FUNDAMENTAL POWERS OF THE STATE

1. Concept, application, and limits

POLICE POWER

LAW OF OVERRULING NECESSITY – The power promoting public welfare by restraining and
regulating the use of liberty and property.

Basis: Public necessity and the right of the State and of the public to self-protection and self-
preservation.

Justification:Salus populi est suprema lex (The welfare of the people is the supreme law); Sic
utere tuo ut alienum non laedas (So use your property as not to injure the property of others).

 Power vested by the Constitution in the legislature to make, ordain and establish all manner of
wholesome and reasonable laws, statutes and ordinances, either with penalties or without, not
repugnant to the Constitution, as they shall judge to be for the good and welfare of the
commonwealth, and for the subject of the same. (MMDA vs Bel-Air Village Association, Inc.
328 SCRA 836, 2000)
Characteristics
a. Most essential, insistent and the least limitable of powers, extending as it does to all the
great public needs. (Ermita-Malate Hotel and Motel Operators Association, Inc. v. City
Mayor of Manila, No. L-24693, July 31, 1967)
b. Plenary; and its scope vast and pervasive, reaching and justifying measures for public
health, public safety, public morals, and the general welfare. (People of the Philippines v.
Siton, G.R. No. 169364, September 18, 2009)
c. May not be bargained away through the medium of a contract or treaty (Ichong v.
Hernandez, G.R. No. L-7995, May 31, 1957)
d. Dynamic, not static, and must move with the moving society it is supposed to regulate
(Osmeña v. COMELEC, G.R. No. 132231 March 31, 1998)
e. Eminent domain may be used as an implement for the attainment of a legitimate police
objective (Association of Small Landowners in the Philippines, Inc. v. Secretary of Agrarian
Reform, G.R. No. 78742, July 14, 1989)

Scope

 The police power of the State," one court has said, "is a power co-extensive with self-
protection, and is not inaptly termed the 'law of overruling necessity. (Rubi v. Provincial Board,
G.R. No. L-14078 March 7, 1919)
 A law enacted in the exercise of police power to regulate or govern certain activities or
transactions could be given retroactive effect and may reasonably impair vested rights or
contracts.
 Police power prevails over contracts. (Philippine National Bank v. Office of the President G.R.
No. 104528, January18, 1996)
 Non-impairment of contracts or vested rights clauses will have to yield to the superior and
legitimate exercise by the State of the police power. (Ortigas and Co. v. Court of Appeals, G.R.
No. 126102, December 4, 2000)
Exercise of Police Power

 Lodged primarily in the legislature

 May be validly delegated by the legislature to the:

a. President;
b. Administrative Board; and
c. Law-Making Bodies on all Municipal Boards

NOTE: Mandamus cannot be availed of to coerce the exercise of police power.

Requisites of Valid Exercise (Limitations)

a. Lawful Subject – the interest of the public generally, as distinguished from that of a particular
class, requires its exercise; and
b. Lawful Means/Method – the means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive upon individuals. (Lucena Grand
Central Terminal, Inc. v. JAC Liner, Inc., G.R.No.148339, February 23, 2005; see also United
States v. Toribio, G.R. No. L-5060, January 26, 1910)

 Sec. 2 of COMELEC Resolution No. 2772, which mandates newspapers of general circulation
in every province or city to provide free print space of not less than ½ page as COMELEC
space, was held to be an invalid exercise of the police power there being no showing of the
existence of a national emergency or imperious public necessity for the taking of the print
space, nor that the resolution was the only reasonable and calibrated response to such
necessity. (Philippine Press Institute vs. COMELEC, 244 SCRA 272, May 22, 1995)

Additional limitations (when exercised by a delegate)

a. Expressly granted by law

GENERAL RULE: Within the territorial limits (for local government units)

