Obligation of Contracts

Obligation of Contracts

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

   Obligation of contract simply refers to the respective undertaking mutually agreed by the parties thereto for compliance under its terms and conditions within permissible limits provided either under the Constitution or legislative enactment - which are not contrary to law, morals, good customs, public order and public policy.

   The contracts within the protection of this constitutional provision against impairment embraces those entered into between the state, province, city, municipality or barangay, or between any of them and individual persons or entities. However, the contract which the constitution protects against impairment is a valid one. For it is well-settled doctrine that the contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, and such stipulations will be the law between the contracting parties provided they are not contrary to law, morals, good customs, public order, or public policy.

   The term law includes laws enacted by the lawmaking body, ordinances of municipal corporations and executive orders of the President as well as administrative orders issued by department secretaries having the force and effect of law.

   However, the constitutional non-impairment clause cannot operate to restrict the application of the police power of the state - the power to protect the public health, the public morals and the public safety.

What Constitutes Impairment

   A law that changes the terms and conditions of a contract expressly contemplated by the parties, or its legal construction or its validity, or its discharge or the remedy for its enforcement constitutes impairment of the contract. The nature and the extent of such change is inconsequential for the reason that it is not a question of degree or the manner or cause of the change that is material;rather, it is a matter in the encroachment with respect to its obligation or dispensing with any part of its force. There is impairment of the contract if either party is absolved by the law from its performance. Impairment has also been predicated on laws, which, without destroying contracts, derogate from substantial contractual rights.

   Accordingly, any law would constitute an impairment of contract whenever its terms and conditions - 

      a) are changed by such law, or
      b) by a party to a contract without the consent of the other whereby the position of the rights of the party is depreciated; or
      c) That the law deprives a party of his right of defending or enforcing the provisions of the contracts; or
      d) That it imposes or dispenses the conditions not express in the contract; or
      e) That it takes away from a party a right vested in under the contract; or
      f) That it diminishes the condition provided in the contract or it reduces the value of the contract.