Autonomy of Contracts

8/3/2019 Autonomy of Contracts

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AUTONOMY OF CONTRACTS

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-46591 July 28, 1987

BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner,vs.HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch XXXIand FLORANTE DEL VALLE, respondents.

MELENCIO-HERRERA, J.:

This is a Petition to review on certiorari the Decision of respondent Court, the dispositive portion ofwhich decrees:

WHEREFORE, the Court finds that the enforcement of the escalation clause retroactivelybefore the lapse of the 15-year period stated in the promissory note is contrary to Sec. 3 ofPresidential Decree No. 116 and Sec. 109 of Republic Act No. 265, and hereby declares nulland void the said escalation clause. The respondent Banco Filipino Savings and MortgageBank is hereby ordered to desist from enforcing the increased rate of interest on petitioner'sloan.

SO ORDERED.

The facts are not in dispute:

On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan secured by areal estate mortgage (the LOAN, for short) from petitioner BANCO FILIPINO1 in the sum of Forty-oneThousand Three Hundred (P41,300.00) Pesos, payable and to be amortized within fifteen (15) yearsat twelve (12%) per cent interest annually. Hence, the LOAN still had more than 730 days to run byJanuary 2, 1976, the date when CIRCULAR No. 494 was issued by the Central Bank.

Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as follows:

I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulatedin this contract without advance notice to me/us in the event law should be enactedincreasing the lawful rates of interest that may be charged on this particular kind of loan.

The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2, 1976,the pertinent portion of which reads:

3. The maximum rate of interest, including commissions, premiums, fees and other chargeson loans with maturity of more than seven hundred thirty (730) days, by banking institutions,including thrift banks and rural banks, or by financial intermediaries authorized to engage inquasi-banking functions shall be nineteen percent (19%) per annum.
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x x x x x x x x x

7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shallcontinue to be governed by the Usury Law, as amended."

CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board by

Presidential Decree No. 116 (Amending Further Certain Sections of the Usury Law) promulgated onJanuary 29, 1973, the applicable section of which provides:

Sec. 2. The same Act is hereby amended by adding the following section immediately aftersection one thereof, which reads as follows:

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or ratesof interest for the loan or renewal thereof or the forbearance of any money, goods or credits,and to change such rate or rates whenever warranted by prevailing economic and socialconditions: Provided, that such changes shall not be made oftener than once every twelvemonths.

The same grant of authority appears in P.D. No. 858, promulgated on December 31, 1975, exceptthat the limitation on the frequency of changes was eliminated.

On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on June30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum effective onMarch 1, 1976.

On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote a letter to theBORROWER as follows:

September 24, 1976

Mr. Florante del Valle14 Palanca StreetB.F. Homes, ParanaqueRizal

Dear Mr. del Valle:

This refers to your letter dated August 28, 1976 addressed to the Governor, Central Bank of thePhilippines, seeking clarification and our official stand on Banco Filipino's recent decision to raiseinterest rates on lots bought on installment from 12% to 17% per annum.

A verification made by our Examiner of the copy of your Promissory Note on file with Banco Filipino

showed that the following escalation clause with your signature is stamped on the Promissory Note:

I /We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulatedin this contract without advance notice to me/us in the event a law should be enactedincreasing the lawful rates of interest that may be charged on this particular kind of loan.

In this connection, please be advised that the Monetary Board, in its Resolution No. 1155 datedJune 11, 1976, adopted the following guidelines to govern interest rate adjustments by banks and


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non-banks performing quasi-banking functions on loans already existing as of January 3, 1976, inthe light of Central Bank Circulars Nos. 492-498:

l. Only banks and non-bank financial intermediaries performing quasi-banking functions mayincrease interest rates on loans already existings of January 2, 1976, provided that:

a. The pertinent loan contracts/documents contain escalation clauses expresslyauthorizing lending bank or non-bank performing quasi-banking functions to increasethe rate of interest stipulated in the contract, in the event that any law or CentralBank regulation is promulgated increasing the maximum interest rate for loans; and

b. Said loans were directly granted by them and the remaining maturities thereofwere more than 730 days as of January 2, 1976; and

2. The increase in the rate of interest can be effective only as of January 2, 1976 or on alater date.

The foregoing guidelines, however, shall not be understood as precluding affected parties from

questioning before a competent court of justice the legality or validity of such escalation clauses.

We trust the above guidelines would help you resolve your problems regarding additional interestcharges of Banco Filipino.

Very truly yours,

(Sgd.) MERCEDES C. PAREDESDirector

Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of thepromissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief" with

respondent Court, praying that the Escalation Clause be declared null and void and that BANCOFILIPINO be ordered to desist from enforcing the increased rate of interest on the BORROWER'sreal estate loan.

For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the BORROWERauthorized it to increase the interest rate once a law was passed increasing the rate of interest andthat its authority to increase was provided for by CIRCULAR No. 494.

In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO FILIPINO todesist from enforcing the increased rate of interest on the BORROWER's loan. It reasoned out thatP.D. No. 116 does not expressly grant the Central Bank authority to maximize interest rates withretroactive effect and that BANCO FILIPINO cannot legally impose a higher rate of interest before

the expiration of the 15-year period in which the loan is to be paid other than the 12% per annum inforce at the time of the execution of the loan.

It is from that Decision in favor of the BORROWER that BANCO FILIPINO has come to this instanceon review by Certiorari. We gave due course to the Petition, the question being one of law.

On February 24, 1983, the parties represented by their respective counsel, not only moved towithdraw the appeal on the ground that it had become moot and academic "because of recentdevelopments in the rules and regulations of the Central Bank," but also prayed that "the decision


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rendered in the Court of First Instance be therefore vacated and declared of no force and effect as ifthe case was never filed," since the parties would like to end this matter once and for all."

However, "considering the subject matter of the controversy in which many persons similarly situatedare interested and because of the need for a definite ruling on the question," the Court, in itsResolution of February 24, 1983, impleaded the Central Bank and required it to submit its Comment,

and encouraged homeowners similarly situated as the BORROWER to intervene in the proceedings.