EXCEPTION: When exercised to protect water supply. (Wilson v. City of Mountain Lake Terraces,
417 P.2d 632 [1966])

b. Must not be contrary to law

 Municipal governments are only agents of the national government. Local councils exercise
only delegated legislative powers conferred on them by Congress as the national lawmaking
body. The delegate cannot be superior to the principal or exercise powers higher than those
of the latter. (Magtajas v. Pryce Properties, G.R. No. 111097, July 20, 1994)

 By virtue of a valid delegation, the power may be exercised by the President and administrative
boards as well as by the lawmaking bodies of municipal corporations or local governments
under an express delegation by the Local Government Code of 1991. (MMDA v. Viron
Transport Co., Inc., G.R. No. 170656, August 15, 2007)

Constitutional Limitations against Police Power

a. Due Process Clause

 b. Equal Protection Clause

 The conflict, therefore, between police power and the guarantees of due process and equal
protection of the laws is more apparent than real. Properly related, the power and the
guarantees are supposed to coexist. The balancing is the essence or, shall it be said, the
indispensable means for the attainment of legitimate aspirations of any democratic society.
There can be no absolute power, whoever exercise it, for that would be tyranny. (Ichong v.
Hernandez, G.R. No. L-7995, May 31, 1957)

Requisites of a Valid Ordinance (Tatel vs. Municipality of Virac, G.R. No. 40243, March 11,
1992)

1. Procedural Requirements
a. Must be within the corporate powers of the local government to enact; and
b. Must be passed according to the procedure prescribed by law.

2. Substantive Requirements
a. Must not contravene the constitution or any statute.
b. Must not be unfair or oppressive.
c. Must not be partial or discriminatory.
d. Must not prohibit, but may regulate trade.
e. Must not be unreasonable.
f. Must be general in application and consistent with public policy. (City of Manila v. Laguio,
Jr., G.R. No. 118127, April 12, 2005)

POWER OF EMINENT DOMAIN or POWER OF EXPROPRIATION

 It is the power of the State that enables it to forcibly acquire private lands intended for public
use upon payment of just compensation to the owner. (Association of Small Landowners in the
Philippines, Inc. v. Secretary of Agrarian Reform, G.R. No. 78742, July 14, 1989)

Requisites for a valid exercise

a. Public use/purpose
b. Payment of just compensation
c. Subject property must be private property
d. Valid taking of subject property
e. Due process must be observed

PUBLIC USE – the general concept of meeting public need or public exigency. The term public
use has now been held to be synonymous with public interest, public benefit, public welfare and
public convenience. (Reyes v. National Housing Authority, G.R. No. 147511, January 20, 2003)

 The foundation of the right to exercise eminent domain is genuine necessity and that necessity
must be of public character.” (Lagcao v. Labra, G.R. No. 155746, October 13, 2004)

JUST COMPENSATION – the full and fair equivalent of the property taken, it is the fair market
value of the property, that is that sum of money which a person, desirous but not compelled to
buy, and an owner, willing, but not compelled to sell, would agree on as a price to be given and
received therefor.” (Republic of the Philippines vs. Asia Pacific Integrated Steel Corporation, G.R.
No. 192100, March 12, 2014)
GENERAL RULE: Principal criterion in determining just compensation is the value of the land at
the time of the taking.

EXCEPTION: Market value is determined as of the time the parties signed the compromise
agreement and the same was approved, because this is tantamount to EPZA impliedly agreeing
to pay the market value of the lot in 1993. (EPZA vs Estate of Salud Jimenez, GR No. 188995,
Aug. 24, 2011)

GENERAL RULE: Property subject of the right of eminent domain should be private property.

EXCEPTION: Private property already devoted to public use cannot be expropriated by a

delegate of legislature acting under a general grant of authority. (City of Manila v. Chinese
Community of Manila et. al, G.R. No. L-14355 October 31, 1919)

Requisites for a valid taking:

a. Expropriator must enter a private property;

b. Entry must be for more than a momentary period
c. Entry must be under a warrant or color of authority;
d. Property must be devoted to public use or otherwise informally appropriated or injuriously
affected; and
e. Utilization of the property must be in such a way as to oust the owner and deprive him of
beneficial enjoyment of the property. (Republic of the Philippines v. Vda. de Castellvi, G.R.
No. L-20620, August 15, 1974)

Due process: The defendant must be given an opportunity to be heard.

