Section 10: Non-Impairment Clause

Title of the Case Facts Issue Held Ruling

Rutter vs. Esteban On 20 August 1941, WoN RA No. 342 is Yes. YES. Statutes
(1953) Royal L. Rutter sold to unconstitutional for declaring a
Placido J. Esteban being violative of the moratorium on the
*The true test of the two (2) parcels of land constitutional enforcement of
constitutionality of a situated in the City of provision forbidding monetary obligations
moratorium statute Manila. To secure the the impairment of the are not of recent
lies in the payment of said obligation of contracts enactment.
determination of the balance of P4,800, a Moratorium laws have
period of the first mortgage over the been adopted
suspension of the same parcels of land ―during times of
remedy; it is required was constituted in financial distress,
that such suspension favor of Rutter. The especially when
be definite and deed of sale having incident to, or caused
reasonable, been registered, a by, a war.‖ The
otherwise it would be new title was issued in Moratorium Law is a
violative of the favor of Placido J. valid exercise by the
constitution Esteban with the State of its police power,
mortgage duly being an emergency
*Moratorium: annotated on the back measure. Although
temporary thereof. Esteban failed conceding that the
prohibition of an to pay the two obligations of the
installments as agreed contract were impaired,
activity
upon, as well as the the impairment was
interest that had within the police power
accrued thereon, and of the State as that
so on 2 August 1949, power was called into
Rutter instituted an exercise by the public
action in the Court of economic emergency
First Instance (CFI) which the legislature had
Manila to recover the found to exist.
balance due, the
interest due thereon, It is required that such
and the attorney‘s suspension be definite
fees stipulated in the and reasonable,
contract. The otherwise it would be
complaint also violative of
contains a prayer for
the sale of the the constitution.
properties mortgaged
in accordance with Herein, obligations
law. Esteban admitted had been pending
averments of the since 1945 as a result
complaint but set up of the issuance of
defense on the Executive Orders 25
moratorium clause and 32 and at present
embodied in RA 342 their enforcement is
(approved 26 July 1948), still inhibited because
allowing a war sufferer of the enactment of
eight (8) years from the Republic Act 342 and
settlement of his claim would continue to be
by the Philippine War unenforceable during the
Damage Commission. 8-year period granted to
After a motion for prewar debtors to afford
summary judgment them an opportunity to
has been presented rehabilitate
by Esteban, and the themselves, which in
requisite evidence plain language means
submitted covering the that the creditors would
relevant facts, the have to observe a vigil
court rendered of at least 12 years
judgment dismissing before they could effect
the complaint holding a liquidation of their
that the obligation investment dating as far
which Rutter seeks to back as 1941. This
enforce is not yet period seems to be
demandable under the unreasonable, if not
moratorium law. oppressive.
Rutter filed a motion
for reconsideration While the purpose of
wherein he raised for Congress is plausible,
the first time the and should be
constitutionality of the commended, the relief
moratorium law, but accorded works injustice
the motion was to creditors who are
denied. Rutter practically left at the
appealed. mercy of the debtors.
Their hope to effect
collection becomes
extremely remote,
more so if the credits
are unsecured. And
the injustice is more
patent when, under the
law, the debtor is not
even required to pay
interest during the
operation of the relief.
Thus, the Court
declared that the
continued operation
and enforcement of
Republic Act 342 at
the present time is
unreasonable and
oppressive, and
should not be
prolonged a minute
longer, and the same
should be declared
null and void and
without effect. This
also holds true as
regards Executive
Orders 25 and 32,
considering that said
Orders contain no
limitation whatsoever
in point of time as
regards the
suspension of the
enforcement and
effectivity of monetary
obligations. This
pronouncement is
most especially
needed in view of the
revival clause
embodied in said Act if
and when it is
declared
unconstitutional or
invalid.
 Ortigas & Co. Ltd. Plaintiff Ortigas was Whether the Municipal Yes. YES! The Local
Partnership vs. Feati engaged in the Resolution, declaring Autonomy Act
Bank & Trust Co. business of the lots as part of the empowers a Municipal
(1979) developing and selling commercial and Council to adopt zoning
residential lots in industrial zone of the and subdivision
A zoning ordinance Highway Hills municipality, ordinances or
will supercede the Subdivision, superseded the regulations for the
restrictions imposed Mandaluyong. It sold restrictions imposed by municipality. Granting
by a private to vendees Padilla Ortigas, which was a that the Resolution is
institution since it is and Angeles two lots contractual not an ordinance, it is
a form of a regulatory (Lots 5 and 6) in undertaking between a regulatory measure.
measure; the non- installments under the parties to the sale The general welfare
impairment of separate agreements clause is liberally
contracts clause will of sale. The vendees interpreted in case of
NOT BAR a police transferred their rights doubt to give more
power legislation to Chavez. Upon power to local
completion of governments in
payment, plaintiff promoting its
executed the deeds of economic conditions,
sale which contained the social welfare and
a restriction, inter alia, material progress of
that the lots shall be the people in the
used by the buyer community. The
exclusively for exceptions are
residential purposes. ―existing vested rights‖
The restriction was arising out of a contract
annotated in the titles between a province, city
of Chavez. Defendant or municipality on one
Feati bought from her hand and a 3rd party on
the lots and the the other, in which case,
building restrictions the original terms and
were also annotated in provisions of the
its titles. Feati contract should govern.
maintains that the
area along the The exercise of this
western part of EDSA power may be judicially
from Shaw Blvd. to inquired into and
Pasig River, where the corrected only if it is
lots were located, has capricious, whimsical,
been declared a unjust or unreasonable,
commercial and there having been a
industrial zone per denial of due process or
Resolution 27 of the violation of applicable
Municipal Council of
Mandaluyong. So, it constitutional
started constructing a guarantees.
The
bank on the lots. Resolution was passed
Plaintiff demanded in the
that Feati stop its
construction. The exercise of police power
latter refused, arguing to safeguard or promote
that the building was the health, safety, peace,
in accordance with the good order and general
zoning regulations and welfare of the people in
it had obtained the locality.
building and planning
The right to exercise
permits.
the police power is a
Plaintiff sought the help continuing one and a
of the court to command business lawful today
Feati to comply with the may in the future,
restrictions annotated in because of changed
situation/ growth of
its title. The trial court population, become a
held that the restrictions menace to the public
were subordinate to the health and welfare,
Resolution, which was a and be required to
valid exercise of police yield to the public
power. It upheld the
classification by the good.
Municipal Council as
having rendered The State, to promote
ineffective the the general welfare, may
restrictions. But interfere with personal
plaintiff, in a motion for liberty, property,
reconsideration which business and
was subsequently occupations. The
denied, argued that Resolution was
said Council had no reasonable, a
power to nullify the legitimate response to
contractual obligations a felt public need, not
assumed by Feati. whimsical or
oppressive. The non-
impairment of contracts
clause will not bar a
police power legislation,
which is not likely to
succumb to the
challenge that because of
it, contractual rights are
rendered nugatory.

