administered by the National Electrification Administration?
Senator Aquino. That cannot be answered with a simple yes or no, Mr. President. The answer will
depend on what provisions we will eventually come up with. Electric cooperatives as they exist today

would not fall under the term "cooperative" as used in this bill because the concept of a cooperative
is that which adheres and practices certain cooperative principles. .
.
Senator Aquino. To begin with, one of the most important requirements, Mr. President, is the
principle where members bind themselves to help themselves. It is because of their collectivity that
they can have some economic benefits. In this particular case [cooperatives under P.D. No. 269], the
government is the one that funds these so-called electric cooperatives.
.
Senator Aquino. That is why in Article III we have the following definition:
A cooperative is an association of persons with a common bond of interest who have voluntarily
joined together to achieve a common social or economic end, making equitable contributions to the
capital required.
In this particular case [cooperatives under P.D. No. 269], Mr. President, the members do not
make substantial contribution to the capital required. It is the government that puts in the
capital, in most cases.
.
Senator Osmea. Under line 6, Mr. President, making equitable contributions to the capital required
would exclude electric cooperatives [under P.D. No. 269]. Because the membership does not make
equitable contributions.
Senator Aquino. Yes, Mr. President. This is precisely what I mean, that electric cooperatives [under
P.D. No. 269] do not qualify in the spirit of cooperatives. That is the reason why they should be
eventually assessed whether they intend to comply with the cooperatives or not. Because, if after
giving them a second time, they do not comply, then, they should not be classified as cooperatives.
Senator Osmea. Mr. President, the measure of their qualifying as a cooperative would be the
requirement that a member of the electric cooperative must contribute a pro rata share of the
capital of the cooperative in cash to be a cooperative.12
Nowhere in P.D. No. 269, as amended, does it require cooperatives to make equitable contributions
to capital. Petitioners themselves admit that to qualify as a member of an electric cooperative under
P.D. No. 269, only the payment of a P5.00 membership fee is required which is even refundable the
moment the member is no longer interested in getting electric service from the cooperative or will
transfer to another place outside the area covered by the cooperative.13 However, under the
Cooperative Code, the articles of cooperation of a cooperative applying for registration must be
accompanied with the bonds of the accountable officers and a sworn statement of the treasurer
elected by the subscribers showing that at least twenty-five per cent (25%) of the authorized share
capital has been subscribed and at least twenty-five per cent (25%) of the total subscription has

been paid and in no case shall the paid-up share capital be less than Two thousand pesos
(P2,000.00).14
b. Extent of Government Control over Cooperatives
Another principle adhered to by the Cooperative Code is the principle of subsidiarity. Pursuant to this
principle, the government may only engage in development activities where cooperatives do not
posses the capability nor the resources to do so and only upon the request of such
cooperatives.15 Thus, Article 2 of the Cooperative Code provides:
Art. 2. Declaration of Policy. It is the declared policy of the State to foster the creation and growth
of cooperatives as a practical vehicle for prompting self-reliance and harnessing people power
towards the attainment of economic development and social justice. The State shall encourage the
private sector to undertake the actual formation and organization to cooperatives and shall create an
atmosphere that is conducive to the growth and development of these cooperatives.
Towards this end, the Government and all its branches, subdivisions, instrumentalities and agencies
shall ensure the provision of technical guidance, financial assistance and other services to enable
said cooperatives to develop into viable and responsive economic enterprises and thereby bring
about a strong cooperative movement that is free from any conditions that might infringe upon the
autonomy or organizational integrity of cooperatives.
Further, the State recognizes the principle of subsidiarity under which the cooperative sector
will initiate and regulate within its own ranks the promotion and organization, training and
research, audit and support services relating to cooperatives with government assistance
where necessary.16
Accordingly, under the charter of the CDA, or the primary government agency tasked to promote and
regulate the institutional development of cooperatives, it is the declared policy of the State that:
[g]overnment assistance to cooperatives shall be free from any restriction and
conditionality that may in any manner infringe upon the objectives and character of cooperatives as
provided in this Act. The State shall, except as provided in this Act, maintain the policy of
noninterference in the management and operation of cooperatives. 17
In contrast, P.D. No. 269, as amended by P.D. No. 1645, is replete with provisions which grant the
NEA, upon the happening of certain events, the power to control and take over the management and
operations of cooperatives registered under it. Thus:
a) the NEA Administrator has the power to designate, subject to the confirmation of the
Board of Administrators, an Acting General Manager and/or Project Supervisor for a
cooperative where vacancies in the said positions occur and/or when the interest of the
cooperative or the program so requires, and to prescribe the functions of the said Acting
General Manager and/or Project Supervisor, which powers shall not be nullified, altered or
diminished by any policy or resolution of the Board of Directors of the cooperative
concerned;18

b) the NEA is given the power of supervision and control over electric cooperatives and
pursuant to such powers, NEA may issue orders, rules and regulations motu propio or upon
petition of third parties to conduct referenda and other similar actions in all matters affecting
electric cooperatives;19
c) No cooperative shall borrow money from any source without the approval of the Board of
Administrators of the NEA;20 and
d) The management of a cooperative shall be vested in its Board, subject to the supervision
and control of NEA which shall have the right to be represented and to participate in all
Board meetings and deliberations and to approve all policies and resolutions. 21
The extent of government control over electric cooperatives covered by P.D. No. 269, as amended,
is largely a function of the role of the NEA as a primary source of funds of these electric
cooperatives. It is crystal clear that NEA incurred loans from various sources to finance the
development and operations of the electric cooperatives. Consequently, amendments to P.D. No.
269 were primarily geared to expand the powers of the NEA over the electric cooperatives to ensure
that loans granted to them would be repaid to the government. In contrast, cooperatives under R.A.
No. 6938 are envisioned to be self-sufficient and independent organizations with minimal
government intervention or regulation.
To be sure, the transitory provisions of R.A. No. 6938 are indicative of the recognition by Congress
of the fundamental distinctions between electric cooperatives organized under P.D No. 269, as
amended, and cooperatives under the new Cooperative Code. Article 128 of the Cooperative Code
provides that all cooperatives registered under previous laws shall be deemed registered with the
CDA upon submission of certain requirements within one year. However, cooperatives created under
P.D. No. 269, as amended, are given three years within which to qualify and register with the CDA,
after which, provisions of P.D. No. 1645 which expand the powers of the NEA over electric
cooperatives, would no longer apply.22
Second, the classification of tax-exempt entities in the Local Government Code is germane to the
purpose of the law. The Constitutional mandate that every local government unit shall enjoy local
autonomy, does not mean that the exercise of power by local governments is beyond regulation by
Congress. Thus, while each government unit is granted the power to create its own sources of
revenue, Congress, in light of its broad power to tax, has the discretion to determine the extent of the
taxing powers of local government units consistent with the policy of local autonomy.23
Section 193 of the Local Government Code is indicative of the legislative intent to vest broad taxing
powers upon local government units and to limit exemptions from local taxation to entities
specifically provided therein. Section 193 provides:
Section 193. Withdrawal of Tax Exemption Privileges.Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned and controlled corporations, except local water districts, cooperatives
duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of this Code. 24

The above provision effectively withdraws exemptions from local taxation enjoyed by various entities
and organizations upon effectivity of the Local Government Code except for a) local water
districts; b) cooperatives duly registered under R.A. No. 6938; and c) non-stock and nonprofit hospitals and educational institutions. Further, with respect to real property taxes, the
Local Government Code again specifically enumerates entities which are exempt therefrom and
withdraws exemptions enjoyed by all other entities upon the effectivity of the code. Thus, Section
234 provides:
SEC. 234. Exemptions from Real Property Tax. The following are exempted from payment of the
real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof had been granted for consideration or otherwise, to a
taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,
nonprofit or religious cemeteries and all lands, buildings and improvements actually, directly,
and exclusively used for religious, charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used by local
water districts and government-owned or controlled corporations engaged in the supply and
distribution of water and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided for under R.A.
No. 6938; and
(e) Machinery and equipment used for pollution control and environmental protection.
Except as provided herein, any exemption from payment of real property tax previously granted to,
or presently enjoyed by, all persons, whether natural or juridical, including all government-owned or
controlled corporations are hereby withdrawn upon the effectivity of this Code. 25
In Mactan Cebu International Airport Authority v. Marcos,26 this Court held that the limited and
restrictive nature of the tax exemption privileges under the Local Government Code is consistent
with the State policy to ensure autonomy of local governments and the objective of the Local
Government Code to grant genuine and meaningful autonomy to enable local government units to
attain their fullest development as self-reliant communities and make them effective partners in the
attainment of national goals. The obvious intention of the law is to broaden the tax base of local
government units to assure them of substantial sources of revenue.
While we understand petitioners predicament brought about by the withdrawal of their local tax
exemption privileges under the Local Government Code, it is not the province of this Court to go into
the wisdom of legislative enactments. Courts can only interpret laws. The principle of separation of
powers prevents them from re-inventing the laws.

Finally, Sections 193 and 234 of the Local Government Code permit reasonable classification as
these exemptions are not limited to existing conditions and apply equally to all members of the same
class. Exemptions from local taxation, including real property tax, are granted to all cooperatives
covered by R.A. No. 6938 and such exemptions exist for as long as the Local Government Code and
the provisions therein on local taxation remain good law.
II
There is No Violation of the Non-Impairment Clause
It is ingrained in jurisprudence that the constitutional prohibition on the impairment of the obligation
of contracts does not prohibit every change in existing laws. To fall within the prohibition, the change
must not only impair the obligation of the existing contract, but the impairment must be
substantial.27 What constitutes substantial impairment was explained by this Court in Clemons v.
Nolting:28
A law which changes the terms of a legal contract between parties, either in the time or mode of
performance, or imposes new conditions, or dispenses with those expressed, or authorizes for its
satisfaction something different from that provided in its terms, is law which impairs the obligation of
a contract and is therefore null and void.
Moreover, to constitute impairment, the law must affect a change in the rights of the parties with
reference to each other and not with respect to non-parties.29
Petitioners insist that Sections 193 and 234 of the Local Government Code impair the obligations
imposed under the six (6) loan agreements executed by the NEA as borrower and USAID as
lender. All six agreements contain similarly worded provisions on the tax treatment of the proceeds
of the loan and properties and commodities acquired through the loan. Thus:
1wphi1

Section 6.5. Taxes and Duties. The Borrower covenants and agrees that this Loan Agreement and
the Loan provided for herein shall be free from, and the Principal and interest shall be paid to
A.I.D. without deduction for and free from, any taxation or fees imposed under any laws or
decrees in effect within the Republic of the Philippines or any such taxes or fees so imposed or
payable shall be reimbursed by the Borrower with funds other than those provided under the
Loan. To the extent that (a) any contractor, including any consulting firm, any personnel of
such contractor financed hereunder, and any property or transactions relating to such
contracts and (b) any commodity procurement transactions financed hereunder, are not
exempt from identifiable taxes, tariffs, duties and other levies imposed under laws in effect in
the country of the Borrower, the Borrower and/or Beneficiary shall pay or reimburse the same
with funds other than those provided under the Loan.30
Petitioners contend that the withdrawal by the Local Government Code of the tax exemptions of
cooperatives under P.D. No. 269, as amended, is an impairment of the tax exemptions provided
under the loan agreements. Petitioners argue that as beneficiaries of the loan proceeds, pursuant to
the above provision, "[a]ll the assets of petitioners, such as lands, buildings, distribution lines
acquired through the proceeds of the Loan Agreements are tax exempt." 31

