Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-19255 January 18, 1968

THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, petitioner,

Lim, Macias, De la Rosa and Salonga for petitioner.

SANCHEZ, J.:

Broadly stated, petitioner's appeal challenges the correctness of the Auditor General's ruling that
"[r]emittance 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:

Art. 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 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. . . .

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 . . . 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 purportedly 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 25% 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, 1950, a contract antedating the Margin Law, which took effect only on
July 16, 1959.

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 3 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 reinsurance, no premium is
due. Of course, the reinsurance treaty lays down the duty to remit premiums — if any reinsurance is
effected upon 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:

. . . 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. . . . 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 . . . 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 obligations 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 than it has been required to do so by the reinsurance
treaty in question" and that "the theoretical equality between the contracting parties . . . 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 . . . to all the
consequences which, according to their nature, may be in keeping with . . . 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
obligations 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
obligations 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 to 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, inspite 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 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 publicity 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 Nebia 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 worthwhile — 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.

Rule Synopsis

Reinsurance treaties are mere contracts for insurance, rather than contracts of insurance. The former
does not establish a fixed obligation to remit reinsurance premiums until the execution of a reinsurance
cession.

Philippine American Life Insurance Company (Philamlife; domestic corp.) and American International
Reinsurance Company (Airco; foreign corp) entered into a reinsurance treaty on January 1, 1950. Under
the treaty, the former will reinsure with the latter certain life insurance policies issued, for which it will
pay reinsurance premiums. As foreign exchange margin on Philamlife remittances of premium to Airco,
the Central Bank collected P268k. Subsequently, Philamlife claimed for a refund of the said amount
seeking exception under Sec. 3 of the Margin Law which exempts from the payment of foreign exchange
margin, “contractual obligations calling for payment of foreign exchange issued, approved and
outstanding as of the date this Act takes effect.” The law took effect on July 16, 1959. It contended that
since the reinsurance treaty was already in effect 9 years prior to the passage of the Margin Law,
reinsurance premiums paid under the treaty were beyond the ambit of said law.

Was Philamlife entitled to a refund of the forex margins previously collected?

The Supreme Court ruled that Philamlife is not entitled to a refund of the forex margins previously
collected. It held that the reinsurance treaty did not establish the obligation of Philamlife to remit to
Airco a fixed, certain, and obligatory sum by way of reinsurance premiums. Under the said treaty,
Philamlife merely “agrees to reinsure.” In this case, Philamlife’s obligation to remit reinsurance premiums
becomes fixed and definite upon the execution of the reinsurance cession. The SC also distinguished
reinsurance policies and reinsurance treaties in this wise: the former were contracts of insurance; the
latter, contracts for insurance.