THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, PETITIONER, VS. THE AUDITOR GENERAL, RESPONDENT.

Broadly stated, petitioner’s appeal challenges the Correctness of
the Auditor General’s ruling that “[r]emittances
of premia on insurance policies issued or renewed on
or after July 16, 1959, or even if issued or renewed before the said date, but
their reinsurance was effected only thereafter, are not exempt from the margin
fee, even if the reinsurance treaty under which they are reinsured was approved
by the Central Bank before July 16, 1959.” 
So stated, the case calls into question the applicability of Section 3
of the Margin Law (Republic Act 2609, approved on July 16, 1959) which exempts
certain obligations from payment of the margin fee, thus:

“SEC. 3. The provisions of this Act shall not apply to the
liquidation of drafts drawn under letters of credit nor of contractual
obligations calling for payment of foreign exchange issued, approved and
outstanding as of the date this Act takes effect and the extension thereof,
with the same terms and conditions as the original contractual
obligations:  Provided, That the
repayment of loans contracted by the government of the Philippines with foreign
governments and/or private banks and the importation of machineries and
equipment by provinces, cities or municipalities for the exclusive use in the
operation of public utilities fully-owned and maintained by them shall likewise
be exempted from the operation of this Act.”

Appropriate to state here is that – except as otherwise in the
law stated – the Margin Law subjects all sales of foreign exchange by the
Central Bank and its authorized agent banks to a uniform margin of not more than
forty per cent (40%) over the banks’ selling rates.^[1]  The Monetary Board is empowered to fix the
margin “at such rate as it may deem necessary to effectively curtail any
excessive demand upon the international reserve.”^[2]
Such margin, however, “shall not be changed oftener than once a year
except upon the recommendation of the National Economic Council and the
approval of the President.”^[3]
The Monetary Board has pegged the margin fee at 25%.^[4]

Following are the facts that gave rise to the present controversy:

On January 1, 1950, Philippine American Life Insurance Company [Philamlife], a domestic life insurance corporation, and
American International Reinsurance Company [Airco] of
Pembroke, Bermuda, a corporation organized under the laws of the Republic of Panama,
entered into an agreement – reinsurance treaty – which provides in its
paragraph 1, Article I, the following:

“ARTICLE I On and after the 1st day of
January 1950, the Ceding Company [Philamlife] agrees
to reinsure with AIRCO the entire first excess of such life insurance on the
lives of persons as may be Written by the Ceding Company under direct
application over and above its maximum limit of retention for life insurance,
and AIRCO binds itself, subject to the to terms and provisions of this agreement,
to accept such reinsurances on the same terms and for an amount not exceeding
its maximum limit for automatic acceptance of life reinsurance.  x x x.”

By the third paragraph of the same Article I, it is also
stipulated that even though Philamlife “is already
on a risk for its maximum retention under policies previously issued, when new
policies are applied for and issued [Philamlife] can
cede automatically any amount, within the limits x x x specified, on the same terms
on which it would be willing to accept the risk for its own account, if it did
not already have its limit of retention.”

Reinsurances under said reinsurance treaty of January 1, 1950 may
also be had facultatively upon other cases
pursuant to Article II thereof, whereby Airco’s
liability begins from acceptance of the risk, These cases include those set
forth in paragraph 2 of the treaty’s Article I which expressly excludes from
automatic reinsurance the following:  (a)
any application for life insurance with Philamlife
which, together with other papers containing information as to insurability of
the risk, shows that “the total amount of life insurance (including
accidental death benefit) applied for to or already issued by all com­panies
[other life insurance companies which had previously accepted the risk] exceeds
the equivalent of Five Hundred Thousand Dollars ($500,000) United States
currency;” and (b) any life on which Philamlife
“retains for its own account less than its regular maximum limit of
retention for the age, Sex, plan, rating and occupation of the risk.”

Every life insurance policy reinsured under the aforecited agreement “shall be upon the yearly
renewable term plan for the amount at risk under the policy reinsured.”^[5] Philamlife agrees to pay premiums for all reinsurances
“on an annual premium basis.”^[6]

It is conceded that no question ever arose with respect to the
remittances made by Philamlife to Airco
before July 16, 1959, the
date of approval of the Margin Law.

