5.

PNB V ZULUETA
Payable in sum certain in money
An instrument is still negotiable although the amount to be paid is expressed
in currency that is not legal tender so long as it is expressed in money. (PNB vs.
Zulueta, 101 Phil 1071, Sec.6 (e)).
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-7271

August 30, 1957

PHILIPPINE NATIONAL BANK, plaintiff-appellant,

vs.
JOSE ZULUETA, defendant-appellee.
Natalio M. Balboa and Ramon B. de los Reyes for appellant.
Lorenzo F. Miravite for appellee.
BENGZON, J.:
In the Manila court of first instance, the Philippine National Bank sued the
defendant upon a letter of credit and a draft for the amount of $14,449.15.
Although willing to pay the equivalent in pesos of the draft, plus bank charges,
the defendant objected to the 17% excise tax imposed by Republic Act No. 601
which the Bank tried to collect. Both documents, he contended, had been issued
and had matured before the approval of said Act, therefore the excise tax
should not be charged.
After the trial, the court rendered judgment exempting defendant from the 17%
excise tax; but ordered him to deliver to plaintiff the sum of P37,622.11 plus
daily interest of P3.9938 on P29,154.55 beginning from January 9, 1953.
The plaintiff appealed, insisting on the right to collect 17% excise or exchange
tax. This is the only issue between the parties now.
For a statement of the facts we may quote from plaintiff's brief. "On October 26,
1948, Defendant-Appellee applied for a commercial letter of credit with PlaintiffAppellant, Philippine National Bank (Manila) and was granted L/C No. 35171
(Exhibit "B") on November 6, 1948, in favor of Otis Elevator Co., 260 Eleventh
Avenue, New York City, U.S.A., for $14,449.15 for the purchase of an electric
passenger elevator; on May 17, 1949, and under the said letter of credit (Exhibit
"B"), Otis Elevator Co. drew a 90 day sight draft for $14,449.15 (Exhibit "A")
which draft was duly presented to and accepted by Defendant-Appellee on July
6, 1949. Said acceptance matured on October 4, 1949. Upon Defendant-

Appellee's signing a 90 day trust receipt (Exhibit "C") on June 3, 1949, PlaintiffAppellant released to Defendant-Appellee the covering documents of the
shipment. In the meantime, debit advice (Exhibit "G") was received from
Plaintiff-Appellant's New York Agency to the effect that it advanced or paid the
draft (Exhibit "A") to Otis Elevator Co. on May 17, 1949, and charged PlaintiffAppellant the sum of $14,467.21 representing the face value of the draft
(Exhibit "A") plus $18.06 as 1/8 of 1% commission. After the maturity date
(October 4, 1949) Plaintiff-Appellant presented the draft to Defendant-Appellee
for payment but the latter failed, neglected and refused to pay.
During its special session in January, 1951, Congress passed House Bill No.
1513, now Republic Act No. 601, approved on March 28, 1951, imposing a 17%
special excise tax (otherwise known as foreign exchange tax) on the value in
Philippine peso of foreign exchange sold by the Central Bank of the Philippines
or its authorized agents. Plaintiff-appellant, as any other commercial bank in the
Philippines, is an authorized agent of the Central Bank of the Philippines.
On October 17, 1952, and January 18, 1953, Plaintiff-Appellant sent bills or
statements of collection (Exhibits "D" and "D-1") to Defendant-Appellee but the
latter failed and refused to effect payment thereof. In those statements, the sum
of P4,955.74 was included representing the 17% special excise tax on the peso
value of the draft for US $14,449.15 (Exhibit "A"), . . . .
Defendant's application for a letter of credit party read as follows:
Please arrange by cable for the establishment of an Irrevocable Letter of
Credit on New York in favor of Otis Elevator Co., 260 Eleventh Avenue, New
York City for account of Ho. Jose C. Zulueta for the sum of FOURTEEN
THOUSAND FOUR HUNDRED FORTY-NINE AND 15/100 ($14,449.15)
DOLLARS against drawn at NINETY DAYS accompanied by shipping
documents covering of One COMPLETE ELECTRIC PASSENGER
ELEVATOR . . .
Drafts must be drawn and presented or negotiated not later than May 31,
1949.
IN CONSIDERATION THEREOF, I/we promise and agree to pay you at
maturity in Philippine Currency, the equivalent of the above amount or
such portion thereof as may be drawn or paid upon the faith of said credit,
together with your usual charges, and I/we authorize you and your
respective correspondents to pay or to accept drafts under this credit, . . .
And the draft issued thereunder (Exhibit A) was negotiable and addressed to
herein defendant as the drawee.
From plaintiff's statement of its position it is not clear whether recovery is
demanded upon the letter of credit, or upon the draft Exhibit A. Plaintiff may,