 The due process clause cannot be trampled upon each time an ordinance orders the
expropriation of a private individual’s property. The courts cannot even adopt a hands-off policy
simply because public use or public purpose is invoked by an ordinance, or just compensation
has been fixed and determined. (Lagcao v. Labra, G.R. No. 155746, October 13, 2004)

POWER OF TAXATION

 Power by which the State raises revenue to defray the necessary expenses of the Government;
“the most effective instrument to raise needed revenues to finance and support myriad
activities for the delivery of basic services essential to the promotion of the general welfare and
the enhancement of peace, progress, and prosperity of the people. (National Power
Corporation v. City of Cabanatuan, G.R. No. 149110, April 9, 2003)

Scope: Covers persons, property or profession or business within the taxing jurisdiction. “The
power of taxation is the most absolute of all powers of the government. It has the broadest scope
of all powers of the government because in the absence of limitations, it is considered as
unlimited, plenary, comprehensive and supreme. (Sison, Jr. v. Ancheta, G.R. No. L-59431, July
25, 1984)

Basis: Lifeblood Theory

 Taxes are the lifeblood of the government, for without taxes, the government can neither exist
nor endure. (NPC v. City of Cabanatuan, G.R. No. 149110, April 9, 2003)
BENEFITS RECEIVED PRINCIPLE – the reciprocal duties of protection and support between the
State and its inhabitants. In return for his contribution, the taxpayer received benefits and
protection from the government.

 The legislature has discretion to determine the nature, object, extent, coverage, and situs of
taxation. But where a tax measure becomes so unconscionable and unjust as to amount to
confiscation of property, courts will not hesitate to strike it down, for despite all its plenitude,
the power to tax cannot override constitutional prescriptions. (Tan v. del Rosario, G.R. No.
109289 October 3, 1994)

Exercise of the Power of Taxation:

a. Primarily, the legislature

b. Local legislative bodies through local taxation (Sec. 19, Local Government Code of 1991;
Sec. 5, Art. X, 1987 Constitution)
c. To a limited extent, the President when granted delegated tariff powers (Sec. 28[2], Art. VI,
1987 Constitution)

LIMITATIONS ON POWER OF TAXATION

1. Inherent limitations

a. Public purpose
b. Non-delegability of power
c. Territoriality of situs of taxation
d. Exemption of government from taxation
e. International comity

2. Constitutional limitations

a. Due Process of Law

i. Tax must be for public purpose;

ii. Imposed within territorial jurisdiction; and
iii. No arbitrariness or oppression in assessment and collection.

b. Equal Protection Clause

c. Uniformity, equitability, and progressivity of taxation

 The rule of taxation shall be uniform and equitable. The congress shall evolve a progressive
system of taxation” (Sec. 28[1], Art. VI, 1987 Philippine Constitution)

UNIFORM – persons or things belonging to the same class shall be taxed at the same rate.

EQUITABLE – taxes should be apportioned among the people according to capacity to pay.
The power to select subjects of taxation includes the power to make classifications. The requisites
for a valid classification are:

a. Must be based on substantial distinctions.

b. Must apply both to present and future conditions.
c. Must be germane to the purposes of the law
 d. Must apply equally to all members of the same class

PROGRESSIVE SYSTEM OF TAXATION –as the resources of the taxpayer becomes higher, his
tax rate likewise increases.

