CENTRAL BANK OF THE PHILIPPINES, PETITIONER, VS. HON. INTERMEDIATE APPELLATE COURT, ARTEX DEVELOPMENT CO., INC., EASTERN TEXTILE MILLS, INC., CENTRAL MANUFACTURING CORP., PACIFI…

This petition for review seeks to annul the decision of the then
Intermediate Appellate Court (now Court of Appeals) which upheld the right of
private respondents to purchase foreign exchange from petitioner Central Bank
at the preferred exchange rate of P2.00
to US $1.00, and, (for the prejudice consequenced
upon them) the payment of interests at the legal rate, on the amounts
respectively due private respondents (Artex
Development Co., Inc., Eastern Textile Mills, Inc., Central Manufacturing
Corp., Pacific Knitting Mills, Inc. and Atlas Textile Development Corporation,
hereafter, “private respondents”), computed from December 21, 1970, until the said amounts are
paid.

On the basis of a Partial Stipulation of Facts submitted to,
approved and condensed by the trial court, and quoted in the Court of Appeals’
decision, the antecedent facts are as follows:

“Plaintiffs (private respondents) are private domestic
corporations engaged in the operation of textile mills.

“On December 9, 1949,
defendant Central Bank (petitioner) issued Circular No. 20, restricting the
sale of foreign exchange and subjecting all foreign exchange transactions to licensing.

“As early as 1954-1955, the Monetary Board of defendant
Central Bank set the policy on integration of local textile
mills, with the avowed
‘objective of maximizing the benefits that could be yielded by the textile
industry in terms of intensified investment, full employment opportunities,
incentives to development of local resources, like cotton growing, and greater
savings in foreign exchange.’

“However, defendant Central Bank’s aforestated
policy on integration of Local Textile Mills, established through its Monetary
Board, was subsequently ‘liberalized x x x in view of technical difficulties and financial demands
of immediate integrated textile manufacture, considering specially local
inexperience in the field.  Textile mills
were thus allowed to begin with finishing operations (the least complicated
phase of production), supplemented in some
cases by limited weaving and spinning.  x
x x.’

“Still later, in 1958, ‘the recent availability of raw cotton,
payable in pesos, from the United States under U.S. Public Law 480 of IGA aid x x x prompted a re-examination of the status of the local textile industry to determine the advisability
of immediately requiring the mills to line up to original and standing,
commitments to integrate.’

“Among U.S.
surpluses made available by U.S. Public Law 480 was raw cotton and the pesos
generated from the sale of that surplus raw
cotton would be loaned to the Philippine government for long-term economic
development.  To generate those pesos
from the sale of surplus raw cotton, local demand had to be created by
requiring the local textile mills to
put up and install spinning mills to manufacture yarn from raw cotton.  ‘With this end in view, local textile mills
companies were requested to submit their schedule[d] of integration over a
two-and-a-half period from second semester 1958 to second semester 1960.  These schedules were employed as the pattern
and base of the proposed overall integration program, the Import-Export
Committee through its ‘Memorandum on Integration Program of Local Textile
Mills’ dated May 30, 1958 (which) were approved by the Monetary Board.

“Plaintiffs incurred contractual obligations, payable in
foreign currency on deferred payment terms, in the purchase of capital
machineries needed for the integration of their textile mills, the project
studies and tax exemption applications pertinent to which were previously submitted to the Tax Committee
composed of representatives of the Department of Finance, the defendant Central
Bank, and the National Economic Council.

“To cover the importation of their textile mill machineries,
equipment, accessories and spare parts under the deferred payment plan, the
plaintiffs filed applications for the
corresponding foreign exchange allocations, plaintiffs’ said applications
approved by defendant Central Bank under several Resolutions of its Monetary
Board on sundry dates, all prior to April 23, 1960.

“On July 16, 1959,
Republic Act 2609 was approved, directing ‘the monetary authorities’ to take steps for the adoption of a
four-year program of gradual decontrol’ and empowering the Monetary Board to
promulgate rules and regulations necessary to carry out the law’s provisions.