We hold otherwise.
A plain reading of the provision quoted above readily shows that it does not grant any tax exemption
in favor of the borrower or the beneficiary either on the proceeds of the loan itself or the properties
acquired through the said loan. It simply states that the loan proceeds and the principal and interest
of the loan, upon repayment by the borrower, shall be without deduction of any tax or fee that may
be payable under Philippine law as such tax or fee will be absorbed by the borrower with funds other
than the loan proceeds. Further, the provision states that with respect to any payment made by the
borrower to (1) any contractor or any personnel of such contractor or any property transaction and
(2) any commodity transaction using the proceeds of the loan, the tax to be paid, if any, on such
transactions shall be absorbed by the borrower and/or beneficiary through funds other than the loan
proceeds.
Beyond doubt, the import of the tax provision in the loan agreements cited by petitioners is twofold:
(1) the borrower is entitled to receive from and is obliged to pay the lender the principal amount of
the loan and the interest thereon in full, without any deduction of the tax component thereof imposed
under applicable Philippine law and any tax imposed shall be paid by the borrower with funds other
than the loan proceeds and (2) with respect to payments made to any contractor, its personnel or
any property or commodity transaction entered into pursuant to the loan agreement and with the use
of the proceeds thereof, taxes payable under the said transactions shall be paid by the borrower
and/or beneficiary with the use of funds other than the loan proceeds. The quoted provision does not
purport to grant any tax exemption in favor of any party to the contract, including the beneficiaries
thereof. The provisions simply shift the tax burden, if any, on the transactions under the loan
agreements to the borrower and/or beneficiary of the loan. Thus, the withdrawal by the Local
Government Code under Sections 193 and 234 of the tax exemptions previously enjoyed by
petitioners does not impair the obligation of the borrower, the lender or the beneficiary under the loan
agreements as in fact, no tax exemption is granted therein.
III
Conclusion
Petitioners lament the difficulties they face in complying with the implementing rules and regulations
issued by the CDA for the conversion of electric cooperatives under P.D. No. 269, as amended, to
cooperatives under R.A. No. 6938. They allege that because of the cumbersome legal and technical
requirements imposed by the Omnibus Rules and Regulations on the Registration of Electric
Cooperatives under R.A. No. 6938, petitioners cannot register and convert as stock cooperatives
under the Cooperative Code.32
The Court understands the plight of the petitioners. Their remedy, however, is not judicial. Striking
down Sections 193 and 234 of the Local Government Code as unconstitutional or declaring them
inapplicable to petitioners is not the proper course of action for them to obtain their previous tax
exemptions. The language of the law and the intention of its framers are clear and unequivocal and
courts have no other duty except to uphold the law. The task to re-examine the rules and guidelines
on the conversion of electric cooperatives to cooperatives under R.A. No. 6938 and provide every
assistance available to them should be addressed by the proper authorities of government. This is

necessary to encourage the growth and viability of cooperatives as instruments of social justice and
economic development.
WHEREFORE, the instant petition is DENIED and the temporary restraining order heretofore issued
is LIFTED.
SO ORDERED.

2. Clemons v. Nolting (42 Phil 702)

G.R. No. L-17959

January 24, 1922

ROBERT S. CLEMONS, petitioner,

vs.
WILLIAM T. NOLTING, as Auditor of the Government of the Philippine Islands, respondent.
Fisher & DeWitt for Petitioner.
Acting Attorney-General Tuason for respondent.
JOHNSON, J.:
This is an original action commenced in the Supreme Court for the writ of mandamus. Its purposes
to compel the respondent "to countersign or cause to be countersigned the original warrant, a copy
of which is set forth in paragraph 10 of the complaint, and to deliver the same to the plaintiff so that
he may present it to the Treasurer of the Philippine Islands and receive payment thereon in the sum
of P73.33, an amount which is alleged to be due him by the Government of the Philippine Islands."
The cause was submitted to the court upon the following stipulated as facts:
1. That plaintiff is a citizen of the United States, temporarily residing in the city of Manila,
Philippine Islands.
2. That defendant, William T. Nolting, is the duly appointed, qualified and acting Auditor of the
Government of the Philippine Islands.
3. That on June 18, 1920, the Honorable Charles E. Yeater, then Acting Governor-General of
the Philippine Islands, cabled the Secretary of War of the United States, of Washington, D.
C., as follows:
Appointed as early as possible after June 30th, 1920, John Deering and Robert S.
Clemons each to position mechanical and electrical engineer, effective the date of
departure from residence, under special contracts to expire December 31st, 1921.
Straight salary $4,000 per annum, with transportation from residence to the
Philippine Islands and return, without civil service privileges. Advance transportation
and request them to sail first available vessel.
4. That in accordance with the authority contained in the said cablegram, above cited, the
Secretary of War, through the Bureau of Insular Affairs, employed plaintiff on behalf of the
Government of the Philippine Islands, and under date of August 6, 1920, wrote plaintiff,
confirming the agreement entered into, as follows:

WAR DEPARTMENT
BUREAU OF INSULAR AFFAIRS
WASHINGTON, August 6, 1920.
Major, R. S. CLEMONS,
Air Photo Detachment,
Tucson, Arizona.
Sir: In accordance with specific authority contained in a cablegram from the
Governor-General of the Philippine Islands, dated June 18, 1920, you are
hereby provisionally appointed to the position of electrical and mechanical
engineer in the Philippine Bureau of Public Works, under special contract to
expire December 31, 1921, at a straight salary of $4,000 per annum. This
appointment is effective as of date of departure from your residence. You will
be furnished transportation from your place of residence in the United States
to the Philippine Islands and return upon the completion of the contract
period, but you will not be entitled to civil service privileges of leaves, etc.
Upon your arrival in Manila you should report at the office of the Director of
Public Works.
Kindly acknowledge your acceptance of this appointment by signing the
inclosed copy hereof and returning it to this bureau at once.
We are unable at this time to give you definite information concerning the
date of the vessel on which we will be able to secure accommodations for
you, but you will be advised by wire as soon as a reservation is obtainable.
Very respectfully,
CHAS. C. WALCUTT, JR.,
Assistant to Chief of Bureau.
Incl.: Copy of this letter.
5. That plaintiff received the letter set forth in the paragraph next preceding, at Tucson,
Arizona, and immediately replied in writing, accepting employment by the Philippine
Government under the terms of the said letter, and promptly sailed for Manila and entered
upon and is still engaged in the discharge of his duties in Bureau of Public Works of the
Insular Government of the Philippine Islands under the terms of the said contract.
6. That on the 1st day of February, 1921, at the rates of exchange then prevailing as fixed by
the Insular Government of the Philippine Islands, the equivalent of $333.33, United States
currency, in Philippine currency was P739.99, and no sum of money in Philippine currency
less than P739.99 would at that time purchase $333.33 in United States currency.
7. That on or about the 1st day of February, 1921, the chief accountant of the Bureau of
Public Works of the Government of the Philippine Islands tendered plaintiff a warrant on the
Treasurer of the Philippine Islands in the sum of P666.66, Philippine currency, in full payment
of his salary for the month of January, 1921.

8. That plaintiff declined to accept the said sum in full discharge of his January, 1921, salary,
but insisted that under his contract with the Philippine Government he was and is entitled to
receive each month as compensation for his services the sum of $333.33 in United States
currency, or a sum in Philippine currency sufficient to enable him to purchase the sum of
$333.33 in United States currency at the rates of exchange prevailing on the date of each
payment, and demanded that he be paid an additional sum of P73.33, which, with the sum of
P666.66, would be the equivalent at the then prevailing official rates of exchange of the sum
of $333.33, United States currency.
9. That the said chief accountant of the Bureau of Public Works, notwithstanding plaintiff's
demand, declined and refused to issue plaintiff a warrant for the payment of his January,
1921, salary in any sum in excess of the sum of P666.66, whereupon plaintiff accepted the
said sum of P666.66, under protest, and as constituting only a partial payment of his salary
for the said month of January, 1921. That plaintiff insistently continued his demands upon the
chief accountant of the Bureau of Public Works for a warrant on the Treasurer of the
Philippine Islands for the payment of the sum of P73.33 to complete the payment of plaintiff's
salary for January, 1921, whereupon the said chief accountant, on August 8, 1921, upon
such demand, issued in favor of plaintiff a warrant on the Treasurer of the Philippine Islands
in words and figures as follows, to wit:
No. 833906.
THE GOVERNMENT OF THE PHILIPPINE ISLANDS.
TO ROBERT S. CLEMONS, C/o Design. Division, B. P. W.
"Date, Aug. 8, 1921. Dr.
"Appropriation, Bureau of Public Works.
P73.33.
Aug. 8, 1921. For premium on P666.66 Jan.salary Dr. Cr.
of Maj. Robert S. Clemons at the rate
of 11% to cover the difference
between dollars and Philippine
currency.
5-E-g
Job
73.33
14594
C-4
73.33
I certify that the foregoing account is correct, just and payable in accordance with law and
regulations.
R. REINOSO,
Chief Accountant,
Bureau of Public Works/dp.
"D.
Treasury Warrant.
No. 833906.
THE GOVERNMENT OF THE PHILIPPINE ISLANDS.
Issued under sec. 616,
Adm. Code.
To the TREASURER OF THE PHILIPPINE ISLANDS:

MANILA, P. I., August 8, 1921.

Pay to Robert S. Clemons --- or order the sum of seventy-three and
33/100 ---- pesos (P73.33).
Payable from the appropriation for Bureau of Public Works.
Countersigned:
Not valid unless countersigned,
R. REINOSO,
Chief Accountant,
Bureau of Public Works.
.........................................
For the Insular Auditor.

For premium on P666.66

Jan. salary at the rate of 11%
to cover the diff. between dollars
and Phil. currency.
10. That plaintiff caused the said warrant, a copy of which is set forth in the paragraph next
preceding, to be presented to the defendant herein, William T. Nolting, for audit by him in his official
capacity as Auditor of the Philippine Government, in accordance with the laws and regulations
governing the auditing department of the Philippine Government; but the said defendant refused and
still refuses to audit the said warrant or to countersign the same, upon the ground that
notwithstanding the terms of plaintiff's contract with the Philippine Government, his salary is payable
in Philippine currency at the rate of two pesos for each dollar in United States currency due plaintiff
regardless of the real value of such pesos or the rate at which they may be exchangeable into
United States currency.
11. That unless the defendant countersigns or causes to be countersigned the said warrant,
hereinabove mentioned, the same will not be paid by the Treasurer of the Philippine Islands, and
plaintiff will be unable to collect and receive the said sum of P73.33 from the Philippine Government,
although the necessary funds for the payment thereof are available in the hands of the Insular
Treasurer and may be disbursed upon the presentation of the warrant above set forth, when
countersigned by the defendant.
The only question presented under said stipulated facts is, may the Government of the Philippine
Islands, when it enters into a contract with an officer or employee under a promise to pay his salary
in "dollars," pay such salary in Philippine currency at the rate of two one if the officer or employee
insists that his salary should be paid in the terms (specie) of his contract? From the stipulated facts it
is seen that the Government promised to pay to the petitioner his salary in "dollars;" that the contract
was made in the United States; that the Government offered to pay the petitioner in "Philippine
currency" at the rate of two to one; that at the time the payment in question was offered, Philippine
currency was at a discount; that two pesos in Philippine currency was not equivalent to one "dollar"
and the petitioner insisted that his salary should be paid in "dollars" or their equivalent value.

