ARTICLE III SECTION 10

NO LAW IMPAIRING THE OBLIGATION OF CONTRACTS SHALL BE PASSED

Purpose of statute:
To safeguard the integrity of valid contractual agreements against unwarranted interference by the state.
As a rule, the will of the obligor and the obligee must be observed and the obligation of their contract must
not be impaired. (Justice Cruz, Constitutional Law, 2000 Edition, 252)
Contract (Consti Law) Any lawful agreement on property or property rights, whether real or personal,
tangible or intangible.
Contract (ObliCon Law) A meeting of the minds between two or more persons wherein one binds
himself, with respect to the other to give something or to render some service (Article 1305, Civil Code)
Parties may either be Natural or Juridical/Artificial persons
Obligation - is the law or duty which binds the parties to perform their undertaking or agreement
according to its terms and intent. (Sturgees vs.Crownshields, 4 Wheat. 122)
Impairment - is anything that diminishes the efficacy of the contract (Clements v. Nolting, 42 Phil. 702)
When is there impairment of contracts?
Changing of the principal amount of a loan or lengthening or shortening of loan durations
Remedies for the enforcement of the rights of the parties are completely withdrawn with the result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 as long as a substantial and efficacious remedy remains. 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are withdrawn.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. vs. Reyes, 62 Phil. 461)
Any degree of diminution is immaterial. As long as the original rights of either the parties are changed to
his prejudice, there is an impairment of the obligation of the contract.
Law (in relation to the impairment clause) statutes by the National Legislature, Executive Orders
and administrative regulations, promulgated under valid delegation including municipal ordinances
Note: it doesnt include case laws
Includes franchises or charters granted by the Government
What is not covered by the term Contract
Licenses privilege, revocable
Marriage special contract; regarded as a social institution
Public Office can be abolished, modified; as it was created by a statute so it too shall be subject
to another
The right is not absolute and is subject to Police Power:
While non-impairment of contracts is constitutionally guaranteed, the rule is not absolute, since it
has to be reconciled with the legitimate exercise of police power. (Ortigas v. Feati [GR L-24670, 14
December1979])
A contract cannot be raised as a deterrent to police power, designed precisely to promote health,
safety, peace, and enhance the common good, at the expense of contractual rights, whenever necessary.
(Sangalang v. Intermediate Appellate Court (IAC) [GR 71169, 22December 1988])
The prohibition is general, affording a broad outline and requiring construction to fill in the details.
The prohibition is not to read with literal exactness like a mathematical formula for it prohibits
unreasonable impairment only. In spite of the constitutional prohibition the State continues to possess
authority to safeguard the vital interests of its people. Legislation appropriate to safeguard said interest
may modify or abrogate contracts already in effect. For not only are existing laws read into contracts in
order to fix the obligations as between the parties but the reservation of essential attributes of sovereign
power is also read into contracts as a postulate of the legal order. All contracts made with reference to
any matter that is subject to regulation under the police power must be understood as made in reference
to the possible exercise of that power. (Abella v. NLRC [GR71813, 20 July 1987])
Police power cannot be surrendered or bargained away through the medium of a contract. Every
contract affecting the public interest suffers a congenital infirmity in that it contains an implied reservation

of the police power as a postulate of the existing legal order. This power can be activated at any time
to change the provisions of the contract, or even abrogate it entirely, for the promotion or protection of the
general welfare. (Villanueva v. Castaneda [GR L-61311, 21September 1987])
Contracts can be impaired in cases of these circumstances:
1.
2.
3.
4.
5.
6.

Emergency Powers
Zoning and Regulatory Ordinances
Labor Contracts
Administrative Regulations
Rental Laws
Tax Exemptions

Cases relevant to the Non- Impairment Clause:

Stone v Mississippi 101 U.S. 814 (1879)

