Effect of Extraordinary Inflation or Deflation on Obligations, Contracts

Extraordinary inflation exists when there is an unusual decrease in the purchasing power of currency (that is, beyond the common fluctuation in the value of currency) and such decrease could not be reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the obligation. Extraordinary deflation, on the other hand, involves an inverse situation.

Article 1250 of the Civil Code provides: Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should intervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.
For extraordinary inflation (or deflation) to affect an obligation, the following requisites must be proven:

[1] that there was an official declaration of extraordinary inflation or deflation from the Bangko Sentral ng Pilipinas (BSP);
[2] that the obligation was contractual in nature; and
[3] that the parties expressly agreed to consider the effects of the extraordinary inflation or deflation.

Despite the devaluation of the peso, the BSP never declared a situation of extraordinary inflation. Moreover, although the obligation in this instance arose out of a contract, the parties did not agree to recognize the effects of extraordinary inflation (or deflation). The RTC never mentioned that there was a such stipulation either in the promissory note or loan agreement. Therefore, respondents should pay their dollar-denominated loans at the exchange rate fixed by the BSP on the date of maturity. (G.R. No. 171545; December 19, 2007)