The petitioner in his first proposition contends that "the use of the dollar sign '$' in a written contract
executed in the United States, signifies dollars in the United States money." That proposition is
admitted by the respondent. The respondent admits that the dollar sign, as found in the contract,
stands for dollars in money of the United States. Both the petitioner and the respondent admit that
the mark used to denote dollar has obtained general currency and conveys the idea of dollars as
definitely as the word "dollars" itself; hence it is not a valid objection to a judgment when the amount
thereof is expressed only in figures, preceded by the dollar mark before the word "dollars" written in
the judgment. (Kelley vs. Sullivan, 201 Mass., 34; Devenney vs. Devenney, 70 Ohio St., 96; United
States vs. Van Auken, 96 U.S., 366, 368.)
The petitioner further contends that a contract for the payment of money, expressed in terms of the
United States dollars, made in the United States, to be performed in the Philippine Islands, can be
discharged only by the payment of the required amount in United States money or in Philippine
pesos of an equivalent commercial value.
The respondent contends that under the laws in force in the Philippine Islands a debt of the
Government, payable in "dollars," may be paid in Philippine currency at the rate of two to one even
though the debt grew out of a special contract which provided that the same should be paid in
"dollars."
It is true that the Legislature of the Philippine Islands has provided, by section 1613 of Act No. 2711,
as amended by Act No. 2776, that "the Philippine silver pesos and the gold coins of the United
States, at the rate of one dollar for two pesos, shall be legal tender in the Philippine Islands for all
debts, public and private" . . . . To arrive at a better understanding of the purposes of the section just
quoted, it might be well to trace the history of the legislation on the question of the legal tender
character of Philippine currency. As early as March 2, 1903, the Congress of the United States
adopted an act establishing a unit of value for the money currency of the Philippine Islands. Said Act
provided, among other things, "that the unit of value in the Philippine Islands shall be the gold peso,
consisting of twelve and nine-tenths grains of gold, nine-tenths fine, etc.; and the gold coins of the
United States at the rate of one dollar for two pesos . . . shall be legal tender for all debts, public and
private, in the Philippine Islands; that the silver Philippine peso, authorized by this Act, shall be legal
tender in the Philippine Islands for all debts, public and private, unless otherwise specifically
provided by contract." Later, by an Act of the Philippine Legislature (section 1771 of Act No. 2657) it
was provided that "the Philippine silver peso shall be a legal tender for all debts, public and
private, unless otherwise specially provided by contract." That provision of Act No. 2657 was carried
forward and made section 1613 of Act No. 2711 as above quoted, without change. The unit of value
fixed by the said Act of Congress for the Philippine Islands was again fixed by section 1770 of Act
No. 2657, which was carried forward and made section 1612 of Act No. 2711. The unit of monetary
value in the Philippine Islands, as defined by the Act of Congress of March 2, 1903, was carried
forward and adopted by the Philippine Legislature in the said Acts Nos. 2657, 2711, and 2776. Act
No. 2776, however, omitted the phrase which was found in the former legislation "unless otherwise
specially provided by contract." The purpose of the omission of that phrase does not clearly appear.
All of the legislation both by Congress and by the Philippine Legislature, prior to Act No. 2776.
limited the legal tender character of the "silver peso" to the payment of debts, public and private,
when the contract did not otherwise provide. Did the omission of that provision in Act No. 2776 make
the tender of the Philippine silver peso, at the rate provided for in defining the unit of value, a legal
tender for the payment of debts, public and private, when the contract expressly provided for
payment of other specie? Could the Legislature of the Philippine Islands or even Congress alter or
change the obligation of the contract as the Jones Act of August 29, 1916, prohibit absolutely the
Legislature of the Philippine Islands from adopting any legislation which would impair the "obligations
of contracts." The right of the legislative department of the state to adopt legislation changing or

altering the obligation of contract has been answered in the negative so many times that it scarcely
merits the citation of authorities now in its support. (Casanovas vs. Hord, 8 Phil., 125; Trustees of
Dartmouth College vs.Woodward, 4 Wheaton [U.S.], 518; McGee vs. Mathis, 4 Wallace, 143.)
It is the utmost importance to note that neither in the cited Act of Congress nor in section 1613 of the
Administrative Code, as amended, is any attempt made to determine the ratio at which debts,
expressed in terms of United States money and payable in the Philippine Islands, may be
discharged by the tender and payment of Philippine silver pesos. Both the Act of Congress and
section 1613 of the Administrative Code provide that debts due in Philippine silver pesos may be
discharged by the payment of "gold coins of the United States at the rate of one dollar for two
pesos," but the converse proposition is nowhere to be found in the law. The reason for this is very
plain. Congress by its own act had so limited the maximum value of the gold peso that in no event
could it be worth more than half a United States gold dollar; but Congress had not itself undertaken
to maintain the parity of the Philippine peso at the theoretical ratio of two for one. Congress did not
provide for the establishment of a gold standard fund, or prescribe any other method by which the
artificial parity between the Philippine silver peso and United States money should be maintained. It
merely authorized the Government of the Philippine Islands to ". . . adopt such measures as it may
deem proper, not inconsistent with said Act of July 1st, 1902, to maintain the value of the silver
Philippine peso at the rate of one gold peso . . . ."
The "measures" which were adopted by the Philippine Government for the purpose of maintaining
the parity of the silver peso with the theoretical gold peso and United States currency, were
embodied in Act No. 938 of the Philippine Commission, adopted October 10th, 1903, the purpose of
which was stated by the late Governor Ide, then Secretary of Finance and Justice of the Philippine
Government, in his official report for the year 1903, as follows:
The theory of the Act of Congress referred to and of the gold-standard act passed by the
Commission is substantially that a gold-standard circulating medium may be maintained at a
parity with gold without any large use of a gold currency by the aid of the means provided for
maintaining the parity between the two currencies. The essential elements of the system are
based upon the maintenance of a reasonable gold-standard fund, the rigid restriction of the
amount of new coinage so as to meet only the demand of commerce, the retirement of a
sufficient amount of such coinage whenever it shall become apparent that there is more in
circulation than the demands of commerce require, the issuance of more of the new currency
whenever it becomes apparent that there is a shortage of such currency in circulation, and
the furnishing of reasonable facilities for the conversion of gold coin or other money of the
United States into Philippine currency, or the reverse, as the demands of commerce may
require. . . .
The procedure relied upon to accomplish the purpose of maintaining the party as stated in Act No.
938 was the creation in the Insular Treasury of a "gold standard fund," which, as provided by section
7 of the Act, was to be used as follows:
First. To exchange on demand at the Insular Treasury in Manila for Philippine currency
offered in sums of not less than ten thousand pesos, or United States currency offered in
sums of not less than five thousand dollars, drafts on the gold-standard fund deposited in the
United States or elsewhere to the credit of the Insular Treasury, charging for the same a
premium of three-quarters of one per centum for demand drafts and of one and one-eighth
per centum for telegraphic transfers, and it is further made the duty of the Insular Treasure to
direct the depositories of the funds of the Philippine Government in the United States to sell
on demand, in sums of not less than ten thousand pesos, exchange against the goldstandard fund in the Philippine Islands, charging for the same a premium of three-quarters of

one per centum for demand drafts and of one and one-eight per centum for telegraphic
transfers, rendering accounts therefor to the Insular Treasurer and Insular Auditor. But the
premium charge for drafts and telegraphic transfers in this paragraph mentioned may be
temporarily increased or decreased by order issued by the Secretary of Finance and Justice
should the conditions at any time existing, in his judgment, require such action. . . .
It will be noted that the possibility that the peso might not be kept at all times at par was
contemplated from the beginning. The last paragraph of the quoted section of Act No. 938 of the
Philippine Commission required the Insular Treasurer to sell gold drafts on the United States in
exchange for Philippine currency at a nominal charge of three-fourths of one per cent; but provided
that this premium charge might be "temporarily increased or decreased by order issued by the
Secretary of Finance and Justice should the conditions at any time existing, in his judgment, require
such action."
This provision has been carried through successive enactments into section 1621 of the
Administrative Code, which, as amended first by Act No. 2776 and again by Act No. 2939, now
provides as follows:
For the purpose of maintaining the parity of the Philippine silver peso with the Philippine gold
peso, and of keeping the currency equal in volume only to the demands of trade, the Insular
Treasurer is hereby authorized and directed
(a) To exchange on demand at the Insular Treasury in Manila for Philippine currency offered
in sums of not less than ten thousand pesos or United States currency offered in sums of not
less than five thousand dollars, drafts on the currency reserve fund deposited in the United
States or elsewhere to the credit of the Insular Treasury, charging for the same a premium of
three-quarters of one per centum for demand drafts and of one and one-eighth per centum
for telegraphic transfers, and it is further made the duty of the Insular Treasurer to direct the
depositories of the funds of the Philippine Government in the United States to sell on
demand, in sums of not less than ten thousand pesos, exchange against the currency
reserve fund in the Philippine Islands, charging or paying for the same a premium of threequarters of one per centum for demand drafts and of one and one-eighth per centum for
telegraphic transfers, rendering accounts therefor to the Insular Treasurer and Insular
Auditor. But the premium rate for drafts and telegraphic transfers in this paragraph
mentioned may be temporarily increased or decreased by order issued by the Secretary of
Finance should the conditions at any time existing, in his judgment, require such action, and
the Governor-General, upon recommendation of the Secretary of Finance, may suspend for
such time as he sees fit, the sale of exchange to any individual, firm, company, or
corporation, or he may require before selling any exchange, such proofs and affidavits as he
deems sufficient that such exchange is needed in legitimate Philippine business and could
not have been legitimately supplied by proceeds of Philippine exports. . . .
As the maintenance of the parity of the Philippine silver peso depends wholly upon the ability and
willingness of the Philippine Government to accept its own money in payment for drafts payable in
gold dollars in the United States, and as the normal nominal rate of exchange intended to maintain
and establish that parity has not beenfixed by Congress or the Philippine Legislature, but may be
increased at any time by order of the Secretary of Finance of the Philippine Government, whenever
existing conditions, in his judgment, require such action, it is obvious that it must have been evident
from the very inception of our present system of currency that while the Philippine peso could never
be worth more than the United States gold dollar, it might be worth very much less. That no doubt is
the reason why Congress, while providing that debts due here in pesos might be discharged by the
payment of gold coin of the United States, at the rate of one dollar for two pesos, did not provide that

a debt, due here in United States gold dollars, might be paid in Philippine pesos at the rate of two
pesos for one dollar. The breakdown of the gold reserve fund, and the consequent depreciation of
the Philippine peso, are now matters of history. Under existing conditions, to compel a creditor to
whom a debt in United States currency is owing, to accept two Philippine paper pesos in satisfaction
of every gold dollar of that debt is nothing short of a discount, and pro tanto a partial repudiation of a
legal obligation.
In the opinion of the Acting Attorney-General, of which mentioned has been made, it is said, in
referring to the cited section of the Administrative Code, as amended:
This Act established two kinds of lawful money with which debts may be
paid: pesos and dollars. An ordinary debtor is at liberty to pay his debt with either.
This statement is undoubtedly correct; but the fact that a debtor may at his option discharge his debt
either in dollars or in pesos is by no means equivalent to the statement that he may at his option pay
one dollar or two pesos. The contention is that he may at his option pay one dollar in the United
States gold coin or as many Philippine pesos as at the prevailing rate of exchange are the equivalent
in value of one dollar.
While the respondent contends, under the laws in force in the Philippine Islands, that a debt of the
Government payable in dollars may be paid in Philippine currency at the rate of two to one, he
overlooks the fact that section 1613 makes the Philippine silver peso and the gold coins of the
United States at the rate of one dollar for two pesos, a legal tender in the Philippine Islands for all
debts, public and private, and not the Philippine paper peso. If the Government can discharge a
contract, payable in dollars, by tendering Philippine paper pesos, then merchants and others who
contract debts payable expressly in dollars may also discharge their debts in a like manner. If such
doctrine should be announced, then no manufacturer or person would take the risk of contracting
obligations here for future payments. They would insist in every instance upon cash transactions.
They would not run the risk of future fluctuations in the value of the paper peso. That would
immediately produce an impossible condition in commercial and business circles in the Philippine
Islands.
It is a well-known fact that the Government has not been willing to accept the Philippine paper peso
at the rate of two to one for gold or dollars. Does it not seem at least strange that it should insist that
its creditors must be satisfied with such a settlement of its debt?
The issue is precisely the same as it would be had the Philippine Government executed a bond in
the United States, in terms of the United States "dollars," payable in Manila, but without an express
stipulation that it should be paid in gold dollars or in any particular kind of the United States money. If
the Government may pay plaintiff in depreciated pesos at the nominal instead of the real par of
exchange, then it might pay its dollar bond in the same way. If the Government can do this, then
Manila merchants can pay their dollar drafts in depreciated pesos at the nominal par, regardless of
their real value; American seamen may have their dollar pay in this port in forty-cent pesos; the
United States may pay its soldiers stationed here in the cheap money, and effect a considerable
saving at their expense. This, of course, would be repudiation, in part, of a just debt; but if
repudiation is permissible as to the debt of the Insular Government to this plaintiff, then it is
permissible, legally at least, to all other debtors, and must be endured, at least as to existing debts
by all other creditors.
We submit that the mere statement of the results which must flow from the recognition of the
principle contended for by the respondent, and involved in a denial of the plaintiff's claim, is sufficient
to refute every argument which may be advanced to support it. Plaintiff, and the hundreds of