At the hearing on February 24, 1983, one Leopoldo Z. So, a mortgage homeowner at B.F. ResortSubdivision, was present and manifested that he was in a similar situation as the BORROWER.Since then, he has written several letters to the Court, pleading for early resolution of the case. TheCourt allowed the intervention of Lolita Perono2and issued a temporary restraining order enjoiningthe Regional Trial Court (Pasay City Branch) in the case entitled "Banco Filipino Savings andMortgage Bank vs. Lolita Perono" from issuing a writ of possession over her mortgaged property.Also snowed to intervene were Enrique Tabalon, Jose Llopis, et als., who had obtained loans withIdentical escalation clauses from Apex Mortgage and Loans Corporation, apparently an affiliate ofBANCO FILIPINO, Upon motion of Jose Llopis, a Temporary Restraining Order was likewise issuedenjoining the foreclosure of his real estate mortgage by BANCO FILIPINO.

The Court made it explicit, however, that intervention was allowed only for the purpose of "joining inthe discussion of the legal issue involved in this proceedings, to wit, the validity of the so-called"escalation clause," or its applicability to existing contracts of loan."

The Central Bank has submitted its Comment and Supplemental Comment and like BANCOFILIPINO, has taken the position that the issuance of its Circulars is a valid exercise of its authorityto scribe maximum rates of interest and that, based on general principles of contract, the EscalationClause is a valid provision in the loan agreement provided that "(1) the increased rate imposed orcharged by petitioner does not exceed the ceiling fixed by law or the Monetary Board; (2) theincrease is made effective not earlier than the effectivity of the law or regulation authorizing such anincrease; and (3) the remaining maturities of the loans are more than 730 days as of the effectivity ofthe law or regulation authorizing such an increase. However, with respect to loan agreements

entered into,on or after March 17, 1980, such agreement, in order to be valid, must also include ade-escalation clause as required by Presidential Decree No. 1684."3

The substantial question in this case is not really whether the Escalation Clause is a valid or voidstipulation. There should be no question that the clause is valid.

Some contracts contain what is known as an "escalator clause," which is defined as one inwhich the contract fixes a base price but contains a provision that in the event of specifiedcost increases, the seller or contractor may raise the price up to a fixed percentage of thebase. Attacks on such a clause have usually been based on the claim that, because of theopen price-provision, the contract was too indefinite to be enforceable and did not evidencean actual meeting of the minds of the parties, or that the arrangement left the price to be

determined arbitrarily by one party so that the contract lacked mutuality. In most instances,however, these attacks have been unsuccessful.4

The Court further finds as a matter of law that the cost of living index adjustment, orescalator clause, is not substantively unconscionable.

Cost of living index adjustment clauses are widely used in commercial contracts in an effortto maintain fiscal stability and to retain "real dollar" value to the price terms of long termcontracts. The provision is a common one, and has been universally upheld and enforced.
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Indeed, the Federal government has recognized the efficacy of escalator clauses in tyingSocial Security benefits to the cost of living index, 42 U.S.C.s 415(i). Pension benefits andlabor contracts negotiated by most of the major labor unions are other examples. Thatinflation, expected or otherwise, will cause a particular bargain to be more costly in terms oftotal dollars than originally contemplated can be of little solace to the plaintiffs.5

What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOANfrom 12% to 17% per annum under the Escalation Clause. It is our considered opinion that it maynot.

The Escalation Clause reads as follows:

I/We hereby authorize Banco Filipino to correspondingly increase

the interest rate stipulated in this contract without advance notice to me/us in the event

a law

increasing

the lawful rates of interest that may be charged

on this particular

kind of loan. (Paragraphing and emphasis supplied)

It is clear from the stipulation between the parties that the interest rate may be increased "in theevent a lawshould be enacted increasing the lawful rate of interest that may be charged on this

particular kind of loan." " The Escalation Clause was dependent on an increase of rate made by"law" alone.

CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued isnot strictly a statute or a law, it has, however, the force and effect of law."6(Italics supplied). "Anadministrative regulation adopted pursuant to law has the force and effect of law."7 "Thatadministrative rules and regulations have the force of law can no longer be questioned. "8

The distinction between a law and an administrative regulation is recognized in the Monetary Boardguidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976 (supra).According to the guidelines, for a loan's interest to be subject to the increases provided inCIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event thatany law or Central Bank regulation is promulgated increasing the maximum interest rate for loans."The guidelines thus presuppose that a Central Bank regulation is not within the term "any law."

The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, addingsection 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan couldstipulate that the rate of interest agreed upon may be increased in the event that the applicablemaximum rate of interest is increased "by law or by the Monetary Board." To quote:

Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money, goods orcredits may stipulate that the rate of interest agreed upon may be increased in the event thatthe applicable maximum rate of interest
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is increased by law or by the Monetary Board:

Provided, That such stipulation shall be valid only ifthere is also a stipulation in theagreement that the rate of interest agreed upon shall be reduced in the event that theapplicable maximum rate of interest is reduced by law or by the Monetary Board;

Provided, further, That the adjustment in the rate of interest agreed upon shall take effect onor after the effectivity of the increase or decrease in the maximum rate of interest.(Paragraphing and emphasis supplied).

It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide:(1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) inorder for such stipulation to be valid, it must include a provision for reduction of the stipulatedinterest "in the event that the applicable maximum rate of interest is reduced by law or by theMonetary Board."

While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation clause inthe Escalation Clause in question provides another reason why it should not be given effect because

of its one-sidedness in favor of the lender.

2. The Escalation Clause specifically stipulated that the increase in interest rate was to be "on thisparticular kind of loan, " meaning one secured by registered real estate mortgage.

Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals continue to begoverned by the Usury Law, as amended." So do Circular No. 586 of the Central Bank, whichsuperseded Circular No. 494, and Circular No. 705, which superseded Circular No. 586. The UsuryLaw, as amended by Acts Nos. 3291, 3998 and 4070, became effective on May 1, 1916. It providedfor the maximum yearly interest of 12% for loans secured by a mortgage upon registered real estate(Section 2), and a maximum annual interest of 14% for loans covered by security other thanmortgage upon registered real estate (Section 3). Significant is the separate treatment of registered

real estate loans and other loans not secured by mortgage upon registered real estate. It appearsclear in the Usury Law that the policy is to make interest rates for loans guaranteed by registeredreal estate lower than those for loans guaranteed by properties other than registered realty.