Existing laws are read

into contracts agreed
upon by the parties to
fix obligations
between them. The
reservation of
essential attributes of
sovereign power is
also read intro
contracts as a
postulate of the legal
order. The policy of
protecting contracts
against impairments
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. The law forms
part of, and is read
into every contract
unless clearly
excluded therefrom in
those cases allowed.

Equity will not enforce

a restriction upon the
use of property by
injunction where the
property has so
changed in character
and environment as to
make it unfit or
unprofitable for use
should the restriction
be enforced. Since it is
now unprofitable and a
health-and-comfort
hazard to use lots 5 and
6 for strictly residential
purposes, Feati should
be permitted, on the
strength of the
Resolution, to use the
same for commercial
purposes. There is no
proviso in the
Resolution expressly
declaring that the
ordinance was not
intended to interfere
with the agreement
between the parties.
Thus, even if the
restrictions where
assumed by Feati, the
contractual undertaking
cannot be enforced as
against the police power
legislation.
 Lozano vs. Martinez Batas Pambansa WoN BP 22 impairs No. No. The gravamen of
(1986) Bilang 22 (BP 22 for freedom of contract the offense punished
short), popularly by B.P. 22 is the act of
* It is not the non- known as the making and issuing a
payment of an obligation Bouncing Check Law worthless check or a
which the law punishes. punishes a person check that is
The law is not intended "who makes or draws dishonored upon its
or designed to coerce a and issues any check presentation for
debtor to pay his debt. on account or for payment. It is not the
The thrust of the law is value, knowing at the non-payment of an
to prohibit, under pain of time of issue that he obligation which the law
sanctions, the making of does not have punishes. The law is not
worthless checks and sufficient funds in or intended or designed to
putting them is credit with the drawee coerce a debtor to pay
circulation. bank for the payment his debt. The thrust of
of said check in full the law is to prohibit,
upon presentment, under pain of sanctions,
which check is the making of worthless
subsequently checks and putting them
dishonored by the is circulation. Because
drawee bank for of its deleterious
insufficiency of funds effects on the public
or credit or would interest, the practice is
have been dishonored proscribed by the law.
for the same reason The law punishes the
had not the drawer, act not as an offense
without any valid against property, but
reason, ordered the an offense against
 bank to stop public order.
payment." Those who
question the . Contracts which
constitutionality of BP contravene public policy
22 insist that it offends are not lawful. We must
the constitutional bear in mind that checks
provision forbidding can not be categorized as
imprisonment for debt mere contracts. It is a
and it contravenes the commercial instrument
equal protection which, in this modern
clause. day and age, has become
a convenient substitute
for money; it form part
of the banking system
and therefore not
entirely

free from the regulatory

power of the state.

