Palanca vs. Court of Appeals

An escalator clause in a domestic obligation that pegs or measures the amount payable in Philippine currency to a foreign currency's exchange rate is null and void under Republic Act No. 529, which declares against public policy any provision purporting to give the obligee the right to require payment in an amount of money of the Philippines measured by a foreign coin or currency.

SimPLICIO A. Palanca was the vendor of a parcel of land covered by TCT No. T-6771766, sold on installment to Jose S. Sanicas, whose account was later assumed by his brother, private respondent Edgardo S. Sanicas, with Jose designated as attorney-in-fact. The contract contained an escalator clause in paragraph 11 adjusting the unpaid balance proportionately based on the prevailing peso-to-dollar exchange rate. Republic Act No. 529 (the Cuenco Law), which declares void any provision in domestic obligations purporting to give the obligee the right to require payment in a particular kind of currency other than Philippine currency or in an amount of Philippine money measured thereby, supplies the statutory framework governing the validity of that clause.

On January 22, 1977, petitioner Simplicio A. Palanca, as vendor, and Jose S. Sanicas, as vendee, entered into a Contract to Sell on Installment of a parcel of land covered by TCT No. T-6771766. Under the contract, Jose agreed to pay P9,851.00 as downpayment and the balance of P88,659.00 in 120 monthly installments, with 14% interest per annum on the outstanding balance. Jose further agreed to pay the annual real property taxes, with a stipulated penalty of 50% surcharge plus 12% compounded interest per annum in case of non-payment. Edgardo S. Sanicas later assumed his brother Jose's account and designated Jose as his authorized representative in dealings with petitioner.

Paragraph 11 of the contract contained an escalator clause providing that "in the event of monetary fluctuation, the unpaid balance account of the herein VENDEE on the aforecited subdivision lot shall be increased proportionately on the basis of the present value of P6.72 to $1.00 US dollar." The parties thus understood "monetary fluctuation" to mean any change in the rate of exchange of the Philippine peso to the U.S. dollar.

Following demands from petitioner for the updating of the account, private respondent requested a detailed statement of his obligations. When petitioner failed to furnish the statement, private respondent hired an accountant to compute his obligations and thereafter tendered P44,955.87 in cash, which included interest at 12% per annum. Petitioner refused to accept the tender, asserting that private respondent's actual liability was P155,630.40 by virtue of the escalator clause in paragraph 11. Private respondent then made a judicial consignment of the amount on May 29, 1987, and filed a complaint for reconveyance with preliminary injunction, praying that petitioner be restrained from cancelling his rights under the contract and from ejecting him from the property, that petitioner be ordered to accept the consigned amount, and that the purchase price be declared fully paid.

The trial court, applying Article 1250 of the Civil Code, ruled that paragraph 11 could not take effect absent extraordinary inflation or deflation, and further held that pegging the unpaid balance at 100.398% — aside from the agreed 14% interest rate — was unconscionable. It ordered petitioner to execute a deed of conveyance in favor of private respondent upon payment of P44,979.87 through judicial consignation. On appeal, the Court of Appeals modified the judgment, computing the amount payable at P70,688.17, broken down as P45,186.04 balance on principal, P22,604.63 interest from January 24, 1983 to April 2, 1987 plus balance on interest, and P2,897.00 land taxes from 1977 to 1986. The appellate court concurred with the trial court that paragraph 11 could not come into effect absent actual extraordinary inflation or deflation.

• Entitlement to Proportionate Increase: Petitioner argued that he was entitled to a proportionate increase in payment on the balance of the purchase price for real property bought on installment, pursuant to paragraph 11 of the Contract to Sell on Installment, which provided for adjustment based on the peso-dollar exchange rate in the event of monetary fluctuation.

• Validity of Escalator Clause: Whether petitioner is entitled to a proportionate increase in payment on the balance of the purchase price for a piece of real property bought on installment, pursuant to paragraph 11 of the subject Contract to Sell on Installment.

• Validity of Escalator Clause: No. The escalator clause in paragraph 11 is null and void for violating Section 1 of Republic Act No. 529, which prohibits domestic obligations from requiring payment in an amount of Philippine currency measured by a foreign currency. The lower courts' reliance on Article 1250's extraordinary inflation requirement was rejected, but the same result was reached on the statutory ground that R.A. No. 529 bars the clause.

