Subjects Covered: Obligations and Contracts, Human Rights/Constitutional Law 2

Topic: Non-impairment of contracts (a.k.a. non-impairment clause)

Royal Rutter, plaintiff-appellant vs. Placido Esteban, defendant-appellee
(G.R. No. L-3708, 18 May 1953, 93 Phil 68)1
Doctrines Upheld: The constitutionality of a law granting moratorium (or relief from
debts and obligations) lies in the period of the suspension determined in that law. The
suspension must be definite and reasonable so that it will not violate the Constitutions
non-impairment clause. The State may postpone the enforcement of the obligation but
cannot destroy it by making the remedy (for the obligations enforcement) futile.
Facts: Royal Rutter sold two parcels of land in the City of Manila worth PhP9600 to
Placido Esteban, where PhP4800 was already paid outright and the remaining PhP4800
to be given in two separate payments: PhP2400 on 7 August 1942 and PhP2400 on 27
August 1943. However, Esteban failed to pay the remaining balance. Thus, Rutter was
forced to institute an action in the Court of the First Instance (CFI) Manila to enforce the
contract and recover the unpaid balance. Esteban, admitted all averments of Rutters
complaint, but he used as a defense the moratorium clause stated in the Moratorium
Law (Rep. Act 342). He claimed that he is a WWII sufferer and has filed claim with the
Philippine War Damage Commission for his losses during the said war. Thus, under the
sec. 2 of RA 342, the demand for him to pay his debt cannot be enforced.
The CFI Manila upheld Estebans argument and dismissed Rutters claim, stating that
the obligation to pay the debt is not yet due and demandable under RA 342. Rutter, in
his motion of reconsideration, appealed to the said trial court about its decision. He also
raised in his motion for the first time the constitutionality of the said Moratorium Law.
But Rutters motion was denied and thus, he elevated his case to the Supreme Court.
Issues: Whether the Moratorium Law can be declared unconstitutional for violating the
constitutional provision about non-impairment of contracts?
Laws Cited: Sections 2 and 3 of the Moratorium Law (RA 342)2
Section 2 - All debts and other monetary obligations payable by private parties within
the Philippines originally incurred or contracted before December 8, 1941, and still
1 Royal Rutter vs. Placido Esteban, G.R. No. L-3708, 18 May 1953. The LawPhil Project
Website, http://www.lawphil.net/judjuris/juri1953/may1953/gr_l-3708_1953.html. (Last accessed
on 15 Mar 2015, 11:35 p.m.)
2 RA 342, secs 2-3. Seen at the PhilippineLaw.info website,
http://philippinelaw.info/statutes/ra342-moratorium-law.html (last accessed on 15 March 2015 at
1:17 p.m.)

remaining unpaid, any provision or provisions in the contract creating the same or in
any subsequent agreement affecting such obligation to the contrary notwithstanding,
shall not be due and demandable for a period of eight (8) years from and after
settlement of the war damage claim of the debtor by the United States Philippine War
Damage Commission, without prejudice, however, to any voluntary agreement which
the interested parties may enter into after the approval of this Act for the settlement of
said obligations.
Section 3. Title III, Debt Moratorium, Executive Order No. 25, dated November 18,
1944, as amended by Executive Order No. 32, dated March 10, 1945, is hereby further
amended by lifting the moratorium therein declared in so far as it affects prewar
obligations, except that as regards those prewar obligations referred to in section 2
hereof, the lifting of said moratorium shall be subject to the conditions provided in said
section. Should the provision of section 2 hereof be in any way declared void and
unenforceable, then as regards the obligations affected thereby, the provisions of Title
III, Debt Moratorium, Executive Order No. 25 dated November 18, 1944, as amended
by Executive Order No. 32 dated March 10, 1945, shall continue to be in force and
effect, any contract or agreement affecting the same to the contrary notwithstanding,
until subsequently repealed or amended by further legislative enactment.
Held by the Court: The Supreme Court reversed the trial courts decision and it
ordered Placido Esteban to pay the remaining balance of PhP4800 with 7% interest per
year until the debt is fully paid, aside from attorneys fees representing 12% of that
amount. It also upheld that upon Estebans failure to pay his debt, the properties
mortgaged will be sold at a public auction and the proceeds from auction sale to be
applied as payment.
The Court also declared the Moratorium Law to be null and void (and without effect) for
violating the Constitutions non-impairment clause.
Rationale of the Court Decision: The Court stated that the purpose of Moratorium
Law is allow debtors who suffered from the last Second World War and filed a claim with
the Philippine War Damage Commission for their losses, to be given relief and
reasonable time to pay their pre-war obligations and not to be victimized by their
creditors. However, due to the enforcement of the Moratorium Law and the Executive
Orders that it upheld to be in force and in effect, the creditors would have to wait for at
least twelve (12) years before they can collect the pre-war obligations of their debtors
which the Court deemed such waiting period to be unreasonable, if not oppressive.
Although the Court commended the Congress purpose for enacting the law, it said that
relief granted is unjust as creditors like Rutter are practically left at the mercy of their
debtors.
The Court also said in its decision that since the countrys economic condition has
already normalized and financially stabilized after the WWII, the Moratorium Laws
continued enforcement and operation is already unreasonable and oppressive, thus
making it reasonable to nullify the said law.