teachers and other employees of the Insular Government affected by the depreciation of the
Philippine paper peso, are merely asking for fair treatment, for an honest compliance on the part of
the Government with its part of the agreement. We do not doubt that, as a matter of fact, the
defendant herein and every responsible official of the Philippine Government recognizes the justice
of the plaintiff's contention, and that the necessity for this rule has arisen from an apprehension lest
their natural tendency to do what they know to be right and fair may constitute a technical violation of
the law.
The contention on the part of the respondent that the Philippine paper peso is a legal tender for the
payment of a contract debt, when some other specie has not been provided, is not tenable for the
reason that it violates the terms of the express contracts
A contract to pay a certain sum in money, without any stipulation as to the kind of money in which it
shall be paid, may always be satisfied by payment of that sum in any currency which is lawful money
at the place and time at which payment is to be made. That is the general rule, under both the
common and the civil law. But when the contract stipulates the specie or kind or character of money
for the performance of the contract, it must be satisfied in the medium of payment mentioned in the
contract.
That doctrine is established and affirmed by the law in force in the Philippine Islands. The Civil Code,
still in force in the Philippine Islands, by article 1170, provides expressly that "payments of debts
of money shall be made in the specie stipulated and, should it not be possible to deliver such specie,
in silver or gold coin legally current in Spain." Article 1754 of the Civil Code provides that the
obligations of persons who borrow money shall be governed by the provisions of said article 1170 of
the same Code. (Serrales vs. Esbri, 200 U. S., 103; City of San Juan vs. St. John's Gas Co., 195 U.
S., 510.)
Contracts are made for things, not names or sounds, and the obligation of the contract arises from
its terms and the means which the law affords for its enforcement. Under the Civil Code the contract
constitutes the law of the parties unless it violates some provision of law or public policy. The parties
themselves make the law by which they shall be governed, and it is the business of the courts to see
that the parties to a legal contract comply with its terms. A law which changes the terms of a legal
contract between parties, either in the time or mode of performance, or imposes new conditions, or
dispenses with those expressed, or authorizes for its satisfaction something different from that
provided in its terms, is law which impairs the obligation of a contract and is therefore null and void.
An interference with the terms of a legal contract by legislation is unwarranted and illegal. A contract
is not fulfilled by the delivery of one thing which is different from the thing the contract provides for.
Words in contracts are to be given the meaning which they were understood to have by the parties
at the time of the making of the contract. There cannot exist in this jurisdiction one law for debtors
and another law for creditors. The genius, the nature, and the spirit of our Government amount to a
prohibition of such acts of legislation, and the general principles of law and reason forbid them.
The Legislature may enjoin, permit, forbid, and punish; it may declare new crimes and establish
rules of conduct for all its citizens in future cases; it may command what is right and forbid what is
wrong, but it cannot change innocence into guilt and punish innocence as a crime, or violate the
rights of an antecedent lawful private contract or the right of private property. (Calder vs. Bul, 3
Dallas, 388.)
The fundamental maxims of a free government seem to require that the rights of personal liberty and
private property should be held sacred, and that includes contractual rights. (Wilkinson vs. Leland, 2
Peters, 657.)

It would be ruinous to the commercial interests of the Philippine Islands to declare that the payment
of debts of money could be made in other specie than that stipulated in the contract.
For all of the foregoing facts and the law, we are fully persuaded that the remedy prayed for should
be, and is hereby, granted. And it is hereby ordered and decreed that the writ of mandamus be
issued to the defendant herein, commanding him to countersign, or cause to the countersigned the
original of the warrant set forth in paragraph 9 of the complaint, and to deliver the same to the
plaintiff so that he may present it to the Treasurer of the Philippine Islands and receive payment of
said sum of P73.33 due him as averred in the complaint; and without any finding as to costs. So
ordered.

3. Philippine National Bank v. Remigio

G.R. No. 78508 March 21, 1994
PHILIPPINE NATIONAL BANK, petitioner,
vs.
FILEMON REMIGIO and the HON. COURT OF APPEALS, respondents.
The Chief Legal Counsel, PNB for petitioner.
Alfredo S. Remigio for private respondent.

VITUG, J.:
Questioned in this appeal instituted by petitioner Philippine National Bank is the decision, dated 05
May 1987, of the appellate court, which has reversed the decision of the then Court of First Instance
("CFI" and now Regional Trial Court) of Isabela, Branch 5, Echague, by ruling in favor of private
respondent Filemon Remigio.
The facts, by and large, are undisputed. In chronology, the events leading to this appeal may be
recited, thus:
(1) On 25 August 1967, private respondent obtained from petitioner a P65,000.00 loan secured by a
real estate mortgage covering five (5) parcels of land in Isabela described in and embraced by
Transfer Certificates of Title ("TCT") No. T-11326, T-681, T-100, and T-27 and Original Certificate of
Title No. I-1673.
(2) Private respondent defaulted; hence on 17 November 1970, petitioner bank extrajudicially
foreclosed on the mortgage, and it acquired the encumbered assets for the sum of P87,082.00. The
sheriff's sale was registered with the Office of the Register of Deeds of Isabela only on 11 October
1972.
(3) In its letter-offer of 15 February 1971, petitioner bank invited private respondent to repurchase
the foreclosed property for P87,082.00 plus interest and other charges. Before that, or on 18

November 1970 (or one day after the foreclosure sale), private respondent already had paid an initial
P10,000.00 to redeem the property. Subsequently, additional payments were made by private
respondent, i.e., P10,000.00 on 26 April 1971 and another P20,000.00 on 17 May 1971.
(4) On 21 October 1972, Presidential Decree ("P.D.") No. 27 was enacted into law that mandated an
agrarian reform. Pursuant thereto, an "Operation Land Transfer Program" was launched; among the
areas it covered were the parcels of land under TCT No. T-100, T-11326 and T-681.
(5) On 17 April 1974, private respondent offered to buy the foreclosed property for P284,000.00
which was the market and appraised value thereof fixed by petitioner bank. On 24 December 1974,
the Deed of Promise to Sellwas executed between petitioner bank and private respondent.
(6) In a letter, dated 25 August 1978, sent to and received by petitioner bank on even date, private
respondent, through counsel, inquired why he was still being made to buy the property for
P284,000.00 when, in truth, he had already paid P40,000.00 of the P87,082.00 previously offered by
petitioner for the redemption of the property. There was no reply or response from petitioner. As of 02
November 1977, private respondent had paid petitioner the total sum of P207,243.85, itemized, as
follows:
1. 18 November 1970 P10,000.00 609324-E
2. 26 April 1971 10,000.00 614980-E
3. 14 May 1971 20,000.00 615701-E
4. 17 April 1974 5,000.00 898926-F
5. 23 May 1974 16,000.00 902110-F
6. 27 May 1974 15,000.00 902305-F
7. 14 June 1974 10,000.00 903771-F
8. 20 December 1974 14,000.00 40135-H
9. 17 December 1976 40,030.75 165395-I
10. 7 January 1977 22,213.10 166579-I
11. 2 November 1977 45,000.00 32641
(7) Private respondent, on 20 September 1978, instituted an action for "Annulment of Foreclosure
Deed, Breach of Contract, Sum of Money and Damages" at the CFI, Echague, Isabela, against
petitioner bank and its Branch Manager Leuterio Genato.
(8) On 19 March 1980, while the case was yet pending with the trial court, petitioner bank
additionally received from the Land Bank of the Philippines P26,348.12 in cash and P160,000.00
worth of Land Bank Bonds in payment of the foreclosed parcels covered by TCT No. T-100, T-11326,
and T-681.
On 05 December 1981, after trial, the court a quo rendered judgment in favor of petitioner bank, the
dispositive portion of which read:
WHEREFORE, in the light of the foregoing considerations, judgment is hereby
rendered:

1. DECLARING the foreclosure sale of the plaintiff's mortgaged properties, covered

by and embraced in Original Certificate of Title No. I-1673 and Transfer Certificates
of Title Nos. T-11326, T-681, T-100 and T-27, all of the Registry of Deeds of Isabela,
as valid;
2. DECLARING the right of the plaintiff to redeem his foreclosed properties as
forever lost;
3. DECLARING the deed of promise the sell executed between the plaintiff and the
defendant bank as valid;
4. DECLARING that the outstanding obligation of the plaintiff to the bank is
P186,874.16 from which shall be deducted whatever payments are made and/or to
be made by the Land Bank of the Philippines as a result of its Operation Land
Transfer Program;
5. ORDERING that whatever balance thereof shall be paid by the plaintiff to the
defendant bank with twelve per cent (12%) interest until fully paid and conversely,
whatever excess thereof shall be refunded by the defendant bank to the plaintiff;
6. ORDERING the defendant bank to execute the corresponding deed of
conveyance of the lands to and in favor of the plaintiff after payment is made in
accordance with the above;
7. ORDERING the defendant bank to deliver to the plaintiff the certificates of title
covering the properties mentioned above;
8. DISMISSING the complaint, with costs against the plaintiff;
9. ORDERING the plaintiff to pay to the defendant, Leuterio Genato, the sum of TEN
THOUSAND PESOS (P10,000.00) as attorney's fees and FIVE THOUSAND PESOS
(P5,000.00) as expenses of litigation; and
10. DENYING the defendant bank's counterclaim. (pp. 128-129, Rollo.)
Private respondent went to the Court of Appeals, which, on 05 May 1987, rendered a decision,
reversing the trial court and entering a new one in favor of private respondent. The appellate court
adjudged, as follows:
WHEREFORE, the decision appealed from is set aside and a new one entered
declaring the foreclosure of the mortgaged properties to be without force and effect;
ordering the defendant bank to release the properties and the plaintiff to transfer the
rights to the tenants-beneficiaries in favor of the Land Bank of the Philippines;
declaring the deed of promise to sell executed by the plaintiff and the defendant bank
rescinded; ordering the defendant bank and the Land Bank of the Philippines to
recalculate the amounts of payments due for the transfer of the subject properties in

accordance with this Decision subject to the provisions of P.D. No. 27 and in
accordance with the mechanics of the Operation Land Transfer; and annulling the
order of the lower court for the plaintiff to pay the defendant the expenses of litigation
and attorney's fees.
Hence, this petition for review on certiorari.
The petition cannot be sustained.
When Presidential Decree No. 27, "Decreeing the Emancipation of Tenants from the Bondage of the
Soil, Transferring to them the Ownership of the Land They Till and Providing the Instruments and
Mechanism therefor," was enacted on 21 October 1972, the parcels of land in dispute were clearly
still subject to private respondent's right of redemption. In the foreclosure of real property by banking
institutions, as well as in the extrajudicial foreclosure by any other mortgagee, the mortgagor could
redeem the property within one year from date of registration of the deed of sale in the appropriate
Registry of Deeds (Santos vs. Register of Deeds of Manila, 38 SCRA 42; Reyes vs. Noblejas, 21
SCRA 1027). In Medida vs. Court of Appeals (208 SCRA 887), we ruled that the "title to the land sold
under a mortgage foreclosure remains with the mortgagor or his grantee until the expiration of the
redemption period . . ." The Court of Appeals committed no error when it thereby held:
. . . The foreclosure proceedings were instituted in 1970, and on this, there appears
to be no question. The registration of the sheriff's sale was, however, effected only on
October 11, 1972. From this date, therefore, the period of redemption begins to run
since, according to judicial construction, the period of redemption begins to run not
from the date of the sale but from the date of registration of the sale in the office of
the Register of Deeds, applying this rule not only to an execution sale but also to an
extrajudicial foreclosure sale of registered land (Salazar vs. Meneses, 118 Phil. 512;
Reyes vs. Noblejas and Santos, 65 O.G. 21, May 26, 1969; Santos vs. RFC, 101
Phil. 980; Reyes vs. Tolentino, G.R. No. L-29142, Nov. 29, 1971) as required under
Section 27 of Rule 39 of the Rules of Court in relation to Section 50 of Act No. 496.
For this reason, the foreclosure proceedings were not completed since the period of
redemption, counted from October 11, 1972, would expire on October 12, 1973. This
would thereby bring the disputed properties under the operation and under the ambit
of the said Opinion which interprets Operation Land Transfer under P.D. No. 27. . .
(Rollo, pp. 87-88.)
It was not thus all that consequential for the appellate court to still rule on the efficacy or inefficacy of
the foreclosure.
In passing, the Secretary of the Department of Justice has himself opined thus:
I am aware that a ruling that lands covered by P.D. No. 27 may not be the object of
the foreclosure proceedings after the promulgation of said decree on October 21,
1972, would concede that P.D. No. 27 had the effect of impairing the obligation of the
duly executed mortgage contracts affecting said lands. There is no question,
however, that the land reform program of the government as accelerated under P.D.

