Section 10 – Non-Impairment Clause

Rutter vs. Esteban [G.R. No. L-3708, May 18, 1953]

FACTS

 On August 20, 1941, Royal L. Rutter sold to Placido J. Esteban two parcels of land situated in the City of
Manila for the sum of P9,600 of which P4,800 were paid outright, and the balance of P4,800 was made
payable as follows: P2,400 on or before August 7, 1942, and P2,400 on or before August 27, 1943, with
interest at the rate of 7 per cent per annum.
 To secure the payment of said balance of P4,800, a first mortgage over the same parcels of land has been
constituted in favor of the plaintiff. The deed of sale having been registered, a new title was issued in favor
of Placido J. Esteban with the mortgage duly annotated on the back thereof.
 Placido J. Esteban failed to pay the two installments as agreed upon, as well as the interest that had
accrued thereon, and so on August 2, 1949, Royal L. Rutter instituted this action in the Court of First
Instance of Manila to recover the balance due, interest, attorney’s fee and prayer for the sale of the
mortgage property.
 Esteban Defense: Moratorium clause embodied in Republic Act No. 342. He claims that this is a prewar
obligation contracted on August 20, 1941; that he is a war sufferer, having filed his claim with the
Philippine War Damage Commission for the losses he had suffered as a consequence of the last war; and
that under section 2 of said Republic Act No. 342, payment of his obligation cannot be enforced until after
the lapse of eight years from the settlement of his claim by the Philippine War Damage Commission, and
this period has not yet expired.
 Court rendered judgment in favor of Esteban because obligation which Rutter’s seek to enforce is not yet
demandable under the moratorium law. He questions the constitutionality of the moratorium law for the
first time, hence it was denied.

ISSUE

Whether or not Republic Act No. 342 is unconstitutional if it will apply in the present case being violative of the
constitutional provision forbidding the impairment of the obligation of contracts - NO

HELD

MORATORIUM LAWS ARE CONSTITUTIONAL. Statutes declaring a moratorium on the enforcement of

monetary obligations are not of recent enactment. These moratorium laws are not new. "For some 1,400 years
western civilization has made use of extraordinary devices for saving the credit structure, devices generally known
as moratoria. The moratorium is postponement of fulfillment of obligations decreed by the state through the
medium of the courts or the legislature. Its essence is the application of the sovereign power" (58 C.J. S., p. 1208
footnote 87). In the United States, many state legislatures have adopted moratorium laws "during times of financial
distress, especially when incident to, or caused by, a war" (41 C.J., p.213). Thus, such laws "were passed by
many state legislatures at the time of the civil war suspending the rights of creditors for a definite and reasonable
time, whether they suspend the right of action or make dilatory the remedy" (12 C.J., p 1078). The laws were
declared constitutional. However, some courts have also declared that "such statutes are void as to contracts
made before their passage where the suspension of remedied prescribed is indefinite or unreasonable in duration"
(12C.J., 1078). The true test, therefore, of the constitutionality of the moratorium statute lies in the
determination of the period of a suspension of the remedy. It is required that such suspension be definite
and reasonable, otherwise it would be violative of the constitution.

One of the arguments advanced against the validity of the moratorium law is the fact that it impairs the
obligation of contracts which is prohibited by the Constitution. This argument, however does not now hold water.
While this may be conceded, it is however justified as a valid exercise by the State of its police power. The
leading case on the matter is Home Building and Loan Association vs. Blaisdell, 290 U. S., 398, decided by the
Supreme Court of the United States on January 8, 1934. Here appellant contested the validity of charter 339 of
the laws of Minnesota of 1933, approved April 13, 1933, called the Minnesota Mortgage Moratorium Law, as being
repugnant to the contract clause of the Federal Constitution. The statute was sustained by the Supreme Court of
Minnesota as an emergency measure. "Although conceding that the obligation of the mortgage contract
was impaired, the court decided that what it thus described as impairment was, notwithstanding the
contract clause of the Federal Constitution, within the police power of the State as that power was called
into exercise by the public economic emergency which the legislative had found to exist". This theory was
up-held by the Supreme Court. Speaking through Chief Justice Hughes, the court made the following
pronouncements:

Not only is the constitutional provision qualified by the measure of control which the State retains over
remedial processes, but the State also continues to possess authority to safeguard the vital interest of its
people. It does not matter that legislation appropriate to that end "has the result of modifying or abrogating
contracts already in effect." . . . . Not only are existing laws read into contracts in order to fix 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. The policy of protecting contracts against impairment
presupposes the maintenance of a government by virtue of which contractual relations are worthwhile a
government which retains adequate authority to secure the peace and good order of society. This principle
of harmonizing the constitutional prohibition with the necessary residuum of state power has had
progressive recognition in the decision of this Court.