• Validity of Escalator Clause: The Court declined to affirm the lower courts' reasoning that extraordinary inflation under Article 1250 of the Civil Code was a prerequisite for enforcing the escalator clause. The parties' clear understanding was that an upward adjustment would occur the moment there was a deterioration of the Philippine peso vis-à-vis the U.S. dollar — this was the "monetary fluctuation" they contemplated — making it unnecessary to determine whether extraordinary inflation had supervened. Nevertheless, while party autonomy permits escalator clauses adjusting contract prices upon the occurrence of specified events, such autonomy may be limited by law. The decisive limitation here is Republic Act No. 529 (the Cuenco Law), Section 1 of which declares against public policy and null and void any provision in a domestic obligation purporting to give the obligee the right to require payment in a particular kind of currency other than Philippine currency, or in an amount of money of the Philippines measured thereby. The Court identified two distinct prohibitions in the law: (1) requiring payment in a specified currency other than Philippine currency, and (2) requiring payment in an amount of Philippine money measured by a foreign currency. Paragraph 11 fell under the second prohibition, as it gave the obligee the right to demand payment of the balance "in an amount of money of the Philippines measured" by the U.S. dollar. The Court emphasized that R.A. No. 529 was enacted to preserve the value of the Philippine peso and maintain public confidence in the monetary system; if foreign currency were used as the basis for measuring amounts payable in Philippine currency, public confidence in the Philippine monetary system would be adversely affected. The transaction was a sale of land in the Philippines payable in Philippine pesos, with no foreign currency directly involved, and was therefore distinct from a loan in foreign currency stipulated to be payable in Philippine currency. The liberalization of foreign exchange regulations through Central Bank Circulars did not repeal or amend R.A. No. 529, because a Central Bank Circular cannot repeal a law — only a law can repeal another law, pursuant to Article 7 of the Civil Code.

• Republic Act No. 529 (Cuenco Law) — Prohibition on Foreign Currency Pegging — The law prohibits two things in all domestic contracts: (1) giving the obligee the right to require payment in a specified currency other than Philippine currency, and (2) giving the obligee the right to require payment in an amount of money of the Philippines measured by a foreign coin or currency. Any provision violating either prohibition is declared against public policy and is null, void, and of no effect. The Court applied this doctrine to invalidate an escalator clause that pegged the unpaid balance of a Philippine peso-denominated sale to the peso-dollar exchange rate, as it constituted requiring payment "in an amount of money of the Philippines measured" by a foreign currency.

• Limitation on Party Autonomy in Escalator Clauses — While parties may stipulate escalator clauses providing that the contract price shall be increased upon the occurrence of certain events, such autonomy is subject to limitation by law. An escalator clause that measures Philippine currency obligations by a foreign currency is unenforceable under R.A. No. 529.

• Central Bank Circulars Cannot Repeal Statutes — Under Article 7 of the Civil Code, laws are repealed only by subsequent laws, and disuse, custom, or practice to the contrary does not excuse non-observance. A Central Bank Circular, being an administrative issuance, cannot repeal or amend a statute. The foreign exchange liberalization Circulars issued by the Monetary Board merely allowed the free sale and purchase of foreign exchange outside the banking system and did not repeal R.A. No. 529.

• "Often lost sight of is the fact that the said law prohibits two things in all domestic contracts: (1) giving the obligee the right to require payment in a specified currency other than Philippine currency; and (2) giving the obligee the right to require payment 'in an amount of money of the Philippines measured thereby.'" — This passage articulates the Court's canonical interpretation of R.A. No. 529, clarifying that the law's second prohibition reaches escalator clauses pegging Philippine peso amounts to foreign currency exchange rates.

• "While the contract may contain an 'escalator clause' providing that in the occurrence of certain events, the contract price shall be increased to a fixed percentage of the base price . . . still the autonomy of the parties to provide such escalator clauses may be limited by law." — This establishes the principle that escalator clauses, while generally permissible as expressions of party autonomy, remain subject to statutory limitations such as R.A. No. 529.

• "Besides, a Central Bank Circular cannot repeal a law. Only a law can repeal another law." — This affirms the hierarchy of legal norms, holding that administrative issuances cannot override or impliedly repeal statutes, a principle rooted in Article 7 of the Civil Code.

• Lily San Buenaventura vs. Court of Appeals, 181 SCRA 197 (1990) — Cited to distinguish cases involving loans contracted in foreign currency but stipulated to be payable in Philippine currency, where the rate of exchange prevailing at the stipulated date of payment governs. The present case involved a domestic sale of land payable in Philippine pesos with no foreign currency directly involved, and thus R.A. No. 529 applied to bar the escalator clause.

• Section 1, Republic Act No. 529 (as amended), the Cuenco Law — Declares against public policy and null and void any provision in a domestic obligation purporting to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency, or in an amount of money of the Philippines measured thereby. Applied to invalidate the escalator clause in paragraph 11, which pegged the unpaid balance to the peso-dollar exchange rate, as it constituted requiring payment in an amount of Philippine money measured by a foreign currency.

• Article 1250, Civil Code of the Philippines — Provides that in case of extraordinary inflation or deflation of the currency stipulated, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. The lower courts applied this provision to require extraordinary inflation before the escalator clause could take effect; the Supreme Court rejected this reasoning as unnecessary given the parties' clear intent to adjust upon any peso-dollar fluctuation, but reached the same result on the ground of R.A. No. 529.

• Article 7, Civil Code of the Philippines — Provides that laws are repealed only by subsequent ones and that violation or non-observance shall not be excused by disuse, custom, or practice to the contrary. Applied to hold that Central Bank Circulars liberalizing foreign exchange could not repeal or amend R.A. No. 529.

Narvasa, C.J., Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Puno, Vitug, Kapunan, and Mendoza, JJ., concur. Padilla, J., concurs in the result. Feliciano, J., is on leave.