No. 27 and mandated by the Constitution itself (Art. XIV, Sec. 12), was undertaken in
the exercise of the police power of the state. It is settled in a long line of decisions of
the Supreme Court that the Constitutional guaranty of non-impairment of obligations
of contract is limited by the exercise of the police power of the state (citations
omitted). One limitation on the contract clause arises from the police power, the
reason being that public welfare is superior to private rights (citation omitted). The
situation here, is like that in eminent domain proceedings, where the state
expropriates private property for public use, and the only condition to be complied
with is the payment of just compensation. Technically, the condemnation proceedings
do not impair the contract to destroy its obligations, but merely appropriate or take for
public use (citation omitted). As the Land Bank is obliged to settle the obligations
secured by the mortgage, the mortgagee is not left without any compensation.
(Opinion No. 92, Series of 1978; Rollo, pp. 88-89.)
The opinion deserves respect (42 Am. Jur. p. 421; Cagayan Valley Enterprises, Inc. vs. Court of
Appeals, 179 SCRA 218; Ramon Salaria vs. Hon. Carlos R. Buenviaje, et al., 81 SCRA 722). This
Court, likewise, in a number of cases has expressed the dictum that police power subordinates the
non-impairment clause of the Constitution (Ortigas and Co. Ltd. Partnership vs. Feati Bank and Trust
Co., 94 SCRA 533; Kabiling vs. National Housing Authority, 156 SCRA 623; Anglo-Fil Trading
Corporation vs. Lazaro, 124 SCRA 494).
Petitioner contends that the Court of Appeals has erred in holding that the bank is entitled only to
P87,012.00, and not to P284,000.00, which it considers to be the fair market value of the property
foreclosed. Here, the Court of Appeals has explained:
We come to the respective liabilities and obligations of the parties. To date, the
defendant bank has received P207,243.85 from the plaintiff (Stipulation of Facts, No.
15). In addition, the defendant bank has also been the recipient of bonds worth
P160,000.00 and cash in the amount of P26,348.12 from the Land Bank in payment
for the properties covered by TCTs Nos. T-100, T-11326 and T-681 or a total amount
of P186,348.12. The defendant bank has accepted payment of the latter amount at
P170,348.12. All in all, the bank has received payments in cash and bonds in the
amount of P377,591.97 as compensation for the plaintiff's original obligation of
P65,000.00. The total amounts paid by plaintiff represent the consideration in part of
the market price of the properties as found by the Loans and Discount Section of the
defendant bank irrespective of whether or not the lands are covered by Operation
Land Transfer. The cash and bonds payments made by the Land Bank to the PNB on
the other hand, represent payments for the lands covered by Operation Land
Transfer, namely T-100, T-11326 and T-681. For its part, the lower court ruled that the
plaintiff's obligation to the defendant bank amounts to P186,874.16 based on the
market price as determined by the Loans and Discount Section of the defendant
bank which market price amounts to P284,000.00. In view of Our conclusion that the
subject mortgaged properties fall under the ambit and purview of Operation Land
Transfer under P.D. No. 27, it appears that said adjudged amount is in excess of the
rightful amount that is due the defendant bank by the plaintiff. We hold, therefore,
that the defendant bank is entitled to a payment of P87,012.00 representing the offer

of the defendant bank to the plaintiff in the same bank's letter to the plaintiff dated
February 15, 1971. The plaintiff is, therefore, entitled to a refund of whatever over
payments were made by him in favor of the defendant bank. The amount of
P87,012.00 represents the redemption price of the foreclosed properties and as a
release of the said properties for redistribution to qualified tenants. (pp. 89-90, Rollo.)
In Development Bank of the Philippines vs. Mirang, 66 SCRA 141, we have ruled that the right of
redemption by the mortgagor could be exercised by paying to the creditor bank all the amounts
owing to the latter "on the date of the sale, with interest on the total indebtedness at the rate agreed
upon in the obligation from said date." In the case of foreclosures by the Philippine National Bank
particularly, Section 20 of its own charter provides:
Sec. 20. Right of Redemption of property foreclosed. The mortgagor shall have
the right, within the year after the sale of real estate as a result of the foreclosure of a
mortgage, to redeem the property by paying the amount fixed by the court in the
order of execution, with interest thereon at the rate specified in the mortgage, and all
the costs and other judicial expenses incurred by the Bank by reason of the
execution and sale and for the custody of said property. (Republic Act No. 1300)
Accordingly, the appellate court did not commit any reversible error in ordering petitioner bank and
the Land Bank of the Philippines to recalculate the amounts of payments due for the transfer of the
foreclosed property.
WHEREFORE, the appealed decision is AFFIRMED.
SO ORDERED.

4. Ortigas & Co. v. Feati Bank and Trust Co (94 SCRA 533)
G.R. No. L-24670 December 14, 1979
ORTIGAS & CO., LIMITED PARTNERSHIP, plaintiff-appellant,
vs.
FEATI BANK AND TRUST CO., defendant-appellee.
Ramirez & Ortigas for appellant.
Taada, Teehankee & Carreon for appellee.

SANTOS, J.:

An appeal interposed on June 23, 1965 by plaintiff-appellant, Ortigas & Co., Limited Partnership,
from the decision of the Court of First Instance of Rizal, Branch VI, at Pasig, Hon. Andres Reyes
presiding, which dismissed its complaint in Civil Case No. 7706, entitled, "Ortigas & Company,
Limited Partnership, plaintiff, v. Feati Bank and Trust Company, defendant," for lack of merit.
The following facts a reproduction of the lower court's findings, which, in turn, are based on a
stipulation of facts entered into by the parties are not disputed. Plaintiff (formerly known as "Ortigas,
Madrigal y Cia") is a limited partnership and defendant Feati Bank and Trust Co., is a corporation
duly organized and existing in accordance with the laws of the Philippines. Plaintiff is engaged in real
estate business, developing and selling lots to the public, particularly the Highway Hills Subdivision
along Epifanio de los Santos Avenue, Mandaluyong, Rizal. 1
On March 4, 1952, plaintiff, as vendor, and Augusto Padilla y Angeles and Natividad Angeles, as
vendees, entered into separate agreements of sale on installments over two parcels of land, known
as Lots Nos. 5 and 6, Block 31, of the Highway Hills Subdivision, situated at Mandaluyong, Rizal. On
July 19, 1962, the said vendees transferred their rights and interests over the aforesaid lots in favor
of one Emma Chavez. Upon completion of payment of the purchase price, the plaintiff executed the
corresponding deeds of sale in favor of Emma Chavez. Both the agreements (of sale on installment)
and the deeds of sale contained the stipulations or restrictions that:
1. The parcel of land subject of this deed of sale shall be used the Buyer exclusively
for residential purposes, and she shall not be entitled to take or remove soil, stones
or gravel from it or any other lots belonging to the Seller.
2. All buildings and other improvements (except the fence) which may be constructed
at any time in said lot must be, (a) of strong materials and properly painted, (b)
provided with modern sanitary installations connected either to the public sewer or to
an approved septic tank, and (c) shall not be at a distance of less than two (2) meters
from its boundary lines. 2
The above restrictions were later annotated in TCT Nos. 101509 and 101511 of the Register of
Deeds of Rizal, covering the said lots and issued in the name of Emma Chavez. 3
Eventually, defendant-appellee acquired Lots Nos. 5 and 6, with TCT Nos. 101613 and 106092
issued in its name, respectively and the building restrictions were also annotated
therein. 4 Defendant-appellee bought Lot No. 5 directly from Emma Chavez, "free from all liens and
encumbrances as stated in Annex 'D', 5 while Lot No. 6 was acquired from Republic Flour Mills through a
"Deed of Exchange," Annex "E". 6 TCT No. 101719 in the name of Republic Flour Mills likewise contained
the same restrictions, although defendant-appellee claims that Republic Flour Mills purchased the said
Lot No. 6 "in good faith. free from all liens and encumbrances," as stated in the Deed of Sale, Annex
"F" 7 between it and Emma Chavez.
Plaintiff-appellant claims that the restrictions annotated on TCT Nos. 101509, 101511, 101719,
101613, and 106092 were imposed as part of its general building scheme designed for the
beautification and development of the Highway Hills Subdivision which forms part of the big landed

estate of plaintiff-appellant where commercial and industrial sites are also designated or
established. 8
Defendant-appellee, upon the other hand, maintains that the area along the western part of Epifanio
de los Santos Avenue (EDSA) from Shaw Boulevard to Pasig River, has been declared a
commercial and industrial zone, per Resolution No. 27, dated February 4, 1960 of the Municipal
Council of Mandaluyong, Rizal. 9 It alleges that plaintiff-appellant 'completely sold and transferred to
third persons all lots in said subdivision facing Epifanio de los Santos Avenue" 10 and the subject lots
thereunder were acquired by it "only on July 23, 1962 or more than two (2) years after the area ... had
been declared a commercial and industrial zone ... 11
On or about May 5, 1963, defendant-appellee began laying the foundation and commenced the
construction of a building on Lots Nos. 5 and 6, to be devoted to banking purposes, but which
defendant-appellee claims could also be devoted to, and used exclusively for, residential purposes.
The following day, plaintiff-appellant demanded in writing that defendant-appellee stop the
construction of the commerical building on the said lots. The latter refused to comply with the
demand, contending that the building was being constructed in accordance with the zoning
regulations, defendant-appellee having filed building and planning permit applications with the
Municipality of Mandaluyong, and it had accordingly obtained building and planning permits to
proceed with the construction.12
On the basis of the foregoing facts, Civil Case No. 7706, supra, was submitted in the lower court for
decision. The complaint sought, among other things, the issuance of "a writ of preliminary
injunction ... restraining and enjoining defendant, its agents, assigns, and those acting on its or their
behalf from continuing or completing the construction of a commercial bank building in the
premises ... involved, with the view to commanding the defendant to observe and comply with the
building restrictions annotated in the defendant's transfer certificate of title."
In deciding the said case, the trial court considered, as the fundamental issue, whether or not the
resolution of the Municipal Council of Mandaluyong declaring Lots Nos. 5 and 6, among others, as
part of the commercial and industrial zone of the municipality, prevailed over the building restrictions
imposed by plaintiff-appellant on the lots in question. 13 The records do not show that a writ of
preliminary injunction was issued.
The trial court upheld the defendant-appellee and dismissed the complaint, holding that the subject
restrictions were subordinate to Municipal Resolution No. 27, supra. It predicated its conclusion on
the exercise of police power of the said municipality, and stressed that private interest should "bow
down to general interest and welfare. " In short, it upheld the classification by the Municipal Council
of the area along Epifanio de los Santos Avenue as a commercial and industrial zone, and held that
the same rendered "ineffective and unenforceable" the restrictions in question as against defendantappellee. 14 The trial court decision further emphasized that it "assumes said resolution to be valid,
considering that there is no issue raised by either of the parties as to whether the same is null and void. 15
On March 2, 1965, plaintiff-appellant filed a motion for reconsideration of the above decision, 16 which
motion was opposed by defendant-appellee on March 17, 1965. 17 It averred, among others, in the motion
for reconsideration that defendant- appellee "was duty bound to comply with the conditions of the contract
of sale in its favor, which conditions were duly annotated in the Transfer Certificates of Title issued in her

(Emma Chavez) favor." It also invited the trial court's attention to its claim that the Municipal Council had
(no) power to nullify the contractual obligations assumed by the defendant corporation." 18

The trial court denied the motion for reconsideration in its order of March 26, 1965.