On June 15, 1948, Congress approved Republic Act No. 265, creating the Central Bank, andestablishing the Monetary Board. That law provides that "the Monetary Board may, within the limitsprescribed in the Usury law,9 fix the maximum rates of interest which banks may charge for differenttypes of loans and for any other credit operations, ... " and that "any modification in the maximuminterest rates permitted for the borrowing or lending operations of the banks shall apply only to futureoperations and not to those made prior to the date on which the modification becomes effective"(Section 109). 1avvphi1

On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The Decree gave

authority to the Monetary Board "to prescribe maximum rates of interest for the loan or renewalthereof or the forbearance of any money goods or credits, and to change such rate or rateswhenever warranted by prevailing economic and social conditions. In one section,10the MonetaryBoard could prescribe the maximum rate of interest for loans secured by mortgage upon registeredreal estate or by any document conveying such real estate or an interest therein and, in anotherseparate section,11 the Monetary Board was also granted authority to fix the maximum interest ratefor loans secured by types of security other than registered real property. The two sections read:

SEC. 3. Section two of the same Act is hereby amended to read as follows:
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SEC. 2. No person or corporation shall directly or indirectly take or receive in moneyor other property, real or personal, or choses in action, a higher rate of interest orgreater sum or value, including commissions, premiums, fines and penalties, for theloan or renewal thereof or forbearance of money, goods, or credits, where such loanor renewal or forbearance is secured in whole or in part by a mortgage upon realestate the title to which is duly registered or by any document conveying such real

estate or an interest therein, than twelve per centum per annum or the maximum rateprescribed by the Monetary Board and in force at the time the loan or renewal thereofor forbearance is granted: Provided, That the rate of interest under this section or themaximum rate of interest that may be prescribed by the Monetary Board under thissection may likewise apply to loans secured by other types of security as may bespecified by the Monetary Board.

SEC. 4. Section three of the same Act is hereby amended to read as follows:

SEC. 3. No person or corporation shall directly or indirectly demand, take, receive, oragree to charge in money or other property, real or personal, a higher rate or greatersum or value for the loan or forbearance of money, goods, or credits, where such

loan or forbearance is not secured as provided in Section two hereof, than fourteenper centum per annum or the maximum rate or rates prescribed by the MonetaryBoard and in force at the time the loan or forbearance is granted.

Apparent then is that the separate treatment for the two classes of loans was maintained. Yet,CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable to unlikeCircular No. 586 dated January 1, 1978 and Circular No. 705 dated December 1, 1979, which fix theeffective rate of interest on loan transactions with maturities of more than 730 days to not exceeding19% per annum (Circular No. 586) and not exceeding 21% per annum (Circular No. 705) "on bothsecured and unsecured loans as defined by the Usury Law, as amended."

In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan was meantby the Monetary Board, the more equitable construction is to limit CIRCULAR No. 494 to loans

guaranteed by securities other than mortgage upon registered realty.

WHEREFORE, the Court rules that while an escalation clause like the one in question can ordinarilybe held valid, nevertheless, petitioner Banco Filipino cannot rely thereon to raise the interest on theborrower's loan from 12% to 17% per annum because Circular No. 494 of the Monetary Board wasnot the "law" contemplated by the parties, nor should said Circular be held as applicable to loanssecured by registered real estate in the absence of any such specific indication and in contraventionof the policy behind the Usury Law. The judgment appealed from is, therefore, hereby affirmed in sofar as it orders petitioner Banco Filipino to desist from enforcing the increased rate of interest onpetitioner's loan.

The Temporary Restraining Orders heretofore issued are hereby made permanent if the escalation

clauses are Identical to the one herein and the loans involved have applied the increased rate ofinterest authorized by Central Bank Circular No. 494.

SO ORDERED.

ANSELMO FERRAZZINI, plaintiff-appellee,vs.CARLOS GSELL, defendant-appellant.


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William A. Kincaid and Thomas L. Hartigan for appellant.Ramon Sotelo for appellee.

TRENT, J.:

This action was brought to recover damages for an alleged wrongful discharge of the

plaintiff, who had been employed by the defendant for an indefinite time to work in thelatter's industrial enterprises in the city of Manila. The defendant admitted that hedischarged the plaintiff without giving him the "written advice of six months in advance" asprovided in the contract, but alleged that the discharge was lawful on account of absence,unfaithfulness, and disobedience of orders. The defendant sought affirmative relief for afurther alleged breach of the contract by the plaintiff after his discharge. From a judgmentin favor of the plaintiff the defendant appealed and now urges that the trial court erred (1)in finding that the plaintiff's discharge was not justified and (2) in declining to consider thecounterclaim and enter judgment in accordance therewith.

1. The plaintiff engaged his "skilled service" to the defendant for the entire existence "of thisagreement" at a fixed monthly salary and agreed "to devote his entire time and efforts tothe best of his knowledge and skill exclusively in carrying out in the most satisfactory

manner possible all of the work which may be entrusted to him during the existence of thiscontract and undertaking, furthermore, to exercise a strict discretion in all matterspertaining to the work so entrusted to him and the whole thereof, . . . ."

The relation of master and servant, which was created by the contract, cast certain dutiesand obligations upon the parties, which they were bound to discharge and fulfill; theforemost, on the part of the master, were those of furnishing the servant with a reasonablysafe place to work, to pay him for his services, and not to discharge him until the expirationof six months after notice; and the foremost, on the part of the servant, were those ofloyalty, faithfulness, and obedience to all reasonable orders not inconsistent with thecontract. Consequently, if the plaintiff's discharge were without just cause, it was inviolation of the contract of service and he is entitled to recover. Otherwise, he is not,

because the breach on his part must necessarily have occurred before his discharge. Hence,the defendant must prove justification for his act for the reason that it was in contraventionof the six-months clause in the contract. In order to justify the dismissal of the plaintiff, thedefendant must show that the plaintiff was guilty of conduct which can be construed to be abreach of some express or implied provision in the contract of service. If it has been shownthat the plaintiff's conduct was inconsistent with the relation of master and servant orincompatible with the due and faithful performance of his duties, his discharge was justified.In view of the fact that the determination of these questions necessarily requires a carefulreview of the evidence and in view of the further fact that we cannot accept the trial court'sfindings upon these important points, we think it advisable to set forth briefly the substanceof all of the material testimony submitted by both parties.

