United States vs. Conde

A penal statute adopted after the execution of a contract cannot be applied retroactively to criminalize the collection of interest at a rate that was lawful when the contract was made, as this would violate both the constitutional prohibition against laws impairing the obligation of contracts and the prohibition against ex post facto laws.

The defendants, Vicente Diaz Conde and Apolinaria R. de Conde, were lenders who had entered into a loan agreement with Bartolome Oliveros and Engracia Lianco on December 30, 1915, under which the borrowers received P300 and agreed to pay interest at five per cent per month. At the time the contract was executed, no usury law was in force in the Philippine Islands. Act No. 2655, the Usury Law, was subsequently adopted and became effective on May 1, 1916, approximately four and a half months after the contract was executed. The defendants were thereafter charged with violating Act No. 2655 for collecting interest at the stipulated rate under the pre-existing contract.

On December 30, 1915, Bartolome Oliveros and Engracia Lianco executed and delivered to Vicente Diaz Conde and Apolinaria R. de Conde a contract evidencing a loan of P300. Under the terms of that contract, Oliveros and Lianco obligated themselves to pay interest at the rate of five per cent per month, payable within the first ten days of each and every month, with the first payment due on January 10, 1916. The contract contained other terms not material to the disposition of the case.

At the time the contract was executed, no usury law was in force in the Philippine Islands. Act No. 2655, the Usury Law, was subsequently adopted and became effective on May 1, 1916, approximately four and a half months after the contract was made. On May 6, 1921, a complaint was filed in the Court of First Instance of Manila charging the defendants with a violation of Act No. 2655 for collecting interest at the stipulated usurious rate. The defendants were arrested, arraigned, and pleaded not guilty. Trial commenced on September 1, 1921.

The lower court acknowledged that no usury law was in force at the time the contract was executed, but found the defendants guilty on the reasoning that they had collected usurious interest after the Usury Law had taken effect. Each defendant was sentenced to pay a fine of P120, with subsidiary imprisonment in case of insolvency. The defendants appealed, contending that the contract predated the Usury Law, that no usury law existed when the contract was made, that Act No. 2655 could have no retroactive effect, and that applying it would impair the obligation of the contract.

• Retroactive Application of Penal Law: Whether Act No. 2655 (the Usury Law) may be applied retroactively to a loan contract executed before its enactment to criminalize the collection of interest at a rate that was lawful when the contract was made.
• Impairment of Contract Obligation: Whether applying Act No. 2655 to the pre-existing contract violates the constitutional prohibition against laws impairing the obligation of contracts.
• Ex Post Facto Law: Whether applying Act No. 2655 to the defendants' conduct constitutes an ex post facto law prohibited in this jurisdiction.

• Retroactive Application of Penal Law: No. Laws must be construed prospectively, not retrospectively; a contract legal at its inception cannot be rendered illegal by subsequent legislation.
• Impairment of Contract Obligation: Yes, applying the law would impair the obligation. The obligation to pay interest at the stipulated rate is part of the contract obligation, and a subsequent law altering that rate impairs the contract in violation of the organic law.
• Ex Post Facto Law: Yes, it would be ex post facto. Act No. 2655 made criminal an act that was innocent when done, and applying it retroactively would give it an ex post facto operation absolutely prohibited unless favorable to the defendant.

• Retroactive Application of Penal Law: The Court applied the established rule that the laws in force at the time a contract is made govern its interpretation and application. A law imposing a new penalty or liability must not be construed as having retroactive effect. The contract here was executed on December 30, 1915, when no usury law existed; Act No. 2655 became effective only on May 1, 1916. Because the stipulation to pay five per cent monthly interest was legal at the time of execution, subsequent legislation could not render it criminal. The Court relied on U.S. vs. Constantino Tan Quingco Chua and Aguilar vs. Rubiato and Gonzales Vila for the proposition that laws must be construed prospectively and that a contract legal at inception cannot be made illegal by later legislation. Articles 21 and 22 of the Penal Code were cited for the rule that penal laws may not be given retroactive effect unless favorable to the accused.

• Impairment of Contract Obligation: The Court reasoned that the obligation to pay interest on money due under a contract, whether express or implied, is part of the obligation of the contract itself. When a contract contains a promise to pay interest at a stipulated rate, that interest becomes part of the principal obligation. A law adopted after the contract's execution that changes or alters the rate of interest cannot be applied to that contract without violating the constitutional prohibition against impairing the obligation of contracts. The Court defined the obligation of a contract as the law binding the parties to perform their agreement, provided it is not contrary to law, morals, or public order. Any law that enlarges, abridges, or changes the parties' intention necessarily impairs the contract. The Jones Law's prohibition on such impairment was held to render any impairing law null and void. The Court cited 8 Cyc. 996 and 12 Corpus Juris 1058–1059 as supporting authority.

