Pandemics, police power, and private contracts

With the worsening COVID-19 outbreak, President Rodrigo Duterte has shifted gears. What began as a mere entreaty to the private sector to extend bills payments, grant reprieves on rental fees to alleviate day-to-day worries of the everyman, has now morphed into something broader.

In an unprecedented “virtual” special session, Congress approved the bill now known as Republic Act No. 11469, or the “Bayanihan to Heal as One Act,” granting the President emergency powers to address the public health crisis. While Congress has parsed out contentious provisions including the extension of emergency powers and take-over of private businesses, the current law still somehow bears upon the property rights of citizens.

Under the Bayanihan Act, the President is empowered to order private hospitals, passenger vessels, and other establishments to direct their operations towards COVID-19 efforts. Unjustified refusal or the inability to operate such enterprises for COVID-19 related purposes will allow the President to take over the companies’ operations. The President may procure the lease of real property for medical purposes; require businesses to prioritize and accept contracts for materials and services; impose grace periods for the payment of residential rent and bank loans; and ensure the availability of credit by lowering effective lending interest rates, among others.

An Orwellian application of the law will impinge upon a right oft-overlooked in the constitutional hierarchy — the non-impairment of contracts. This is contained in Section 10, Article III of the Constitution, which provides that no law impairing the obligation of contracts shall be passed.

The businesses contemplated by the new Bayanihan Act share existing contracts with a myriad of parties such as employees, lessees, lessors, buyers, sellers, contractors, tenants, manufacturers, customers, and the like. As it stands, the law carries the possibility of altering the terms of existing contracts, imposing new conditions, or dispensing with conditions already expressed.

The purpose of the non-impairment clause is to protect private agreements from State interference, with the end goal of encouraging trade and credit by promoting the stability of contractual relations (The Provincial Bus Operators Association of the Philippines v. Department of Labor and Employment, G.R. No. 202275, 17 July 2018).

As early as the 1922 case of Clemens v. Nolting (G.R. No. L-17959, 24 January 1922), the Supreme Court ruled that “[a]n interference with the terms of a legal contract by legislation is unwarranted and illegal.” In then unbending terms, the Supreme Court stated that a law which impairs the obligation of a contract is null and void.

The freedom of contract, however, is not meant to be absolute. Over time, the Supreme Court has expounded on the application of the non-impairment clause and carved out exceptions thereto. Foremost is that the right to non-impairment yields to the State’s police power.

Hence, a statute passed in the legitimate exercise of police power, although incidentally destroying existing contract rights, must be upheld by courts. The non-impairment clause is understood to be subject to reasonable legislative regulation aimed at the promotion of public health, morals, safety, and welfare (The Philippine American Life Insurance Company v. The Auditor General, G.R. No. L-19255, 18 January 1968).

Similar to the freedom of contract, however, the invocation of police power is not set in stone. There is the well-settled rule that a statute built on police power requires the concurrence of a lawful subject and lawful method; in other words, the interests of the general public are involved and the means employed to promote public interest are reasonably necessary (Southern Luzon Drug Corporation v. Department of Social Welfare and Development, G.R. No. 199669, 25 April 2017).

In National Development Company v. Philippine Veterans Bank (G.R. Nos. 84132-33, 10 December 1990), the Supreme Court clarified that police power trumps the non-impairment clause 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.” In the same case, which involved a Marcos-era Presidential Decree extinguishing all mortgages and liens attached to assets of a bankrupt corporation, the Supreme Court found that the loan and mortgage contracts were purely private transactions. Without the “indispensable link” to public welfare, the Supreme Court held that there was an impairment of the obligation of the contract, a deprivation of property rights, and, accordingly, a need to annul the law (i.e. the Presidential Decree).

All in all, government interference with private contracts is justified under police power, so long as the private agreements carry a demonstrated connection to the public interest, and so long as police power is tempered by both lawful subject and method.

Due to the pandemic, the new law theoretically conforms to the requirement of “lawful subject” under the police power concept. It remains to be seen, however, whether the means to carry out the declared State policy are “reasonably necessary.”

For instance, the President’s power to lower lending rates may unduly affect lenders whose charges and interests have already accrued, and which may be considered vested property rights. The moratorium on residential rent and loan payments, while easing the financial burden of the lessee and debtor, in turn strains the landlord and creditor. Establishments which are vaguely described as “no longer capable of operating their enterprises” for the COVID-19 efforts, may be subjected to take-over by the President.

To be sure, the coronavirus cannot enlarge the scope of the emergency powers bestowed upon the President. If, in the exercise of such emergency powers, the President would impair contracts in favor of specific interests, then even an outbreak should not prevent courts from later nullifying such actions. With portions of the new Bayanihan Act painted in such broad and abstract strokes, however, the quarantined public can only rely on the wisdom of the executive branch in implementing the law, for now. And there lies the rub.

The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes, and not offered as, and does not constitute, legal advice or legal opinion.

Samantha Beatrice P. King is an Associate of the Litigation and Dispute Resolution Department of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).

spking@accralaw.com

(632) 8830-8000.