Other prohibitions:

a. Prohibition against imprisonment for non-payment of poll tax;

b. Prohibition against impairment of obligations and contracts;
c. Prohibition against infringement of religious freedom;
d. Prohibition against appropriation of proceeds of taxation for the use, benefit or support of
any church;
e. Prohibition against taxation of religious, charitable and educational entities;
f. Prohibition against taxation of non-stock, non-profit educational institutions; and
g. Others:
i. Grant of tax exemption
ii. Veto of appropriation, revenue, tariff bills by the President
iii. Non-impairment of the SC jurisdiction
iv. Infringement of press freedom
v. Grant of franchise

DOUBLE TAXATION – taking for the same tax period the same thing or activity twice, when it
should be taxed but once, for the same purpose and with the same kind of character of tax.”
(Commissioner of Internal Revenue vs. City Trust Investment Phils., Inc., G.R. No. 127105, June
25, 1999)

INTERNATIONAL JURIDICAL DOUBLE TAXATION – imposition of comparable taxes in two or

more states on the same taxpayer in respect of the same subject matter and for identical
periods.(Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc., G.R. No. 127105,
June 25, 1999)

NOTE: There is no provision in the Constitution specifically prohibiting double taxation. The
Supreme Court has not categorically held that double or multiple taxation is prohibited in our
jurisdiction.

Direct Duplicate Taxation (Obnoxious)

Requisites:

a. Additional taxes are imposed

b. On the same subject
c. By the same taxing jurisdiction
d. During the same period
e. For the same purpose
f. Covering the same kind of character of tax
 Despite lack of specific constitutional prohibition, double taxation will not be allowed if the
same will result in a violation of the equal protection clause. However, if certain properties
are subjected to an additional tax whereas others similarly situated are not similarly taxed,
the owners of the first properties would have a right to complain.
TAX EXEMPTIONS
Requisites: No law granting any tax exemption shall be passed without the concurrence of a
majority of all the Members of Congress (Sec. 28[4], Art. VI, 1987 Constitution)

Instances of Tax Exemption under the Constitution

a. Sec. 28(3), Art. VI: charitable institutions, churches, mosques, non-profit cemeteries, etc.
actually, directly and exclusively used for religious, charitable or educational purposes
b. Sec. 4(3), Art. XIV: revenues and assets of non-stock, non-profit educational institutions
used actually, directly and exclusively for educational purposes
c. Sec. 4(4), Art. XIV: grants, endowments, donations or contributions used actually, directly
and exclusively for educational purposes
d. Where the tax exemption is granted gratuitously, it may be revoked at will; but not if granted
for a valuable consideration (Mactan Cebu International Airport Authority v. Marcos, G.R.
No. 120082, September 11, 1996)
 Tax exemptions are to be construed in strictissimi juris against the taxpayer and liberally in
favor of the taxing authority and should be granted only by clear and unmistakable terms.
(Commissioner of Internal Revenue v. City Trust Investment Philippines., Inc., G.R. No.
139786, September 27, 2006)

License Fee vs. Tax

LICENSE FEE TAX
Police Power measure Revenue measure
Amount limited to the cost of permit and Amount may be unlimited, provided it is not
reasonable police regulation, except when it confiscatory.
is imposed on a non-useful occupation
Paid for the privilege of doing something Imposed on person or property for revenue.
and may be revoked when public interest so
requires.

Kinds of License Fees

a. For useful occupations or enterprises
b. For non-useful occupations or enterprises
c. When a license fee is imposed in order to discourage non-useful occupations or enterprises,
the amount, imposed may be a bit exorbitant
1. Requisites for valid exercise

POLICE POWER POWER OF EMINENT POWER OF TAXATION

DOMAIN
a. Lawful subject a. There is genuine necessity a. Public purpose
b. Lawful means b. Private property b. Uniformity
c. Taking in the constitutional c. Within the jurisdiction of
When exercised by a sense the taxing authority
delegate: d. Public use d. Certain guarantee
e. Just compensation against injuries to
a. Expressly granted by f. Due process of law individuals shall be
law provided.
b. Within the territorial
limits
c. Must not be contrary to
law

2. Similarities and Differences

Similarities:
a. Inherent in the State;
b. Necessary and indispensable;
c. Methods by which State interferes with private property;
d. Presuppose equivalent compensation;
e. Exercised primarily by the Legislature.

