QUESTION:

What is the basis of non-impairment of contracts?

ANSWER:

Sec. 10, Art. III. No law impairing the obligation of contracts shall be passed.

The non-impairment clause is limited in application to laws that derogate from prior acts
or contracts by enlarging, abridging or in any manner changing the intention of the
parties

QUESTION: What is the purpose of the non-impairment clause?

ANSWER:

The purpose of the non-impairment clause is to safeguard the integrity of valid

contractual agreements against unwarranted interference by the State. As a rule, the
will of the obligor and the obligee must be observed and the obligation of their contract
must not be impaired. (Justice Cruz, Constitutional Law, 2000 Edition, 252)

The purpose of the non-impairment clause of the Constitution20 is to safeguard the

integrity of contracts against unwarranted interference by the State. As a rule, contracts
should not be tampered with by subsequent laws that would change or modify the rights
and obligations of the parties.21 Impairment is anything that diminishes the efficacy of
the contract. There is an impairment if a subsequent law changes the terms of a
contract between the parties, imposes new conditions, dispenses with those agreed
upon or withdraws remedies for the enforcement of the rights of the parties.

(GOLDENWAY MERCHANDISING CORPORATION vs. EQUITABLE PCI BANK G.R.

No. 195540)
QUESTION:

When can we say that a law would tantamount to the impairment of a contract?

ANSWER:

In the case in Lepanto Consolidated Mining Co. v. WMC Resources Int'l. Pty. G.R. No.
162331 (2006), the supreme court ruled that Substantial impairment as conceived in
relation to impairment of contracts has been explained as a law which changes the
terms of a legal contract between parties, either in the time or mode of performance, or
imposes new conditions, or dispenses with those expressed, or authorizes for its
satisfaction something different from that provided in its terms, is law which impairs the
obligation of a contract and is therefore null and void

QUESTION: On what instance will non-impairment prevails?

ANSWER:

1. Against the removal of tax exemptions, where the consideration for the contract
is the tax exemption itself

2. Regulation on loans

QUESTION: When will non-impairment clause yield?

ANSWER:

1. Valid exercise of police power i.e. zoning regulation, premature campaign ban,
liquidation of a chartered bank;
2. Statute that exempts a party from any one class of taxes;

3. Against freedom of religion;

4. Judicial or quasi-judicial order

QUESTION: Is the constitutional guarantee of non-impairment of contracts absolute?

ANSWER:

While non-impairment of contracts is constitutionally guaranteed, the rule is not

absolute, since it has to be reconciled with the legitimate exercise of police power, i.e.,
"the power to prescribe regulations to promote the health, morals, peace, education,
good order or safety and general welfare of the people." Invariably described as "the
most essential, insistent, and illimitable of powers" and "in a sense, the greatest and
most powerful attribute of government," the exercise of the power may be judicially
inquired into and corrected only if it is capricious, whimsical, unjust or unreasonable,
there having been a denial of due process or a violation of any other applicable
constitutional guarantee. Police power "is elastic and must be responsive to various
social conditions; it is not confined within narrow circumscriptions of precedents resting
on past conditions; it must follow the legal progress of a democratic way of life. Public
welfare when clashing with the individual right to property should prevail through the
state's exercise of its police power. Further, laws and reservation of essential attributes
of sovereign power are read into contracts agreed upon by the parties. 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 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 where such exclusion is allowed.
(Ortigas v. Feati GR L-24670, 14 December 1979)

QUESTION: Will ordinances, in exercise of police power, be given retroactive effect and
impair vested rights and contracts.

ANSWER:

In general, laws are to be construed as having only prospective operation. Lex prospicit,
non respicit. Equally settled, only laws existing at the time of the execution of a contract
are applicable thereto and not later statutes, unless the latter are specifically intended to
have retroactive effect. A later law which enlarges, abridges, or in any manner changes
the intent of the parties to the contract necessarily impairs the contract itself and cannot
be given retroactive effect without violating the constitutional prohibition against
impairment of contracts. One exception involves police power. A law enacted in the
exercise of police power to regulate or govern certain activities or transactions could be
given retroactive effect and may reasonably impair vested rights or contracts. Police
power legislation is applicable not only to future contracts, but equally to those already
in existence. Non-impairment of contracts or vested rights clauses will have to yield to
the superior and legitimate exercise by the State of police power to promote the health,
morals, peace, education, good order, safety, and general welfare of the people.
Moreover, statutes in exercise of valid police power must be read into every contract.
While Philippine legal system upholds the sanctity of contract so that a contract is
deemed law between the contracting parties, nonetheless, stipulations in a contract
cannot contravene "law, morals, good customs, public order, or public policy." Otherwise
such stipulations would be deemed null and void.

(Ortigas v. Court of Appeals GR 126102, 4 December 2000)

QUESTION: Can the constitutional guarantee on non-impairment of contracts be raised

as a deterrent to the exercise of police power.

ANSWER:
All contracts are subject to the overriding demands, needs, and interests of the greater
number as the State may determine in the legitimate exercise of police power. The
Court guarantees sanctity of contract and is said to be the "law between the contracting
parties," but while it is so, it cannot contravene "law, morals, good customs, public order,
or public policy." Above all, it cannot be raised as a deterrent to police power, designed
precisely to promote health, safety, peace, and enhance the common good, at the
expense of contractual rights, whenever necessary. Police power is the power to
prescribe regulations to promote the health, morals, peace, education, good order or
safety and general welfare of the people. Invariably described as "the most essential,
insistent, and illimitable of powers" and "in a sense, the greatest and most powerful
attribute of government," the exercise of the power may be judicially inquired into and
corrected only if it is capricious, whimsical, unjust or unreasonable, there having been a
denial of due process or a violation of any other applicable constitutional guarantee.
Police power is elastic and must be responsive to various social conditions; it is not
confined within narrow circumscriptions of precedents resting on past conditions; it must
follow the legal progress of a democratic way of life. Public welfare, when clashing with
the individual right to property, should be made to prevail through the state's exercise of
its police power.