Impairment Clause

23-25

23. Lozano v Martinez

Facts: The constitutionality of Batas Pambansa Bilang 22 (BP 22 for short), popularly known as the Bouncing
Check Law, which was approved on April 3, 1979, is the sole issue presented by these petitions for decision.
The question is definitely one of first impression in our jurisdiction.
These petitions arose from cases involving prosecution of offenses under the statute. The defendants in those
cases 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, 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 us for relief.

Issue: Whether or not BP22 contravenes the non-impairment clause

Held: We find no valid ground to sustain the contention that BP 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. 33 Besides, we must bear in mind that checks can not 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 forms part of the banking system and therefore not entirely free from the regulatory
power of the state.
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. 34

It is also suggested that BP 22 constitutes undue or improper delegation of legislative powers, on the theory
that the offense is not completed by the sole act of the maker or drawer but is made to depend on the will of
the payee. If the payee does not present the check to the bank for payment but instead keeps it, there would
be no crime. The logic of the argument stretches to absurdity the meaning of "delegation of legislative power."
What cannot be delegated is the power to legislate, or the power to make laws, 35 which means, as applied to
the present case, the power to define the offense sought to be punished and to prescribe the penalty. By no
stretch of logic or imagination can it be said that the power to define the crime and prescribe the penalty
therefor has been in any manner delegated to the payee. Neither is there any provision in the statute that can
be construed, no matter how remotely, as undue delegation of executive power. The suggestion that the
statute unlawfully delegates its enforcement to the offended party is farfetched.

Lastly, the objection has been raised that Section 9 (2) of Article VII of the 1973 Constitution was violated by
the legislative body when it enacted BP 22 into law. This constitutional provision prohibits the introduction of
amendments to a bill during the Third Reading. It is claimed that during its Third Reading, the bill which
eventually became BP 22 was amended in that the text of the second paragraph of Section 1 of the bill as
adopted on Second Reading was altered or changed in the printed text of the bill submitted for approval on
Third Reading.

A careful review of the record of the proceedings of the Interim Batasan on this matter shows that, indeed,
there was some confusion among Batasan Members on what was the exact text of the paragraph in question
which the body approved on Second Reading. 36 Part of the confusion was due apparently to the fact that
during the deliberations on Second Reading (the amendment period), amendments were proposed orally and
approved by the body or accepted by the sponsor, hence, some members might not have gotten the complete
text of the provisions of the bill as amended and approved on Second Reading. However, it is clear from the
records that the text of the second paragraph of Section 1 of BP 22 is the text which was actually approved by
the body on Second Reading on February 7, 1979, as reflected in the approved Minutes for that day. In any
event, before the bill was submitted for final approval on Third Reading, the Interim Batasan created a Special
Committee to investigate the matter, and the Committee in its report, which was approved by the entire body
on March 22, 1979, stated that "the clause in question was . . . an authorized amendment of the bill and the
printed copy thereof reflects accurately the provision in question as approved on Second Reading. 37 We
therefore, find no merit in the petitioners' claim that in the enactment of BP 22 the provisions of Section 9 (2) of
Article VIII of the 1973 Constitution were violated.

24. TIRO v HONOSTAS

Facts: In Civil Case No. 11616 of the defunct Court of First Instance of Cebu, Zafra Financing Enterprise sued
Aurelio Tiro in his official capacity as Superintendent of Schools in Cebu City. It appears that Zafra had extend
loans to public school teachers in Cebu City and the teachers concerned executed promissory notes and
special powers of attorney in favor of Zafra to take and collect their salary checks from the Division Office in
Cebu City of the Bureau of Public Schools. However, Tiro forbade the collection of the checks on the basis of
Circular No. 21.

Circular no. 21 provides: "PROHIBITING PAYMENT OF SALARY TO PERSONS OTHER THAN THE
EMPLOYEE CONCERNED:

To Superintendents:

It has been observed that some employees delegate the collection of their salaries to attorneys-in-fact on the
strength of powers of attorney or other forms of authority in favor of other persons, evidently in satisfaction of
obligations contracted by them. This practice should be discouraged in view of its adverse effects on the
efficiency and morale of employees whose incentive to work is necessarily impaired, since their salary or a
portion thereof goes to other persons.