• Ex Post Facto Law: The Court held that every law making an action done before its passage criminal — when that action was innocent when done — and punishing such action is an ex post facto law. Act No. 2655 made the collection of five per cent monthly interest criminal, but the defendants' act of stipulating and collecting such interest was lawful when performed in December 1915. To apply Act No. 2655 to the defendants' conduct would give the statute an ex post facto operation. The Court distinguished civil retroactive laws, which may be permissible if curative in character, from ex post facto penal laws, which are absolutely prohibited unless their retroactive effect favors the defendant. The Court noted that what courts might say in a civil action under Article 1255 of the Civil Code — which permits annulment of contracts contrary to morals or public order — was a separate question not before the Court.

• Prospective Construction of Laws — Laws must be construed prospectively and not retrospectively; a law imposing a new penalty, liability, or disability must not be given retroactive effect. A contract legal at its inception cannot be rendered illegal by subsequent legislation. The Court applied this doctrine to hold that the Usury Law could not criminalize the collection of interest under a contract executed before the law's enactment.

• Impairment of the Obligation of Contracts — The obligation of a contract is the law binding the parties to perform their agreement if not contrary to law, morals, or public order. Any law that enlarges, abridges, or changes the parties' intention impairs the contract. The obligation to pay interest at a stipulated rate is part of the contract obligation; a subsequent law altering that rate impairs the contract and is null and void under the organic law. The Court held that applying Act No. 2655 to the pre-existing loan contract would constitute an unconstitutional impairment.

• Prohibition Against Ex Post Facto Laws — Every law that makes an action done before its passage criminal — which was innocent when done — and punishes such action is an ex post facto law, absolutely prohibited unless its retroactive effect is favorable to the defendant. The Court found that applying the Usury Law to conduct that was legal when committed would constitute an ex post facto law.

• "The obligation of the contract is the law which binds the parties to perform their agreement if it is not contrary to the law of the land, morals or public order. That law must govern and control the contract in every aspect in which it is intended to bear upon it, whether it affect its validity, construction, or discharge. Any law which enlarges, abridges, or in any manner changes the intention of the parties, necessarily impairs the contract itself." — This passage articulates the Court's definition of the obligation of a contract and the standard for determining whether a law impermissibly impairs that obligation, serving as the ratio decidendi for the constitutional holding.

• "If a contract is legal at its inception, it cannot be rendered illegal by any subsequent legislation. If that were permitted then the obligations of a contract might be impaired, which is prohibited by the organic law of the Philippine Islands." — This formulation captures the core rule that contracts lawful when made cannot be retroactively criminalized, a principle central to the Court's reversal of the conviction.

• "Every law that makes an action, done before the passage of the law, and which was innocent when done, criminal, and punishes such action, is an ex post facto law." — This is the canonical definition of an ex post facto law as applied in this case, directly supporting the holding that retroactive application of the Usury Law was prohibited.

• U.S. vs. Constantino Tan Quingco Chua, 39 Phil. 552 — Followed for the proposition that laws must be construed prospectively and that a contract legal at its inception cannot be rendered illegal by subsequent legislation.
• Aguilar vs. Rubiato and Gonzales Vila, 40 Phil. 570 — Followed for the same principle regarding prospective construction of laws and the prohibition against retroactive impairment of contract obligations.

• Act No. 2655 (The Usury Law) — The statute penalizing the collection of usurious interest, effective May 1, 1916. The Court held that this law could not be applied retroactively to a contract executed on December 30, 1915, before its enactment.
• Articles 21 and 22, Penal Code — Provisions prohibiting retroactive application of penal laws unless favorable to the accused. The Court cited these articles to support the rule against ex post facto application of Act No. 2655.
• Article 1255, Civil Code — Permits courts to annul contracts contrary to morals or public order. The Court noted that this provision's application in a civil action was a separate question not before it.
• Jones Law — The organic law of the Philippine Islands containing the constitutional prohibition against laws impairing the obligation of contracts. The Court held that retroactive application of the Usury Law would violate this prohibition.

Araullo, C.J., Street, Malcolm, Avanceña, Ostrand, Johns, and Romualdez, JJ., concurred.