The Central Bank of the Philippines
collected the sum of P268,747.48 as foreign exchange margin on Philamlife remittances to Airco
purported totalling $610, 998.63 and made subsequent
to July 16, 1959.

Philamlife subsequently filed with the
Central Bank a claim for the refund of the above sum of P268,747.48.  The ground therefor
was that the reinsurance premiums so remitted were paid pursuant to the January 1, 1950 reinsurance treaty,
and, therefore, were pre-existing obligations expressly exempt from the margin
fee.

On June 7, 1960, the Monetary Board in line with the opinion of
its Acting Legal Counsel – resolved that “reinsurance contracts entered
into and approved by the Central Bank before July 17, 1959 are exempt from the
payment of the 35% foreign exchange margin, even if remittances thereof are
made after July 17, 1959,” because such remittances “are only made in the
implementation of a mother contract, a continuing contract which is the
reinsurance treaty.”^[7]

The foregoing resolution notwithstanding, the Auditor of the
Central Bank, on April 19, 1961,
refused to pass in audit Philamlife’s claim for
refund.

On May 17, 1961,
Philamlife sought reconsideration with the Auditor
General.

On October 24, 1961,
the request for reconsideration was denied. 
The Auditor General in effect expressed the view that the existence of
the reinsurance treaty of January 1,
1950 did not place reinsurance premia –
on reinsurance effected on or after the approval of the
Margin Law on July 17, 1959
– out of the reach of said statute.^[8]

Hence, the present petition for review.

1.  The thrust of
petitioner’s argument is that the premia remitted
were in pursuance of its reinsurance treaty with Airco
of January 1, 1959 a
contract antedating the Margin Law, which took effect only on July 16.

But the validity of such claim must be tested by the provisions
of Section 3 of the Margin Law quoted earlier in this opinion.  Said Section expressly withholds the
enforcement of the provisions of said Act on “contractual obligations
calling for payment of foreign exchange issued, approved and outstanding as of
the date this Act takes effect and the extension thereof, with the same terms
and conditions as the original contractual obligations.”

True, the reinsurance treaty precedes the Margin Law by over nine
years. Nothing in that treaty, however, obligates Philamlife
to remit to Airco a fixed, certain, and obligatory
sum by way of reinsurance premiums.  All
that the reinsurance treaty provides on this point is that Philamlife
“agrees to reinsure.” The treaty speaks of a probability; not a
reality.  For, without it reinsurance, no
premium is due.  Of course the
reinsurance treaty lays down the duty to remit premiums – if any reinsurance is
effected on the covenants in that treaty written. So it is that the reinsurance
treaty per se cannot give rise to a contractual obligation
calling for the payment of foreign exchange “issued, approved and
outstanding as of the date this Act (Republic Act 2609] takes effect.”

For an exemption to come into play, there must be a reinsurance
policy or, as in the reinsurance treaty provided, a “reinsurance
cession”^[9]
which may be automatic or facultative. ^[10]

There should not be any misapprehension as to the distinction
between a reinsurance treaty, on the one hand, and a reinsurance
policy or a reinsurance cession, on the other.  The concept of one and the other is well
expressed thus:

“x x x A
reinsurance policy is thus a contract of indemnity one insurer makes with
another to protect the first insurer from a risk it has already assumed. x x x. .  In contradistinction, a reinsurance treaty is
merely an agreement between two insurance companies whereby one agrees to
cede and the other to accept reinsurance business pursuant
to provisions specified in the treaty. 
The practice of issuing policies by insurance companies includes, among
other things, the issuance of reinsurance policies on standard risks and also
on substandard risks under special arrangements. The lumping of the
different agreements under a contract has resulted in the
term known to the insurance world as ‘treaties.’  Such a treaty is, in fact, an agreement
between insurance companies to cover the different situations described:  Reinsurance treaties and reinsurance policies
are not synonymous.  Treaties are
contracts for insurance; reinsurance policies or cessions x x x are contracts of
insurance.”^[11]

Philamlife’s obligation to remit
reinsurance premiums becomes fixed and definite upon the execution of the
reinsurance cession.  Because, for every
life insurance policy ceded to Airco, Philamlife agrees to pay premium.^[12]  It is only after a reinsurance cession is
made that pay­ment of reinsurance premium may be exacted, as it is only after Philamlife seeks to remit that reinsurance premium that the
obligation to pay the margin fee arises.