undoubtedly, proceed on either cause of action. (See Art. 571 Code of

Commerce; Sec. 51 Negotiable Instruments Law.)
Had the plaintiff elected to recover on said letter of credit, then it would meet
with the doctrines in Araneta vs. Philippine National Bank, 95 Phil., 160, 50 Off.
Gaz., (11) 5350), According to the majority opinion in that case, plaintiff should
receive the equivalent in pesos, on May 17, 1949, of what the New York Agency
paid to Otis Elevator, i.e. $14,467.21 (plus bank fees of course.) According to the
minority opinion, the equivalent in pesos of the same amount of dollars on
October 4, 1949. No. 17% tax on both dates. In converting dollars into pesos, no
17% exchange tax would be imposable, since it was created only in March 1951.
The plaintiff knows the case, for it was a party to it; and anticipating, in this
appeal, the obvious conclusions, it insists not so much on the letter of credit, as
on the bill of exchange Exhibit A1 . As stated before, such draft was drawn by
Otis Elevator Co. in New York. It was addressed to defendant as drawee, who is
due course accepted it. There is no, question that upon accepting it, defendant
became a party primarily liable2; and the holder (Philippine National Bank) may
sue him, even if there had been no presentation for payment on the day of
maturity. (Sec. 70 Negotiable Instruments Law.)
Admittedly, defendant's responsibility is for $14,449.15 due in Manila on
October 4, 1949 (plus bank fees). He is under obligation to deliver such amount
in pesos as were the equivalent of $14,449.15. At what rate of exchange? The
rate prevailing on the day of issuance, day of acceptance, day of maturity, the
day suit is filed, or that prevailing on the day judgment is rendered requiring
him to pay? Herein lies the center of the controversy. Appellant will win this
appeal only if the rate on the last days above mentioned is held to be the legal
rate.
The document is negotiable and is governed by the Negotiable Instruments Law.
But this statute does not certain any express provision on the question. We
know the draft is a foreign bill of exchange, because, drawn in New York, it is
payable here. (See. 129 Negotiable Instruments Law.) We also know that
although the amount payable is expressed in dollars not current money here
it is still negotiable, for it may be discharged with pesos of equivalent
amount3. The problem arises when we try to determine the "equivalent
amount", because the rate of exchange fluctuates from day to day.
There are decisions in America to the effect that, "the rate of exchange in effect
at the time the bill should have been paid" controls. (11 C.J.S. p. 264.)
Such decisions agree with the provisions of the Bills of Exchange Act of
England4 and could be taken as enunciating the correct principle, inasmuch as
our Negotiable Instruments Law, practically copied the American Uniform
Negotiable Instruments Law which in turn was based largely on the Bills of

