THE IMPAIRMENT CLAUSE

PURPOSE: to safeguard the integrity of valid contractual agreements against unwarranted interference by the State.

·         NOTE! Protection of the impairment clause is not absolute.

CONTRACT

-          Refers to any lawful agreement on property or property rights, whether real or personal, tangible or intangible

-          The agreement may be executed or executory

-          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

-          Includes franchises or charters granted to private persons or entities

-          Does not cover licenses as these involve grants of privileges only that are essentially revocable

-          Does NOT include marriage contracts

-          GR: A public office is not a property right and therefore cannot be the subject of a contract between the incumbent and the government

XPN: Salaries already earned – will be deemed as vested property right that cannot be withdrawn or reduced by retroactive legislation

-          The State’s restraint upon the right to have an interest or ownership over forest land does not violate the constitutional guarantee of non-impairment of contracts. Said restraint is a valid exercise of the police power of the State. (Land Bank of the Philippines v. Republic of the Philippines)

 

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 legislative bodies

-          Does not include judicial decisions or adjudications made by administrative bodies in the exercise of their quasi-judicial powers

-          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

-          The obligation of the contract is the vinculum juris, 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. (Sturgess v. Crownshields)

IMPAIRMENT

-          Anything that diminishes the efficacy of the contract

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

-          But in the case of remedies, 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. 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. (Manila Trading Co. v. Reyes)

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.

-          The freedom to contract is not absolute; all contracts and all rights are subject to the police power of the State and not only may regulations which affect them established by the State, but all such regulations must be subject to change from time to time, as the general well-being of the community may require, or as the circumstances may change, or as experience may demonstrate the necessity. (Beltran v. Secretary of Health)

-          It has long been settled that police power legislation, adopted by the State to promote the health, morals, peace, education, good order, safety, and general welfare of the people prevail not only over future contracts but even over those already in existence, for all private contracts must yield to the superior and legitimate measures taken by the State to promote public welfare. (Surigao del Norte Electric Cooperative Inc. v. Energy Regulatory Commission)

-          The legislature cannot bargain away the police power through the medium of a contract. Neither may private parties fetter the legislative authority by contracting on matters that are essentially within the power of the lawmaking body to regulate.

-          The police power is superior to the non-impairment clause. The constitutional guaranty of non-impairment of contracts is limited by the exercise of public health, safety, morals, and general welfare of the community. (BANAT v. COMELEC)

-          The prohibition contained in constitutional provisions against impairing the obligation of contracts is not an absolute one and is not to be read with literal exactness like a mathematical formula. Such provisions are restricted to contracts with respect to property, or some object of value, and confer rights which may be asserted in a court of justice, and have no application to statutes relating to public subjects within the domain of the general legislative powers of the State, and involving the public right and public welfare of the entire community affected by it. They do not prevent proper exercise by the State of its police powers. By enacting regulations reasonably necessary to secure the health, safety, morals, comfort, or general welfare of the community, even the contracts may thereby be affected; for such matter cannot be placed by contract beyond the power of the State to regulate and control them. (Ilusorio v. Court of Agrarian Relations)

-          In The Learning Child, Inc. v. Ayala Alabang Village Association, the SC reiterated that a zoning ordinance, being an exercise of the police power, is superior to the impairment clause. However, it declared that, a zoning ordinance, while valid as a police measure, was not intended to affect existing rights protected by the impairment clause. It is always a wise policy to reconcile apparently conflicting rights under the Constitution and to preserve both instead of nullifying one against the other.

-          In Article XII, Section 11, of the Constitution, it is provided that no franchise to operate a public utility shall 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”. 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.

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

-          A contract is property, and like any other property, may be 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, as they do the tangible property of the company, to public uses. (Long Island Water Supply Co. v. Brooklyn)

-          It has also been held that a lawful tax on a new subject, or an increased tax on an old one does not interfere with a contract or impair its obligation within the meaning of the Constitution. On the other hand, where a law grants a tax exemption in exchange for valuable consideration, such exemption is considered a contract and cannot be repealed because of the impairment clause.

-          The Contract Clause has never been thought as a limitation on the exercise of the State’s power of taxation save only where a tax exemption has been granted for a valid consideration. (Smart Communications, Inc. v. City of Davao)