Upon the premise that the margin fee of P268,747.48 was collected
on remittances made on reinsurance effected on or after the Margin Law took
effect, refund thereof does not come within the coverage of the exemption
circumscribed in Section 3 of the said law.

2.  Nor will the argument
that the Margin Law impairs the obligation of contract – constitutionally
proscribed – under the reinsurance treaty, carry the day for petitioner.

Petitioner’s point is that if the Margin Law were applied, it
“would have paid much more to have the continuing benefit of reinsurance
of its risks then it has been required to do so by the reinsurance treaty in
question” and that “the theoretical equality between the contracting
parties x x x would be
disturbed and one of them placed at a distinct disadvantage in relation to the
other.”

This pose at once loses potency on the face of the rule
long” recognized that existing laws form part of the contract “as the
measure of the obligation to perform them by the one party and the right acquired
by the other.”^[13]  Stated otherwise, “[t]he obligation does
not inhere, and subsist in the contract itself, propio
vigore, but in the law applicable to the
contract.”^[14]  Indeed, Article 1315 of the Civil Code gives
out the precept that parties to a perfected contract “are bound x x x to all the consequences
which, according to their nature, may be in keeping with x x
x law.”

Accordingly, when petitioner entered into the reinsurance treaty
of January 1, 1950 with Airco, it did so with the understanding that the municipal
laws of the Philippines
at the time said treaty was executed, became an unwritten condition
thereof.  Such municipal laws constitute
part of the obligation of contract.  It
is in this context that we say that Republic Act 265, the Central Bank Act,
enacted on June 15, 1948 –
previous to the date of the reinsurance treaty – became a part of the
obligation of contract created by the latter. 
And under Republic Act 265, reasonable restrictions may be imposed by
the State through the Central Bank on all foreign exchange transactions
“in order to protect the inter­national reserve of the Central Bank during
an exchange crisis.”^[15]  The Margin Law is nothing more than a
supplement the Central Bank Act; it is a reasonable restriction on transactions
in foreign exchange.  It, too, is an
additional arm given the Central Bank to attain its objec­tives, to wit:  (1) “[t]o maintain monetary stability in
the Philippines;”
and (2) “([t]o preserve the international value of the peso and the
convertibility of the peso into other freely convertible currencies.”^[16]  On top of all these is that that statute was
enacted in a background of “dangerously low international reserves.”^[17]

The following explanatory note by the Committee on Banks,
Currency and Corporations on House Bill No. 3663, which later became the Margin
Law; Republic Act 2609, is expressive of the purpose of the law, namely, to
reduce the excessive demand on and prevent further decline of our international
reserves; viz:

“The international reserves of the Philippines
have reached such a low level as to require remedial action beyond that
provided in Republic Act No. 265, in spite of exchange controls which have been
in force since 1949.  The decline in the
level of our international reserves has persisted.  The means and the measures presently
authorized in the Charter of the Central Bank for dealing with the balance of
payments problem have been found inadequate.

The purpose of this Bill is to provide the Central Bank with an
additional instrument for effectively coping with the problem and achieving
domestic and international stability of our currency.  The additional instrument of Central Bank
action provided for by this bill consists of a cost restriction on all imports,
as well as invisibles, to reduce the excessive demand for foreign
exchange.  The proceeds that may accrue
to the Central Bank from the margin will be distributed in accordance with the
provisions of section 41 of the Bank’s Charter.”

That some such law as Republic Act 2609 was envisioned by the
contracting parties, Philamlife and Airco, when the January 1, 1950 reinsurance treaty was
executed, may be gleaned from the provisions of Article VI of said treaty whereunder “[e]xcept in
those instances where AIRCO is taxed directly and independently on premiums
collected by it from the Ceding Company, AIRCO shall reimburse the Ceding
Company for the tax paid on reinsurance premiums, paid AIRCO by the Ceding.
Company which are not allowed the Ceding Company, as a deduction in the tax
statement of the Ceding Company.”

