The non-impairment clause and government contracts

Section 10, Article III of the Constitution provides:

"SECTION 10. NO LAW IMPAIRING THE OBLIGATION OF CONTRACTS SHALL BE PASSED."

According to a ruling of the Supreme Court, 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 that would change or modify the rights and obligations of the parties. 

It includes statutes enacted by the national legislature, executive orders and administrative regulations promulgated under a valid delegation of power, and municipal ordinances passed by the local legislative bodies.

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. It is anything that diminishes the efficacy of the contract.

However, it applies only to previously perfected contracts and 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.

Interestingly, Republic Act No. 3019 considers as a corrupt practice and unlawful the act by any public officer, “Causing any undue injury to any party, including the Government, or giving any private party any unwarranted benefits, advantage or preference in the discharge of his official administrative or judicial functions through manifest partiality, evident bad faith or gross inexcusable negligence.”


It behooves all concerned officers of government agencies and instrumentalities then, especially those bestowed with rule-making powers, to observe and be mindful of this section of the Bill of Rights when entering into contracts and subsequently crafting rules and regulations affecting the former, to avert and avoid any legal bind.  

Thinking of buying leasehold rights or subleasing real property in Subic Bay Freeport Zone?

When buying leasehold rights or leasing real properties from locators and individuals inside the Subic Bay Freeport Zone (SBFZ), “caveat emptor.” Let the buyer beware.

The Freeport is governed by a special law, Republic Act No. 7227, as amended; its implementing rules and regulations; as well as a relatively new set of rules entitled “Resident’s Handbook.”

A property being offered for transfer or sublease should have been duly approved for lease/assignment by the Subic Bay Metropolitan Authority (SBMA) board of directors. The properly signed lease agreement or deed of assignment must have been registered at the SBMA Registry Office. The subject property must also be checked whether it has unpaid accounts with the SBMA, or utility firms such as Enerzone, Subicwater and Subictel.

To be accorded legal effect especially insofar as SBMA and third parties are concerned, the succeeding deed of assignment or sublease agreement should be submitted to the SBMA for approval and registration; and the latter’s share from the total purchase price properly accounted and remitted to it. When applicable, no taxes would be assessed and paid from the transaction.

It is because RA 7227 provides that:

"(c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the development of municipalities outside the City of Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas.

In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter." (Section 12)

For that matter, the would-be assignor/sublessor must guarantee to the buyer/sublessee the following:

1. That it is not in default in its agreement with SBMA;
2. That it shall pay SBMA its due share from the total consideration of the agreement;
3. That it shall submit to SBMA a certified true copy of the deed of assignment/sublease agreement within five (5) days from its execution; and
4. That it shall pay in full the balance stipulated in the terms of its lease agreement, upon execution of the deed of assignment/sublease agreement.

Finally, it is important to remember that the original Lease Agreement between the locator/individual and the SBMA is always considered to be integral to the succeeding deed of assignment/sublease.

Synergy between and among the Subic Bay Freeport and contiguous communities: a genuine catalyst for progress

The Subic Bay Freeport (“Freeport”), through the Subic Bay Metropolitan Authority (SBMA) has been granted much autonomy by the Philippine government via Republic Act (RA) No. 7227, as amended. Among others, Subic Bay Freeport enjoys its status as a self-sustaining, industrial, commercial, financial and investment center; as a separate customs territory; and a tax-free zone except for the payment of three percent (3%) of the gross income earned by all businesses and enterprises within the Freeport.

The Freeport used to be the US Subic Naval Base. By virtue of the 1947 US-RP Military Bases Agreement, large tracts of land historically belonging to Olongapo City, Subic, Hermosa and Morong, were segregated and fenced. After the treaty expired and was not renewed in 1991, RA 7227 was enacted, and the Freeport was born. In order to do so, the law required the concurrence of the said affected local government units (LGUs) through their legislatures. The LGUs agreed primarily in exchange for employment opportunities for their constituents and the trickle-in effects of development from the Freeport.

But despite the declaration of those LGUs as integral parts of the Freeport, a perceptible gap, both physical and psychological, remains between them and the Freeport. Courtesy perhaps of the old fences and man-made channels still dividing them.

Thus, the love-hate relationships started between the Freeport and these LGUs. Issues ranging from appointments of LGU representatives to the SBMA board of directors, preference in the hiring of workers, delayed remittance of the 1% share, business competition between Freeport-based and outside traders, territorial disputes, would crop up from time to time. These are concerns, however, that can be avoided and settled as long as the parties involved would have an open mind and focus on critical collaboration.

In this regard, it is important to note that although the Freeport has a certain level of autonomy, it lacks a distinct feature of a political subdivision to fully function independently and seamlessly, i.e., it does not have its own local police (the Law Enforcement Department [LED] is an internal security force), it does not have its own prosecutorial service, neither does it have its own courts. The SBMA, its residents and investors usually run “outside the base” to the courts of Olongapo City, Dinalupihan, or Balanga City in case of civil disputes. Preliminary investigation of crimes committed in the Freeport is held either in Olongapo City or Balanga City, and criminal cases are subsequently filed in courts exercising territorial jurisdiction where such crimes are committed.

In other words, the Freeport relies on various instrumentalities outside its gates in order to efficiently manage and maintain harmony and stability inside, and ensure the consistent pace of progress and development.

While it is laudable and proper then to insulate the Freeport from politics, the reality must be accepted, however, that the Freeport is surrounded by local political units whose services and cooperation it vastly needs in order to succeed. It is surrounded by communities whose development is likewise vital to the Freeport’s relevance and competitiveness in the global stage.

It is in this light that the Freeport must break from its perceived isolationism (whether rightly or wrongly), actively engage the concerned LGUs and communities, and find a common ground by which they can work together.

Corporate social responsibility (CSR) is a tool that can be harnessed to establish rapport and camaraderie such that the people and their communities would truly feel and understand that they are prime stakeholders in this fenced-in area called the Freeport. The SBMA together with like-minded and willing locators, may focus on a broad array of programs such as educational assistance and grants, including technical and vocational programs; environmental conservation and protection; and basic services subsidies and food-for-work programs. Indeed, by practicing CSR, the Freeport may bring about a holistic, top-to-bottom development that would be beneficial to most, if not all, stakeholders.

Here’s looking forward to the roaring success of the Freeport on its twentieth (20th) anniversary next year.