Differences:
POWER OF EMINENT POWER OF
POLICE POWER POLICE POWER
DOMAIN TAXATION
Basis Public necessity and Necessity of the Power emanating
right of State and of property for public from necessity
public to self-protection use. (Lifeblood Doctrine
and self-preservation. Theory)
Scope Liberty and property Property rights only Property rights only
Who may exercise? Only by the May be exercised by Only by the
government private entities government

Purpose For property or purpose Property taken Property taken

that are noxious, thus intended for public intended for public
may be destroyed. use, thus for use, thus for
wholesome wholesome purposes
purposes
 Compensation Intangible, altruistic Full and fair Protection and public
feeling that the equivalent value of improvements for the
individual has the property taxes paid.
contributed to the expropriated.
public good.

Limitations on the exercise: Generally, it is limited by the Bill of Rights. Although in some cases,
the exercise of the power prevails over specific constitutional guarantees. Subject at all times to
the limitations and requirements of the Constitution and may in proper cases be annulled by the
courts, i.e when there is grave abuse of discretion. (Nachura, Outline Reviewer in Political Law,
2016)

3. Delegation

GENERAL RULE: Exercised by the Legislature.

EXCEPTION: When validly delegated:

a. Police Power: to the (1) President, (2) administrative bodies, or (3) law-making bodies of
the local government units
b. Power of Eminent Domain: to the (1) President, (2) Law-making bodies of the local
government units, (3), public corporations, (4) quasi-public corporations, and (5)
administrative bodies (NOTE: The grant of the power of eminent domain to local
government units under Republic Act No. 7160 cannot be understood as equal to the
pervasive and all-encompasing power vested in the legislative branch of the government.)
c. Power of Taxation: to the (1) Law-making bodies of the local government units (Sec. 5, Art.
X, 1987 Constitution), and (2) President (Sec. 28[2], Art. VI, 1987 Constitution)

DUE PROCESS

CONCEPT OF RIGHT TO LIFE, LIBERTY, AND PROPERTY

a. Right to Life – not just a protection of the right to be alive or to the security of one’s limb
against physical harm but is the right to a good life.

b. Right to Property – includes all kinds of property found in the Civil Code. It also includes the
right to work and the right to earn a living. A mere privilege, however, may evolve into some
form of property right protected by due process.

 No right is absolute, and the proper regulation of a profession, calling, business or trade
has always been upheld as a legitimate subject of a valid exercise of the police power by
the state particularly when their conduct affects either the execution of legitimate
 governmental functions, the preservation of the State, the public health and welfare and
public morals.

 When property is classified into historical treasures or landmarks, such classification should
be done with both procedural and substantive due process especially when it “will involve
imposition of limits on ownership. (Army and Navy Club of Manila vs. Court of Appeals, G.R.
No. 110223, April 8, 1997)

 The right to protected property is not absolute and can be overturned upon a showing of
reasonable fair, and just management practices by the employer. In this case, the protection
of trade and manufacturing secrets is a reasonable management practice to justify the
prohibition. (Duncan Association vs. Glaxo Wellcom Phils., G.R. No. 162994, September 17,
2004)

 Regulation against private property which constitutes a permanent deprivation of property

without just compensation is “unlawful taking” and is no longer a valid exercise of police power.
(People of the] Philippines vs. Fajardo, G.R. No. L-12172, August 29, 1958)

c. Right to Liberty - The right to Liberty guaranteed by the Constitution includes the right to exist
and the right to be free from arbitrary personal restraint or servitude. Liberty includes the right
of the citizens to be free to use his faculties in all lawful ways; to live an work where he will; to
earn his livelihood by an lawful calling; to pursue any avocations, an for that purpose. to enter
into all contracts which may be proper, necessary, and essential to his carrying out these
purposes to a successful conclusion. (Rubi vs. Provincial Board of Mindoro, G.R. No. L-14078,
March 7, 1919)

CONCEPT OF DUE PROCESS

 A law which hears before it condemns, which proceeds upon inquiry and renders judgment
only after trial. (Nachura, Outline Reviewer in Political Law Reviewer, 2016)
 A guaranty against any arbitrariness on the part of the government, whether committed by the
legislature, executive or judiciary (Cruz, Constitutional Law, 2007)
 The embodiment of the sporting idea of fair play.
 All persons, whether natural or juridical, are protected.
 Due process is a guaranty against any arbitrariness on the part of the government, whether
committed by the legislature, executive or the judiciary. If the law itself unreasonable deprives
a person of his life, liberty or property, he is denied of the protection of due process.

