Case Name: Rutter vs Esteban GR No./Date: G.R. No.

L-3708; May 18, 1953

Topic: Right to Property; Non-impairment of Contracts
Author: Justice Bautista Angelo
Doctrine (if applicable):
Facts: In August 20, 1941, Rutter sold to Esteban 2 parcels of land in Manila. Esteban paid 3/4ths of the purchase
price and they constituted a mortgage over one of the parcels to secure the payment of the balance.

However, the war broke out and somehow, Esteban was not able to pay the balance of the purchase price on the
due date and so, on August 2, 1949, Rutter instituted an action to recover the balance with the CFI.

Esteban admitted the averments of the complaint but as a defense, he claimed that his obligation was a pre-war
obligation covered by the moratorium embodied in R.A. No. 342.

Section 2 of Republic Act No. 342 provides that all debts and other monetary obligations contracted before
December 8, 1941, any provision in the contract creating the same or any subsequent aggreement affecting such
obligation to the contrary notwithstanding, shall not due and demandable for a period of eight (8) years from and
after settlement of the war damage claim of the debtor by the Philippine War Damage Commission.

The CFI ruled in favor of the debtor Esteban. This brings us to the sole issue raised by petitioner on appeal
Issue/s: Whether or not R.A. No. 342, which declared a moratorium on certain pre-war obligations, is
unconstitutional for violation of the Constitutional provision prohibiting the impairment of the obligation of
contracts.

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Held: Yes. R.A. No. 342 is unconstitutional.

Statutes declaring a moratorium on obligations are generally constitutional

Statutes declaring a moratorium on obligations are not new: For some 1,400 years western civilization has made
use of extraordinary devices for saving the credit structure, devices generally known as moratoria. The moratorium
is postponement of fulfillment of obligations decreed by the state through the medium of the courts or the
legislature. Its essence is the application of the sovereign power.

Such laws were often passed during or after times of financial distress such as wars and disasters. Similar laws
were passed in some US states after the civil war and they have been declared constitutional. Some laws however,
were declared unconstitutional where the period of moratorium prescribed is indefinite or unreasonable.

The argument that moratorium laws impair the obligation of contracts does not hold water. It is justified as a valid
exercise of the state of it's police power.

In the US case, Home Building and Loan Association vs. Blaisdell, it was held that:

The economic interests of the State may justify the exercise of its continuing and dominant protective power
notwithstanding interference with contracts. . . .

xxx

Similarly, where the protective power of the State is exercised in a manner otherwise appropriate in the regulation
of a business it is no objection that the performance of existing contracts may be frustrated by the prohibition of
injurious practices. . . .

. . . . The question is not whether the legislative action affects contracts incidentally, or directly or indirectly, but
whether the legislation is addressed to a legitimate end and the measures taken are reasonable and appropriate to
that end.

Thus the true test of constitutionality of a moratorium statute lies in the determination of the period of a
suspension of the remedy. It is required that such suspension be definite and reasonable, otherwise it would be
violative of the constitution.

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R.A. No. 342 is unconstitutional for being unreasonable
The moratorium law, enacted in 1948, came on the heels of executive orders likewise declaring moratoriums. With
its 8 year moratorium period, it is clearly unreasonable for creditors who have to observe a vigil of 12 years to
collect on debts which have become demandable as early as 1941. And the injustice is more patent when, under the
law, the debtor is not even required to pay interest during the operation of the relief.

The court also noted that the reconstruction is paying off and that the Philippines is headed to better times. Hence
the Supreme Court declared R.A. No. 342 unreasonable and oppressive and hence, null and void and without effect.

Notes: Esteban was ordered to pay the balance with interest at the rate of 7% per annum with 12% attorneys fees.