CONSTI2: NON-IMPAIRMENT CLAUSE
(ART.III, Sec 10: No law impairing the obligation and contracts shall be passed.)
*WHAT IS PROHIBITED?
ART.1306: The contracting parties may establish such stipulations,causes,terms
and conditions as they may them convenient,provided they are not contrary to
law,morals, good customs, public order or public policy.
- the right given to the parties are not absolute. It is subject to the limitation that said stipulations,
clauses……
PURPOSE OF IMPAIRMENT CLAUSE: To safeguard the integrity of valid contractual agreements
against unwarranted interference by the State. The protection of the said clause is not absolute,
when contracts are valid at the time of their conclusion may become invalid or some of their
provisions that maybe rendered inoperative or illegal, by virtue of supervening legislation.
CONTRACT (WHAT AND WHO ARE COVERED)
-refers to any lawful agreement on property or property rights, whether real or personal,
tangible or intangible.
(Covered)- the parties maybe private persons only, natural or artificial, or private persons on the
one hand and the government
or its agencies on the other hand. It includes franchises or charters granted to private
persons or entities, like an authorization to operate a public utility.
(Not Covered)- licenses such as the operation of a liquor store or a cockpit, as this involve privileges
only that are essentially revocable. Neither does it include the marriage contract, which is
regarded as a social institution subject at all times to regulation by the legislature and to
change of the original conditions. A public office is not a property right. The office itself, if
created by statute, mybe modified or even abolished or any of its incidents mybe changed,
as by reduction of the term or salary except where the salary has already been earned, in
which case it will be deemed a vested property right that cannot be withdrawn or reduced
by retroactive legislation.
GENERAL RULE: CONTRACTS TAKE EFFECT ONLY AS BETWEEN THE PARTIES, THEIR ASSIGNS AND
THEIR HEIRS EXCEPT IN A CASE WHERE THE RIGHTS AND OBLIGATIONS ARISING FROM
CONTRACT ARE NOT TYRANSMISSIBLE BY THEIR NATURE, OR BY STIPULATION,OR BY
PROVISON OF LAW(ART.1311,NEW CIVIL CODE)
LAW
-includes statutes enacted by the national legislature, executive, oders and administrative
regulations promulgated under a valid delegation of power and municipal ordinances.
(Not Covered)- it does not include judicial decisions or adjudications made by administrative bodies
in the exercise of their quasi-judicial bodies.
Note: TO IMPAIR,THE LAW MUST RETROACT so as to affect existing contracts concluded BEFORE
ITS ENACTMENT. There will be NO IMPAIRMENT IF THE LAW IS MADE TO OPERATE
PROSPECTIVELY ONLY, to cover contracts entered into AFTER ITS ENACTMENT.
OBLIGATION (obligation of contracts-vinculum juris)
-the tie that binds the parties to each other.
-the obligation of the contract binds the parties to perform their undertaking or agreement
according to its terms and intent.
IMPAIRMENT
-a law,impairs a contract when it enlarges, abridges, or in any manner changes the intention
of the parties even if the change is done indirectly such as shortening or lengthening the
period of payment or the remedies for the enforcement of the rights of the parties are
completely withdrawn.
*In the case of remedies, there will be impairment only if all of them are withdrawn. There will be
NO IMPAIRMENT, as long as substantial and efficacious remedy remains even if the remedy left is
the most difficult to employ.
GENERAL RULE: A LAW WHICH IMPAIRS THE OBLIGATION OF A CONTRACT IS NULL AND
VOID(ART.III,SEC.10,1987 CONSTITUTION)
EXCEPTION: WHEN THE LAW DEMANDS POLICE POWER.
*Demands of police power arising from social justice, general welfare,public health , safety
amelioration of labor conditions PREVAIL OVER CONTRACTS.All these considerations are based under
the time honored principle of SALUS POPULI EST SUPREMA LEX as expressly pronounced in Calalang
vs Williams 70 Phil.726). The legislature cannot bargain away the police power through a medium of
contract.
Stone vs. Mississipipi- a franchise granted by the government in exchange for valuable consideration
for the operation of lottery was in effect revoked when the legislature subsequently
imposed a prohibtion on all kinds of gambling of the State. The measure was sustained
although the term of the franchise had not yet expired.
Rutter vs Esteban- the Philippine Government declared, first by E.O. 32 of the Pres. Later by
Legislature,R.A. 342 known as the Moratorium Law on the payment of pre-war debts until
after 8yrs from the settlement of the war damage claims of the debtors. The law was
annuled by the SC as violative of the Impairment Clause. The Court declared that,first, the
emergency caused by the war that earlier justified the moratorium was no longer existing.
The period was oppressively long ,extending over a period of 4yrs when the E.O was in force
and another 8yrs as provided under the law(R.A 342) during the creditor could not enforce
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 his claim. Finally, during the moratorium ,all the rights of the creditors were suspended,
including the right to collect interest on the principal of the loan so long as it remained
unpaid.
Ortigas & Co. vs. Feati Bank- two lots sold by the petitioners on condition that they were to
be used only for residential purposes were subsequently acquired by the respondent, which
started erectionof a commercial building. The petitioner sought to restrain such construction
on the strength of stipulated condition but the respondent invoked a resolution adopted by
the municipal council of Mandaluyong declaring the area in which the lots were located a
commercial and industrial zone.
The SC upheld the respondent, ruling that the zoning resolution had been adopted
in the exercise of the police power, which was superior to the impairment clause and so
could modify the provisions of the contract of sale.
the expropriation ,the U.S. Supreme Court declared that a contract is a propertyand like any
other property maybe taken for public use ..subject to the rule of just compensation. The true
view is that the condemnation proceedings do not impair the contract, do not break its
obligations, but appropriate it, the tangible property of the company-to public uses.
Note: Where a law grants tax exemptions in exchange for valuable consideration, such tax
exemption is considered A CONTRACT and cannot be repealed because of the impairment
clause. All other tax exemptions are NOT CONTRACTUAL and so maybe REVOKED AT WILL
by the legislature.

Lozano vs. Martinez- rejecting the challenge to B.P 22on the ground that it contravened the
Impairment clause. The SC found no valid ground to sustain the contention.The freedom of
contract which is constitutionally protected is freedom to enter into lawful contracts.
Contracts which contravene public policy are not lawful. Besides, checks cannot be
categorized as mere contracts. It is a commercial instrument which has become a
convenient substitute for money;it forms part of the banking system and therefore not
entirely free from the regulatory power of the state.

*It is submitted that this reservation is not at all necessary inasmuch as the subject of the franchise
Is necessarily connected with the public welfare and so is embraced in the police power of the State.

Section 11. No franchise, certificate, or any other form of authorization for the operation of
a public utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least sixty per centum of whose
capital is owned by such citizens; nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. Neither shall any such franchise
or right be granted except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public. The participation of
foreign investors in the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers of such
corporation or association must be citizens of the Philippines.

Note: Like the police power, the other inherent powers of eminent domain and taxation may
validly limit the impairment clause.

Long Island Water Supply vs. Brooklyn- a private corporation contracted to supply the town of New
Lots with water for a period of 25 years. The town was later annexed to the City of Brooklyn,
which then sought to expropriate the properties and franchises of the plaintiff. In sustaining
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