ANSELMO FERRAZZINI: On Friday evening at supper there was some talk about Mr. Gsell

measuring the goods for the umbrellas. Then I said that if Mr. Gsell does this, it is my idea

that he has no confidence in his employees. I was talking to everybody in general. There

were present Mr. Specht, Mr. Alberto Ferrazzini and Mr. Inhelder. Mr. Specht was an

employee of the defendant at the time. I do not remember telling Specht that he was not

receiving sufficient salary. The only thing I remember distinctly is that i said `that Mr. Gsell

does not seem to have any confidence in us.'


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Q. Is it not a fact that shortly, or sometime before your discharge, you have been in the

habit of leaving the factory for considerable periods in the morning to go outside for the

purpose of taking a drink?

A. As long as I have been with the firm of Carlos Gsell I was allowed in the morning ten or

fifteen minutes during the hot season to absent myself to have a drink of beer or whiskyand soda; and the same in the afternoon.

Q. Is it not a fact that Mr. Bender, the manager of the factory, had repeated spoken to you,

or had several times spoken to you about your habit of leaving the factory for the purpose

of taking a drink, and had prohibited you from doing it, forbade you to do it?

A. He merely told me not to do it in such an ostentatious manner. Mr. Bender told me that

Mr. Gsell did not like to see me go out in the forenoon and afternoon; I told him that Mr.

Gsell himself had told me on one occasion that if I had to have a drink I could go out for it

and it would be all right; this was in the presence of Mr. Landvatter.

Q. Then, am I to understand that when you went out to take a drink it was because you

must have one?

A. Yes, of course.

Q. Is it not a fact that Mr. Bender had conversations with you, at least once in the month of

March, regarding this matter?

A. I don't remember it.

Q. Were not you frequently spoken to about it?

A. No, sir.

CARLOS GSELL: The first reason that led to his dismissal was because several months,

through April and May, he had the habit of going out in the morning and afternoon for

having a drink; not one but many drinks, because he was out sometimes an hour and an

hour and a half; and as I have a factory with 400 working people I have to see that certain

discipline is maintained in the factory. I gave instructions to the manager. Mr. Bender, to

see that this habit would be dropped, but he (the plaintiff) would not do so. Now what made

me pleased to dismiss him was because on a certain night at the mess where he ate with

other employees of my house, he provoked one of my employees, a new arrival, and said

that all the control I had in the factory was one of mistrust; he said I was suspicious; that Imeasured the cloth in my office for the umbrellas and that he would not support such

treatment from my side; at the same time he said to this newly arrived employee that the

salary that he, the new man, got under the contract was not sufficient to live on and that he

should not continue to work for me. I asked the plaintiff about the conversation which he

had at the mess and he did not deny it. He said that he did not mean it to be so bad. The

factory was prejudiced on account of the plaintiff absenting himself, because sometimes I

wanted to speak to him, tell him something, and he was not there. I had to wait for him,


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and then when he came back it was noon perhaps, and it could not be done. I gave

instructions to Mr. Bender, the manager, to stop the plaintiff's going out without permission.

I did not exactly authorized the plaintiff to go out to drink. I always wanted to stop this. The

plaintiff was the older of those who have gone out to drink. The plaintiff held a responsible

position. In the first place it was his duty to make repairs to the machinery in all the

departments; later he was entrusted with the various departments not at the same time;

once he had the bleaching department; once he had to help out in the umbrella factory; and

then he was in charge of the hat factory. The plaintiff had other employees under him.

CARL BENDER: I came to the Philippine Islands in the middle of March as the defendant's

manager. I saw that the plaintiff was frequently out of the factory. I told him that we was

not allowed to leave the factory without my permission. HE kept up the habit of going out in

the morning and afternoon for an hour or more and I told him the second time. He told me

that he had permission from the former manager to go out and take a drink. I again told

him he must not go out without my permission. Notwithstanding these orders, he was out

one whole Saturday afternoon and I reported him to the defendant. The plaintiff went out

without permission some thirty-five times after I ordered him not to do so. I had the other

employees search for him, but they could not find him. He would go out four or five times a

week.

HERMAN INHELDER: I was present at the mess in June when that conversation took place.

We were discussing several things, including the business and the way the umbrella factory

was run. The plaintiff spoke in a manner that indicated that Mr. Gsell did not trust Mr.

Specht. I did not want to have this kind of a conversation going on there and I told the

plaintiff he had better leave the house.

Q. Did the plaintiff say anything with respect to the amount of salary, which Mr. Specht was

receiving? If so, what?

A. I won't pretend that Mr. Ferrazzini said it that night, about the salary, but he said it on

several occasions before, and well what he did say was that Mr. Specht ought not to

work so much for such a small salary.

ALBERTO FERRAZZINI: I was present when the conversation took place in the mess one

evening of June last. A discussion arose about Mr. Gsell exercising control over the

merchandise or goods. Then the plaintiff said that this seemed to show that Gsell had no

confidence in Mr. Specht. Mr. Specht was in charge of the umbrella department. The

conversation was then carried on in German and I could not understand what they said.

HANS SPECHT: I am foreman of the umbrella factor of the defendant. During theconversation at the mass the plaintiff told me that the defendant had no confidence in me. I

protested and then the plaintiff tried to prove it by stating that the defendant was

investigating things in the umbrella factory, verifying the goods for the umbrellas. The

plaintiff said nothing about my salary at that time, but on a previous occasion he told me

that I was foolish at my age to work for such a small salary. I reported the matter to the

defendant.