Ortigas & Co. Ltd. Partnership vs. Feati Bank & Trust Co. [G.R. No. L-24670, December 14, 1979]

FACTS

 Ortigas Co (plaintiff) is engaged in real estate business, developing and selling lots to the public,
particularly the Highway Hills Subdivision along Epifanio de los Santos Avenue, Mandaluyong, Rizal.
 On March 4, 1952, plaintiff, as vendor, and Augusto Padilla y Angeles and Natividad Angeles, as
vendees, entered into separate agreements of sale on installments over two parcels of land, known as
Lots Nos. 5 and 6 situated in Mandaluyong City.
 After 10 years Padilla transferred their rights and interests over the aforesaid lots in favor of one Emma
Chavez. Upon completion of payment of the purchase price, the plaintiff executed the corresponding
deeds of sale in favor of Emma Chavez. Both the agreements and deed of sale contained the stipulations
and restrictions - To maintain the place as a commercial and industrial zone.

1. The parcel of land subject of this deed of sale shall be used by the Buyer exclusively for residential
purposes, and she shall not be entitled to take or remove soil, stones or gravel from it or any other lots
belonging to the Seller.

2. All buildings and other improvements (except the fence) which may be constructed at any time in said lot
must be, (a) of strong materials and properly painted, (b) provided with modern sanitary installations
connected either to the public sewer or to an approved septic tank, and (c) shall not be at a distance of less
than two (2) meters from its boundary lines."

 Feati Bank acquired Lots Nos. 5 and 6, although Republic Flour Mills purchased the said Lot No. 6 "in
good faith, free from all liens and encumbrances, "
 May 5, 1963, defendant-appellee began laying the foundation and commenced the construction of a
building on Lots Nos. 5 and 6, to be devoted to banking purposes, but which defendant-appellee
claims could also be devoted to, and used exclusively for, residential purposes.
  On the following day Ortigas demanded in writing the defendant-appellee to stop the construction of
the commercial building on the said lots. The latter refused to comply with the demand, contending that
the building was being constructed in accordance with the zoning regulations, defendant-appellee
having filed building and planning permit applications with the Municipality of Mandaluyong, and it had
accordingly obtained building and planning permits to proceed with the construction.

ISSUE

(1) whether Resolution No. 27 s-1960 is a valid exercise of police power; and (2) whether the said Resolution can
nullify or supersede the contractual obligations assumed by defendant-appellee.

HELD

ZONING REGULATION MAY IMPAIR THE CONTRACTUAL RELATIONS OF PARTIES. The need for
reconciling the non-impairment clause of the Constitution and the valid exercise of police power may also
be gleaned from Helvering v. Davis wherein Mr. Justice Cardozo, speaking for the Court, resolved the
conflict "between one welfare and another, between particular and general, thus —

Nor is the concept of the general welfare static. Needs that were narrow or parochial a century ago
may be interwoven in our day with the well-being of the nation what is critical or urgent changes
with the times.

The motives behind the passage of the questioned resolution being reasonable, and it being a "legitimate
response to a felt public need," not whimsical or oppressive, the non-impairment of contracts clause of
the Constitution will not bar the municipality's proper exercise of the power. Now Chief Justice
Fernando puts it aptly when he declared: "Police power legislation then is not likely to succumb to the
challenge that thereby contractual rights are rendered nugatory."

Furthermore, We restated in Philippine American Life Ins. Co. v. Auditor General that laws and reservation
of essential attributes of sovereign power are read into contracts agreed upon by the parties. Thus —

Not only are existing laws read into contracts in order to fix 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. The policy of protecting contracts against impairments presupposes the
maintenance of a government by virtue of which contractual relations are worthwhile – a
government which retains adequate authority to secure the peace and good order of society.

Again, We held in Liberation Steamship Co., Inc. v. Court of Industrial Relations, through Justice J.B.L.
Reyes, that ... the law forms part of, and is read into, every contract, UNLESS clearly excluded there
from in those cases where such exclusion is allowed." The decision in Maritime Company of the Philippines
v. Reparations Commission, written for the Court by Justice Fernando, now Chief Justice, restates the rule.

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, i.e., "the power to prescribe regulations to
promote the health, morals, peace, education, good order or safety and general welfare of the people."

The lots themselves not only front the highway; industrial and commercial complexes have flourished about
the place. EDSA, a main traffic artery which runs through several cities and municipalities in the Metro
Manila area, supports an endless stream of traffic and the resulting activity, noise and pollution are hardly
conducive to the health, safety or welfare of the residents in its route. Having been expressly granted
the power to adopt zoning and subdivision ordinances or regulations, the municipality of Mandaluyong,
through its Municipal Council, was reasonably, if not perfectly, justified under the circumstances, in passing
the subject resolution.
The contractual obligations so assumed cannot prevail over Resolution No. 27, of the Municipality
of Mandaluyong, which has validly exercised its police power through the said resolution. Accordingly, the
building restrictions, which declare Lots Nos. 5 and 6 as residential, cannot be enforced.

