The impairment clause or the non-impairment clause (either is ok, the same with the establishment clause vis-a-vis non-establishment clause) is to protect the sanctity of contracts against unfair interference from the State. After all, that is what the Bill of Rights is for. This originated in the U.S. when in the revolutionary period, the legislature would enact laws that practically erases the debt of a number of people to the detriment of their creditors.
But unlike other subjects of protection like people’s lives or liberty, Section 10 of the Bill of Rights protects contracts, which is, let’s face it, not quite up there in the level of freedom of speech or religion, social justice, or privacy. This means that more often than not, when faced against a law or a government action that legitimately advances a public interest, the contract will not win. Public welfare, more often than not, trumps private rights.
Anyway, let’s get to it.
Is the word “law” here strictly limited to legislative acts? Or should it also cover other governmental acts like the word “law” in the due process, equal protection, freedom of religion, and freedom of speech provisions? The answer is the former. The word “law” under Sec. 10 only covers legislative acts (statutes, ordinances, Executive Orders, etc.):
“For it is well-settled that a law within the meaning of this constitutional provision has reference primarily to statutes and ordinances of municipal corporations. Executive orders issued by the President whether derived from his constitutional powers or valid statutes may likewise be considered as such. It does not cover, therefore, the exercise of the quasi-judicial power of a department head even if affirmed by the President. The administrative process in such a case partakes more of an adjudicatory character. It is bereft of any legislative significance. It falls outside the scope of the non-impairment clause.”
–Lim v. Secretary of Agriculture and Natural Resources, 1970
Also, the law referred to in Sec. 10 should be one coming from a governmental body, and not a Church’s canon laws (lol):
[The portion of the Organic Act, the Act of Congress of August 29, 1916, section 3, paragraph 5, providing “That no law impairing the obligation of contracts shall be enacted” is not applicable since the “law” there mentioned is an Act of the Philippine Commission or Legislature or an ordinance or resolution of a municipal council, and does not include an ecclesiastical law promulgated by the Pope for the Catholic world.]
-Justice Malcolm Separate Opinion, Gonzalez v. The Roman Catholic Archbishop of Manila, 1928
And naturally, a law does not impair the obligation of contracts unless it affects existing contracts concluded before its enactment. In other words, there can be no impairment of contracts formed AFTER the enactment of the law (future contracts):
“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.”
-Justice Isagani Cruz, Constitutional Law, 2013, p. 258
Now, what constitutes an impairment of a contract?
Section 10 has been explained in a 2003 case:
[It is ingrained in jurisprudence that the constitutional prohibition on the impairment of the obligation of contracts does not prohibit every change in existing laws. To fall within the prohibition, the change must not only impair the obligation of the existing contract, but the impairment must be substantial. What constitutes substantial impairment was explained by this Court in Clemons v. Nolting:
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.
Moreover, to constitute impairment, the law must affect a change in the rights of the parties with reference to each other and not with respect to non-parties.]
–PHILRECA v. DILG Secretary, 2003
Segue: To make an example of “the law must affect a change in the rights of the parties with reference to each other and not with respect to non-parties,” here is a case explaining how an imposition of a tax, although obviously burdening a contract of sale, is not a violation of the non-impairment clause because a tax does not alter the relationship between the parties in the sales contract but the relationship between the parties and the state:
“In the case at bar the Government of the Philippine Islands was in no sense a party to the contract of July 15, 1913, between the plaintiff and the defendants; and it is readily seen that when the Legislature of these Islands increased the internal revenue tax upon cigarettes, this was an act done by a stranger to the contract, and not by any person in privity therewith. The consequence is that, properly speaking, the legislative fiat, placing the burden of the tax on the purchaser, did not in any wise affect the obligation of the contract as between the parties. It was merely an external factor which, supervening upon the situation created by the contract , made it impossible for the purchaser to realize the benefit which would have accrued to him if the seller had been required to pay the tax. Nearly all changes in taxation affect existing contracts in some way or other, but this does not necessarily change such contracts in a legal sense.”
–La Insular v. Machuca, 1919
Thus, we can safely set the following rules:
To fall within the prohibition of non-impairment clause (Sec. 10, Art. III, Constitution), the impairment of the contract must be SUBSTANTIAL and ONLY AFFECTS THE rights of the parties with reference to each other and not with respect to non-parties.