The plaintiff admits that he stated to those present at the mess that if the defendant


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measured the cloth for the umbrellas, "It is my idea that he has no confidence in hisemployees." Mr. Specht, the foreman f the umbrella factory, says that "During theconversation at the mess, the plaintiff told me that the defendant had no confidence in me."The plaintiff testified that he did not remember telling Specht that he (Specht) was notreceiving sufficient salary, while Inhelder testified positively that the plaintiff stated onseveral occasions that Specht ought not to work so much for such a small salary, and

Specht also testified positively that "he (the plaintiff) told me that I was foolish at my age towork for such a small salary." As to the plaintiff's absenting himself during working hours forthe purpose of drinking, we have, on the one hand, the plaintiff's testimony to the effectthat as long as he had been with the firm of Gsell he had been "allowed in the morning tenor fifteen minutes during the hot season to absent himself to have a drink of beer orwhiskey, and the same in the afternoon," and that "the manager merely told me not to do itin such an ostentatious manner." While, on the other hand, we have the testimony of thedefendant wherein he states that he instructed his manager, Mr. Bender, to direct theplaintiff to discontinue his habit of drinking during working hours, and the testimony of themanager (Bender) to the effect that he expressly directed the plaintiff not to go out withoutpermission. But the plaintiff violated his express order some thirty-five times, keeping upthe habit of going out (for the purpose of drinking) in the morning and afternoon for an houror more at a time. All of the foregoing show a course of conduct on the part of the plaintiff

inconsistent with the due and faithful performance of his duties as an employee of thedefendant. He sought to create a feeling of unrest among the employees by inducing themto believe that the defendant had no confidence in them and that at least one employee wasnot receiving sufficiently salary. If it were true that the defendant was measuring the clothfor the umbrellas, he had a right to do so and this fact would not justify the plaintiff insaying that the defendant had no confidence in the employees. Likewise, if it be true thatthe defendant or his manager did at first authorize the plaintiff to absent himself duringworking hours for the purpose of drinking, the defendant had a perfect right to withdrawthis permission at anytime he saw fit to do so. In fact, the defendant, through his manager,expressly directed the plaintiff to cease leaving the factory for that purpose, but the plaintiffviolated this order numerous times. The plaintiff, being at times foreman and at other timesin charge of important departments of the factory wherein some four hundred employees

were at work, it cannot be questioned but that the defendant not only had a right to prohibitdrinking during working hours, but it was his duty to do so for his own interests and thesafety of his other employees. But it is intimated in the record that the defendantdischarged the plaintiff on account of the conversation at the mess. If it be true that thedefendant gave this as his sole reason for so acting at the time he discharged the plaintiff,yet he would not be prevented from setting up at the trial the fact that the plaintiffcontinued to disobey his orders with reference to absenting himself for the purpose ofdrinking. The defendant was, at the time he discharged the plaintiff, authorized to take intoconsideration the latter's whole course of conduct in determining whether the contract ofemployment should be terminated. We are, therefore, convinced that real errors wascommitted by the trial court in its findings of fact and that the record fully justifies areversal of such findings, and a declaration to the effect that the defendant was justified interminating the contract of employment.

2. At the opening of the trial in the court below and before any testimony had been taken,counsel for the defendant stated:

I desire to amend my answer at this time by the addition of the following paragraph:

The defendant further alleges for a second and further defense to the complaint herein, and

for a counterclaim thereto, that the plaintiff has engaged in business in the Philippine


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Islands since leaving the service of the defendant and without the defendant's request or

consent, in violation of his contract with the defendant; wherefore, the defendant demands

judgment against the plaintiff for the sum of ten thousand pesos.

By the COURT: If the plaintiff does not claim any time to answer the new pleadings, the

court will grant the amendment as asked for.

By Mr. SOTELO: I note my exception to the admission of a counterclaim at this time; I have

no time to prepare myself to meet it.

By the COURT: The court has stated that if counsel for the plaintiff requires time to answer

or meet this counterclaim he will be granted time to do so.

By Mr. SOTELO: The attorney for the plaintiff answers to the court that much time has been

lost already since the filing of the complaint and the trial, and he wants to go to trial in

order that the plaintiff may get what he is justly entitled to.

Testimony in support of the counterclaim was duly introduced before the close of the trial.In the final decision the court said:

The court is of the opinion that the defendant's so-called amendment to his answer, dictated

by counsel to the official stenographer, and not `upon motion filed in court, and after notice

to the adverse party and an opportunity to be heard,' must be disregarded in the

consideration of this case.

This is manifest error. The verbal petition was expressly granted and the proferredamendment accepted by the court. Plaintiff's counsel noted his exception to this ruling andsignified his willingness to proceed with the trial. All thereafter considered the answer asthus amended. We must, therefore, dispose of the defendant's counterclaim upon the

merits.

That portion of the contract upon which the defendant's counterclaimed is based reads asfollows:

That during the term of this contract, and for the period of five years after the termination

of the employment of the said party of the second part, whether this contract continue in

force for the period of one, two, three or more years, or be sooner terminated, the said

party of the second party shall not engage or interest himself in any business enterprises

similar to or in competition with those conducted, maintained or operated by the said party

of the first day in the Philippines, and shall not assist, aid or encourage any such enterprise

by the furnishing of information, advice or suggestions of any kind, and shall not enter into

the employ of any enterprises in the Philippine Islands, whatever, save and except after

obtaining special written permission therefor from the said party of the first part. It is

further stipulated and agreed that the said party of the second part is hereby obligated and

bound to pay unto the party of the first part the sum of ten thousand pesos, Philippine

currency (P10,000) as liquidated damages for each and every breach of the present clause

of this contract, whether such breach occurred during the employment of the said party of

the second part or at any time during the period of five years from and after the termination


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of said employment, and without regard to the cause of the termination of said

employment.

The plaintiff admits that he entered the employment of Mr. Whalen in the Philippine Islandsas a foreman on some construction work for a cement factory within a few days after hisdischarge and without the consent, either written or verbal, of the defendant. This work was

entirely different and disassociated from that engaged in by the defendant Gsell, yet this actof the plaintiff was a technical violation of the above-quoted provisions of the contractwherein he expressly agreed and obligated himself "not to enter into the employment of anyenterprise in the Philippine Islands, whatever, save and except after obtaining specialwritten permission therefor" from the defendant. The question now arises whether theseprovisions of the contract are valid and binding upon the plaintiff.

Counsel for the defendant in their printed brief say:

There is no doubt as to the validity of the contract, Gsell vs. Koch (16 Phil. Rep., 1) has

settled that question in a similar contract and that decision has never been criticised, but is

cited as recently as 1914 with approved. (Lambert vs. Fox, 26 Phil. Rep., 588).