Lozano vs. Martinez [G.R. No. L-63419, December 18, 1986]

FACTS

This is a consolidated case, the petition arose from cases involving prosecution of offenses under the BP
22 also known as Bouncing Check Law. The defendant in these case moved seasonably to quash the
information on the ground that the acts charged did not constitute an offense, the statute being
unconstitutional. The motions were denied by the respondent trial court, except in one case, which is the
subject of G.R No. 75789, wherein the trial court declared the law unconstitutional and dismissed the case.
The parties adversely affected have come to the court for remedy. Those who question the constitutionality
of the said statute insist the following ground:

1) It offends the constitutional provision forbidding imprisonment for debt;

2) it impairs freedom of contract;

3) it contravenes the equal protection clause;

4) it unduly delegates legislative and executive powers; and

5) its enactment is flawed in the sense that during its passage the interim Batasan violated the
constitutional provision prohibiting to a bill on Third Reading.

BP 22 punishes a person "who makes or draws and issues any check on account or for value,
knowing at the time of issue that he does not have sufficient funds in or credit with the drawee bank
for the payment of said check in full upon presentment, which check is subsequently dishonored by
the drawee bank for insufficiency of funds or credit or would have been dishonored for the same
reason had not the drawer, without any valid reason, ordered the bank to stop payment." The
penalty prescribed for the offense is imprisonment of not less than 30 days nor more than one year or a fine
or not less than the amount of the check nor more than double said amount, but in no case to exceed
P200,000.00, or both such fine and imprisonment at the discretion of the court.

The statute likewise imposes the same penalty on "any person who, having sufficient funds in or credit
with the drawee bank when he makes or draws and issues a check, shall fail to keep sufficient
funds or to maintain a credit to cover the full amount of the check if presented within a period of
ninety (90) days from the date appearing thereon, for which reason it is dishonored by the drawee
bank.

An essential element of the offense is "knowledge" on the part of the maker or drawer of the check of the
insufficiency of his funds in or credit with the bank to cover the check upon its presentment. Since this
involves a state of mind difficult to establish, the statute itself creates a prima facie presumption of such
knowledge where payment of the check "is refused by the drawee because of insufficient funds in or credit
with such bank when presented within ninety (90) days from the date of the check. To mitigate the
harshness of the law in its application, the statute provides that such presumption shall not arise if within
five (5) banking days from receipt of the notice of dishonor, the maker or drawer makes arrangements for
payment of the check by the bank or pays the holder the amount of the check.
Another provision of the statute, also in the nature of a rule of evidence, provides that the introduction in
evidence of the unpaid and dishonored check with the drawee bank's refusal to pay "stamped or written
thereon or attached thereto, giving the reason therefor, "shall constitute prima facie proof of "the making or
issuance of said check, and the due presentment to the drawee for payment and the dishonor thereof ... for
the reason written, stamped or attached by the drawee on such dishonored check."

The presumptions being merely prima facie, it is open to the accused of course to present proof to the
contrary to overcome the said presumptions.

ISSUE: Whether or not BP 22 violates the constitutional provision forbidding imprisonment for debt

HELD - NO

POLICE POWER; BATASANG PAMBANSA 22; VALID EXERCISE THEREOF; NOT REPUGNANT TO
CONSTITUTIONAL INHIBITION AGAINST IMPRISONMENT FOR DEBT- “which enables it to prohibit all
things hurtful to the comfort, safety and welfare of society. It is power not emanating from or conferred by
the constitution, but inherent in the state, plenary, "suitably vague and far from precisely defined, rooted in
the conception that man in organizing the state and imposing upon the government limitations to safeguard
constitutional rights did not intend thereby to enable individual citizens or group of citizens to obstruct
unreason able the enactment of such salutary measures to ensure communal peace, safety, good order
and welfare."

The gravamen of the offense punished by BP 22 is the act of making and issuing a worthless check or a
check that is dishonored upon its presentation for payment. It is not the non-payment of an obligation which
the law punishes. The law is not intended or designed to coerce a debtor to pay his debt. The thrust of the
law is to prohibit, under pain of penal sanctions, the making of worthless checks and putting them in
circulation. Because of its deleterious effects on the public interest, the practice is proscribed by the law.
The law punishes the act not as an offense against property, but an offense against public order.

The effects of the issuance of a worthless check transcends the private interests of the parties directly
involved in the transaction and touches the interests of the community at large. The mischief it creates is
not only a wrong to the payee or holder, but also an injury to the public. The harmful practice of putting
valueless commercial papers in circulation, multiplied a thousand fold, can very well pollute the channels of
trade and commerce, injure the banking system and eventually hurt the welfare of society and the public
interest.