“Accordingly, on April 22, 1960, the Monetary Board of
defendant Central Bank approved Resolution No. 632 adopting a ‘program of
Gradual Decontrol’, and further approved, on April 25, 1960, CB Circular No.
105 which established a decontrol rate of P3.20 to $1.00 but specifically
excluded from the operation of said
decontrol rate ‘existing contractual obligations previously approved by the
Monetary Board.’

“On November 28,
1960, defendant Central Bank issued CB Circular No. 117 amending
Circular No. 105 but still alleged servicing at the P2.00 to $1.00 rate of
‘special financing items previously approved by the Monetary Board.’

“On March 2, 1961,
defendant Central Bank issued CB Circular No. 121 which eliminated ‘existing
contractual obligations previously approved by the Monetary Board’ from among
the enumerated foreign exchange transactions within the coverage of the P2.00
to $1.00 preferred exchange rate.

“Thenceforth, despite their protestations, plaintiffs were
denied purchases of foreign exchanges at the P2.00 to $1.00 exchange rate with
which to service their aforesaid foreign exchange obligations, incurred in the
importation of capital machinery needed
to effect integration of their textile mills. 
Instead, plaintiffs were made to purchase, as they did, but under
protest, foreign exchange needed to service their obligations at the ‘free
market’ rate.” (pp. 91-93, Rollo)

On January 2, 1964,
private respondents filed a complaint for declaratory relief.  Petitioner filed a motion to dismiss.  Before the resolution of the motion, private
respondents filed, and the court admitted an amended complaint, wherein they
additionally prayed the trial court to:

“x x x
declare their rights x x x
to the end that they be declared with right to purchase from defendant Central
Bank, and the defendant Central Bank be declared with duty to sell plaintiffs,
foreign exchange as may be necessary to meet the deferred payments at the rate
of P2 to $1, to the end that defendant Central Bank should be ordered to pay
plaintiffs the increased costs of the deferred payments already made and to be
made on their imported capital machinery represented by the peso difference
between the actual rates paid for the
foreign exchange and P2 to $1 x x x
and thereafter sell to the plaintiffs all the foreign exchange needed to meet
the subsequent deferred payments as they fall due at P2 to $1 x x x.” (p. 106, Rollo; pp. 577-578, Record on Appeal)

On December 3, 1973,
the trial court^[1]
rendered judgment, the dispositive portion of which
reads as follows:

“WHEREFORE, judgment is hereby rendered:

(1)  Declaring the plaintiffs to
have the right to purchase from defendant Central Bank, and the latter to have
the duty to sell to the former, the foreign exchange needed to pay the
obligations incurred by plaintiffs to cover the importation of the capital
machinery, equipment, spare parts and accessories
for their integrated textile mills
operations at the preferred rate of P2.00 to $1.00; and

(2)  Ordering defendant
Central Bank to pay plaintiffs the amounts opposite their names, to wit:

(a)  Artex Development
Company. . . . . . . .   P3,795,839.11

(b)  Atlas Textile Development Co. . . . . . .
.   P1,000,995.71

(c)  Central Manufacturing Corp. . . . . . . . .
.  P3,947,161.59

(d)  Eastern
Textile Mills . . . . . . . . . . . . . . .  
P6,279,071.93

(e)  Pacific Knitting Mills. . . . . . . . . . . .
. .  . . P    831,880.75

as well as interest on the said amounts,
at the legal rate from December 21, 1970
until said amounts are paid, and to pay the costs.

“SO ORDERED.” (Record on Appeal, pp. 625-626) (pp. 95-96,
Rollo)

On January 5, 1979,
petitioner filed a Notice of
Appeal.  Also, on the same date, private
respondents filed a motion for reconsideration of the decision, insofar as it
ordered petitioner to pay private respondents, interests on the amounts at the legal rate, from December 21, 1970 only until said amounts are
paid, which was denied by the trial court for lack of merit.

Upon denial of their motion for reconsideration, private
respondents likewise interposed an appeal to the Court of Appeals (pp. 640-642,
Record on Appeal).