 Responsiveness to the supremacy of reason, obedience to the dictates of justice. (Ermita-

Malate Hotel & Motel Operators Association vs. City of Manila, G.R. No. L-24693, July 31,
1967)

 Juridical persons are covered by the protection but only insofar as their property is concerned.
(Smith, Bell & Co. vs. Natividad, G.R. No. 15574, September 17, 1919)
1. Procedural and substantive

Kinds of Due Process

PROCEDURAL DUE PROCESS – serves as a restriction on actions of judicial and quasi-judicial

agencies of government. (Nachura, Outline Reviewer in Political Law Reviewer, 2016)

 Procedural due process is the constitutional standard demanding that notice and an
opportunity to be heard be given before judgment is rendered. As long as a party is given
the opportunity to defend his interests in due course, he would have no reason to
complain; the essence of due process is in the opportunity to be heard. A formal or trial-
type hearing is not always necessary. (Imperial vs. GSIS, G.R. No. 191224, October 24,
2011)

Note: Defects in procedural due process may be cured when the party has been afforded the
opportunity to appeal or to seek reconsideration of the action or ruling complained of. (Nestle vs.
Puedan, G.R. No. 220617, January 30, 2017)

SUBSTANTIVE DUE PROCESS – requires the intrinsic validity of the law in interfering with the
rights of the person to his life liberty or property.

Requisites:

a. Lawful subject: The interests of the public, in general, as distinguished from those
of a particular class, require the intervention of the State.

b. Lawful means: The means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive on individuals.

· A law violates substantive due process when it is unreasonable and oppressive.

 Substantive due process requires that a valid ordinance must have a sufficient justification
for the Government's action. This means that in exercising police power the local
government unit must not arbitrarily, whimsically or despotically enact the ordinance
regardless of its salutary purpose. So long as the ordinance realistically serves a legitimate
public purpose, and it employs means that are reasonably necessary to achieve that
purpose without unduly oppressing the individuals regulated, the ordinance must survive
a due process challenge. (Mosqueda vs. Pilipino Banana Growers & Exporters
Association, Inc., G.R. No. 189185, August 16, 2016)

NOTE: Publication of laws is part of substantive due process.

2. Void-for-Vagueness

VOID-FOR-VAGUENESS DOCTRINE - a statute which either forbids or requires the doing of an

act in terms so vague that men of common intelligence must necessarily guess at its meaning
and differ as to its application, violates the first essential of due process of law." (Estrada vs.
Sandiganbayan, G.R. No. 148560, November 19, 2001)
A vague statute is repugnant to the constitution in two (2) respects:

1. It violates due process for failure to accord persons, especially the parties targeted by it,
fair notice of what conduct to avoid.
2. It leaves law enforces unbridled discretion in carrying out its provisions and becomes an
arbitrary flexing of the Government muscle.

3. Judicial and administrative due process

JUDICIAL DUE PROCESS:

a. An impartial court or tribunal clothed with judicial power to hear and determine the matter
before it.
b. Jurisdiction must be lawfully acquired over the person of the defendant and over the property
which is the subject matter of the proceeding.
c. The defendant must be given an opportunity to be heard.
d. Judgment must be rendered upon lawful hearing. (Nachura, Outline Reviewer in Political Law
Reviewer, 2016)