Ganzon vs. Inserto Petitioner Rodolfo Whether or not the No. No. The questioned
(1983) Ganzon initiated trial court may order the court orders violate the
proceedings to extra- cancellation of a non-impairment of
judicially foreclose a mortgage lien annotated contracts clause
real estate mortgage in a Torrens Certificate guaranteed under the
executed by the of Title to secure the Constitution.
private respondents in payment of a promissory Substitution of the
his favor. The Deed of note and substitute such mortgage with a surely
Real Estate Mortgage mortgage lien with a bond to secure the
executed between surety bond approved payment of the
Randolph Tajanlangit by the same court to P40.000.00 note
and Esteban secure the payment of would in effect change
Tajanlangit as the promissory note? the terms and
mortgagors on one conditions of the
hand and Rodolfo mortgage contract.
Ganzon as mortgagee Even before trial on
on the other hand was the very issues
to secure the payment affecting the contract,
by the Tajanlangits of the respondent court
a promissory note has directed a
amounting to deviation from its
P40,000.00 in favor of terms, diminished its
Ganzon. efficiency and
dispensed with a
Thereafter, petitioner primary condition.
Gregorio Lira, in his
capacity as ex-oficio A mortgage is but an
provincial sheriff of accessory contract. The
Iloilo served personal consideration of the
notice of the mortgage is the same
foreclosure consideration of the
proceedings on the principal contract
private respondents. A without which it cannot
day before the exist as an independent
scheduled public contract.
auction, the private
respondents filed a It is a right in rem, a lien
civil action for specific on the property.
performance,
damages, and This conversion can not
prohibition with be ordered for it would
preliminary injunction abridge the rights of the
mortgagee under the
against the petitioners mortgage contract.
with the respondent
court. The action, Moreover, the
sought to declare the questioned orders violate
extrajudicial the non-impairment of
foreclosure contracts clause
proceedings and all guaranteed under the
proceedings taken in Constitution.
connection therewith Substitution of the
null and void. The trial mortgage with a surety
court issued an order bond to secure the
enjoining the payment of the
provincial sheriff from P40,000.00 note would
proceeding with the in effect change the
scheduled auction terms and conditions of
sale. the mortgage contract.
Even before trial on
Before actual trial, the the very issues
private respondents affecting the contract,
filed a "Motion For the respondent court
Release Of Real has directed a
Estate And For The deviation from its
Clerk Of Court To terms, diminished its
Accept Bond Or Cash efficiency, and
In Lieu Thereof," to dispensed with a
which the petitioners primary condition
interposed an
Opposition. The
respondent court
granted the
respondents' motion.
NDC vs. PVB The particular WON Philippine Yes. YES. A mortgage lien is a
(1990) enactment in question Veterans Bank as property right derived
is Presidential Decree creditor of Agrix is still from contract and so
No. 1717, which entitled for payment comes under the
ordered the without prejudice to protection of Bill of
rehabilitation of the PD 1717. rights so do interests on
Agrix Group of loans, as well as
Companies to be penalties and charges,
administered mainly which are also vested
by the National rights once they accrue.
Development Private property cannot
Company.
simply be taken by law
The law outlined the
from one person and
procedure for filling
given to another
claims against the
Agrix Companies and without just
created a claims compensation and any
committee to process known public purpose.
these claims. This is plain arbitrariness
Especially relevant to and is not permitted
this case, and noted at under the constitution.
the outset, is section The court also feels that
4(1) thereof providing the decree impairs the
that “all mortgages and obligation of the
other liens presently contract between Agrix
attaching to any of the and the private
assets of the dissolved respondent without
corporations are justification. While it is
hereby extinguished.” true that the police
Earlier, the Agrix power is superior to the
Marketing Inc. had impairment clause, the
executed in favor of principle will apply only
private respondent where the contract is so
Philippine Veterans related to the public
Bank a real estate welfare that it will be
mortgage dated July 7, considered congenitally
1978 over three susceptible to change by
parcels of land situated the legislature in the
in Los Baños, Laguna. interest of greater
During the existence of
number.
the mortgage, Agrix
went bankrupt. It was
Our finding in sum, is
the expressed purpose
that PD 1717 is an
of salvaging this and
the other Agrix invalid exercise of the
companies that the police power, not being
aforementioned decree in conformity with the
was issued by traditional requirements
President Marcos. of a lawful subject and a
Pursuant thereto, the lawful method. The
private respondent extinction of the
filed a claim with the mortgage and other
AGRIX Claims liens and of the interest
Committee for the and other charges
payment of its loan pertaining to the
credit. In the legitimate creditors of
meantime, the New Agrix constitutes taking
Agrix, Inc. and the without due process of
National Development law, and this is
Company, petitioners compounded by the
herein, invoking Sec. 4 reduction of the secured
(1) of the decree, filed creditors to the category
a petition with the of unsecured creditors
Regional Trial Court of in violation of the equal
Calamba, Laguna, for protection clause.
the cancellation of the Moreover, the new
mortgage lien in favor corporation being
of the private neither owned nor
respondent. For its controlled by the
part, the private government, should
respondent took steps
have been created only
to extrajudicially
by general and not
foreclose the mortgage,
special law. And in so far
prompting the
as the decree also
petitioners to file a
second case with the interferes with purely
same court to stop the private agreements
foreclosure. The two without any
cases were demonstrated
consolidated. connection with the
public interest, there is
After the submission likewise an impairment
by the parties of their of the obligation of the
respective pleadings, contract.
the trial court rendered
the impugned decision.
Judge Francisco Ma.
Guerrero annulled not
only the challenged
provision, viz., Sec. 4
(1), but the entire Pres.
Decree No. 1717 on the
grounds that:
(1) the presidential
exercise of legislative
power was a violation
of the principle of
separation of powers;
(2) The law impaired
the obligation of
contracts; and
(3) the decree violated
the equal protection
clause. The motion for
reconsideration of this
decision having been
denied, the present
petition was filed.
The Court granted the
petitioner's prayer for
a temporary
restraining order and
instructed the
respondents to cease
and desist from
conducting a public
auction sale of the
lands in question.
The petitioners
contend that the
private respondent is
now estopped from
contesting the validity
of the decree.
The Court, after noting
that the petitioners had
already filed their
claims with the AGRIX
Claims Committee
created by the decree,
had simply dismissed
the petition on the
ground of estoppel.

