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Non-Impairment Clause
Section 10. No law impairing the obligation of contracts shall be passed.
RUTTER VS. ESTEBAN [93 PHIL 68; NO.L-3708; 18 MAY 1953]
Facts: On August 20,1941 Rutter sold to Esteban two parcels of land situated in the Manila for
P9,600 of which P4,800 were paid outright, and the balance 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 percent per annum. To secure the payment of said balance of P4,800, a first
mortgage has been constituted in favor of the plaintiff. Esteban failed to pay the two
installments as agreed upon, as well as the interest that had accrued and so Rutter instituted
an action to recover the balance due, the interest due and the attorney's fees. The complaint
also contains a prayer for sale of the properties mortgaged in accordance with law. Esteban
claims that this is a prewar obligation contracted and 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 RA 342(moratorium law), payment of
his obligation cannot be enforced until after the lapse of eight years. The complaint was
dismissed. A motion for recon was made which assails the constitutionality of RA 342.
Issue: Whether or Not RA 342 unconstitutional on non-impairment clause grounds.
Held: Yes. 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 police
power. The economic interests of the State may justify the exercise of its continuing and
dominant protective power notwithstanding interference with contracts. The question is not
whether the legislative action affects contracts incidentally, or directly or indirectly, but
whether the legislation is addressed to a legitimate end and the measures taken are
reasonable and appropriate to that end.
However based on the President’s general SONA and consistent with what the Court believes
to be as the only course dictated by justice, fairness and righteousness, declared that the
continued operation and enforcement of RA 342 at the present time is unreasonable and
oppressive, and should not be prolonged should be declared null and void and without effect.
This holds true as regards Executive Orders Nos. 25 and 32, with greater force and reason
considering that said Orders contain no limitation whatsoever in point of time as regards the
suspension of the enforcement and effectivity of monetary obligations.
ORTIGAS VS. FEATI BANK [94 SCRA 533; NO.L-24670; 14 DEC 1979]
Facts: Plaintiff is engaged in real estate business, developing and selling lots to the public,
particularly the Highway Hills Subdivision along EDSA. On March 4, 1952, plaintiff, as vendor,
and Augusto Padilla and Natividad Angeles, as vendees, entered into separate agreements of
sale on installments over two parcels of land of the Subdivision. On July 19, 1962, the said
vendees 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 (of sale on
installment) and the deeds of sale contained the stipulations or restrictions that:
1. The parcel of land shall be used 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.
Eventually said lots were bought by defendant. Lot 5 directly from Chavez and Lot 6 from
Republic Flour Mills by deed of exchange, with same restrictions. Plaintiff claims that
restriction is for the beautification of the subdivision. Defendant claimed of the
commercialization of western part of EDSA. Defendant began constructing a commercial bank
building. Plaintiff demand to stop it, which forced him to file a case, which was later dismissed,
upholding police power. Motion for recon was denied, hence the appeal.
Issue: Whether or Not non-impairment clause violated.
Held: No. Resolution is a valid exercise of police power. 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. Health, safety, peace, good order and general
welfare of the people in the locality are justifications for this. It should be stressed, that 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.

Lozano vs Martinez
Facts:
Petitioners were charged with violation of Batas Pambansa Bilang 22 (Bouncing Check Law).
They moved seasonably to quash the informations on the ground that the acts charged did not
constitute an offense, the statute being unconstitutional. The motions were denied by the
respondent trial courts, except in one case, wherein the trial court declared the law
unconstitutional and dismissed the case. The parties adversely affected thus appealed.
Issue:
1. Whether or not BP 22 is violative of the constitutional provision on non-imprisonment due
to debt
2. Whether it impairs freedom of contract
3. Whether it contravenes the equal protection clause
Held:
1. The enactment of BP 22 is a valid exercise of the police power and is not repugnant to the
constitutional inhibition against imprisonment for debt. 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.
Unlike a promissory note, a check is not a mere undertaking to pay an amount of money. It is
an order addressed to a bank and partakes of a representation that the drawer has funds on
deposit against which the check is drawn, sufficient to ensure payment upon its presentation
to the bank. There is therefore an element of certainty or assurance that the instrument will be
paid upon presentation. For this reason, checks have become widely accepted as a medium of
payment in trade and commerce. Although not legal tender, checks have come to be perceived
as convenient substitutes for currency in commercial and financial transactions. The basis or
foundation of such perception is confidence. If such confidence is shaken, the usefulness of
checks as currency substitutes would be greatly diminished or may become nil. Any practice
therefore tending to destroy that confidence should be deterred for the proliferation of
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worthless checks can only create havoc in trade circles and the banking community.
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 wen pollute the channels of trade and commerce, injure the banking
system and eventually hurt the welfare of society and the public interest.
2. The freedom of contract which is constitutionally protected is freedom to enter into “lawful”
contracts. Contracts which contravene public policy are not lawful. Besides, we must bear in
mind that checks can not be categorized as mere contracts. It is a commercial instrument
which, in this modem day and age, has become a convenient substitute for money; it forms
part of the banking system and therefore not entirely free from the regulatory power of the
state.
3. There is no 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. (Lozano vs Martinez, G.R. No. L-
63419, December 18, 1986)
The enactment of BP 22 a valid exercise of the police power and is not repugnant to the
constitutional inhibition against imprisonment for debt.
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 law punishes the act not as an offense against property, but an offense against public
order. The thrust of the law is to prohibit, under pain of penal sanctions, the making of
worthless checks and putting them in circulation. An act may not be considered by society as

