BILL OF RIGHTS IN PREPARATION FOR BAR EXAM

SECTION 10.

To fall within the prohibition

1. the change must impair the obligation of the existing contracts, and
2. the impairment must be substantial

Substantial impairment
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; hence, it is null and void. Clemons v.
Nolting

This limitation is addressed to

the exercise of legislative or quasi-legislative power and not on the exercise
of judicial or quasi-judicial power

Hierarchies
o With respect to private contracts, the question about the power to
tax is irrelevant because a tax law does not alter the relation between
the parties.
o With respect to public contracts, the answer is NO because just as
the state cannot contract away its police power so also it cannot
contract away its power to tax.
o As to freedom of religion, the Court ruled that the free exercise of
religion is superior to contract rights.

Cases/Doctrines
A mere change in procedural remedies which does not change the
substance of a contract and which at the same time still leaves an
efficacious remedy for enforcement does not impair the obligation of
contracts. Manila Trading v. Reyes

Not all impairment of the substance of a contract is violative of the

Constitution especially if it is in pursuance of the valid exercise of police
power. Rutter Estaban
o The clause protects contracts with the government or public
contracts.
o Franchises are contracts and therefore are covered by the clause.

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A rehabilitation plan approved by statute which merely suspends the
actions for claims does not violate the contract clause. It is a different
matter, however, if the amount of rental is changed. The amount of
rental is an essential condition of any lease contract. Needless to state, the
change of its rate in the Rehabilitation Plan is not justified as it
impairs the stipulation between the parties.

Timber licenses, permits and license agreements are the principal

instruments by which the State regulates the utilization and disposition of
forest resources to the end that public welfare is promoted. They are not
deemed contracts within the purview of the due process of law clause.

THE PURPOSE of the impairment clause is to safeguard the integrity of

valid contractual agreements against unwarranted interference by the State.
As a rule, they should be respected by the legislature and not tampered
with by subsequent laws that will change the intention of the parties or
modify their rights and obligations.” The will of the obligor and the obligee
must be observed; the obligation of their contract must not be impaired.

It should be stressed at the outset, however, that the protection of the

impairment clause is not absolute. There are instances, as will appear
later, when contracts valid at the time of their conclusion may become
invalid, or some of their provisions may be rendered inoperative or
illegal, by virtue of supervening legislation.

The Supreme Court has recognized that there are views “that the non-
impairment clause is obsolete and redundant because contracts are
considered property, and thus, are protected by the due process clause. On
the other hand, studies show why the non-impairment clause should be
maintained. Aside from its traditional purpose of prohibiting State
interference in purely private transactions, the non-impairment clause
serves as a guarantee of the separation of powers between the judicial
and legislative branches of the government. The non-impairment clause
serves as a check on the legislature to act only through generally applicable
laws prescribing rules of conduct that operate prospectively.”

CONTRACT
o The term “contract” as used in the impairment clause refers to any
lawful agreement on property or property rights, whether real or
personal, tangible or intangible.
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 o The agreement may be executed or executory.
o The parties may be private persons only, natural or artificial, or private
persons on the one hand and the government or its agencies on the
other hand.
o It has been considered as including franchises or charters granted to
private persons or entities, like an authorization to operate a public
utility,” although in our jurisdiction, a franchise has been held as
partaking “of the nature of a grant and is beyond the purview of the
nonimpairment clause of the Constitution.”
o But it does not cover licenses,” say for operation of a liquor store or a
cockpit, or license agreements,’ such as an Industrial Forest
Management Agreement for the development, utilization and
management of a forest area, as these involve grants of privileges only
that are essentially revocable.
o Neither does it include the marriage contract, which, more than a
mere agreement between the spouses, is regarded as a social
institution subject at all times to regulation by the legislature and to
change of the original conditions.

o Also, as earlier observed, a public office is not a property right and

therefore cannot be the subject of a contract between the incumbent
and the government. The office itself, if created by statute, may be
modified or even abolished or any of its incidents may be
changed, as by reduction of the term or the salary. The exception
already noted is 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.”

Excluded from the concept are special contracts “imbued with public
interest,” such as stock distribution option agreements which embody stock
distribution plans made in connection with the agrarian reform program of
the government. Said agreements require governmental approval, and may
be later revoked if so approved, as “everything” about them is “subject to
administrative adjudication.”"

It has further been held in Land Bank of the Philippines v. Republic of the Philippines’ that the
“constitutional guarantee of non-impairment of contracts may not” be used by the petitioner “to
validate its interest over the land as mortgagee. The State’s restraint upon the right to have an
interest or ownership over forest lands does not violate the constitutional guarantee of non-
impairment of contracts. Said restraint is a valid exercise of the police power of the State.”

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  As used in the impairment clause, “law” includes statutes enacted by
the national legislature, executive orders and administrative
regulations promulgated under a valid delegation of power, and
municipal ordinances passed by the local legislative bodies.

 However, it does not include judicial decisions or adjudications

made by administrative bodies in the exercise of their quasi-
judicial powers.

Accordingly, the Supreme Court did not consider A. No. 8042, which was
enacted in 1995, as violative of the impairment clause. With respect to
an employment Contract executed after its promulgation. “Rather, when the
parties executed their 1998 employment contract, they were deemed to have
incorporated into it all the provisions of R.A. No. 8042.”

A similar ruling was held in BANAT v. Commission on Elections, with

respect to a law promulgated three months before the execution of the
subject contracts. Neither was Section 47 of R.A. No. 8791 (which modified
the time for the exercise by juridical persons of their right of redemption by
reducing the one-year period originally provided in Act No. 3135) considered
as violative of the impairment clause as it did not provide for the
“retroactive application of the new redemption period because Section 47
exempts from its operation those properties foreclosed prior to its effectivity
and whose owners shall retain their redemption rights under Act No, 3135."

OBLIGATION
The “obligation” of the contract is the vinculum juris, i.e. the tie that
binds the parties to each other, “The obligation of a contract is the law or
duty which binds the parties to perform their undertaking or agreement
according to its terms and intent.”” In a contract of loan, for example,
the obligation is the duty of the lender to extend the loan and of the
borrower to repay it, according to their stipulations,
IMPAIRMENT
Impairment is anything that diminishes the efficacy of the contract.” In
the above example of the contract of loan, there will be an impairment of its
obligation if by subsequent law the principal of the loan is reduced or
increased, or the period of payment is shortened or lengthened, or
conditions are added or removed, or the remedies for the enforcement

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of the rights of the parties are completely withdrawn.” The degree of the
diminution is immaterial. As long as the original rights of either of the
parties are changed to his prejudice, there is an impairment of the
obligation of the contract.
There is 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.”

But in the case of remedies, there will be impairment only if all of them
withdrawn, with the result that either of the parties will be unable to
enforce his rights under the original agreement. There will be no
impairment, in other words, as long as a substantial and efficacious remedy
remains. And this rule holds true even if the remedy retained is the most
difficult to employ and it is the easier ones that are withdrawn.”
LIMITATIONS

Despite the impairment clause, a contract valid at the time of its execution
may be legally modified or even completely invalidated by a
subsequent law. If the law is a proper exercise of the police power, it
will prevail over the contract.

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