In a dispute over unpaid airline ticket sales, the Supreme Court clarified that when a debt is incurred in a foreign currency, the conversion rate to Philippine pesos should be based on the exchange rate at the time the payment is made, not when the debt was initially established. This ruling ensures that the real value of the obligation is preserved, reflecting economic realities and protecting the creditor from losses due to currency fluctuations. This principle remains applicable even with the repeal of Republic Act No. 529, emphasizing the importance of adhering to prevailing exchange rates for fair and just settlements of foreign currency debts.

From Yen to Pesos: Which Exchange Rate Rules in Debt Settlement?

The case of C.F. Sharp & Co., Inc. versus Northwest Airlines, Inc. arose from an International Passenger Sales Agency Agreement where C.F. Sharp failed to remit proceeds from airline ticket sales. Northwest Airlines initially secured a judgment against C.F. Sharp in Japan for 83,158,195 Yen, plus interest. When Northwest Airlines tried to enforce this judgment in the Philippines, a dispute emerged regarding the appropriate currency conversion rate from Yen to Philippine pesos. The central question was whether the conversion should be based on the exchange rate at the time the debt was incurred or at the time of payment. This issue became crucial due to fluctuations in currency values over time. This case highlights the complexities of settling international debts and the significance of choosing the correct exchange rate for equitable resolution.

The Court of Appeals initially ruled that the conversion rate should be the prevailing rate at the time of payment, citing Zagala v. Jimenez, which interpreted Republic Act No. 529 (R.A. No. 529). This Act stipulates that obligations are to be discharged in Philippine currency, with the conversion rate determined at the time of payment. However, C.F. Sharp argued that the repeal of R.A. No. 529 by R.A. No. 8183 invalidated this jurisprudence, claiming that the new law should alter the conversion practice. To fully understand the court’s decision, it’s vital to examine the relevant provisions of R.A. No. 529 and R.A. No. 8183.

R.A. No. 529, as amended, states:

SECTION 1. Every provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the Philippines which provision purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null, void, and of no effect, and no such provision shall be contained in, or made with respect to, any obligation hereafter incurred.

This provision essentially mandates that debts should be settled in Philippine currency. However, R.A. No. 8183, which repealed R.A. No. 529, provides a different perspective:

SECTION 1. All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment.

While R.A. No. 8183 allows parties to agree on settling obligations in a currency other than Philippine currency, it does not specify the exchange rate to be used for conversion when payment is made in pesos. Building on this, the Supreme Court clarified that despite the repeal of R.A. No. 529, the principle of using the exchange rate at the time of payment remains applicable. This ensures the preservation of the real value of the obligation.

The Supreme Court underscored that the repeal of R.A. No. 529 by R.A. No. 8183 merely removed the prohibition on stipulating payment in foreign currency. Crucially, both laws are silent on the applicable rate of exchange for converting foreign currency obligations into their peso equivalent. It follows, therefore, that the jurisprudence established under R.A. No. 529 regarding the rate of conversion remains applicable. As the Court noted in Asia World Recruitment, Inc. v. National Labor Relations Commission, obligations in foreign currency may be discharged in Philippine currency based on the prevailing rate at the time of payment.

Moreover, the Court addressed C.F. Sharp’s argument that Article 1250 of the Civil Code should apply. Article 1250 states that in cases of extraordinary inflation or deflation, the value of the currency at the time the obligation was established should be the basis of payment. However, the Supreme Court clarified that this rule applies only when there is an official declaration of extraordinary inflation or deflation, which was not the case here.

Beyond the currency conversion issue, Northwest Airlines sought a modification of the Court of Appeals’ award of interest. Generally, a party who has not appealed is not entitled to affirmative relief. The Supreme Court, however, has the authority to correct plain errors, especially those affecting the correct application of the law. In this case, the Court of Appeals failed to apply the correct legal rate of interest.

Drawing from Eastern Shipping Lines, Inc. v. Court of Appeals, the Supreme Court reiterated that the legal rate of interest for obligations involving the payment of a sum of money, absent any stipulation, is 12% per annum. The Court ultimately ruled that C.F. Sharp was liable for 61,734,633 Yen, plus damages for delay at 6% per annum from August 28, 1980, until payment, with interest at 12% per annum from the filing of the complaint on August 28, 1980, until fully satisfied. This comprehensive resolution ensured both the principal debt and the interest were accurately calculated.

FAQs

What was the central issue in this case?	The main issue was determining the correct exchange rate to use when converting a foreign currency debt (Yen) to Philippine pesos for payment. The court had to decide whether to use the rate at the time the debt was incurred or the rate at the time of payment.
What did the Court decide about the exchange rate?	The Supreme Court ruled that the exchange rate at the time of payment should be used. This ensures that the creditor receives the real value of the debt, accounting for currency fluctuations over time.
How did the repeal of R.A. 529 affect this case?	The repeal of R.A. 529 by R.A. 8183 removed the prohibition on stipulating payment in foreign currency. However, it did not change the established jurisprudence that the exchange rate at the time of payment should be used for converting debts to Philippine pesos.
What is Article 1250 of the Civil Code, and why didn’t it apply here?	Article 1250 states that in cases of extraordinary inflation or deflation, the currency value at the time the obligation was established should be used for payment. This article did not apply because there was no official declaration of extraordinary inflation or deflation in this case.
What rate of interest was applied to the debt?	The court applied a legal interest rate of 12% per annum from the date the complaint was filed (August 28, 1980) until the debt is fully paid. Additionally, damages for the delay were set at 6% per annum from August 28, 1980, until payment is completed.
Can the parties agree to a different currency for payment under R.A. 8183?	Yes, R.A. 8183 allows parties to agree that the obligation or transaction shall be settled in any currency other than Philippine currency at the time of payment. This provides flexibility in international transactions.
What was the original amount of the debt in Japanese Yen?	The original judgment in Japan ordered C.F. Sharp to pay Northwest Airlines 83,158,195 Yen. However, this was reduced to 61,734,633 Yen due to partial payments made by C.F. Sharp.
What is the practical implication of this ruling for international transactions?	This ruling reinforces the principle that debts in foreign currency should be converted to Philippine pesos using the exchange rate at the time of payment. This ensures fairness and protects creditors from losses due to currency fluctuations, making international transactions more predictable.

The Supreme Court’s decision in C.F. Sharp & Co., Inc. vs. Northwest Airlines, Inc. provides crucial guidance on currency conversion in debt settlements. By affirming the use of the exchange rate at the time of payment, the Court ensures equitable outcomes in international financial transactions, safeguarding the real value of obligations amidst fluctuating currency markets. This ruling underscores the judiciary’s role in adapting legal principles to economic realities, promoting fairness and stability in international dealings.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: C.F. Sharp & Co., Inc. vs. Northwest Airlines, Inc., G.R. No. 133498, April 18, 2002