The petitioners stress

that in the case at bar
the private respondent
also invoked the
provisions of Pres.
Decree No. 1717 by
filing a claim with the
AGRIX Claims
Committee. Failing to
get results, it sought to
foreclose the real
estate mortgage
executed by AGRIX in
its favor, which had
been extinguished by
the decree. It was only
when the petitioners
challenged the
 foreclosure on the
basis of Sec. 4 (1) of the
decree, that the private
respondent attacked
the validity of the
provision. At that stage,
however, consistent
with Mendoza, the
private respondent
was already estopped
from questioning the
constitutionality of the
decree.
NO. The Court reiterates
BPI vs. SEC The Bank of the WoN the requirement No. that the SEC’s approval
(2007) Philippine Islands for SEC approval of the of the Rehabilitation
(BPI), through its Rehabilitation Plan Plan did not impair
*Non-impairment predecessor-in- impair the obligations BPI’s right to contract.
clause is a limit on interest, Far East Bank of contract As correctly contended
the exercise of and Trust Company by private respondents,
legislative power and (FEBTC), extended the non-impairment
NOT of judicial or credit accommodations clause is a limit on the
quasi-judicial power to the ASB Group with exercise of legislative
*The SEC was acting an outstanding power and not of judicial
as a quasi-judicial aggregate principal or quasi-judicial power.
body and is therefore amount of The SEC, through the
free from the P86,800,000.00, hearing panel that heard
impairment secured by a real estate the petition for approval
mortgage over two (2) of the Rehabilitation
properties located in Plan, was acting as a
Greenhills, San Juan. quasi-judicial body and
thus, its order approving
On 2 May 2000, the the plan cannot
ASB Group filed a constitute an impairment
petition for of the right and the
rehabilitation and freedom to contract.
suspension of
payments before the Besides, the mere fact
SEC. that the Rehabilitation
Plan proposes a dacion
Thereafter, on 18 en pago approach does
August 2000, the not render it defective on
interim receiver the ground of
submitted its Proposed impairment of the right
Rehabilitation Plan for to contract. Dacion en
the ASB Group. The pago is a special mode
Rehabilitation Plan of payment where the
provides, among debtor offers another
others, a dacion en thing to the creditor who
pago by the ASB Group accepts it as equivalent
to BPI of one of the of payment of an
properties mortgaged outstanding debt. The
to the latter at the ASB undertaking really
Group as selling value partakes in a sense of the
of P84,000,000.00 nature of sale, that is, the
against the total creditor is really buying
amount of the ASB the thing or property of
Group’s exposure to the debtor, the payment
the bank. In turn, ASB for which is to be
Group would require charged against the
the release of the other debtor’s debt. As such,
property mortgaged to the essential elements of
BPI, to be thereafter a contract of sale,
namely; consent, object
placed in the asset certain, and cause or
pool. consideration must be
present. Being a form of
contract, the dacion en
pago agreement cannot
be perfected without the
consent of the parties
involved.