19

On April 2, 1965 plaintiff-appellant filed its notice of appeal from the decision dismissing the
complaint and from the order of March 26, 1965 denying the motion for reconsideration, its record on
appeal, and a cash appeal bond." 20 On April 14, the appeal was given due course 21 and the records of
the case were elevated directly to this Court, since only questions of law are raised. 22
Plaintiff-appellant alleges in its brief that the trial court erred
I. When it sustained the view that Resolution No. 27, series of 1960 of the Municipal
Council of Mandaluyong, Rizal declaring Lots Nos. 5 and 6, among others, as part of
the commercial and industrial zone, is valid because it did so in the exercise of its
police power; and
II. When it failed to consider whether or not the Municipal Council had the power to
nullify the contractual obligations assumed by defendant-appellee and when it did not
make a finding that the building was erected along the property line, when it should
have been erected two meters away from said property line. 23
The defendant-appellee submitted its counter-assignment of errors. In this connection, We already
had occasion to hold in Relativo v. Castro 24 that "(I)t is not incumbent on the appellee, who occupies a
purely defensive position, and is seeking no affirmative relief, to make assignments of error, "
The only issues to be resolved, therefore, are: (1) whether Resolution No. 27 s-1960 is a valid
exercise of police power; and (2) whether the said Resolution can nullify or supersede the
contractual obligations assumed by defendant-appellee.
1. The contention that the trial court erred in sustaining the validity of Resolution No. 27 as an
exercise of police power is without merit. In the first place, the validity of the said resolution was
never questioned before it. The rule is that the question of law or of fact which may be included in
the appellant's assignment of errors must be those which have been raised in the court below, and
are within the issues framed by the parties. 25 The object of requiring the parties to present all questions
and issues to the lower court before they can be presented to the appellate court is to enable the lower
court to pass thereon, so that the appellate court upon appeal may determine whether or not such ruling
was erroneous. The requirement is in furtherance of justice in that the other party may not be taken by
surprise.26 The rule against the practice of blowing "hot and cold" by assuming one position in the trial
court and another on appeal will, in the words of Elliot, prevent deception. 27 For it is well-settled that
issues or defenses not raised 28 or properly litigated 29 or pleaded 30 in the Court below cannot be raised or
entertained on appeal.
In this particular case, the validity of the resolution was admitted at least impliedly, in the stipulation
of facts below. when plaintiff-appellant did not dispute the same. The only controversy then as stated
by the trial court was whether or not the resolution of the Municipal Council of Mandaluyong ... which
declared lots Nos. 4 and 5 among others, as a part of the commercial and industrial zone of the

municipality, prevails over the restrictions constituting as encumbrances on the lots in

question. 31 Having admitted the validity of the subject resolution below, even if impliedly, plaintiffappellant cannot now change its position on appeal.
But, assuming arguendo that it is not yet too late in the day for plaintiff-appellant to raise the issue of
the invalidity of the municipal resolution in question, We are of the opinion that its posture is
unsustainable. Section 3 of R.A. No. 2264, otherwise known as the Local Autonomy
Act," 32 empowers a Municipal Council "to adopt zoning and subdivision ordinances or regulations"; 33 for
the municipality. Clearly, the law does not restrict the exercise of the power through an ordinance.
Therefore, granting that Resolution No. 27 is not an ordinance, it certainly is a regulatory measure within
the intendment or ambit of the word "regulation" under the provision. As a matter of fact the same section
declares that the power exists "(A)ny provision of law to the contrary notwithstanding ... "
An examination of Section 12 of the same law 34 which prescribes the rules for its interpretation likewise
reveals that the implied power of a municipality should be "liberally construed in its favor" and that "(A)ny
fair and reasonable doubt as to the existence of the power should be interpreted in favor of the local
government and it shall be presumed to exist." The same section further mandates that the general
welfare clause be liberally interpreted in case of doubt, so as to give more power to local governments in
promoting the economic conditions, social welfare and material progress of the people in the community.
The only exceptions under Section 12 are existing vested rights arising out of a contract between "a
province, city or municipality on one hand and a third party on the other," in which case the original terms
and provisions of the contract should govern. The exceptions, clearly, do not apply in the case at bar.
2. With regard to the contention that said resolution cannot nullify the contractual obligations
assumed by the defendant-appellee referring to the restrictions incorporated in the deeds of sale
and later in the corresponding Transfer Certificates of Title issued to defendant-appellee it should
be stressed, that while non-impairment of contracts is constitutionally guaranteed, the rule is not
absolute, since it has to be reconciled with the legitimate exercise of police power, i.e., "the power to
prescribe regulations to promote the health, morals, peace, education, good order or safety and
general welfare of the people. 35 Invariably described as "the most essential, insistent, and illimitable of
powers" 36 and "in a sense, the greatest and most powerful attribute of government, 37 the exercise of the
power may be judicially inquired into and corrected only if it is capricious, 'whimsical, unjust or
unreasonable, there having been a denial of due process or a violation of any other applicable
constitutional guarantee. 38 As this Court held through Justice Jose P. Bengzon in Philippine Long
Distance Company vs. City of Davao, et al. 39 police power "is elastic and must be responsive to various
social conditions; it is not, confined within narrow circumscriptions of precedents resting on past
conditions; it must follow the legal progress of a democratic way of life." We were even more emphatic
inVda. de Genuino vs. The Court of Agrarian Relations, et al., 40 when We declared: "We do not see why
public welfare when clashing with the individual right to property should not be made to prevail through
the state's exercise of its police power.
Resolution No. 27, s-1960 declaring the western part of highway 54, now E. de los Santos Avenue
(EDSA, for short) from Shaw Boulevard to the Pasig River as an industrial and commercial zone,
was obviously passed by the Municipal Council of Mandaluyong, Rizal in the exercise of police
power to safeguard or promote the health, safety, peace, good order and general welfare of the
people in the locality, Judicial notice may be taken of the conditions prevailing in the area, especially
where lots Nos. 5 and 6 are located. The lots themselves not only front the highway; industrial and

commercial complexes have flourished about the place. EDSA, a main traffic artery which runs
through several cities and municipalities in the Metro Manila area, supports an endless stream of
traffic and the resulting activity, noise and pollution are hardly conducive to the health, safety or
welfare of the residents in its route. Having been expressly granted the power to adopt zoning and
subdivision ordinances or regulations, the municipality of Mandaluyong, through its Municipal
'council, was reasonably, if not perfectly, justified under the circumstances, in passing the subject
resolution.
The scope of police power keeps expanding as civilization advances, stressed this Court, speaking
thru Justice Laurel in the leading case of Calalang v. Williams et al., 41 ThusAs was said in the case of Dobbins v. Los Angeles (195 US 223, 238 49 L. ed.
169), 'the right to exercise the police power is a continuing one, and a business
lawful today may in the future, because of changed situation, the growth of
population or other causes, become a menace to the public health and welfare, and
be required to yield to the public good.' And in People v. Pomar (46 Phil. 440), it was
observed that 'advancing civilization is bringing within the scope of police power of
the state today things which were not thought of as being with in such power
yesterday. The development of civilization), the rapidly increasing population, the
growth of public opinion, with an increasing desire on the part of the masses and of
the government to look after and care for the interests of the individuals of the state,
have brought within the police power many questions for regulation which formerly
were not so considered. 42 (Emphasis, supplied.)
Thus, the state, in order to promote the general welfare, may interfere with personal liberty, with
property, and with business and occupations. Persons may be subjected to all kinds of restraints and
burdens, in order to secure the general comfort health and prosperity of the state 43 and to this
fundamental aim of our Government, the rights of the individual are subordinated. 44
The need for reconciling the non-impairment clause of the Constitution and the valid exercise of
police power may also be gleaned from Helvering v. Davis 45 wherein Mr. Justice Cardozo, speaking for
the Court, resolved the conflict "between one welfare and another, between particular and general, thus

Nor is the concept of the general welfare static. Needs that were narrow or parochial
a century ago may be interwoven in our day with the well-being of the nation What is
critical or urgent changes with the times. 46
The motives behind the passage of the questioned resolution being reasonable, and it being a "
legitimate response to a felt public need," 47 not whimsical or oppressive, the non-impairment of
contracts clause of the Constitution will not bar the municipality's proper exercise of the power. Now Chief
Justice Fernando puts it aptly when he declared: "Police power legislation then is not likely to succumb to
the challenge that thereby contractual rights are rendered nugatory." 48
Furthermore, We restated in Philippine American Life Ins. Co. v. Auditor General 49 that laws and
reservation of essential attributes of sovereign power are read into contracts agreed upon by the parties.
Thus

Not only are existing laws read into contracts in order to fix obligations as between
the parties, butthe reservation of essential attributes of sovereign power is also read
into contracts as a postulate of the legal order. The policy of protecting contracts
against impairments presupposes the maintenance of a government by virtue of
which contractual relations are worthwhile a government which retains adequate
authority to secure the peace and good order of society.
Again, We held in Liberation Steamship Co., Inc. v. Court of Industrial Relations, 50 through Justice
J.B.L. Reyes, that ... the law forms part of, and is read into, every contract, unless clearly excluded
therefrom in those cases where such exclusion is allowed." The decision in Maritime Company of the
Philippines v. Reparations Commission, 51 written for the Court by Justice Fernando, now Chief Justice,
restates the rule.
One last observation. Appellant has placed unqualified reliance on American jurisprudence and
authorities 52 to bolster its theory that the municipal resolution in question cannot nullify or supersede the
agreement of the parties embodied in the sales contract, as that, it claims, would impair the obligation of
contracts in violation of the Constitution. Such reliance is misplaced.
In the first place, the views set forth in American decisions and authorities are not per se controlling
in the Philippines, the laws of which must necessarily be construed in accordance with the intention
of its own lawmakers and such intent may be deduced from the language of each law and the
context of other local legislation related thereto. 53 and Burgess, et al v. Magarian, et al., 55 two Of the
cases cited by plaintiff-appellant, lend support to the conclusion reached by the trial court, i.e. that the
municipal resolution supersedes/supervenes over the contractual undertaking between the parties. Dolan
v. Brown, states that "Equity will not, as a rule, enforce a restriction upon the use of property by
injunction where the property has so changed in character and environment as to make it unfit or
unprofitable for use should the restriction be enforced, but will, in such a case, leave the complainant to
whatever remedy he may have at law. 56 (Emphasis supplied.) Hence, the remedy of injunction in Dolan
vs. Brown was denied on the specific holding that "A grantor may lawfully insert in his deed conditions or
restrictions which are not against public policy and do not materially impair the beneficial enjoyment of the
estate. 57 Applying the principle just stated to the present controversy, We can say that since it is now
unprofitable, nay a hazard to the health and comfort, to use Lots Nos. 5 and 6 for strictly residential
purposes, defendants- appellees should be permitted, on the strength of the resolution promulgated
under the police power of the municipality, to use the same for commercial purposes. In Burgess v.
Magarian et al. it was, held that "restrictive covenants running with the land are binding on all subsequent
purchasers ... " However, Section 23 of the zoning ordinance involved therein contained
a proviso expressly declaring that the ordinance was not intended "to interfere with or abrogate or annul
any easements, covenants or other agreement between parties." 58 In the case at bar, no such proviso is
found in the subject resolution.
It is, therefore, clear that even if the subject building restrictions were assumed by the defendantappellee as vendee of Lots Nos. 5 and 6, in the corresponding deeds of sale, and later, in Transfer
Certificates of Title Nos. 101613 and 106092, the contractual obligations so assumed cannot prevail
over Resolution No. 27, of the Municipality of Mandaluyong, which has validly exercised its police
power through the said resolution. Accordingly, the building restrictions, which declare Lots Nos. 5
and 6 as residential, cannot be enforced.