Exchange Act of England of 1882. In fact we practically followed this rule

in Westminster Bank vs. K. Nassor, 58 Phil. 855.
There is one decision applying the rate of exchange at the time judgment is
entered. (11 C. J. S. p.264.)5
This decision however seems not to have taken into account the Bills of
Exchange Act above mentioned. And we have rejected its view in the
Westminster case, supra. Furthermore it related to a bill expressly
made payable in a foreign currency which is not the case here. And the
theory would probably produce undesirable effects upon commercial
documents, for it would make the amount uncertain, the parties to the bill not
being able to foresee the day judgment would be rendered. 6
But the appellant argues, the defendant had promised to pay $14,419.15 in
dollars; therefore he must be ordered to pay the sum in dollars at current
rates plus 17%.
The argument rests on a wrong premise. Defendant had not promised to pay in
dollars. He agreed to pay the equivalent of $14,419.15 dollars, in Philippine
currency 7.
But if we admit that defendant had agreed to pay in dollars, then we have to
apply Republic Act No. 529 and say that his obligation "shall be discharged in
Philippine currency measured at the prevailing rates of exchange at the time the
obligation was incurred."
Now then, Zulueta's obligation having been incurred 8 before the creation of the
17% tax, it may not be validly burdened with such tax, because the law
imposing it could not be deemed to have impaired obligations already existing
at the time of its approval..
The plaintiff's theory seems to be that in remitting dollars to its New York
Agency, after it collects from the defendant, it has to pay for the said excise
tax.9 The trial judge expressed the belief that such amount had been
remitted before the enactment of Republic Act 601, because considering the
practice of banks of replenishing their agencies abroad with necessary funds, he
deemed it improbable that the Manila Office of the Bank in two years had not
reimburse its New York Agency for the amount advanced on account of the draft
Exhibit A. This belief most probably accorded with reality; because as early as
May 17, 1949 (Exhibit G) the New York Agency had "charged" the amount of this
draft against the account of the Manila office there, which means the Agency
had reimbursed itself the amount of the draft out of the funds of the Manila
Office then in its possession (in New York) or coming to its possession
afterwards. And it is unbelievable that in two years the Manila office never had
in New York sufficient funds to effect the reimbursement.

In fact, the statement of account rendered by plaintiff to defendant on October

17, 1952, (Exhibit D) enumerated these charges:
To
your
amounting to

acceptance $14,449.
15

Plus:
Commission

Remitter's
18.06
$14,567.
21

Converted at 3/4 %

5% int.
10/19/52-1251 da.

P29,151.
43

5/17/494,995.68
P34,147.
11

10%

comm.

on 2,911.51

$14,449.15
Documentary stamps

8.70

Air Mail

2.00

17% Excise Tax on 4,955.74

P29,151.43
Other charges
3.00

From the above it may be deduced that the amount of the draft had
been remitted or paid to the New York Agencyin May 1949, for the reason that
Zulueta is charged with remitter's commission" and 5% interest on the amount
of the draft (and such commission) beginning from May 17, 1949. This
necessarily impllies that in accordance with Exhibit G, the New York Agency had
been reimbursed of the draft's amount (or such amount was remitted) on May
17, 1949.10 Now, in May 1949 no 17% exchange tax was payable upon such
remittance; and the Manila office did not pay it. Therefore Zulueta should not
pay it too.
In view of the foregoing the judgment will be affirmed, with costs against
appellant. So ordered.
Paras, C.J., Padilla, Montemayor and Bautista Angelo, JJ., concur.

Separate Opinions
REYES, A., J., concurring:
Plaintiff in this case seeks reimbursement in Philippine currency for the amount
in dollars advanced by it through its New York agency to meet a draft drawn
against defendant and accepted by the latter for a valuable consideration.
Plaintiff's to such reimbursement is not questioned. What is disputed is its
pretended right to add to the amount of the draft the excise tax of 17 % which
plaintiff would had to pay to the Government if it were to remit now to New York
the necessary amount of dollars that its agency there had paid on the draft.
I cannot bring myself to believe that it is only now that plaintiff has thought of
sending dollars to New York to replace the amount advanced by its agency. As
intimated in the majority opinion and in consonance with good banking practice,
the necessary remittance must have been effected long ago, that is, long before
the creation of the excise tax on foreign exchange in March, 1951. Plaintiff,
therefore, could not have paid such tax, and not having done so it has no right
to get reimbursement therefore from defendant.
I do not think that defendant could be legally made to pay more than what
plaintiff had actually advanced for him, aside from commission and other
charges, on the theory that the Philippine peso has depreciated in value with
respect to the American dollar. Legally, it has not. The legal rate of exchange
between the two currencies is still two to one. What happened is that with the
creation of the excise tax in 1951, it would now be more costly to remit dollars
abroad. But why should plaintiff make that remittance now when, as already
stated, it must have already done so long before the creation of the excise tax
on foreign exchange?

