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As a general rule, the contract clause of the constitution states that “No
law shall pass any law impairing the obligations of the contracts. Further, it
prohibits the state governments from specifically legislating to interfere or
usurp private contractual rights. However, it is only limited by the ability of
the state governments to legislate to interfere with those rights under their
police power.” This provision in the Constitution shows a direct prohibition
on the enactment of the State laws that have a retroactive effect to impair
obligations and rights arising under contracts entered into prior to the
enactment of such state laws. In other words, the constitutional guaranty of
non-impairment of obligations of contracts is limited by the exercise of the
police power of the State in the interest of public health, safety, morals and
general welfare. The objective of the non-impairment clause is to safeguard
the integrity of contracts between parties, which includes government, from
unwarranted interference by the State.
A contract entered between the state and any individual is within the
prohibition of non-impairment clause. It is worthy to take note that the mere
fact that the state is a party to the contract, does not by any chance give the
state the power to impair the obligation since they are governed by non-
impairment clause.
Further, the legislatures cannot enact laws that would alter, modify or
amend the rights and obligations of the parties in the contracts that have been
validly entered into. There is alteration, modification or amendment if the
terms of the contracts are changed, new conditions are imposed, existing
provisions are cancelled, or remedies for enforcement of the parties are
modified. The prohibition is aimed at the legislative power of the State and
not at the decisions of its courts, or the acts of administrative or executive
officers or the doings of corporations or individuals.

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. This general rule however is also subject to exceptions. One
of which is when the contracts are impaired by reason of an emergency
situation or the legislature would regulate an industry or commercial activity.
Such legislations is not directly targeted at interfering with individuals
business contracts right, and it does not violate any Contract Clause. (Ortigas
The prohibition is general, affording a broad outline andrequiring construction
to fill in the details. The prohibition is not toread with literal exact ness like a
mathematical formula for it prohibitsunreasonable impairment only. In spite
of the constitutionalprohibition the State continues to possess authority to
safeguard thevital interests of its people.

As held in one case, a contract cannot be raised as a deterrent to police

power, designed precisely to promote health, safety, peace, and enhance the
commongood, at the expense of contractual rights, whenever necessary.
Legislation appropriate to safeguard said interestmay modify or abrogate
contracts already in effect. For not only areexisting laws read into contracts in
order to fix the obligations asbetween the parties but the reservation of
essential attributes of sovereign power is also read into contracts as a postulate
of the legalorder. All contracts made with reference to any matter that is
subjectto regulation under the police power must be understood as made
inreference to the possible exercise of that power.
(2) No. The government intervention on behalf of consumers is not the right
approach. Government interventions will result to prejudice or bias to the
other party. The reason that there is a contract clause or non-impairment
clause is to protect every rights of individuals who enters into a contract with
the State. It can be said that there could be no bias nor prejudice to the other
party if the contract was entered in good faith as well as its execution.
If we allow that the State can interfere with every contract, the state will
presumably only promote its interest towards the contract and will prejudice
the other contracting party. The application of non-impairment clause would
prohibit nor prevent any government actions that will prejudice the other
contracting party. As a result, there will be no bias nor favor on the
government side.