The enactment of BP 22 is a declaration by the legislature that, as a matter of public policy, the making and
issuance of a worthless check is deemed public nuisance to be abated by the imposition of penal
sanctions.

FREEDOM OF CONTRACT NOT IMPAIRED CHECKS NOT CATEGORIZED AS CONTRACTS. — We

find not valid ground to sustain the contention that B.P. 22 impairs freedom of contract. The freedom of
contract which is constitutionally protected is freedom to enter into "lawful" contracts. Contracts which
contravene public policy are not lawful. We must bear in mind that checks cannot be categorized as mere
contracts. It is a commercial instrument which, in this modern day and age, has become a convenient
substitute for money; it form part of the banking system and therefore not entirely free from the regulatory
power of the state.

BILL OF RIGHTS; EQUAL PROTECTION OF LAW DOES NOT PRECLUDE CLASSIFICATION OF

INDIVIDUALS; CASE AT BAR — Neither do we find substance in the claim that the statute in question
denies equal protection of the laws or is discriminatory, since it penalizes the drawer of the check, but not
the payee. It is contended that the payee is just as responsible for the crime as the drawer of the check,
since without the indispensable participation of the payee by his acceptance of the check there would be no
crime. This argument is tantamount to saying that, to give equal protection, the law should punish both the
swindler and the swindled. The petitioners' posture ignores the well accepted meaning of the clause "equal
protection of the laws". The clause does not preclude classification of individuals, who may be accorded
different treatment under the law as long as the classification is not unreasonable or arbitrary.

Ganzon vs. Inserto [G.R. No. L-56450, July 25, 1983]

FACTS

Petitioner Rodolfo Ganzon executed a deed of absolute sale of a parcel of land in favor of private
respondents (Randolph Tajanlangit and Esteban Tajanlangit). Several months later, a deed of real estate
mortgage was executed between the same parties to secure the payment by the private respondents of a
promissory note in favor of petitioner. Private respondents filed a civil action against petitioners after
Ganzon initiated extrajudicial foreclosure proceedings in accordance with the terms and conditions of the
said mortgage.Thereafter, petitioner Gregorio Lira, in his capacity as ex-oficio provincial sheriff of Iloilo
served personal notice of the foreclosure proceedings on the private respondents. Lira also caused the
publication in a newspaper of general circulation in the City and Province of Iloilo of a Notice of Extra
Judicial Sale of Mortgaged Property, setting the sale at public auction of the mortgaged property at 10:00
a.m. on September 28, 1979, at his office at the Provincial Capitol, Iloilo City.

The private respondents filed a civil action for specific performance, damages, and prohibition with
preliminary injunction against the petitioners with the respondent court. The action, sought to declare the
extrajudicial foreclosure proceedings and all proceedings taken in connection therewith null and void. The
trial court issued an order enjoining the provincial sheriff from proceeding with the scheduled auction sale.

Before actual trial, the private respondents filed a "Motion For Release Of Real Estate And For The Clerk
Of Court To Accept Bond Or Cash In Lieu Thereof," to which the petitioners interposed an Opposition. The
respondent court granted the respondents' motion.

ISSUE Whether or not the order of respondent judge violates the non-impairment clause of the Constitution

HELD

YES. Substitution of the mortgage with a surety bond to ensure the payment of a loan would in effect
change the terms and conditions of the mortgage contract. Even before trial on the very issues affecting the
contract, the respondent court has directed a deviation from its terms, diminished its efficiency and
dispensed with a primary condition.

COURTS CANNOT CHANGE THE OBLIGATIONS OF THE PARTIES. Applying the principles underlying
the nature of a mortgage, the real estate mortgage constituted on Lot No. 1901-E-61-B-lF of the subdivision
plan Psd-27482, located in the District of Molo, Iloilo City covered by Transfer Certificate of Title No. T-
50324 cannot be substituted by a surety bond as ordered by the trial court. The mortgage lien in favor of
Petitioner Rodolfo Ganzon is inseparable from the mortgaged property. It is a right in rem, a lien on the
property. To substitute the mortgage with a surety bond would convert such lien from a right in rem, to a
right in personam. This conversion cannot be ordered for it would abridge the rights of the mortgagee under
the mortgage contract.

Moreover, the questioned orders violate the non-impairment of contracts clause guaranteed under the
Constitution. Substitution of the mortgage with a surety bond to secure the payment of the P40,000.00 note
would in effect change the terms and conditions of the mortgage contract. Even before trial on the very
issues affecting the contract, the respondent court has directed a deviation from its terms, diminished its
efficiency, and dispensed with a primary condition.