On October 19, 1984,
the Court of Appeals rendered judgment, the decretal
portion of which reads:

“WHEREFORE, modified in the sense that the payment of
interests on the amounts which the defendant is ordered to respectively pay the plaintiffs should commence from January
2, 1964, the date of the filing of the original complaint (p. 1, RA), the
decision appealed from is hereby affirmed in all other respects, it being in
full accord with the evidence and the law, without costs.” (p. 58, Rollo)

The sole issue in this case is whether or not petitioner made an
enforceable promise or assurance to sell foreign exchange to private respondents
at the preferred rate of P2.00 to US $1.00 to service the deferred payment of
private respondents’ imported machinery and equipment.

The instant petition is devoid of merit.

Under the doctrine of promissory estoppel:

“x x x an estoppel may arise from the making of a promise, even
though without consideration, if it was intended that the promise should be
relied upon and in fact it was relied upon, and if a refusal to enforce it
would be virtually to sanction the perpetration of fraud or would result in
other injustice.  In this respect, the reliance by the promisee
is generally evidenced by action or forbearance on his part, and the idea has
been expressed that such action or forbearance would reasonably have been
expected by the promisor.  Mere omission by the promisee
to do whatever the promisor promised to do has been
held insufficient ‘forbearance’ to give rise to a promissory estoppel.’ (19 Am. Jur., loc.
cit.).” (Emerito Ramos v. Central Bank of the Philippines, G.R. No. L-29352, October 4, 1971; 41 SCRA 565 at p. 588, also Go Ong
v. Court of Appeals, G.R. No. 75884, September 24, 1987; 154 SCRA 270).

“x x x.

“x x x
after the Central Bank has made express
commitments to petitioners therein that it would support the Overseas Bank of
Manila, and avoid its liquidation if the petitioners would execute (a) the Voting Trust Agreement turning over the management of OBM to the
CB or its nominees, and (b) mortgage or assign their properties to the Central
Bank to cover the overdraft balance of OBM, which petitioners did, the Central
Bank may not retreat from its representations and liquidate the Overseas Bank
of Manila, to the prejudice of petitioners, depositors and other creditors,
under the rule of ‘promissory estoppel.’ The Central Bank cannot just unilaterally
disregard its representations and promises to rehabilitate and normalize the
financial condition of the OBM without violating Article 1159 of the Civil Code
of the Philippines, which provides that ‘(o)bligations
arising from contracts have the force of law between the contracting parties
and should be complied with in good
faith,’ as well as Article 1315, stating that ‘(c)ontracts
are perfected by mere consent, and from that moment the parties are
bound not only to the fulfillment of what has been expressly stipulated but
also to all the consequences which, according to their nature, may be in
keeping with good faith, usage and law.’ In other words, by making the
foregoing representations and commitments to the OBM, the Central Bank had thereby assumed a contractual obligation
in favor of the OBM such that it cannot unceremoniously ignore the same.”
(See Gonzalo Sy Trading v. Central Bank, G.R.
No. 41480, April 30, 1976, 70 SCRA 570, at p. 585)

In the present
case, the trial court summed up certain antecedents to justify the application
of the doctrine of promissory estoppel as adopted in
the Ramos case:

“The records show that pursuant to a policy established by the
Monetary Board as early as 1954-1955 in order to ‘maximize benefits x x x in terms of intensified
investment, full employment opportunities and incentives to development of local reserves,’ plaintiffs
were required to integrate their textile mills. 
In line with this directive, plaintiffs filed applications for authority
to purchase needed foreign exchange to cover importation of the requisite
capital machinery.  Acting on plaintiffs’
applications, defendant Central Bank directed plaintiffs:

(a)  to submit cost estimates
of their respective textile mill integration projects, with defendant Central
Bank making it understood that, under prevailing policy, authorization of
capital machinery importation by plaintiffs was
to be conditioned on approval of
the foreign currency costs of the project, as well as the schedules of corresponding
peso payments; and

(b)  to contract for the importation of the needed capital machinery only on a deferred payment basis.

Plaintiffs complied with defendant Central Bank’s directives.  They submitted the required cost estimates for the integration of
their textile mills based on the rate of
exchange of P2.00 to
US $1.00.  They
likewise submitted the schedules of the counterpart peso payments on deferred payment terms.  Defendant Central Bank
approved both.