Petitioner complains that reinsurance contracts abroad would be
made impractical by the imposition of the 25% margin fee.  Reasons there are which should deter us from
giving in to this view.  First, there is
no concrete evidence that such imposition of the 25% margin fee is
unreasonable.  Second, if really
continuance of the existing reinsurance treaty becomes unbearable, that
contract itself provides that petitioner may potestatively
write finis thereto on ninety days’ written notice.^[18]  In truth, petitioner is not forced to
continue its reinsurance treaty indefinitely with Airco.

3.  Another roadblock is
astride petitioner’s route to refund.

To maintain domestic and international stability in currency is a
primary concern of the State; it is in pursuance of the consti­tutional
mandate, in the preamble ordained, to “promote the general welfare”;
it is a Matter of public policy.  This
could mean action to forestall a currency debacle, to improve the low international
reserve, or to conserve and even increase such reserve.

The Margin Law, Republic Act 2609, it is well to remember, is a
remedial currency measure.  It was thus
passed to reduce as far as is practicable the excessive demand for foreign
exchange.  Petitioner’s stand that
because it had a continuing – though revocable – reinsurance treaty with Airco, all remittances of reinsurance premia
made by it to its foreign reinsurer should be
withdrawn from the operation of the Margin Law, we are constrained to state, is
at war with the State’s economic policy of preserving the stability of our
currency.  Petitioner may not, in the
words of the Solicitor General, “tie the hands of the State and render it
powerless to impose certain margin or cost restrictions on its remittances of
reinsurance premia in foreign exchange to fall due as
policies become reinsurable under said treaty,
whenever such remittances would constitute an excessive demand on our
international reserves.”

Viewed from this focal point, there cannot be an impairment of
the obligation of contracts.  For, the
State may, through its police power adopt whatever economic policy may
reasonably be deemed to promote public welfare, and to enforce that policy by
legislation adapted to its purpose.^[19]  We have, in Abe vs. Foster
Wheeler Corporation^[20]
declared that:  “The freedom of
contract, under our system of government, is not meant to be absolute.  The same is understood to be subject to
reasonable legislative regulation aimed at the promotion of public health,
morals, safety and welfare.  In other
words, the constitutional guaranty of non-impairment of obligations of contract
is limited by the exercise of the police power of the State, in the interest of
public health, safety, morals and general welfare.”  It has been said, and we believe correctly,
that “the economic interests of the State may justify the exercise of its
continuing and dominant protective power notwithstanding interference with
contracts.”^[21]  It bears repetition to state at this point
that the Margin Law is part of the economic “Stabilization Program”
of the country.^[22]

Tersely put then, “the [constitutional] obligation of
contracts provision does not bar a proper exercise of the state’s police
power.”^[23]  Nebbia vs.
New York^[24]
reasons out that:  “Under our form
of government the use of property and the making of contracts are normally
matters of private and not of public concern. The general rule is that both
shall be free of governmental interference. 
But neither property rights nor contract rights are absolute; for
government cannot exist if the citizen may at will use his property to the
detriment of his fellows, or exercise his freedom of contract to work them
harm.  Equally fundamental with the
private right is that of the public to regulate it in the common
interest.”  As emphatic, if not
more, is the following from Norman
vs. Baltimore & Ohio Railroad Company,^[25]
thus:  “Contracts, however express,
cannot fetter the constitutional authority of the Congress. Contracts may
create rights of property, but when contracts deal with a subject matter which
lies within the control of the Congress, they have a congenital infirmity.  Parties cannot remove their transactions  from the reach of dominant constitutional
power by making contracts about them.” 
More.  In another case,
pronouncement was made that: “Not only are existing laws read into
contracts in order to fix obligations as between the parties, but the reservation
of essential attributes of sovereign power is
also read into contracts as a postulate
of the legal order. 
The policy of protecting contracts against impairment presupposes the
maintenance of a government by virtue of which contractual relations are worth
while, – a government which retains adequate authority to secure the peace and
good order of society.”^[26]

For the reasons given, the petition for review is hereby denied,
and the ruling of the Auditor General of October 24, 1961 denying refund is hereby affirmed.

