REPUBLIC OF THE PHILIPPINES, PLAINTIFF-APPELLANT, VS. LAUREANO BROS., INC., ET AL., DEFENDANTS-APPELLEES.

On February 17, 1959,
April 21, 1959 and May 11, 1959 Laureano
Brothers, Inc. entered into three contracts with the Republic of the Philippines,
the former to sup­ply the latter with plumbing materials worth $172,382.00,
$289,107.00 and $174,412.00, respectively. 
To assure performance of the contract of April 21, 1959, Laureano Bros.,
Inc. posted bonds of Mutual Surety Insurance Co. for P45,642.80,
Citadel Insurance & Surety Co., Inc. for P40,000.00 and People’s Surety
& Insurance Co., Inc. for P30,000.00. 
It also posted a performance bond of the Mu­tual Security Insurance
Corporation in the sum of P69,764.80 to cover the
contract of May 11, 1959.

The plumbing materials called for in the three con­tracts were
intended for the use of the National Water­works & Sewerage Administration
and their purchase as to be financed by the United States Government through the International Cooperation Administration.

Letters of credit were opened in favor of foreign suppliers and
the same were paid in full in dollars by the United States Government as
follows:

The plumbing materials in question arrived in the Philippines
and were delivered to the Philippine Govern­ment but all of them did not meet
the specifications con­tained and required in the aforementioned
contracts.  The shipments covered by the
contracts of February 17, 1959
and May 11, 1959 were
accepted without prejudice to claim refund of overpayment resulting from the
inferior quality of the plumbing materials delivered.  The shipment covered by the contract of April 21, 1959 was rejected.

In view of the condition contained in the agreement between the
International Cooperation Administration of the U.S. Government and the
National Economic Council of the Philippine Government with respect to the
particular U.S. aid program that the dollars made available by the U.S.
Government shall automatically be refundable upon failure of the Philippine
Government to implement the pro­ject for which said dollars were released, the
U.S. Go­vernment demanded upon the Republic of the Philippines to refund the
sum of $357,843.58.

On its part, the Philippine Government demanded upon Laureano Brothers, Inc. to refund the sum of $357,758.86 as
overpayment for the plumbing materials.  Laureano Brothers Inc. made no payment despite repeated demands, consequently the Republic of the Philippines
filed a suit for recovery in the Court of First Instance of Manila against Laureano Brothers, Inc. and its sureties afore­mentioned.

On March 12, 1965,
after defendants filed their ans­wer, the parties entered into a compromise
agreement where­by defendant Laureano Brothers, Inc.
agreed to pay to the Republic of the Philippines
the following:

1.     
$37,389.92 as refund under the
contract of February 17, 1959.

2.     
$289,107.00 as refund under the
contract of April 21, 1959.

3.     
$32,383.10 as refund under the
contract of May 11, 1959.

4.     
P5,000.00
as reimbursement for the expenses of Solicitor Ignacio in connection with his
trip to England
and Germany to
secure the depositions of the suppliers of the plumbing materials in question.

5.     
P45,410.00
representing sheriff’s guards fees.

Under said compromise agreement Laureano
Brothers, Inc. proposed, with the approval of the plaintiff
Repu­blic of the Philippines,
to pay the above obligations as follows:

P300,000.00 on or
before March 31, 1966

P300,000.00 on or
before March 31, 1967

The balance – on or
before March
31, 1968 or upon finality of the court’s
judgment.

The parties further agreed to submit to
the court’s re­solution the question on the rate of exchange to be used in
converting dollars to pesos in regard to the refund claimed by plaintiff under
the three aforesaid contracts in the total sum of $358,885.02.

On June 17, 1965
the lower court rendered the following judgment based upon our holding in Arrieta v. NARIC, L-15645, January 31, 1964, fixing the rate of conversion from
dollars to pesos as at the time the principal obli­gation was contracted:

“WHEREFORE, and following the said deci­sion cited by both
parties, judgment is hereby rendered fixing the rate of exchange of pesos to
dollars at P2.00 to $1.00, the same being the judicial determination called for
by the aforesaid paragraph 8 of said parties’ COMPRO­MISE AGREEMENT.”

Its motion for reconsideration having been denied, the Republic
of the Philippines
appealed to this Court.

The question raised is what rate of exchange shall be applied in
converting to pesos the obligation in ques­tion which is expressed in dollars.

Appellees contend that the conversion
rate should be that prevailing in 1959 when Laureano
Bros., Inc. en­tered into contracts with the Republic of the Philippines to
supply the latter with plumbing materials in conso­nance with the ruling in Arrieta v. NARIC, supra, or two pesos to one dollar.

On the other hand, appellant maintains that the rate of exchange
applicable is that prevailing when the par­ties entered into a compromise
agreement on March 12, 1965,
that is, at P3.91 to $1.00.

This suit was filed to recover damages and the plain­tiff is
entitled to recover a sum of money which will constitute an indemnity for
damage occasioned by defen­dant’s breach of contract.  The breach of contract and the damage
expressed in dollars are admitted.  And We are called upon to determine the damage’s equivalent in
Phi­lippine currency.

In the case of Engel v. Mariano Velasco & Co., 47 Phil. 115, decided in 1924, where a similar question of the
applicability of exchange rates was presented, the Supreme Court applied the
exchange rate prevailing at the time judgment for damages was rendered.  The inten­tion was “to give judgment for
such an amount as will, at the time of judgment, purchase the amount due on the
note in the funds or currency in which it is payable.” The Su­preme Court
rejected the proposition to apply the exchange rate prevailing at the time of
breach of contract.

Forty years later, the Supreme Court held in the cited case, Arrieta v. NARIC, supra, that the exchange rate applicable
is that prevailing when the obligation was incurred – that is, in said case,
the original prin­cipal obligation.

Considering the facts and circumstances obtaining in the instant
case, there is merit in both parties’ insis­tence to apply to this case the
rationale of the ruling in the Arrieta
case.  After all, the facts of the two ca­ses
are nearly similar, aside from the fact that the Ar­rieta
case is more recent than the Engel case.

In the light of the Arrieta case, the
rate of ex­change applicable should be that prevailing when the par­ties
entered into the compromise agreement in 1965 or P3.91 to one dollar.  For it is from that moment
when Laureano Bros., Inc. has bound itself to pay to
the Repu­blic of the Philippines the sum of $358,885.02 as damages under the three aforementioned
contracts.  What is being
collected in this suit is said sum of $358,885.02, sub­ject of the compromise,
which supplanted or took the place of the sum of $357,758.86
originally prayed for in the complaint. 
Stated differently, inasmuch as the obligation to pay the amount of
$358,885.02 came to exist on March 12, 1965, the conversion rate from dollar to
pesos should be that current as of the same date or P3.91 to $1.00.

WHEREFORE, the judgment appealed from is reversed.  The rate of exchange applicable for the
conversion of the damages payable by Laureano Bros.,
Inc. to the Republic of the Philippines expressed in dollars is hereby fixed at
P3.91 to $1.00.  No costs.

SO ORDERED.

Reyes, J.B.L., Acting C.J., Dizon, Makalintal, Zaldivar, Sanchez, Ruiz
Castro, Angeles, and Fernando, JJ., concur.