An examination of these cases, as well as others in point, is necessary in order to determinewhether or not the question has been settled, and if we find that it is still an open one inthis jurisdiction, we must proceed with the case. In pursuing this inquiry it is well to bear inmind (1) that the case under consideration has been tried in both courts exclusively uponthe theory that the local law alone is applicable to the contract and (2) that the business inwhich the plaintiff became engaged was entirely different and distinct from that conducted,maintained or operated by the defendant 4vYE62.

In Gsell vs. Koch, supra, a demurrer was sustained upon the ground that the allegations inthe complaint did not constitute a cause of action, and after defendant declined to amend,judgment was entered dismissing the action. On appeal this order was reversed and therecord returned with instructions to direct the defendant to answer. The paragraph in thewritten contract, upon which the judgment of this court rests, reads:

Third. The said Pedro Koch binds himself to pay in cash to Mr. Gsell the sum of ten thousand

pesos if, after leaving the firm of C. Gsell, and against the latter's will, he shall engage

directly or indirectly in carrying on any business in which the said Carlos Gsell is at present

engaged, or within the two and one-half years fixed for the duration of the present contract

in these Islands, either as an employee or member of a firm or company, or on his own

account; and he furthermore binds himself to pay in cash to Mr. Gsell an equal sum of ten

thousand pesos for each violation of any secret of the business entrusted him.

The plaintiff in that case was engaged solely and exclusively in the manufacture of

umbrellas, matches, and hats. The secret process for making straw hats had cost theplaintiff some P20,000 and the defendant Koch, after having entered the hat factory under acontract of employment and after having learned the secret process employed by theplaintiff, left the plaintiff's service and engaged in the manufacture of straw hats in violationof the above-quoted provisions of the contract, using the trade secrets which he had thuslearned. The provisions in the contract against the engaging in the manufacturing of strawhats in the Philippine Islands were held to be reasonably necessary for the protection of theplaintiff and not oppressive in so far as the defendant was concerned. In the case underconsideration the contract goes far beyond that which formed the basis of the action in the


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case just cited. Here the plaintiff Ferrazzini was prohibited from engaging in any business oroccupation whatever in the Philippine Islands for a period of five years after the terminationof this contract of employment without special written permission from the defendant. Thisplaintiff became engaged, as we have said, as a foreman in a cement factory, while thedefendant in the other case became engaged in identically the same business which hisemployer was carrying on, that is, the manufacture of straw hats. Consequently, the

reasons which support the validity of the contract in the one case are not applicable to theother. The same is true of the case ofFornow vs. Hoffmeister(6 Phil. Rep., 33), wherein thedecision rests solely upon the question whether the contract was in violation of the contractlabor laws. No other question was submitted or decided in that case. Therefore, whether theclause under consideration is valid and enforcible is still an open question.

Articles 1091 and 1255 of the Civil Code read:

ART. 1091. Obligations arising from contracts have legal force between the contracting

parties, and must be fulfilled in accordance with their stipulations."

ART. 1255. The contracting parties may make the agreement and establish the clauses and

conditions which they may deem advisable, provided they are not in contravention of law,morals, or public order.

Hence, the policy of the law requires that the freedom of persons to enter into contractsshall not be lightly interfered with, but if a contract be not founded upon a legalconsideration (causa) or if it conflicts with the morals of the times or contravenes someestablished interest of society, the courts will not aid in its enforcement.

Passing over the question whether "consideration" of the American law and the "causa" ofthe civil law are equivalent and whether there was adequate or legal consideration or"causa" on which the contract was founded, we will limit our further inquiry to thedetermination of the question whether that part of the contract under consideration isagainst public policy (orden publico).

Manresa, Vol. 8 p. 606, says:

Public policy (orden publico) which does not here signify the material keeping of public

order represents in the law of persons the public, social and legal interest, that which is

permanent and essential of the institutions, that which, even if favoring an individual in

whom the right lies, cannot be left to his own will. It is an idea which, in cases of the waiver

of any right, is manifested with clearness and force. Thus the jurisprudence on the subject

of mortgages contains an interesting declarations on this point in a resolution of January 24,

1898, wherein it was held that: `The power of the husband to give marital permission

cannot be validly conferred upon any attorney-in-fact, as the legislator has willed that, for

reasons of the interest of society and of family government and discipline it should bevested only in the husband, being personal to him in the highest sense and therefore not

capable of being transmitted.'

Mucius Scaevola's (vol. 20, p., 505) conclusion is that:


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Agreements in violation oforden publico must be considered as those which conflict with

law, whether properly, strictly and wholly a public law (derecho) or whether a law of the

person, but law which in certain respects affects the interest of society.

Articles 1893 and 1895 of Merrick's Revised Civil Code of Louisiana, a civil law state, read:

ART. 1893. An obligation without a cause, or with a false or unlawful cause, can have no

effect.

ART. 1895. Illegal or immoral cause. The cause is unlawful, when it is forbidden by law,

when it is contra bonos mores or to public order.

In Fabacher vs. Bryant & Mather(46 La. Ann., 820), the plaintiff and one Thomas Eganwere engaged in the business of hauling cotton for the presses in the city of New Orleans.Both of these men were members of the Draymen's Association which had adopted a tariffof charges and undertook to distribute among the members the hauling of the variouspresses. The owners of the press were not consulted either as to the prices to be paid or asto those who should do the hauling. They could not obtain draymen outside of the union.

They had to engage those designated by the union. The defendants employed Egan on thelatter's representation that he had been so designated. Later the defendants employed theplaintiff upon the same representations. Finally, after investigation, the defendants declinedto permit the plaintiff to do the work and carried out their contract with Egan. The plaintiffthereupon instituted this action for damages based upon the breach of his contract by thedefendants. On the setting aside of a verdict in favor of the plaintiff by the trial court and anappeal having been duly entered, the Supreme Court affirmed the judgment, directing thedismissal of the case, holding that the plaintiff's contract was plainly repugnant to publicpolicy, citing articles 1893 and 1895 supra. (India Bagging Association vs. Kock, 14 La.ann., 168; Gravier vs. Carraby, 17 La., 118, 142, and cases collected in 20 Hennen'sDigest, p. 1007, No. 1.)

