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J. Non-impairment of contracts

1. CONCEPT

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

a. Freedom to 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 be 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. (Goldenway Merchandising Corporation v. Equitable PCI Bank, G.R. No. 195540, 13 March 2013)

The freedom of contract, under our system of government, is not meant to be absolute. The same is understood to be subject to reasonable legislative regulation aimed at the promotion of publicity health, morals, safety and welfare. In other words, the constitutional guaranty of non-impairment of obligations of contract is limited by the exercise of the police power of the State, in the interest of public health, safety, morals and general welfare. (Abe vs. Foster Wheeler Corporation, En Banc, G.R. Nos. L-14785 and L-14923, 27 February 1961)

Not all contracts are protected under the non-impairment clause. Contracts whose subject matters are so related to the public welfare are subject to the police power of the State and, therefore, some of its terms may be changed or the whole contract even set aside without offending the Constitution; otherwise, “important and valuable reforms may be precluded by the simple device of entering into contracts for the purpose of doing that which otherwise may be prohibited.” (PBOAP v. DOLE, En Banc, G.R. No. 202275, 17 July 2018)

Likewise, contracts which relate to rights not considered property, such as a franchise or permit, are also not protected by the non-impairment clause. The reason is that the public right or franchise is always subject to amendment or repeal by the State,  the grant being a mere privilege. In other words, there can be no vested right in the continued grant of a franchise. Additional conditions for the grant of the franchise may be made and the grantee cannot claim impairment. (Ibid.)

b. Impairment

Impairment – is anything that diminishes the efficacy of the contract. There is an 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. (Goldenway Merchandising Corporation v. Equitable PCI Bank, supra.)

There is an impairment when, either by statute or any administrative rule issued in the exercise of the agency’s quasi-legislative power, the terms of the contracts are changed either in the time or mode of the performance of the obligation. There is likewise impairment when new conditions are imposed or existing conditions are dispensed with. (PBOAP v. DOLE, supra.)

c. Purpose

The purpose of the non-impairment clause of the Constitution is to safeguard the integrity of contracts against unwarranted interference by the State. As a rule, contracts should not be tampered with by subsequent laws that would change or modify the rights and obligations of the parties. (Goldenway Merchandising Corporation v. Equitable PCI Bank, supra.)

The non-impairment clause of the Constitution must yield to the loftier purposes targeted by the Government. The right granted by this provision must submit to the demands and necessities of the State’s power of regulation. Such authority to regulate businesses extends to the banking industry which, as this Court has time and again emphasized, is undeniably imbued with public interest. (Ibid.)

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