To curb this unwholesome practice, it is hereby directed that henceforth no cashier or disbursing officer shall
pay to attorneys-in-fact or other forms of authority to collect the salary of an employee, expect when the
persons so designated and authorized is a immediate member of the family of the employee concerned, and in
all other cases, except upon proper authorization of the Assistant Executive Secretary for legal and
Administrative Matters, with the recommendation of the Financial Assistant.

All orders or regulations inconsistent herewith are hereby revoked. This order shall take effect immediately.

2. Accordingly, it is desired that, henceforth, cashiers or disbursing officers pay the salary due any school
employee or issue the treasury warrant of any teacher direct to such employee or teacher, except when
authority to collect the salary or treasury warrant has been given to another person, and the person so
authorized is an immediate member of the family of the employee or teacher concerned.

3. Any previous regulation issued by this Office inconsistent with this Circular is hereby revoked."

Zafra sought to compel Tiro to honor the special powers of attorney; to declare Circular No. 21 to be illegal;
and to make Tiro pay attorney's fees and damages. The trial court granted the prayer of Zafra but the claim for
money was disallowed on the ground that he acted in good faith in implementing Circular No. 21.cdrep
Issue: whether or not Circular No. 21 is valid and enforceable

Held: The salary check of a government officer or employee such as a teacher does not belong to him before it
is physically delivered to him. Until that time the check belongs to the Government. Accordingly, before there is
actual delivery of the check, the payee has no power over it; he cannot assign it without the consent of the
Government. On this basis Circular No. 21 stands on firm legal footing.

The Circular is question is authorized by relevant statutes extant when it was issued such as the following:

"SEC. 79(b). Power to regulate. The Department Head shall have power to promulgate, whoever he may
see fit to do so, all rules, regulations, orders, circular, memorandums, not contrary to law, necessary to
regulate the proper working and harmonious and efficient administration of each and all of the offices and
dependencies of his Department, and for the strict enforcement and proper execution of the laws relative to
matters under the jurisdiction of said Department; but none of said rules or orders shall prescribe penalties. All
rules, regulations, order or instructions of a general and permanent character promulgated in conformity with
this section shall be numbered by be numbered by each Department consecutively each year, and shall be
duly published.

Chiefs of Bureaus or office may, however, be authorized to promulgate circulars of information or instructions
for the government of the officers and employees in the interior administration of the business of each Bureau
or office, and in such case said circulars shall not be required to be published." (Revised Administrative Code.)
cdphil

"SEC. 21 Deductive Prohibited. No person shall make any deduction whatsoever from the salaries of
teachers except under specific authority of law authorizing such deductions: Provided, however, that upon
written authority executed by the teacher concerned, (1) lawful dues and fees owing to the Philippine Public
School Teachers Association, and (2) premiums properly due on insurance policies, shall be deductible."
(Magna Carta For Teachers, R.A. No. 4670.)

Zafra's claim that the Circular impairs the obligation of contracts with the teachers is baseless. For the Circular
does not prevent Zafra from collecting the loans. The Circular merely makes the Government a non-participant
in their collection which is within its competence to do.

25. Ganzon v Inserto

Facts: May the respondent court order that a mortgage on real property be substituted by a surety bond and
direct the Register of Deeds to cancel the mortgage lien annotated on the Torrens Title since the surety bond
already secures the obligation earlier secured by the cancelled mortgage?

The petitioner comes to us stating that the lower court acted with grave abuse of discretion and in excess of its
jurisdiction in so ruling.

Petitioner Rodolfo Ganzon initiated proceedings to extra-judicially foreclose a real estate mortgage executed
by the private respondents in his favor. The Deed of Real Estate Mortgage executed on March 19, 1979
between Randolph Tajanlangit and Esteban Tajanlangit as mortgagors on one hand and Rodolfo Ganzon as
mortgagee on the other hand was to secure the payment by the Tajanlangits of a promissory note amounting
to P40,000.00 in favor of Ganzon.

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.

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 trial court may order the cancellation of a mortgage lien annotated in a Torrens
Certificate of Title to secure the payment of a promissory note and substitute such mortgage lien with a surety
bond approved by the same court to secure the payment of the promissory note?

Held: No. The questioned court orders violate the non-impairment of contracts clause guaranteed under the
Constitution. Substitution of the mortgage with a surely 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.