ADMINISTRATIVE DUE PROCESS:

a. The right to a hearing, which includes the right to present one’s case and submit evidence in
support thereof;
b. The tribunal must consider the evidence presented;
c. The decision must have something to support itself;
d. The evidence must be substantial;
e. The decision must be rendered on the evidence presented at the hearing, or at least contained
in the record and disclosed to the parties;
f. The tribunal or any of its judges must act on his own independent consideration of the facts
and the law of the controversy and not simply accept the views of a subordinate in arriving at
a decision;
g. The board or body should, in all controversial questions, render its decision in such a manner
that all the parties to the proceeding will know the various issues involved, and the reasons
for the decision. (Ang Tibay vs. Commissioner of Internal Revenue, G.R. No. 46496, February
27, 1940)

In administrative proceedings, the filing of charges and giving reasonable opportunity for the
person so charged to answer the accusations against him constitute the minimum
requirements of due process, which simply means having the opportunity to explain his side,
present evidence, the requirements of due process are satisfactorily complied with because
what the law abhors is absolute lack of opportunity to be heard. (Pichay, Jr. vs Office of the
Deputy Executive Secretary for Legal Affairs, et. al. G.R No. 196425, July 24, 2012)
 A. EQUAL PROTECTION

 All persons or things similarly situated should be treated alike, both as to rights conferred and
responsibilities imposed. (Ichong vs. Hernandez, G.R. No. L-7995, May 31, 1957)

Substantive equality is not enough. It is also required that the law be enforced and applied equally.
Equal protection clause does not require universal application of the law. What the Constitution
requires is equality among equals.

1. Requisites for valid classification

a. It must be based upon substantial distinctions: There must be real and substantial
differences between the classes treated differently.
b. It must be germane to the purpose of the law.
c. It must not be limited to existing conditions only: The classification must be enforced not
only for the present but as long as the problem sought to be corrected continues to exist.
d. It must apply equally to all members of the class: The classification would be regarded as
invalid if all the members of the class are not treated similarly, both as to rights conferred and
obligations imposed. (Garcia vs. Drilon, G.R. No. 179267, June 25, 2013)

2. Tests to determine the reasonableness of a classification

a. Deferential or Rational Basis Test – the challenged classification needs only be shown to
be rationally related to serving a legitimate state interest.

b. Strict Scrutiny Test – requires the government to show that the challenged classification
serves a compelling state interest and that the classification is necessary to serve that
interest. Thus test is applied when the challenged statute either (a) classifies on the basis of
an inherently suspect characteristic or (b) infringes on fundamental constitutional rights. In
these situations, the usual presumption of constitutionality is reversed, and it falls upon the
government to demonstrate that its classification has been narrowly tailored to further
compelling governmental interests; otherwise, the law shall be declared unconstitutional for
violating the equal protection clause.

Test – the government must show that the challenged classification serves an important state
interest and that the classification is at least substantially related to serving that interest.

 The standard is satisfied if the classification or distinction is based on a reasonable

foundation or rational basis and is not palpably arbitrary. (Garcia vs. Drilon, G.R. No.
179267, June 25, 2013)
 B. NON-IMPAIRMENT OF CONTRACTS

1. Concept and limitations

Non-impairment of contracts or vested rights clauses will have to yield to the superior and
legitimate exercise by the State of the police power. (Ortigas and Co. vs. Court of Appeals, G.R.
No. 126102, December 4, 2000)

Contract Clause

No law impairing the obligation of contracts shall be passed. (Sec. 10, Art. III, 1987 Constitution)

IMPAIRMENT – anything that diminishes the efficacy of the contract. Degree of diminution is
immaterial. As long as the original rights of either party are changed to their prejudice, there is
already impairment of the obligation of contract.

 To impair, law must retroact so as to affect existing contracts concluded before its enactment.
 However, there is no impairment as long as substantial and efficacious remedy remains, holds
true even if there’s remedy remained but it is the most difficult to employ, the easy ones are
withdrawn.