The following examples of laws constitute substantial impairment:
1. A law which changes the terms of a legal contract between parties, either in the time or mode of performance
2. A law which imposes new conditions, or dispenses with those expressed,
3. Authorizes for its satisfaction something different from that provided in its terms (This basically means imposing a different remedy for the enforcement of the contract. There will be impairment only if all of them are 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.
-Cruz, p. 259)
Now that we know what constitutes impairment, the next question on our minds should be, what falls under the term “contract”?:
[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. The agreement maybe executed or executory. 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. It includes franchises or charters granted to private persons or entities, like an authorization to operate a public utility.]
-Justice Isagani Cruz, Constitutional Law, 2013, pp. 256-257
But that does not mean that any impairment to these contracts is automatically prohibited because of the non-impairment clause. All of these, especially franchises or charters, can be subject to police power of the state:
“…even assuming that the same may be invoked, the non-impairment clause must yield to the police power of the State. Property rights and contractual rights are not absolute. The constitutional guaranty of non-impairment of obligations is limited by the exercise of the police power of the State for the common good of the general public.”
–Pacific Wide Realty and Development Corporation v. Puerto Azul Land, 2009
However, there are types of contracts that are definitely not covered by the non-impairment clause. An example is a license:
“A license is merely a permit or privilege to do what otherwise would be unlawful, and is not a contract between the authority, federal, state, or municipal, granting it and the person to whom it is granted.”
–Tan v. The Director of Forestry, 1983
Thus, licenses can be essentially revoked anytime public interest so requires.
Another example is a marriage contract. Marriage is a social institution that can be regulated by the State. Thus, a law allowing divorce would not violate the non-impairment clause.
Nevertheless, the distinction between contracts v. non-contracts barely matters because, as we said before, even contracts yield to police power. But of course, the distinction may be useful for academic purposes.
Going back to police power, let’s look at a very old case that perfectly illustrates both sides of the coin. We will see how police power prevails over the non-impairment clause, but then, there is a limit as to what police power can do. This case involves those that were damaged by World War II. An Executive Order (EO 25) dated 1944 imposed a moratorium on debts contracted before 1941. This means that creditors cannot collect the debts of those damaged by the war. Then, in 1948, the Legislature enacted a law (RA 342) where the debt cannot be demandable for another 8 years. The SC declared that the first moratorium was indeed valid. However, the second one which extends to 8 more years, and does not allow any interest to accrue, was deemed unconstitutional:
[One of the arguments advanced against the validity of the moratorium law is the fact that it impairs the obligation of contracts which is prohibited by the Constitution. This argument, however, does not now hold water. While this may be conceded, it is however justified as a valid exercise by the State of its police power. The leading case on the matter is Home Building and Loan Association vs. Blaisdell, decided by the Supreme Court of the United States on January 8, 1934. Here appellant contested the validity of charter 339 of the laws of Minnesota of 1933, approved April 13, 1933, called the Minnesota Mortgage Moratorium Law, as being repugnant to the contract clause of the Federal Constitution. The statute was sustained by the Supreme Court of Minnesota as an emergency measure. “Although conceding that the obligations of the mortgage contract were impaired, the court decided that what it thus described as an impairment was, notwithstanding the contract clause of the Federal Constitution, within the police power of the State as that power was called into exercise by the public economic emergency which the legislature had found to exist.”
x x x x
But the ruling in the Blaisdell case has its limitations which should not be overlooked in the determination of the extent to be given to the legislation which attempts to encroach upon the enforcement of a monetary obligation. It must be noted that the application of the reserved power of the State to protect the integrity of the government and the security of the people should be limited to its proper bounds and must be addressed to a legitimate purpose. If these bounds are transgressed, there is no room for the exercise of the power, for the constitutional inhibition against the impairment of contracts would assert itself. x x x x.. In fine, the decision in the Blaisdell case is predicated on the ground that the laws altering existing contracts will constitute an impairment of the contract clause of the Constitution only if they are unreasonable in the light of the circumstances occasioning their enactment.
x x x x
But we should not lose sight of the fact that these obligations had been pending since 1945 as a result of the issuance of Executive Orders Nos. 25 and 32 and at present their enforcement is still inhibited because of the enactment of Republic Act No. 342 and would continue to be unenforceable during the eight-year period granted to prewar debtors to afford them an opportunity to rehabilitate themselves, which in plain language means that the creditors would have to observe a vigil of at least twelve (12) years before they could effect a liquidation of their investment dating as far back as 1941. This period seems to us unreasonable, if not oppressive. While the purpose of Congress is plausible, and should be commended, the relief accorded works injustice to creditors who are practically left at the 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, unlike similar statutes in the United States.]