A mortgage is but an accessory contract. The consideration of the mortgage is the same consideration of the
principal contract without which it cannot exist as an independent contract.

It is a right in rem, a lien on the property.

This conversion can not 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

26. Pagcor v BIR

Facts: petitioner Philippine Amusement and Gaming Corporation (PAGCOR), seeking the declaration of nullity
of Section 1 of Republic Act (R.A.) No. 9337 insofar as it amends Section 27 (c) of the National Internal
Revenue Code of 1997, by excluding petitioner from exemption from corporate income tax for being repugnant
to Sections 1 and 10 of Article III of the Constitution. Petitioner further seeks to prohibit the implementation of
Bureau of Internal Revenue (BIR) Revenue Regulations No. 16-2005 for being contrary to law.

The undisputed facts follow.

PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A2 on January 1, 1977. Simultaneous
to its creation, P.D. No. 1067-B3 (supplementing P.D. No. 1067-A) was issued exempting PAGCOR from the
payment of any type of tax, except a franchise tax of five percent (5%) of the gross revenue.4 Thereafter, on
June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's exemption.

PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later restored by Letter
of Instruction No. 1430, which was issued in September 1984.

On January 1, 1998, R.A. No. 8424,8 otherwise known as the National Internal Revenue Code of 1997, took
effect. Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled corporations (GOCCs)
shall pay corporate income tax, except petitioner PAGCOR, the Government Service and Insurance
Corporation, the Social Security System, the Philippine Health Insurance Corporation, and the Philippine
Charity Sweepstakes Office

With the enactment of R.A. No. 933710 on May 24, 2005, certain sections of the National Internal Revenue
Code of 1997 were amended. The particular amendment that is at issue in this case is Section 1 of R.A. No.
9337, which amended Section 27 (c) of the National Internal Revenue Code of 1997 by excluding PAGCOR
from the enumeration of GOCCs that are exempt from payment of corporate income tax.

Different groups came to this Court via petitions for certiorari and prohibition assailing the validity and
constitutionality of R.A. No. 9337, in particular:

1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and properties; Section 5, which
imposes a 10% VAT on importation of goods; and Section 6, which imposes a 10% VAT on sale of services
and use or lease of properties, all contain a uniform proviso authorizing the President, upon the
recommendation of the Secretary of Finance, to raise the VAT rate to 12%. The said provisions were alleged to
be violative of Section 28 (2), Article VI of the Constitution, which section vests in Congress the exclusive
authority to fix the rate of taxes, and of Section 1, Article III of the Constitution on due process, as well as of
Section 26 (2), Article VI of the Constitution, which section provides for the "no amendment rule" upon the last
reading of a bill;

2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the Constitution, or the guarantee of
equal protection of the laws, and Section 28 (1), Article VI of the Constitution; and

3) other technical aspects of the passage of the law, questioning the manner it was passed.

On September 1, 2005, the Court dismissed all the petitions and upheld the constitutionality of R.A. No.
9337.12

On the same date, respondent BIR issued Revenue Regulations (RR) No. 16-2005,13 specifically identifying
PAGCOR as one of the franchisees subject to 10% VAT imposed under Section 108 of the National Internal
Revenue Code of 1997, as amended by R.A. No. 9337.

Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code, regardless of
how their franchisees may have been granted, shall be subject to the 10% VAT imposed under Sec.108 of the
Tax Code. This includes, among others, the Philippine Amusement and Gaming Corporation (PAGCOR), and
its licensees or franchisees.

Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating the non-
impairment clause of the Constitution. Petitioner avers that laws form part of, and is read into, the contract
even without the parties expressly saying so. Petitioner states that the private parties/investors transacting
with it considered the tax exemptions, which inure to their benefit, as the main consideration and inducement
for their decision to transact/invest with it. Petitioner argues that the withdrawal of its exemption from corporate
income tax by R.A. No. 9337 has the effect of changing the main consideration and inducement for the
transactions of private parties with it; thus, the amendatory provision is violative of the non-impairment clause
of the Constitution.

Issue: WHETHER OR NOT SEC 1 of RA 9337 IS NULL AND VOID AB INITIO FOR BEING REPUGNANT TO
THE NON-IMPAIRMENT [CLAUSE] EMBODIED IN SECTION 10, ARTICLE III OF THE 1987
CONSTITUTION.