In India Bagging Association vs. Kock, supra, an association of eight commercial firms inNew Orleans, holders of 7,410 bales of India cotton bagging, was formed, the membersbinding themselves for the term of three months not to sell any bagging, nor offer to sellany, except with the consent of the majority of them expressed at a meeting; under thepenalty of ten dollars for every bale sold or offered for sale. This action was brought againstone of the members by the manager of the association for the recovery of a penalty of$7,400 for having sold 740 bales of bagging in contravention of the articles of theassociation. From a judgment in favor of the association the defendant member appealedand the Supreme Court reversed the judgment saying:

The agreement between the parties was palpably and unequivocably a combination inrestraint of trade, and to enhance the price in the market of an article of primary necessityto cotton planters. Such combination are contrary to public order, and cannot be enforced in

a court of justice.

By "public policy," as defined by the courts in the United States and England, is intendedthat principle of the law which holds that no subject or citizen can lawfully do that which hasa tendency to be injurious to the public or against the public good, which may be termedthe "policy of the law," or "public policy in relation to the administration of the law." (Words& Phrases Judicially Defined, vol. 6, p. 5813, and cases cited.) Public policy is the principleunder which freedom of contract or private dealing is restricted by law for the good of thepublic. (Id., Id.) In determining whether a contract is contrary to public policy the nature of


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the subject matter determines the source from which such question is to be solved.(Hartford Fire Ins. Co. vs. Chicago, M. & St. P. Ry. Co., 62 Fed. 904, 906.)

The foregoing is sufficient to show that there is no difference in principle between the publicpolicy (orden publico) in the two jurisdictions (the United States and the Philippine Islands)as determined by the Constitution, laws, and judicial decisions.

In the United States it is well settled that contracts in undue or unreasonable restraint oftrade are unenforcible because they are repugnant to the established public policy in thatcountry. Such contracts are illegal in the sense that the law will not enforce them. TheSupreme Court of the United States, in Oregon Steam Navigation Co. vs. Winsor(20 Wall.,64), quoted with approval in Gibbs vs. Consolidated Gas Co. of Baltimore (130 U. S., 396),said:

Cases must be judged according to their circumstances, and can only be rightly judged

when the reason and grounds of the rule as carefully considered. There are two principal

grounds on which the doctrine is founded that a contract in restraint of trade is void as

against public policy. One is, the injury to the public by being deprived of the restricted

party's industry; and the other is, the injury to the party himself by being precluded frompursuing his occupation, and thus being prevented from supporting himself and his family.

And in Gibbs vs. Consolidated Gas Co. of Baltimore, supra, the court stated the rule thus:

Pubic welfare is first considered, and if it be not involved, and the restraint upon one party

is not greater than protection to the other party requires, that contract may be sustained.

The question is, whether, under the particular circumstances of the case and the nature of

the particular contract involved in it, the contract is, or is not, unreasonable.

Chapter 5, title 13, book 2, of our Penal Code makes it a crime for a person to solicit any

gift or promise as a consideration for agreeing to refrain from taking part in any public,

auction, or attempting to cause bidders to stay away from such auction by means of

threats, gifts, promises or any other artifice, with intent to affect the price of the thing

auctioned (Art. 542), or to combine for the purpose of lowering or raising wages to an

abusive extent, or to regulate the conditions of labor (Art. 543), or by spreading false

rumors, or by making use of any other artifice, succeeds in altering the prices which would

naturally be obtained in free competition for merchandise, stocks, public and private

securities, or any other thing which may be the object of trade and commerce (Art. 544).

And Act No. 98, as amended, of the Philippine Commission likewise makes it a crime for any

person or corporation, engaged as a common carrier, to subject any particular person, firm,

company, corporation, or locality, or any particular kind of traffic to any undue or

unreasonable prejudice or discrimination. To this extent the Legislature has expressly

covered the subject and left to the courts to determine in each case whether any other

particular agreement or contract is contrary to public policy PrSS4XJfHp.

It needs no argument to show that an agreement or contract entered into for the purpose of

accomplishing any of the prohibited acts mentioned in the above cited provisions of the

Penal Code or in Act No. 98 would be unenforcible as being in violation of positive law.

Those falling within the provisions of articles 542 and 544 of the Penal Code and Act No. 98

would clearly be agreements or contracts in undue or unreasonable restraint of trade. The
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meaning given to the word "trade" would determine the question whether those coming

within the provisions of article 543 would or would not be the same. If the commercial

meaning of the word should govern, and in this sense t has reference to the business of

selling or exchanging some tangible substance or commodity for money, or the business of

dealing by way of sale in commodities, it would appear that such would not be contract in

restraint of trade. This may be the most common significance of the word "trade." but it isnot the only one, nor the most comprehensive meaning in which the word is properly used.

In the broader sense, it is any occupation or business carried on for subsistence or profit.

Anderson's Dictionary of Law gives the following definition: "Generally equivalent to

occupation, employment, or business, whether manual or mercantile; any occupation,

employment or business carried on for profit, gain, or livelihood, not in the liberal arts or in

the learned professions." In Abbott's Law Dictionary the word is defined as "an occupation,

employment or business carried on for gain or profit." Among the definitions given in the

Encyclopaedic Dictionary is the following: "The business which a person has learnt, and

which he carries on for subsistence or profit; occupation; particularly employment, whether

manual or mercantile, as distinguished from the liberal arts or the learned professions and

agriculture." Bouvier limits the meaning to commerce and traffic and the handicraft ofmechanics. (In re Pinkney, 47 Kan., 89.) We are inclined to adopt and apply the broader

meaning given by the lexicographers.

The contract under consideration, tested by the law, rules and principles above set forth, is

clearly one in undue or unreasonable restraint of trade and therefore against public policy.

It is limited as to time and space but not as to trade. It is not necessary for the protection

of the defendant, as this is provided for in another part of the clause. It would force the

plaintiff to leave the Philippine Islands in order to obtain a livelihood in case the defendant

declined to give him the written permission to work elsewhere in this country.

The foregoing are our reasons upon which the short decision and order for judgment,heretofore filed,

[1]were based.

G.R. No. L-21127 February 9, 1924

ALFONSO DEL CASTILLO, plaintiff-appellant,vs.SHANNON RICHMOND, defendant-appellee.