Then came Central Bank Circulars issued purportedly in
implementation of Republic Act No. 2609, to wit, Circular No. 105, dated April
26, 1960, Circular No. 117, dated November 29, 1960, Circular No. 121 dated
March 2, 1961 and Circular No. 133, dated January 21, 1962.  As may be noted from a reading of these
circulars:

(a) C.B. Circular No. 105 specifically exempted from the decontrol rate
‘existing contractual obligations previously approved by the Monetary Board;
accordingly, these existing and previously approved contractual obligations
continued to enjoy the preferred P2.00 to US $1.00 rate.

(b) C.B. Circular No. 106, while no longer retaining the aforementioned exemption found in C.B. Circular No.
105, still allowed the preferred P2.00 to US $1.00 rate for special financing
items previously approved by the Monetary Board.

(c) C.B. Circular No. 121 eliminated ‘special financing items
previously approved by the Monetary Board’ from P2.00 to US $1.00 preferred
rate coverage, and in lieu thereof, added ‘forward exchange contracts with
Monetary Board Approval.’

(d) C.B. Circular No. 133 provided inter alia
that the ‘free market rate shall not be administratively fixed but shall be
determined through transactions in the free market.’

The record further show[n] that to clarify the free market system
established by C.B. No. 133, defendant Central Bank, on March 9, 1962, issued
its ‘memorandum to Authorized Agent Banks No. 7’ definitely specifying who are allowed to purchase
dollars from Authorized Agent Banks at the preferred exchange rate of exchange
of P2.00 to U.S. $1.00.  Paragraph 4 of
said Memorandum provided that:

‘4. Outstanding
letters of credit and/or obligations without forward exchange contracts but
which were established pursuant to specific
Monetary Board approval or letter-
authority, as those obligations covered by dollar promissory notes executed by
the commercial banks in favor of the Central Bank, with a ceiling
conversion rate of P3.20 to $1.00 may be serviced, at the option of the
importer, either at such stipulated rate, subject to the payment of the margin
fee, whenever applicable, or at the prevailing free market under Central Bank
Circular No. 133.’

Prior to C.B. Circular No. 117, and even after C.B. Circular No.
105, plaintiffs paid the amortizations on the obligations incurred for the purchase of their textile mill
integration machinery in the stipulated foreign currency which defendant
Central Bank authorized them to purchase at the P2.00 to U.S. $1.00 preferred
rate.  Thenceforth, the preferred rate
was denied to plaintiffs.

Under the foregoing facts, the Court is of the view and so holds
that plaintiffs, under the doctrine of ‘promissory estoppel‘
adopted in this jurisdiction in the Overseas Bank of Manila and/or by virtue
of their having hitherto complied with
the directives of defendant Central Bank, had previously acquired
rights which remained subsisting at the
time of the issuance of the aforecited CB
Circulars.  (Record on Appeal, pp.
591-595).” (pp. 98-100, Rollo; emphasis
ours)

Witness Benigno Zialcita,
Senior Executive of Artex Development Co., Inc.
provides a resume of the resultant injustice to private respondents:

“If we had known at the time that we would have to pay a
higher rate than we do for the machinery which we (sic) required to integrate,
we definitely would not have gone to the integration program; at least we would
not have acquired the machinery on a deferred payment plan because we will be
subjected to great financial risk.  At
least what we would have done was to acquire only a portion of the machinery
that we could afford to pay at that time without necessary exchange risk and
not on the long-term obligation.  x x x  In one of the circulars in the Central Bank
issued during the period of gradual decontrol, there was specifically stated
that no acceleration of payment will be allowed.  Even if we had the money, we could not pay in full the obligation.  (pp. 25-26, tsn., May 15,
1967).” (p.
106, Rollo; p. 597, Record on Appeal)

Petitioner sought to extricate itself from any commitment and/or
obligation to service private respondents’ foreign exchange allocation for the
importation of their textile machineries, equipment, accessories and spare
parts at the preferred rate of P2.00 to U.S. $1.00, claiming that there was no
perfected contract between the parties since what it did merely was to issue in
pursuance of its rule-making power the resolutions relied upon.  It invoked the case of Batchelder
v. Central Bank (G.R. No. L-25071, March
29, 1972; 44 SCRA 54) the facts of which are as follows:

“In July, 1959, the Republic of the Philippines
adopted a gradual decontrol program through the enactment of Republic Act No.
2609.  To implement this legislation
Central Bank issued Circulars Nos. 105 and 106 both dated April 25, 1960. 
The exchange rate under the decontrol program was higher than the
prevailing rate before decontrol of P2.00 per US $1.00.  On March
30, 1960, Batchelder entered into a
contract with the United States Navy for the construction of a weather station
in Bukidnon, Mindanao covered
by U.S. Navy Contract No. NBy-13374.  On June 17, 1960, the Central Bank
through its governing Monetary Board promulgated Resolution No. 857 and
implemented this resolution through its
Memorandum to Authorized Agent Banks, I.D.-FM No. 11 dated June 23,
1960.  Under Resolution No. 857 and the implementing
circular aforesaid, Filipino and American resident contractors for
constructions in U.S. military bases in the Philippines whose contracts
antedated April 25, 1960 were
required to surrender to the Central Bank their dollar earnings under their
respective contracts but were entitled to utilize 90% of their surrendered
dollars for importation at the preferred rate of commodities for use within or
outside said U.S. military bases.  The
Central Bank pursuant to the decontrol program also promulgated Circulars Nos.
111, 117 and 121, dated September 12,
1960; November 28, 1960;
and March 2, 1961, respectively,
and finally adopted full decontrol through its Circular No. 133 dated January 21, 1962.  The Central Bank also promulgated Monetary
Board Resolution No. 695 dated April 28, 1961 amending
MB Resolution No. 857 of June 23, 1960, and implementing the
former through Memorandum ID-FM No. 30 on May 18, 1961.

“Thereafter, Batchelder applied with
the Central Bank for a license to utilize 90%
of his surrendered earnings in the sum of U.S. $179,969.40 but was
allowed the amount of U.S. $25,874.84 only, or 21.41% of the amount applied
for.  Batchelder
sued to be allowed to utilize the balance of the 90% of his surrendered dollar
earnings.”

We ruled that the Monetary Board Resolutions merely laid down a
general policy on the utilization of the dollar earnings of Filipino and
resident American contractors undertaking projects in U.S.
military bases.  They “are not
contracts that give rise to obligations which must be fulfilled by the Central
Bank in favor of affected parties.”

Moreover, it is clear that “not all imports against proceeds
of contracts entered into prior to April
25, 1960 are entitled to the preferred buying rate of
exchange.  Only imports against proceeds
of contracts entered into prior to April 25, 1960, not otherwise classified
as dollar–to–dollar transactions, are
entitled to the preferred rate of
exchange, in which case CB would issue the corresponding license to the
contractor for authority to buy foreign exchange at the preferred rate for the
payment of said imports.

Unlike the Batchelder case, however,
private respondents were required to integrate and thereafter authorized to
import capital machinery only upon CB approval of
the foreign currency costs of the project, as well as the corresponding peso
payments, aside from being directed to undertake
importation only on a deferred payment basis.  In short, private respondents merely complied
with rules and regulations of the CB, as participants of the textile
mills integration program. 
As a result, they should not now be deprived of rights acquired by
reason thereof.

Admittedly, petitioner is duly committed to maintain the
stability of the country’s foreign exchange reserve position.  Underlying this commitment, however, is the government’s strict and
faithful adherence to basic principles of fairness and decency under the Bill
of Rights.  Hence, CB circulars/memoranda
must be implemented in a manner that would not only safeguard or harmonize them
with government programs designed to uplift or promote the country’s level of
production and employment, but at the same time avoid irreparable or
grave prejudice to participants of said program.

We, therefore, rule that since private respondents faithfully
complied with petitioner’s directives as participants of the textile mills
integration program, petitioner is now estopped from
enforcing the disputed circulars that would deny private respondents their
right to purchase foreign exchange at the preferred rate of P2.00 to US $1.00.

ACCORDINGLY, the petition is hereby DENIED, and the
decision of the Court of Appeals is hereby AFFIRMED in toto, without costs.

SO ORDERED.

Narvasa, (Chairman), Gancayco, and Griño-Aquino, JJ., concur.

Cruz, J., on leave.

^[1]
Presiding Judge, Ricardo J. Francisco, CFI, Br.
6, 7th Judicial Branch, Pasig,
Rizal.