SECTION 10 – THE IMPAIRMENT CLAUSE

“No law impairing the obligation of contracts shall be passed.”

Purpose : to safeguard the integrity of valid contractual agreements against

unwarranted interference by the State. They should be respected by the legislature
and not tampered with by the subsequent laws that will change the intention of the
parties or modify their rights and obligations. The will of the obligor and obligee
must be observed and the obligation of their contract must not be impaired.

- The 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.
- Agreement may be executed or executor
- Parties may be private persons only, natural or artificial or private persons
on one hand and the govt or its agencies
- Does NOT cover licenses or license agreements (as these involve grants of
privileges only that are revocable) and marriage contract (bc it is regardes as
a social institution)
Law
- includes statutes enacted by the natl legislature, EO and administrative
regulations promulgated under a valid delegation of power and municipal
ordinances passed by LLBs
- does not include judicial decisions or adjudications made by admin 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 is no impairment if the law is made to operate
prospectively only, to cover contracts entered into after its enactment.
Obligation
- the law or duty which binds the parties to perform their undertaking or
agreement according to its terms and intent
Impairment
- anything that diminishes the efficacy of the contract
- when the original rights of either of the parties are changed to his prejudice
- in the case of remedies, there will be impairment only if all of them are
withdrawm, with the result that either of the parties will be unable to enforce
his rights under the original agreement. There’s no impairment as long as a
substantial and efficacious remedy remains. This rule remains true evein the
remedy retained is the most difficult to employ and it is the easier ones that
are withdrawn
Limitations
- a valid contract may be legally modified by a subsequent law despite the
impairment clause.
- If the law is a proper exercise of the police power, it will prevail over the
contract
- Police power legislation 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
- A zoning ordinance, while valid as a police measure, was not intended to
affect existing rights protected by the impairment clause.
- ART 12, SEC 11 of the consti = embraced in the police power of the state
- 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
- 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. All other tax exemptions are not contractual and so
may be revoked at will by the legislature.