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

FELIX, J., concurring:

The decision rendered in this case, penned by Mr. Justice Cezar Bengzon,
perfectly reflects and delivers the opinion of the majority of this Court and I
subscribe to each and every statement made and argument adduced therein.
This being so, it would seem that any concurring or supporting opinion is quite
superfluous and I would not have taken the task of writing further in the matter
were it not for the fact that in the dissenting opinion it is stated that:
It cannot be justly contended that if a debtor had borrowed, say $10,000,
the lender should be satisfied with eight or nine thousand. Yet that is what
the majority's decision actually amounts to.
The writer further says that:
the majority opinion has the merit of giving the bank a costly lesson on the
advantages of not considering political influence in the making and
collecting of its loans; but I am afraid the experience will be too quickly
forgotten to even palliate the sacrifice of fundamental justice to technical
considerations.
I, certainly, cannot leave these statements pass unanswered.
To begin with, I might say that if any lesson has been given by the majority of
this court to the plaintiff bank, it is not in this case but in the case of Araneta vs.
The Philippine National Bank (G.R. No. L-4633, May 31, 1954), cited in the
majority decision, where the latter was a party to that case and a similar
doctrine was laid down. Coming now to the bone of contention, I notice that the
dissenting Justice views the matter involved in the controversy as a loanand
submits that the question really at issue can be boiled down to the proposition
of "whether it is the lender or the borrower who should bear the added cost of
the depreciation of the peso in relation to the dollar".
In this connection, I might say that defendant's obligation to the plaintiff would
have been settled some years ago were it not for the fact that the Bank insisted
in collecting the special excise tax of 17 per cent on foreign exchange
transactions imposed by Republic Act No. 601 which entered into effect on
March 28, 1951, and was not yet in force at the time the obligation of the
defendant matured on October 4, 1948. And even if we look at the case as
aloan and apply to the transaction the provisions of Article 312, paragraph 1, of
the Code of Commerce, cited by the dissenting Justice, yet We could not, under

the facts and circumstances of the case that cannot be denied, logically arrive
at the same conclusion that he has come to.
And the reason is obvious. In the first place, We have to take into account that
the New York agency of Philippine National Bank and its central office in Manila
are not separate and independent entities. That is why it is the Philippine
National Bank (Manila office) and not the New York agency of said Bank that is
the plaintiff in this case. Consequently, any payment made to plaintiffs central
office in Manila for obligations that any debtor may have contracted with said
New York agency is and has to be considered as a payment or settlement of said
obligations, there being no need to attain this result that the plaintiff would
adjust is accounts with its agency, or transmit to the latter the amounts
received from the debtor.
In the second place, the obligation contracted by the defendant was not to pay
$14,419.15 in dollars, but the equivalent of $14,419.15 dollars, in Philippine
currency. So, when defendant's obligation matured on October 4, 1949, the
defendant had to pay to the Bank not the sum of $14,467.21 representing the
face value of the draft Exhibit A, plus $18.06 as 1/8 of 1 per cent
commission, but its equivalent in pesos at the time of such maturity, and had
the defendant failed to satisfy then his obligation, he could be held liable to pay
in addition thereof, the corresponding interests for the period of default and
nothing else. And that is precisely what defendant is willing to pay.
From the foregoing, I hope to have made clear my stand on the matter.