IN VIEW OF THE FOREGOING, the decision appealed from, dismissing the complaint, is hereby
AFFIRMED. "without pronouncement as to costs.
SO ORDERED.

5. Ilusorio v. Court of Agrarian Relations (17 SCRA 25)

G.R. No. L-20344

May 16, 1966

POTENCIANO ILUSORIO and TERESA ILUSORIO, petitioners,

vs.
THE COURT OF AGRARIAN RELATIONS, PASCUAL MANALILI, SANTIAGO PANGILINAN,
IRENEO DE LA CRUZ, GONZALO SANTIAGO, GRACIANO MANGALINDAN, JOSE MALLARI,
RICARDO BALMEO, SALVADOR SANTIAGO, VALENTIN PACHECO LEANDRO MANINGAS,
EMILIANO PACHECO, TIMOTEO MAGCALAS, ARTEMIO GABRIEL and MIGUEL STA.
ANA, respondents.
Juan F. Gomez for petitioners.
Mateo J. Lorenzo for respondents.
N. G. Nostratis and R. S. Fajardo for respondent Court of Agrarian Relations.
CONCEPCION, J.:
Appeal from a decision of the Court of Agrarian Relations; the dispositive part of the which reads:
IN VIEW OF ALL THE FOREGOING, the Court hereby holds that Section 14 of Republic Act
No. 1199, as amended, is constitutional and the leasehold system of tenancy shall govern
the relationship of the parties, except Nicodemus Magcalas and Miguel Santiago, starting
with the 1961-1962 agri-year.
Petitioners are hereby ordered to pay per agri-year to respondent-landholders rentals in the
amount appearing opposite their names:
NAMES

RENT IN CAVANS
OF PALAY

1. Miguel Sta. Ana

17.66 cavans

2. Domingo Santiago

15.88

"

3. Timoteo Magcalas

17.46

"

4. Leandro Maningas

13.77

"

5. Valentin Pacheco

9.37

"

6. Gonzalo Santiago

5.59

"

7. Salvador Santiago

13.24

"

8. Emiliano Pacheco

9.21

"

25.86

"

9. Santiago Pangilinan

10. Jose Sta. Ana

21.99

"

11. Graciano Mangalindan

17.05

"

12. Ricardo Balmero

17.25

"

13. Ireneo dela Cruz

16.05

"

14. Jose Mallari

11.06

"

15. Artemio Gabriel

10.29

"

Respondent-landholders are hereby ordered to return to petitioners the following amounts of

palay of the variety harvested appearing opposite their names:
1. Miguel Sta. Ana

22.28 cavans

2. Domingo Santiago

12.73

"

3. Timoteo Magcalas

11.6

"

4. Leandro Maningas

10.14

"

5. Valentin Pacheco

15.26

"

6. Gonzalo Santiago

6.01

"

7. Salvador Santiago

11.93

"

8. Emiliano Pacheco

11.92

"

9. Santiago Pangilinan

16.62

"

10. Jose Sta. Ana

10.65

"

11. Graciano Mangalindan

17.21

"

12. Ricardo Balmeo

17.58

"

13. Ireneo de la Cruz

17.7

"

14. Jose Mallari

12.85

"

15. Artemio Gabriel

13.38

"

TOTAL

208.38 cavans

The petition with respect to Nicodemus Magcalas and Miguel Santiago is hereby dismissed.
The prayer of Pascual Manalili for the determination of the rent he is to pay is likewise
dismissed for lack of evidence.
All other claims are dismissed.
Petitioners herein, Potenciano Ilusorio and Teresa Ilusorio, are co-owners of a parcel of land situated
in the Barrio of Bantug, Municipality of San Miguel, Province of Bulacan. The main respondents
herein i.e. the fifteen (15) winning tenants named in the dispositive part above-quoted have for
years worked on said land under the share tenancy system. Before the beginning of the agricultural
year 1960-1961, they gave notice to the petitioners, in conformity with the provisions of Section 14 of

Republic Act No. 1199, as amended, that they (respondents) wanted to change their tenancy
contract from said system to leasehold tenancy. The Ilusorios having refused to agree thereto, said
respondents and three other tenants whose claims were dismissed by the Court of Agrarian
Relations instituted this proceedings, in said court, on November 16, 1960. The main defense set
up by petitioners herein, as respondents in said court, is that the aforementioned Section 14 of
Republic Act No. 1199, as amended, is unconstitutional, which was rejected by the lower court.
Hence this appeal in which the Ilusorios maintain: (1) that said provision is unconstitutional; and (2)
that the lower court had acted arbitrarily in fixing the rentals collectible by them from respondents
herein at 20% of the average harvest for the agricultural years 1959-1960, 1960-1961, and 19611962.
Petitioners assail the constitutionality of Section 14 of Republic Act No. 1199, as amended, upon the
ground that it violates the freedom of contract and impairs property rights, as well as the obligation of
contracts. The Court has already held, however, that:
The prohibition contained in constitutional provisions against impairing the obligation of
contracts is not an absolute one and is not to be read with literal exactness like a
mathematical formula. Such provisions are restricted to contracts with respect property, or
some object of value, and confer rights which may be asserted in a court of justice, and have
no application to statute relating to public subjects within the domain of the general
legislative powers of the State, and involving the public right and public welfare of the entire
community affected by it. They do not prevent proper exercise by the State of its police
powers. By enacting regulations reasonably necessary to secure the health, safety, morals,
comfort, or general welfare of the community, even the contracts may thereby be affected;
for such matter cannot be placed by contract beyond the power of the State to regulate and
control them. (Ongsiako vs. Gamboa, et al., 86 Phil. 50.)
Although mainly concerned with the constitutionality of Sections 9 and 50 of Republic Act No. 1199,
as amended the validity of this law in its entirely was upheld in Primero vs. Court of Agrarian
Relations, L-10594 (May 2, 1957), in the following language:
... We find no merit in this contention. The provisions of law assailed as unconstitutional do
not impair the right of the landowner to dispose or alienate his property nor prohibit him to
make such transfer or alienation; they only provide that in case of transfer or in case of
lease, as in the instant case, the tenancy relationship between the landowner and his tenant
should be preserved in order to insure the well-being of the tenant or protect him from being
unjustly dispossessed by the transferee or purchaser of the land; in other words, the purpose
of the law in question is to maintain the tenants in the peaceful possession and cultivation of
the land or afford them protection against unjustified dismissal from their
landholdings.Republic Act 1199 is unquestionably a remedial legislation promulgated
pursuant to the social justice precepts of the Constitution and in the exercise of the police
power of the State to promote the common weal. It is a statute relating to public subjects
within the domain of the general legislative powers of the State and involving the public
rights and public welfare of the entire community affected by it. Republic Act 1199, like the
previous tenancy law enacted by our law-making body, was passed by Congress in
compliance with the constitutional mandate that "the promotion of social justice to insure the
well-being and economic security of all the people should be the concern of the State" (Art.
II, sec. 5) and that "the State shall regulate the relations between landlord and tenant ... in
agriculture ... ." (Art. XIV, see. 6). (Emphasis supplied.)
As regards, particularly, Section 14 of Republic Act No. 1199, as amended, which is the main object
of petitioners' appeal, its validity has been repeatedly sustained by this Court in Mateo de Ramas vs.

Court of Agrarian Relations, L-19555 (May 29, 1964), Macasaet vs. Court of Agrarian Relations, L19750 (July 17, 1964), andUichanco vs. Gutierrez, L-20275-9 (May 31, 1965). We find no cogent
reason to depart from the view we have so far adhered to, which is in consonance with our
consistent jurisprudence on the police power of the State.
As regards the second issue, it is urged that respondent court has acted arbitrarily in fixing, in its
decision, dated June 27, 1962, the rentals to be paid by respondents herein on the basis of the
average harvest for the three (3) preceding agricultural years, for said rentals, petitioners maintain,
should be determined from year to year. This pretense is refuted by Section 46 (a) of Republic Act
No. 1199, as amended by Republic Act No. 2263, pursuant to which:
The fixed consideration for the use of ricelands, shall not be more than the equivalent of
twenty-five per centum in case of first class land and twenty per centum in case of second
class land of the average gross produce, after deducting the same amount of palay used as
seed and the cost of harvesting and threshing of the past three normal harvests.
It should be noted, also, that the rental thus fixed is subject to the qualification found in a proviso to
the effect:
That, if the landholder introduced improvements on the farm which increase its productivity,
he may demand for an, increase in the rental proportionate to the increase in production
resulting from such improvements. In case of disagreement the court shall determine the
reasonable increase in rental. Classification of ricelands shall be determined by productivity;
first class lands being those which yield more than forty cavans per hectare and second
class lands being those which yield forty cavans or less, the same to be computed upon the
normal average harvest of the three preceding years.
1wph1.t

Wherefore, the decision appealed from is hereby affirmed, with costs against petitioners herein. It is
so ordered.

6. Tiro v. Hontanosas (125 SCRA 697)

G.R. No. L-32312 November 25, 1983
AURELIO TIRO, as City Superintendent of Schools of Cebu City, petitioner-appellant,
vs.
HONORABLE AGAPITO HONTANOSAS, Judge of the Court of First Instance of Cebu, Branch
XI, ZAFRA FINANCING ENTERPRISE and MARCELINO ZAFRA, respondents-appellees.
Nazareno R. Pacquiao and Medudio P. Belarmino for petitioner-appellant.
The Solicitor General and Amadeo Seno and Teodoro Almase for respondents-appellees.

ABAD SANTOS, J,:

In Civil Case No. 11616 of the defunct Court of First Instance of Cebu, Zafra Financing Enterprise
sued Aurelio Tiro in his official capacity as Superintendent of Schools in Cebu City. It appears that

Zafra had extended loans to public school teachers in Cebu City and the teachers concerned
executed promissory notes and special powers of attorney in favor of Zafra to take and collect their
salary checks from the Division Office in Cebu City of the Bureau of Public Schools. However, Tiro
forbade the collection of the checks on the basis of Circular No. 21, series 1969, dated December 5,
1969, of the Director of Public Schools which reads as follows:
t.hqw

PROHIBITING PAYMENT OF SALARY TO PERSONS OTHER THAN THE

EMPLOYEE CONCERNED
To Superintendents:
1. Quoted hereunder is Memorandum Order No. 93 dated February 5, 1968, of the
Executive Office entitled "Prohibiting Payment of Salary to Any Person Other Than
the Employees Concerned, Except As Provided Herein."
t.hqw

It has been observed that some employees delegate the collection of

their salaries to attorneys-in-fact on the strength of powers of attorney
or other forms of authority in favor of other persons, evidently in
satisfaction of obligations contracted by them. This practice should be
discouraged in view of its adverse effects on the efficiency and
morale of employees whose incentive to work is necessarily
impaired, since their salary or a portion thereof goes to other
persons.
To curb this unwholesome practice, it is hereby directed that
henceforth no cashier or disbursing officer shall pay to attorneys-infact or other persons who may be authorized under a power of
attorney or other forms of authority to collect the salary of an
employee, except when the persons so designated and authorized is
an immediate member of the family of the employee concerned, and
in all other cases, except upon proper authorization of the Assistant
Executive Secretary for Legal and Administrative Matters, with the
recommendation of the Financial Assistant.
All orders or regulations inconsistent herewith are hereby revoked.
This order shall take effect immediately.
2. Accordingly, it is desired that, henceforth, cashiers or disbursing officers pay the
salary due any school employee or issue the treasury warrant of any teacher direct to
such employee or teacher, except when authority to collect the salary or treasury
warrant has been given to another person, and the person so authorized is an
immediate member of the family of the employee or teacher concerned.
3. Any previous regulation issued by this Office inconsistent with this Circular is
hereby revoked.