inherently wrong, hence, not malum in se but because of the harm that it inflicts on the
community, it can be outlawed and criminally punished as malum prohibitum. The state can do
this in the exercise of its police power.
Ganzon v Inserto;
FACTS:
Petitioner Rodolfo Ganzon executed a deed of absolute sale of a parcel of land in favor of
private respondents. 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
not 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. Respondent judge ordered the substitution of the mortgage
lien with a surety bond.
ISSUE(S):
Whether or not the order of respondent judge violates the non-impairment clause of the
Constitution.
RULING:
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.
NDC v Agrix G.R. Nos. 84132-33 December 10, 1990
J. Cruz
Facts:
Pres. Decree No. 1717, which ordered the rehabilitation of the Agrix Group of Companies to be
administered mainly by the National Development Company, outlined the procedure for filing
claims against the Agrix companies and created a Claims Committee to process these claims.
Especially relevant to this case is Sec. 4(1) thereof providing that "all mortgages and other liens
presently attaching to any of the assets of the dissolved corporations are hereby extinguished."
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Before this, the Agrix Marketing had executed in favor of petitioner Philippine Veterans Bank a
real estate mortgage dated July 7, 1978, over three (3) parcels of land situated in Los Baños,
Laguna. During the existence of the mortgage, AGRIX went bankrupt. It was for the expressed
purpose of salvaging this and the other Agrix companies that the aforementioned decree was
issued by President Marcos.
Petitioner filed a claim with the AGRIX Claims Committee for the payment of its loan credit. In
the meantime, the New Agrix, Inc. and the National Development Company, invoking Sec. 4 (1)
of the decree, filed a petition with the Regional Trial Court of Calamba, Laguna, for the
cancellation of the mortgage lien in favor of Philippine Veterans.
For its part, the Philippine Veterans took steps to extrajudicially foreclose the mortgage,
prompting Agrix to file a second case with the same court to stop the foreclosure.
In the trial court, the judge annulled not only the challenged provision of Sec. 4 (1), but the
entire Pres. Decree No. 1717 on the grounds that: (1) the presidential exercise of legislative
power was a violation of the principle of separation of powers; (2) the law impaired the
obligation of contracts; and (3) the decree violated the equal protection clause.
The motion for reconsideration of this decision having been denied, the present petition was
filed in the Supreme Court.
The petitioners contend that the private respondent is now estopped from contesting the
validity of the decree. They cited Mendoza v. Agrix Marketing, Inc.,1 where the
constitutionality of Pres. Decree No. 1717 was also raised but not resolved.
Moreover the claims committee dismissed the filing of the petition by Philippine Veterans on
the ground of the aforementioned estoppel.
The petitioners stress that in that the private respondent also invoked the provisions of Pres.
Decree No. 1717 by filing a claim with the AGRIX Claims Committee. Failing to get results, it
sought to foreclose the real estate mortgage executed by AGRIX in its favor, which had been
extinguished by the decree. It was only when the petitioners challenged the foreclosure on the
basis of Sec. 4 (1) of the decree, that the private respondent attacked the validity of the
provision. At that stage, however, consistent with Mendoza, the petitioners alleged that
private respondent was already estopped from questioning the constitutionality of the decree.