Held: The non-impairment clause is contained in Section 10, Article III of the Constitution, which provides that
no law impairing the obligation of contracts shall be passed. The non-impairment clause is limited in
application to laws that derogate from prior acts or contracts by enlarging, abridging or in any manner
changing the intention of the parties.29 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.

As regards franchises, Section 11, Article XII of the Constitution31 provides that no franchise or right shall 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.

In Manila Electric Company v. Province of Laguna, the Court held that a franchise partakes the nature of a
grant, which is beyond the purview of the non-impairment clause of the Constitution.The pertinent portion of
the case states:

While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as being in
the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions,
nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions, in the real sense of
the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to
by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully
entered into by them under enabling laws in which the government, acting in its private capacity, sheds its
cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked
without impairing the obligations of contracts. These contractual tax exemptions, however, are not to be
confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant which is
beyond the purview of the non-impairment clause of the Constitution. Indeed, Article XII, Section 11, of the
1987 Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no
franchise for the operation of a public utility shall be granted except under the condition that such privilege
shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires.

In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos, clubs and other
recreation or amusement places, sports, gaming pools, i.e., basketball, football, lotteries, etc., whether on land
or sea, within the territorial jurisdiction of the Republic of the Philippines.36 Under Section 11, Article XII of the
Constitution, PAGCORs franchise is subject to amendment, alteration or repeal by Congress such as the
amendment under Section 1 of R.A. No. 9377. Hence, the provision in Section 1 of R.A. No. 9337, amending
Section 27 (c) of R.A. No. 8424 by withdrawing the exemption of PAGCOR from corporate income tax, which
may affect any benefits to PAGCORs transactions with private parties, is not violative of the non-impairment
clause of the Constitution.

Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10% VAT is
invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that petitioner can be
subjected to VAT. R.A. No. 9337 is clear only as to the removal of petitioner's exemption from the payment of
corporate income tax, which was already addressed above by this Court.
s pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108 of R.A. No. 8424
by imposing VAT on other services not previously covered, it did not amend the portion of Section 108 (B) (3)
that subjects to zero percent rate services performed by VAT-registered persons to persons or entities whose
exemption under special laws or international agreements to which the Philippines is a signatory effectively
subjects the supply of such services to 0% rate.

Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been thoroughly and
extensively discussed in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation.39
Acesite was the owner and operator of the Holiday Inn Manila Pavilion Hotel. It leased a portion of the hotels
premises to PAGCOR. It incurred VAT amounting to P30,152,892.02 from its rental income and sale of food
and beverages to PAGCOR from January 1996 to April 1997. Acesite tried to shift the said taxes to PAGCOR
by incorporating it in the amount assessed to PAGCOR. However, PAGCOR refused to pay the taxes because
of its tax-exempt status. PAGCOR paid only the amount due to Acesite minus VAT in the sum of
P30,152,892.02. Acesite paid VAT in the amount of P30,152,892.02 to the Commissioner of Internal Revenue,
fearing the legal consequences of its non-payment. In May 1998, Acesite sought the refund of the amount it
paid as VAT on the ground that its transaction with PAGCOR was subject to zero rate as it was rendered to a
tax-exempt entity.

Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not to indirect
taxes, like the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no distinction
on whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is also exempt from
indirect taxes, like VAT, as follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to
PAGCOR. Although the law does not specifically mention PAGCOR's exemption from indirect taxes, PAGCOR
is undoubtedly exempt from such taxes because the law exempts from taxes persons or entities contracting
with PAGCOR in casino operations. Although, differently worded, the provision clearly exempts PAGCOR from
indirect taxes. In fact, it goes one step further by granting tax exempt status to persons dealing with PAGCOR
in casino operations. The unmistakable conclusion is that PAGCOR is not liable for the P30, 152,892.02 VAT
and neither is Acesite as the latter is effectively subject to zero percent rate under Sec. 108 B (3), R.A. 8424.
(Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature clearly
granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in the instant case,
can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or services subject to
VAT. Thus, by extending the tax exemption to entities or individuals dealing with PAGCOR in casino
operations, it is exempting PAGCOR from being liable to indirect taxes.

Assailed section constitutional.