Costs against petitioner.

SO ORDERED.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Castro, and Angeles, JJ., concur.

Fernando, J., concurs in a
separate opinion.

^[1]
Section 1, R.A. 2609.

^[2] Id.

^[3] Id.

^[4]
Central Bank Circular No. 95 of July
17, 1959.

^[5]
Article VI, Reinsurance Treaty.

^[6]
Article VII, Id.

^[7]
Resolution 824 of the Monetary Board.

^[8] See
petitioner’s motion for reconsideration of May 17, 1961 filed with the Auditor General, Rollo, p. 34.

^[9]
Article V, Reinsurance Treaty.

^[10]
Articles I and II, Id.

^[11]
Pioneer Life Insurance Co. vs. Alliance Life Insurance Co., 30 N.E. 2d
66, 72; emphasis supplied.  See also:  Maurer vs. International Reinsurance
Corporation, 74 A 2d 822, 828.

^[12]
Articles VI and VII, Reinsurance Treaty.

^[13]
I Cooley’s Constitutional Limitations, 8th ed., p. 582.

^[14] Ogden
vs. Saunders, 6 L. ed., pp. 606, 642 (Opinion of Mr. Justice Trimble).

^[15]
Sec. 74, Republic Act 265.

^[16]
Sec. 2, Id.

^[17]
Sponsorship speech of Senator Sabido, Congressional
Record, Senate, June 10, 1959, Vol. II, No. 8, p. 110.

^[18]
Article XVI, Reinsurance Treaty.

^[19]
Savage vs. Martin, 91 P 2d 273, 280, citing Nebbia
vs. New York, 78 L. ed.
957.

^[20]
L-14785 and L-14923, November 29,
1960.

^[21] Home
Building & Loan Association vs.
Blaisdell, 78 L. ed. 413, 428, cited in
Rutter vs. Esteban, 93 Phil. 68, 73.

^[22]
Congressional Record, Senate, June 10,
1959, Vol. II, No. 8, p. 112.

^[23]
16 Am. Jur. 2d, p. 780.

^[24]
291 U.S. 502,
523, 78 L. ed. 940, 948-949.

^[25]
294 U.S. 240,
307-308, 79 L. ed. 885, 902.

^[26] Home
Building & Loan Association vs.
Blaisdell, supra,
at p. 427; emphasis supplied.

In pari
materia, the following from the Government’s
brief may be cited:

“x x
x Even in the field of taxation, authorities are
numerous to the effect that a lawful tax on a new subject, or an increased tax
on an old one, interferes not with a contract or impairs its obligation within
the meaning of the Constitution, even though such taxation may affect
particular contracts so as to increase the debt of one party or lessen the
security of another, or impose additional burdens upon one class and release
the burdens of the other class (La Insular v.
Machuca Go-Tauco, 39 Phil.
567, and authorities cited therein). 
Thus, the imposition of a tax under a statute passed after a contract
has been entered into was held not an impairment of the obligation of contract
even if the immediate consequence of the tax is to make the contract less
profitable to one of the parties (Kehrer v. Stewart, 197 U S 60, 49 L. ed. 663;
Tanner v. Little, 240 U.S. 369, 60 L.
ed. 691; La Insular v. Machuca Go-Tauco, supra), the reason being that all
contracts are made subject to the taxing powers of the government (Clement
National Bank v. State of Vermont,
231 U.S. 120, 58 L. ed. 148).”

Clean

6 pt
6 pt
0
3

MicrosoftInternetExplorer4

st1:*{behavior:url(#ieooui) }

/* Style Definitions */
table.MsoNormalTable
{mso-style-name:”Table Normal”;
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-parent:””;
mso-padding-alt:0in 5.4pt 0in 5.4pt;
mso-para-margin:0in;
mso-para-margin-bottom:.0001pt;
mso-pagination:widow-orphan;
font-size:10.0pt;
font-family:”Times New Roman”;}