Issues:
1. Is estoppel applicable?
2. Is PD 1717 constitutional?
Held: No. Yes. petition dismissed
Ratio:
1. To rule now that the private respondent is estopped for having abided with the decree
instead of boldly assailing it is to close our eyes to a cynical fact of life during the Marcos time.
This case must be distinguished from Mendoza, where the petitioners, after filing their claims
with the AGRIX Claims Committee, received in settlement shares of stock valued at P40,000.00
without protest or reservation.
The private respondent has not been paid a single centavo on its claim, which was kept
pending for more than seven years for alleged lack of supporting papers. Significantly, the
validity of that claim was not questioned by the petitioner when it sought to restrain the
extrajudicial foreclosure of the mortgage by the private respondent. The petitioner limited
itself to the argument that the private respondent was estopped from questioning the decree
because of its earlier compliance with its provisions.
2. The Court is especially disturbed by Section 4(1) of the decree, quoted above, extinguishing
all mortgages and other liens attaching to the assets of AGRIX. It also notes, the restriction in
Subsection (ii) thereof that all "unsecured obligations shall not bear interest" and in Subsection
(iii) that "all accrued interests, penalties or charges as of date hereof pertaining to the
obligations, whether secured or unsecured, shall not be recognized."
These provisions must be read with the Bill of Rights, where it is clearly provided in Section 1
that "no person shall be deprived of life, liberty or property without due course of law nor shall
any person be denied the equal protection of the law" and in Section 10 that "no law impairing
the obligation of contracts shall be passed.
Petitioners argue that property rights, like all rights, are subject to regulation under the police
power for the promotion of the common welfare. Hence justification of the provision.
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Court- The police power is not a panacea for all constitutional maladies. Neither does its mere
invocation conjure an instant and automatic justification for every act of the government
depriving a person of his life, liberty or property.
A legislative act based on the police power requires the concurrence of a lawful subject and a
lawful method. In more familiar words, a) the interests of the public generally, as distinguished
from those of a particular class, should justify the interference of the state; and b) the means
employed are reasonably necessary for the accomplishment of the purpose and not unduly
oppressive upon individuals
The case is not applicable to these requirements because the interests of the public are not
sufficiently involved to warrant the interference of the government with the private contracts
of AGRIX. The decree speaks vaguely of the "public, particularly the small investors," who
would be prejudiced if the corporation were not to be assisted. There was no record of these
investors. Also, there was no public interest to be protected. The decree was to the benefit of
an exclusive set of investors.
The oppressiveness is patent on the face of the decree to rehabilitate Agrix. No consideration is
paid for the extinction of the mortgage rights. The accrued interests and other charges are
simply rejected by the decree.
A mortgage lien is a property right derived from contract and so comes under the protection of
the Bill of Rights. Private property cannot simply be taken by law from one person and given to
another without compensation and any known public purpose. This is plain arbitrariness and is
not permitted under the Constitution.
And not only is there arbitrary taking, there is discrimination as well. In extinguishing the
mortgage and other liens, the decree lumps the secured creditors with the unsecured creditors
and places them on the same level in the prosecution of their respective claims.
Under the equal protection clause, all persons or things similarly situated must be treated
alike, both in the privileges conferred and the obligations imposed. Conversely, all persons or
things differently situated should be treated differently. In the case at bar, persons differently
situated are similarly treated, in disregard of the principle that there should be equality only
among equals.
One may also well wonder why AGRIX was singled out for government help, among other
corporations where the stockholders or investors were also swindled. It is not clear why other
companies entitled to similar concern were not similarly treated.
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On top of all this, New Agrix, Inc. was created by special decree notwithstanding the provision
of Article XIV, Section 4 of the 1973 Constitution, then in force, that:
SEC. 4. The Batasang Pambansa shall not, except by general law, provide for the formation,
organization, or regulation of private corporations, unless such corporations are owned or
controlled by the Government or any subdivision or instrumentality thereof.
The new corporation is neither owned nor controlled by the government.
RULING:
NO. The Court reiterates that the SEC’s approval of the Rehabilitation Plan did not impair BPI’s
right to contract. As correctly contended by private respondents, the non-impairment clause is
a limit on the exercise of legislative power and not of judicial or quasi-judicial power. The SEC,
through the hearing panel that heard the petition for approval of the Rehabilitation Plan, was
acting as a quasi-judicial body and thus, its order approving the plan cannot constitute an
impairment of the right and the freedom to contract.

The Court also feels that the decree impairs the obligation of the contract between AGRIX
and the private respondent without justification. While it is true that the police power is
superior to the impairment clause, the principle will apply only where the contract is so related
to the public welfare that it will be considered congenitally susceptible to change by the
legislature in the interest of the greater number.
It can be seen that the contracts of loan and mortgage executed by AGRIX are purely private
transactions and have not been shown to be affected with public interest.
BPI vs. SEC G.R. No. 164641 December 20, 2007 Dacion en Pago, Non Impairment of Contracts
Besides, the mere fact that the Rehabilitation Plan proposes a dacion en pago approach does
not render it defective on the ground of impairment of the right to contract. Dacion en pago is
a special mode of payment where the debtor offers another thing to the creditor who accepts
it as equivalent of payment of an outstanding debt. The undertaking really partakes in a sense
of the nature of sale, that is, the creditor is really buying the thing or property of the debtor,
the payment for which is to be charged against the debtor’s debt. As such, the essential
elements of a contract of sale, namely; consent, object certain, and cause or consideration
must be present. Being a form of contract, the dacion en pago agreement cannot be perfected
without the consent of the parties involved.

FACTS:

The Bank of the Philippine Islands (BPI), through its predecessor-in- interest, Far East Bank and
Trust Company (FEBTC), extended credit accommodations to the ASB Group with an
outstanding aggregate principal amount of P86,800,000.00, secured by a real estate mortgage
over two (2) properties located in Greenhills, San Juan. On 2 May 2000, the ASB Group filed a
petition for rehabilitation and suspension of payments before the SEC.

Thereafter, on 18 August 2000, the interim receiver submitted its Proposed Rehabilitation Plan
for the ASB Group. The Rehabilitation Plan provides, among others, a dacion en pago by the
ASB Group to BPI of one of the properties mortgaged to the latter at the ASB Group as selling
value of P84,000,000.00 against the total amount of the ASB Group’s exposure to the bank. In
turn, ASB Group would require the release of the other property mortgaged to BPI, to be
thereafter placed in the asset pool.

ISSUE:

Does the requirement for SEC approval of the Rehabilitation Plan impair the obligations of
contract?