Non-impairment clause

Section 10. No law impairing the obligation of contracts shall be passed.

The non-impairment clause is contained in Section 10, Article III of the Constitution, which provides that 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.[29] 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.

When does a law impair the obligation of contracts:

1) If it changes the terms and conditions of a legal contract either as to the time or mode of performance

2) If it imposes new conditions or dispenses with those expressed

3) If it authorizes for its satisfaction something different from that provided in its terms.

A mere change in PROCEDURAL REMEDIES which does not change the substance of the contract, and which
still leaves an efficacious remedy for enforcement does NOT impair the obligation of contracts.

A valid exercise of police power is superior to obligation of contracts.

NON-IMPAIRMENT OF CONTRACTS JURISPRUDENCE:

Abella v. NLRC

– illegal dismissal – To come under the constitutional prohibition, the law must effect change in the rights of the
parties with reference to each other and not with reference to non-parties. The contract in this case cannot have
the effect of annulling subsequent legislation for the protection of the workers.

Ortigas and Co. v. CA

– MMDA ordinance; reclassification of a portion of Ortigas Ave. – 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 the non-impairment of contracts;
Police power legislation is applicable not only to future contracts but equally to those already in existence. Non-
impairment of contracts must yield to the superior and
legitimate exercise by the State of police power to promote health, morals, etc.
National Development Company v. Philippine Veteran’s Bank

– mortgage liability; AGRIX – While it is true that police power is superior to the impairment clause, the principle
will only apply only where the contract is so related to the public welfare that it will be considered congenitally
susceptible to change by the legislature in the interest of the greater number.

Republic v. Caguioa

– tax exemptions; granted but was later withdrawn by a latter law – There is no vested right in tax exemption,
more so when the latest expression of legislative intent render its continuance doubtful; Congress in the
legitimate exercise of its lawmaking powers, can enact a law withdrawing a tax
exemption just as efficaciously as it may grant the same.

No law impairing the obligation of contracts shall be passed (Sec. 10, Art. III, 1987 Constitution).

The power of taxation cannot be exercised in a manner that would impair the obligation of contracts. What is
prohibited is that a taxing statute be passed that would alter the relative rights of the parties with each other.

The mere fact that a tax makes the conduct of a business more expensive or makes an activity more difficult
does not result in the impairment of the obligation of contracts. Contract is impaired only if the relative position
of the parties to a contract (i.e. equality that is assumed when the contract was entered into) is disturbed by
the operation of a taxing statute.

Application

An example of impairment by law is when a tax exemption based on a contract is revoked by a later taxing
statute. But exemption from taxation provided for in a franchise, although in a sense is an exemption based on
a contract, may be revoked because under the Constitution, a franchise is “subject to amendment, alteration,
or repeal” by Congress. (Sec.11, Art. XII.)

The obligation of a contract is impaired when its terms or conditions are changed by law or by a party without
the consent of the other, thereby weakening the position or rights of the latter.

An example of impairment by law is when a later taxing statute revokes a tax exemption based on a contract.
But this only applies when the tax exemption has been granted for a valid consideration.

A later statute may revoke exemption from taxation provided for in a franchise because the Constitution provides
that a franchise is subject to amendment, alteration or repeal.

The parties to the contract cannot exercise the power of taxation.

· > They cannot agree or stipulate that this particular transaction may be exempt from tax- not allowed
(except if government)

OPOSA vs. FACTORAN

· > Police power prevails over the non-impairment clause
LA INSULAR vs. MANCHUCA

· > A lawful tax on a new subject or an increased tax on an old one, does not interfere with a contract or
impairs its obligation.

· > The constitutional guarantee of the non-impairment clause can only invoked in the grant of tax exemption.

RULES:
1) If the exemption was granted for valuable consideration and it is granted on the basis of a contract.
> cannot be revoked
2) If the exemption is granted by virtue of a contract, wherein the government enters into a contract with a
private corporation
> cannot be revoked unilaterally by the government
3) If the basis of the tax exemption is a franchise granted by Congress and under the franchise or the tax
exemption is given to a particular holder or person
> can be unilaterally revoked by the government (Congress)
· > The non-impairment clause applies only to contracts and not to a franchise.
· > The non-impairment clause applies to taxation but not to police power and eminent domain.

Furthermore, it applies only where one party is the government and the other, a private individual.
· > As a rule, the obligation to pay tax is based on law. But when, for instance, a taxpayer enters into a
compromise with the BIR, the obligation of the taxpayer becomes one based on contract