 The purpose of the non-impairment clause is to safeguard the integrity of contracts against
unwarranted interference by the State. As a rule, contracts should not be tampered with by
subsequent laws which would change or modify the rights and obligations of the parties.
There is impairment if a subsequent law changes the terms of a contract between the parties,
imposes new conditions, dispenses with those agreed upon or withdraws remedies for the
enforcement of the rights of the parties. (Goldenway Merchandising Corporation vs. Equitable
PCI Bank, GR No. 195540, 13 Mar 2013)

 To fall within the prohibition, the change must not only impair the obligation of the existing
contract, but the impairment must be substantial. Moreover, the law must effect a change in
the rights of the parties with reference to each other, and not with respect to non-parties.
(Philippine Rural Electric Cooperatives Association vs. Secretay, DILG, GR No. 143078, June
10, 2003)

Limitations

a. Police Power: If the law is a proper exercise of police power, it will prevail over a contract.
Public welfare is superior to private rights.

 In every contract, there is an implied reservation that it is subject to the police power of the
State. (Ortigas & Co. vs. Feati Bank and Trust Co., GR No. L-24670, December 14, 1979)

 The POEA resolution and memorandum circular increasing and adjusting rates of
compensation and other benefits in the POEA Standard Employment Contracts for Seafarers,
 being a valid implementation of PD957 which was enacted under the police power of the State,
prevail over non-impairment clause. (Conference of Maritime Manning Agencies vs. POEA,
G.R. No. 114714 April 21, 1995)

b. Congenial infirmity – susceptibility to change by the legislature as a postulate of legal order.

Franchises, privileges, licenses, etc., do not come within the context of the provision. Sec.11,
Art. XII provides that “Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration or repeal by the Congress when the
common good so requires.”

 Timber licenses, permits and license agreements are the principal instruments by which
the State regulates the utilization and disposition of forest resources to the end that public
welfare is promoted. They merely evidence a privilege granted by the State to qualified
entities, and do not vest in the latter a permanent irrevocable right to the particular
concession area and the forest products therein. They may be validly amended, modified,
replaced, or rescinded by the Chief Executive when national interest so requires. They are
not contracts within the purview of the due process clause. (C & M Timber Corporation vs.
Alcala, G.R. No. 111088, June 13, 1997)

Contemporary application of the Contract Clause

CONTRACT – any lawful agreement on the property rights, whether real or personal tangible or
intangible but does not cover licenses, marriage contract and public office.

 When is there impairment: There is impairment when there is a change in the terms of a legal
contract between parties, either in the time or mode of performance, or imposes new
conditions, or dispenses with those expressed or authorizes for its satisfaction something
different from that provided in its terms. (Clemons vs. Nolting, G.R. No. 17959, January 24,
1922)

EXCEPTIONS:

a. Police Power – public welfare is superior to private rights (Philippine National Bank vs.
Remigio, G.R. No. 78508, March 21, 1994).
b. Power of Eminent Domain
c. Power of Taxation

 In every contract, there is an implied reservation that it is subject to the police power of the
State. (Ortigas & Co. vs. Feati Bank and Trust Co., G.R. No. L-24670, December 14, 1979).

SUBSTANTIAL IMPAIRMENT – A law which changes the terms of a legal contract between
parties, either in the time or mode of performance, or imposes new conditions, or dispenses with
those expressed, or authorizes for its satisfaction something different from that provided in its
terms; hence, it is null and void. (Clemons vs. Nolting, G.R. No. L-17959, January 24, 1922)
 This limitation is addressed to the exercise of legislative or quasi-legislative power and not on
the exercise of judicial or quasi-judicial power.

Hierarchies

1. With respect to private contracts, the question about the power to tax is irrelevant because a
tax law does not alter the relation between the parties.
2. With respect to public contracts, the answer is NO because just as the state cannot contract
away its police power so also it cannot contract away its power to tax.
3. As to freedom of religion, the Court ruled that the free exercise of religion is superior to contract
rights.

 A mere change in procedural remedies which does not change the substance of a contract
and which at the same time still leaves an efficacious remedy for enforcement does not impair
the obligation of contracts. (Manila Trading vs. Reyes, G.R. No. L-43263, October 31, 1935)