REYES, J.B.L., dissenting:

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

Since Zulueta's obligation is measured in terms of U.S. dollars that have

increased in value vis-a-vis the peso, Art. 312, par. 1, of the Code of Commerce,
which was the law then in force, must be read into the contract. It provides:
If the loan consists of money, the debtor shall pay it by returning an
amount equal to that received, in accordance with the legal value which
the money may have at the time of the return, unless the kind of money in
which the payment is to be made has been stipulated, in which case the
change which its value may suffer shall be to the detriment or for the
benefit of the lender. (Emphasis supplied)
The majority decision, in upholding the contention that Zulueta is not
chargeable with the 17% tax, virtually authorizes just the contrary; and permits
the defaulting borrower to repay an amount in pesos that, in violation of the law
and his engagement, can not be converted into the same amount of dollars
loaned to him. I believe it is contrary to all elemental justice and good faith to
enable a borrower to return to his creditor less than the amount borrowed,
specially taking into account that Zulueta, by his obdurate refusal to pay a just
debt, is a debtor in bad faith who is responsible for any subsequent damages
suffered by his creditor, even if due to fortuitous event.
Applicable here are the considerations in Hawes vs. Woolcock (26 Wis. 629,
635), quoted with approval in Engel vs. Mariano Velasco & Co., 47 Phil. 115,
143:
In Hawes vs. Woolcock (26 Wis., 629, 635), the court said:
"Perhaps a strict application of logical reasoning to the question would lead
to the result that the premium should be estimated at the rate when the
note fell due. That was when the money should have been paid, and when
the default in performing the contract occurred. This conclusion would be
supported by the analogy derived from the rule of damages on contracts to
deliver specific articles, fixing the market price at the time when they
ought to have been delivered as the criterion. This rule might sometimes
be to the advantage of the holder of the note, as in the present case. In
other cases, where the premium was less at the time the note became due
than at the time of trial, it would be to his detriment. And in view of these
uncertainties and fluctuations in the rate, upon grounds of policy as well as
for its tendency to do as complete justice between the parties as is
possible, we have come to the conclusion that the true rule in such cases is
to give judgment for such an amount as will, at the time of the judgment,
purchase the amount due on the note in the funds or currency in which it is
payable.
The crucial point is that the Bank's action is not for damages, but for specific
performance of Zulueta's obligation. While payable in Philippine pesos, it was

actually one to pay a definite sum in United States dollars, since he promised to
pay an equivalent amount. The failure to specify any fixed number of pesos, and
the omission of any reference to any rate of exchange, is proof that the parties
had in mind the restoration to the Bank of the value of the dollars it had
advanced. In other words, Zulueta engaged to return to the Bank so many
Philippine pesos as could be converted into $14,449.15; and that is what the
Bank asks him to do. It can not be justly contended that if a debtor had
borrowed, say, ten thousand dollars, the lender should be satisfied with eight or
nine thousand. Yet that is what the majority's decision actually amounts to.
I see no point in determining the rate of dollar-peso exchange at the date of
maturity or of the constitution of the obligation, since Zulueta did not engage to
pay any definite amount of pesos, but so many as would be needed to make up
$14,449.15. And as Zulueta is being required to comply with a specific promise,
there is no relevancy in whether or not the main office of the Bank has or has
not remitted the dollars to its American agency; after all, the two part are of the
same institution. Anyway, if the dollars have not been remitted, the amount that
Zulueta is now sentenced to pay will not permit a remittance of the same
number of dollars that the Bank advanced for his account. If they were
heretofore remitted, the funds of the Bank in Manila have been diminished pro
tanto, and they can not be replenished to their original level in terms of
dollars unless Zulueta is required to pay the exchange tax.
Of course, the majority opinion has the merit of giving the Bank a costly lesson
on the advantages of not considering political influence in the making and
collecting of its loans; but I am afraid the experience will be too quickly
forgotten to even palliate the sacrifice of fundamental justice to technical
considerations.