–Rutter v. Esteban, 1953
Thus, it’s safe to say that even if police power does prevail over the non-impairment clause like in the case of moratorium laws, the exercise of police power must be reasonable. We can connect this to the two requirements of substantive due process:
1. valid governmental objective
2. the means employed must be reasonably necessary/related to the accomplishment of the purpose and not unduly oppressive
After all, these requirements of due process are also the limitations on the exercise of police power.
Anyway, to better prepare us for the bar, let’s look at some cases involving the non-impairment clause.
First, let’s look at the cases where the non-impairment clause prevailed. There aren’t that many.
1. Casanovas v. Hord (1907)- Contractual tax exemptions.
In this case, the Spanish Government gave a person a literal gold mine with the condition that he should mine it. The deed granting the gold mine already has terms that include the amount of tax it must pay, but it also has the condition that no other taxes shall be imposed on the mine. Thereafter, a tax law was passed that imposed tax on the gold mine. The SC voided the application of said tax law to the mine because not doing so would be a violation of the non-impairment clause:
“It seems very clear to us that this deed constituted a contract between the Spanish Government and the plaintiff, the obligation of which contract was impaired by the enactment of section 134 of the Internal Revenue Law above cited, thereby infringing the provisions above quoted from section 5 of the act of Congress of July 1, 1902.
x x x
Our conclusion is that the concessions granted by the Government of Spain to the plaintiff, constitute contracts between the parties; that section 134 of the Internal Revenue Law impairs the obligation of these contracts, and is therefore void as to them.“
However, this should not be confused with the tax exemptions granted to franchises. Those tax exemptions can be revoked:
“These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the operation of a public utility shall be granted except under the condition that such privilege shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires.”
–Manila Electric Company v. Province of Laguna, 1999
Thus, it’s safe to say that franchises may be contracts, but they are not included in the application of the non-impairment clause.
2. Co v. PNB (1982)- Retroactive application of a law (Act 3135) that alters the terms and conditions under which the right of redemption may be exercised. In this case, the law did not take into account when a loan was secured. Thus, in effect, some loans and mortgages would have their terms and conditions altered:
“Without considering the date the loan was secured and the date of the mortgage contract, and taking into account only the dates of the foreclosures and auction sales, it is quite obvious that any change in the law governing redemption that would make it more difficult than under the law at the time of the sale cannot be given retroactive effect. Under the terms of the mortgage contract, the terms and conditions under which redemption may be exercised are deemed part and parcel thereof whether the same be merely conventional or imposed by law. To alter those terms in a manner prejudicial to the mortgagor or the person redeeming the property as his successor-in-interest after the foreclosures and sales would definitely come within the constitutional proscription against impairment of the obligations of contracts.“
I think these are the only two that are clear. These doctrines still stand as they were both cited by cases in 1999 (case already linked above) and 2013 (Goldenway v. Equitable PCI Bank), respectively, even if in both these cases, the doctrine did not find any application.
It just goes to show that post-1987 Constitution, our SC has become more embracing of the concept that public welfare always trumps private rights.
Let’s look at the cases where the non-impairment clause stood no chance. But wait, do we really have to? I think it’s safe to say that the following exercises of police power prevail over the non-impairment clause:
1. social legislation (labor, agrarian reform, retroactive effect of retirement laws, etc.)
2. election regulation intended for the common good (campaign period imposition)
3. zoning regulation (determines whether land is residential, commercial, agricultural)
4. freedom of religion
5. freedom of speech
6. preservation of the environment
Thus, if a question comes up when any of these conflicts with the non-impairment clause, just say this:
The non-impairment clause must yield to the police power of the State. Property rights and contractual rights are not absolute. The constitutional guarantee of non-impairment of obligations is limited by the exercise of the police power of the State for the common good of the general public.
For freedom of religion or other similarly situated liberties like freedom of speech:
The free exercise of religious profession or belief is superior to contract rights. In case of conflict, the latter must, therefore, yield to the former.
Alright, that’s it for the non-impairment of contracts. Up next, adequate legal assistance and free access to courts.
The Bartender 