Zafra sought to compel Tiro to honor the special powers of attorney; to declare Circular No. 21 to be
illegal; and to make Tiro pay attorney's fees and damages. The trial court granted the prayer of Zafra
but the claim for money was disallowed on the ground that he acted in good faith in implementing
Circular No. 21.
Tiro now seeks in this petition for review a reversal of the trial court's decision.
The petition is highly impressed with merit.
The core issue is whether or not Circular No. 21 is valid and enforceable and the answer is definitely
in the affirmative.
The salary check of a government officer or employee such as a teacher does not belong to him
before it is physically delivered to him. Until that time the check belongs to the Government.
Accordingly, before there is actual delivery of the check, the payee has no power over it; he cannot
assign it without the consent of the Government. On this basis Circular No. 21 stands on firm legal
footing.
The Circular in question is authorized by relevant statutes extant when it was issued such as the
following:
t.hqw

SEC. 79(b). Power to regulate. The Department Head shall have power to
promulgate, whoever he may see fit to do so, all rules, regulations, orders, circular,
memorandums, not contrary to law, necessary to regulate the proper working and
harmonious and efficient administration of each and all of the offices and
dependencies of his Department, and for the strict enforcement and proper execution
of the laws relative to matters under the jurisdiction of said Department; but none of
said rules or orders shall prescribe penalties. All rules, regulations, orders or
instructions of a general and permanent character promulgated in conformity with
this section shall be numbered by each Department consecutively each year, and
shall be duly published.
Chiefs of Bureaus or offices may, however, be authorized to promulgate circulars of
information or instructions for the government of the officers and employees in the
interior administration of the business of each Bureau or office, and in such case said
circulars shall not be required to be published. (Revised Administrative Code.)
SEC. 21. Deductions Prohibited. No person shall make any deduction whatsoever
from the salaries of teachers except under specific authority of law authorizing such
deductions: Provided, however, that upon written authority executed by the teacher
concerned, (1) lawful dues and fees owing to the Philippine Public School Teachers
Association, and (2) premiums properly due on insurance policies, shall be
deductible. (Magna Carta For Teachers, R.A. No. 4670.)

Zafra's claim that the Circular impairs the obligation of contracts with the teachers is baseless. For
the Circular does not prevent Zafra from collecting the loans. The Circular merely makes the
Government a non-participant in their collection which is within its competence to do.
WHEREFORE, the petition is granted; the judgment of the court a quo is hereby set aside; costs
against the private respondent.
SO ORDERED.

7. Caleon v. Agus Development Corporation (207 SCRA 748)

G.R. No. 77365 April 7, 1992
RITA CALEON, petitioner,
vs.
AGUS DEVELOPMENT CORPORATION and COURT OF APPEALS, respondents.

BIDIN, J.:
This is a petition for review on certiorari seeking the reversal of the January 28, 1987 decision of the
Court of Appeals in CA-G.R. SP No. 10990 entitled "Rita Caleon V. Hon. Samilo Barlongay, et al."
dismissing the petition for review of the decision of the Regional Trial Court of Manila, Branch 34,
which affirmed the decision of the Metropolitan Trial Court of Manila, Branch XII, ejecting the
petitioner.
The undisputed facts of the case are as follows:
Private respondent Agus Development Corporation is the owner of a parcel of land denominated as
Lot 39, Block 28, situated at 1611-1619 Lealtad, Sampaloc, Manila, which it leased to petitioner Rita
Caleon for a monthly rental of P180.00. Petitioner constructed on the lot leased a 4-door apartment
building.

Without the consent of the private respondent, the petitioner sub-leased two of the four doors of the
apartment to Rolando Guevarra and Felicisima Estrada for a monthly rental of P350.00 each. Upon
learning of the sub-lease, private respondent through counsel demanded in writing that the petitioner
vacate the leased premises (Rollo, Annex "A", p. 20).
For failure of petitioner to comply with the demand, private respondent filed a complaint for
ejectment (Civil Case No. 048908) with the Metropolitan Trial Court of Manila, Branch XII against the
petitioner citing as ground therefor the provisions of Batas Pambansa Blg. 25, Section 5, which is the
unauthorized sub-leasing of part of the leased premises to third persons without securing the
consent of the lessor within the required sixty (60)-day period from the promulgation of the new law
(B.P. 25). (Rollo, Petition, p. 8).
After trial, the court a quo rendered its decision ordering petitioner and all persons claiming
possession under her (a) to vacate the premises alluded to in the complaint; (b) to remove whatever
improvement she introduced on the property; (c) to pay private respondent the amount of P2,000.00
as attorney's fees; and (d) to pay the costs (Rollo, Annex "A", p. 19).
Petitioner appealed the decision to the Regional Trial Court and on November 24, 1980, presiding
judge of the RTC, the Hon. Samilo Barlongay, affirmed in toto the decision of the Metropolitan Trial
Court (Rollo, Annex "A", p. 19).
The decision of the Regional Trial Court was appealed to the Court of Appeals for review. The
respondent Court of Appeals rendered its decision dated January 28, 1987, the dispositive portion of
which reads as follows:
PREMISES CONSIDERED, the petition not being prima facie meritorious, the same
is outright dismissed.
SO ORDERED. (Rollo, Annex "A", p. 21)
Hence, the petition for review on certiorari.
The principal issue in this case is whether or not the lease of an apartment includes a sublease of
the lot on which it is constructed, as would constitute a ground for ejectment under Batas Pambansa
BLg. 25.
Petitioner is of the view that Batas Pambansa Blg. 25 is not applicable because what she leased
was her own apartment house which does not include a sublease of the lot she leased from private
respondent on which the apartment is constructed.
Petitioner's contention is untenable.
This issue has already been laid to rest in the case of Duellome v. Gotico (7 SCRA 841 [1963])
where this Court ruled that the lease of a building naturally includes the lease of the lot, and the
rentals of the building includes those of the lot. Thus:

. . . the lease of a building would naturally include the lease of the lot and that the
rentals of the building include the rentals of the lot.
xxx xxx xxx
Furthermore, under our Civil Code, the occupancy of a building or house not only
suggests but implies the tenancy or possession in fact of the land on which they are
constructed. This is not a new pronouncement. An extensive elaboration of this rule
was discussed by this Court in the case ofBaquiran, et al., v. Baquiran, et al., 53 O.G.
p. 1130.
. . . the Court of Appeals should have found the herein appellees
lessees of the house, and for all legal purposes, of the lot on which it
was built as well.
But petitioner insists that the ruling in the aforecited case is not applicable to the case at bar
because the former is a damage suit while the latter is an ejectment case.
Be that as it may, this Court has categorically answered in the affirmative, the principal question,
common to both cases and on which rests the resolution of the issues involved therein. Under the
above ruling it is beyond dispute that petitioner in leasing her apartment has also subleased the lot
on which it is constructed which lot belongs to private respondent. Consequently, she has violated
the provisions of Section 5, Batas Pambansa Blg. 25 which is a ground for Ejectment.
Section 5 of Batas Pambansa Blg. 25 enumerates the grounds for judicial ejectment, among which is
the subleasing of residential units without the written consent of the owner/lessor, to wit:
Se. 5 Grounds for judicial ejectment. Ejectment shall be allowed on the following
grounds:
a) Subleasing or assignment of lease of residential units in whole or in part, with the
written consent of the owner/lessor: Provided that in the case of subleases or
assignments executed prior to the approval of this Act, the sublessor/assignor shall
have sixty days from the effectivity of this Act within which to obtain the written
approval of the owner/lessor or terminate the sublease or assignment.
Section 2(b) of Batas Pambansa Blg. 25 defines the term residential unit as follows:
Sec. 2. Definition of Terms Unless otherwise indicated wherever in this Act, the
following shall have the following meaning:
xxx xxx xxx
b. A residential unit refers to an apartment, house and/or land on which another's
dwelling is located used for residential purposes and shall include not only buildings,
parts or units thereof used solely as dwelling places, except motels, motel rooms,

hotels, hotel rooms, boarding houses, dormitories, rooms and bedspaces for rent, but
also those used for home industries, retail stores, or other business purposes if the
owner thereof and his family actually live therein and use it principally for dwelling
purposes: . . .
Petitioner argued further that Batas Pambansa Blg. 25 cannot be applied in this case because there
is a perfected contract of lease without any express prohibition on subleasing which had been in
effect between petitioner and private respondent long before the enactment of Batas Pambansa Blg.
25. Therefore, the application of said law to the case at bar is unconstitutional as an impairment of
the obligation of contracts.
It is well settled that all presumptions are indulged in favor of constitutionality; one who attacks a
statute, alleging unconstitutionality must prove its invalidity beyond a reasonable doubt (Victoriano v.
Elizalde Rope Workers' Union, 59 SCRA 54 [1974]). In fact, this Court does not decide questions of
a constitutional nature unless that question is properly raised and presented in appropriate cases
and is necessary to a determination of the case,i.e., the issue of constitutionality must be the very lis
mota presented (Tropical Homes, Inc. v. National Housing Authority, 152 SCRA 540 [1987]).
In any event, it is now beyond question that the constitutional guaranty of non-impairment of
obligations of contract is limited by and subject to the exercise of police power of the state in the
interest of public health, safety, morals and general welfare (Kabiling, et al. v. National Housing
Authority, 156 SCRA 623 [1987]). In spite of the constitutional prohibition, the State continues to
possess authority to safeguard the vital interests of its people. Legislation appropriate to
safeguarding said interest may modify or abrogate contracts already in effect (Victoriano v. Elizalde
Rope Workers' Union, et al., supra). In fact, every contract affecting public interest suffers a
congenital infirmity in that it contains an implied reservation of the police power as a postulate of the
existing legal order. This power can be activated at anytime to change the provisions of the contract,
or even abrogate it entirely, for the promotion or protection of the general welfare. Such an act will
not militate against the impairment clause, which is subject to and limited by the paramount police
power (Villanueva v. Castaeda, 154 SCRA 142 [1987]).
Batas Pambansa Blg. 25, "An Act Regulating Rentals of Dwelling Units or of Land On Which
Another's Dwelling is Located and For Other Purposes" shows that the subject matter of the law is
the regulation of rentals and is intended only for dwelling units with specified monthly rentals
constructed before the law became effective (Baens v. Court of Appeals, 125 SCRA 634 [1983]).
Batas Pambansa Blg. 25 is derived from P.D. No. 20 which has been declared by this Court as a
police power legislation, applicable to leases entered into prior to July 14, 1971 (effectivity date of
RA 6539), so that the applicability thereof to existing contracts cannot be denied (Gutierrez v.
Cantada, 90 SCRA 1 [1979]).
Finally, petitioner invokes, among others, the promotion of social justice policy of the New
Constitution. Like P.D. No. 20, the objective of Batas Pambansa Blg. 25 is to remedy the plight of
lessees, but such objective is not subject to exploitation by the lessees for whose benefit the law
was enacted. Thus, the prohibition provided for in the law against the sublease of the premises
without the consent of the owner. As enunciated by this Court, it must be remembered that social

justice cannot be invoked to trample on the rights of property owners, who under our Constitution
and laws are also entitled to protection. The social justice consecrated in our Constitution was not
intended to take away rights from a person and give them to another who is not entitled thereto
(Salonga v. Farrales, 105 SCRA 360 [1981]).
WHEREFORE, the Petition is Denied for lack of merit and the assailed decision of the Court of
Appeals is Affirmed.
SO ORDERED.

8. PNB v. Remigio refer to case no. 3