Facts:
In 1867, the provisional state legislature of Mississippi chartered the Mississippi Agricultural,
Educational, and Manufacturing Aid Society. The Society was chartered to run a lottery for the next 25
years; however, in 1868, a new constitution ratified by the people outlawed lotteries in the state. John
Stone and others associated with the Society were arrested in 1874 for running a lottery. The Society
claimed they were protected by the provisions of their charter while the state declared that the
subsequent enforcement legislation had repealed the grant.
Issue:
Whether or not Mississippi violated the impairment of contract clause by repealing the Society's
grant?
Held:
A unanimous Court found that the Mississippi classification of lotteries as outlawed acts was
valid. The State legislature does not have the power to bind the decisions of the people and future
legislatures. The Court stated that no legislation had the authority to bargain away the public health and
morals. The Court viewed the lottery as a vice that threatened the public health and morals. The contracts
protected in the Constitution are property rights, not governmental rights. Therefore, one can only obtain
temporary suspension of the governmental rights (in this case, the right to outlaw actions) in a charter
which can be revoked by the will of the people.
Norman v. Baltimore & Ohio Railroad Co., 294 U.S. 240 (1935)
Facts:
This case pertains to two cases merged into one.
In the first case, an action on a coupon from a railroad bond, the Court of Appeals of New York
sustained the trial court in limiting the recovery to the face of the coupon, dollar for dollar, in currency.
In the second case, a proceeding under 77 of the Bankruptcy Act, a federal District Court made
a like ruling with respect to certain other railroad bonds. In this case, two appeals were taken to the Circuit
Court of Appeals, one allowed by that court and the other by the District Judge. While they were pending,
this Court granted writs of certiorari on the petition of the United States and the Reconstruction Finance
Corporation, which had both intervened in the District Court.
A bond for the future payment of a stated number of dollars in gold coin of the United States "of
or equivalent to the standard of weight and fineness existing" on the date of the bond, or for payment in
gold coin of the United States "of the standard of weight and fineness prevailing" on the date of the bond,
is not a contract for payment in gold coin as a commodity, or in bullion
Such "gold clauses" are intended to afford a definite standard or measure of value, and thus to
protect against depreciation of the currency and discharge of the obligations by payment of a lesser value
than that prescribed.
In determining whether the Joint Resolution of June 5, 1933, exceeded the power of Congress by
undertaking to nullify such "gold clause" stipulations in preexisting money contract obligations, and by

providing that such obligations shall be discharged, dollar for dollar, in any coin or currency which at the
time of payment is legal tender for public and private debts, the Resolution must be considered in its
legislative setting, with other measures in pari materia, and in the light of the following principles, which
have heretofore been laid down by this Court, viz:
Issue:
Whether or not the invalidation of the Gold clause in private and public contracts is considered a
violation of the impairment clause guaranteed by the constitution?
Held:
No. Congress has power, in its control of the monetary system, to endeavor to conserve the gold
resources of the Treasury, to insure its command of gold in order to protect and increase its reserves, and
to prohibit the exportation of gold coin or its use for any purpose inconsistent with the needs of the
Treasury. Congress could constitutionally act upon the gold clauses in anticipation of this devaluation, if
the clauses interfered with its policy.
Manila Trading and Supply Co. vs. Reyes
62 Phil 461 (GR No. L-43263) October 31, 1935
Facts:
On December 13, 1933, following the enactment of Act No. 4122 or the Installment Sales Law,
E.M. Reyes executed in favor of the Manila Trading & Supply Co., a chattel mortgage on an automobile
as security for the payment of the sum of P400, which Reyes agreed to pay in ten equal monthly
installments. As found by the trial judge, Reyes failed to pay some of the installments due on his
obligation. Thereupon the Manila Trading & Supply Co., proceeded to foreclose its chattel mortgage. The
mortgaged property was sold at public auction by the sheriff of the City of Manila for the sum of P200,
After applying this sum, with interest, costs, and liquidated damages to Reyes' indebtedness, the latter
owed the company a balance of P275.47, with interest thereon at the rate of 12 percent per annum from
February 19, 1934.
When Reyes failed to pay the deficiency on the debt, the company instituted an action in the
Court of First Instance of Manila for the recovery thereof. To plaintiff's complaint defendant filed an answer
in which he pleaded as a defense that plaintiff, having chosen to foreclose its chattel mortgage, had no
further action against defendant for the recovery of the unpaid balance owed by him to plaintiff, as
provided by Act No. 4122. After trial the lower court sustained defendant's defense and rendered a
judgment absolving him from the complaint, with costs.
From this judgment, the plaintiff has taken an appeal and here contends that the lower court erred
in not declaring Act No. 4122 of the Philippine Legislature unconstitutional for the several reasons
including that it unduly restrains the liberty of a person to contract with respect to his property rights.
Issue:
Whether or not the said law violates the impairment clause?
Held:
Parties have no vested rights in particular remedies or modes of procedure, and the Legislature
may change existing remedies and modes of procedure without impairing the obligations of contracts,
provided an efficacious remedy remains for the enforcement of a mortgage may not, even when public
policy is invoked as an excuse, be pressed so far as to cut down the security of a mortgage without
moderation or reason or in a spirit of oppression.
In the Philippines three remedies are available to the vendor who has sold personal property on
the installment plan. (1) He may elect to exact fulfillment of the obligation (Bachrach Motor Co. vs. Millan
[1935], 61 Phil 409). (2) If the vendee shall have failed to pay two or more installments, the vendor may
cancel the sale. (3) If the vendee shall have failed to pay two or more installments, the vendor may
foreclose the mortgage if one has been given on the property. Act 4122 does no more than qualify the
remedy.