F.R. Feria for appellant.Manly, Goddard and Lockwood for appellee.

JOHNSON, J.:

This action was commenced in the Court of First Instance of the Province of Albay on the 18th dayof October, 1922. Its purpose was to have declared null and of no effect the following contractexecuted and delivered on the 20th day of July, 1915:
http://philippinelaw.info/jurisprudence/grl10712-ferrazzini-v-gsell.html#fn1http://philippinelaw.info/jurisprudence/grl10712-ferrazzini-v-gsell.html#fn1http://philippinelaw.info/jurisprudence/grl10712-ferrazzini-v-gsell.html#fn1


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CONTRACT FOR RENDERING SERVICES

Know all men by these presents:

That Shannon Richmond, of lawful age and a resident of the district of Legaspi, andAlfonso del Castillo, also of lawful age and a resident of the district of Daraga of the

municipality and Province of Albay, Philippine Islands, have covenanted and agreedone with the other as follows:

1. That Alfonso del Castillo, in consideration of a monthly remuneration of P125 to bepaid to him by Shannon Richmond, agrees to enter the employ of said ShannonRichmond beginning this date, as pharmacist, and to take charge of the prescriptiondepartment of the drugstore known as the Botica Americana situated in the district ofLegaspi of the municipality and Province of Albay, Philippine Islands, and to performall the duties and obligations as such pharmacist together with such other duties inconnection with the same that by custom correspond to the pharmacist in a drugstoreof this kind.

2. That in consideration of the performance of the duties and obligations aboveindicated by the said Alfonso del Castillo, Shannon Richmond hereby agrees to paythe said Alfonso del Castillo the salary of P125 each month.

3. That in consideration of the fact that the said Alfonso del Castillo has justgraduated as a pharmacist and up to the present time has not been employed in thecapacity of a pharmacist and in consideration of this employment and the monthlysalary mentioned in this contract, the said Alfonso del Castillo also agrees not toopen, nor own nor have any interest directly or indirectly in any other drugstore eitherin his own name or in the name of another; nor have any connection with or beemployed by any other drugstore situated within a radius of our miles from the districtof Legaspi, municipality and Province of Albay, while the said Shannon Richmond orhis heirs may own or have open a drugstore, or have an interest in any other onewithin the limits of the districts of Legaspi, Albay, and Daraga of the municipality ofAlbay, Province of Albay.

4. That either of the parties to this contract may terminate his relations as employerand employee with or without reason, and upon thirty days' notice; remaining,nevertheless, in full force and effect all the other conditions and agreementsstipulated in this contract.

5. That the said Alfonso del Castillo furthermore agrees not to divulge or make use ofany of the business secrets or private formulas of the said Shannon Richmond.

In these terms, we execute this contract for the rendering of services on this 20th day

of July, 1915, in the district of Legaspi, municipality and Province of Albay PhilippineIslands.

(Sgd.) "SHANNON RICHMOND"ALFONSO DEL CASTILLO

Signed in the presence of:


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(Sgd.) "M. GOYENA"L. AZANA"

The said contract was acknowledge before a notary on the same day of its execution.

The plaintiff alleges that the provisions and conditions contained in the third paragraph of said

contract constitute an illegal and unreasonable restriction upon his liberty to contract, are contrary topublic policy, and are unnecessary in order to constitute a just and reasonable protection to thedefendant; and asked that the same be declared null and void and of no effect. The defendantinterposed a general and special defense. In his special defense he alleges "that during the time theplaintiff was in the defendant's employ he obtained knowledge of his trade and professional secretsand came to know and became acquainted and established friendly relations with his customers sothat to now annul the contract and permit plaintiff to establish a competing drugstore in the town ofLegaspi, as plaintiff has announced his intention to do, would be extremely prejudicial to defendant'sinterest." The defendant further, in an amended answer, alleges "that this action not having beenbrought within four years from the time the contract referred to in the complaint was executed, thesame has prescribed."

During the trial of the cause an effort was made to sustain the allegations of the complaint thatparagraph 3 of the said contract constituted an illegal and unreasonable restriction upon the right ofthe plaintiff to contract and was contrary to public policy. The lower court found that it wasunnecessary to pass upon the question of prescription presented by the defendant.

Upon a consideration of the merits, the court a quo concluded "that the contract the annulment ofwhich is sought by the plaintiff is neither oppressive to him, nor unreasonably necessary to protectthe defendant's business, nor prejudicial to the public interest." From that judgment the plaintiffappealed to this court. In this court the appellant still insists that said contract is illegal,unreasonable, and contrary to public policy.

From a reading of paragraph 3 of the contract above quoted, it will be seen that the only restrictionplaced upon the right of the plaintiff is, that he shall "not open, nor own, nor have any interest directlyor indirectly in any other drugstore either in his own name or in the name of another; nor have anyconnection with or be employed by any other drugstore as pharmacist or in any capacity in anydrugstore situated within a radius offour miles from the district of Legaspi, municipality and Provinceof Albay, while the said Shannon Richmond or his heirs may own or have open a drugstore, or tohave an interest in any other one within the limits of the districts of Legaspi, Albay, and Daraga ofthe municipality of Albay, Province of Albay." It will be noted that the restrictions placed upon theplaintiff are strictly limited (a) to a limited district or districts, and (b) during the time while thedefendant or his heirs may own or have open a drugstore, or have an interest in any other one withinsaid limited district.

The law concerning contracts which tend to restrain business or trade has gone through a longseries of changes from time to time with the changing conditions of trade and commerce. With trifling

exceptions, said changes have been a continuous development of a general rule. The early casesshow plainly a disposition to avoid and annul all contract which prohibited or restrained any one fromusing a lawful trade "at any time or at any place," as being against the benefit of the state. Later,however, the rule became well established that if the restriant was limited to "a certain time" andwithin "a certain place," such contracts were valid and not "against the benefit of the state." Latercases, and we think the rule is now well established, have held that a contract in restraint of trade isvalid providing there is a limitation upon either time or place. A contract, however, which restrains aman from entering into a business or trade without either a limitation as to time or place, will be heldinvalid. (Anchor Electric Co. vs.Hawkes, 171 Mass., 101; Algervs. Thacher, 19 Pickering [Mass.] 51;


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Taylorvs. Blanchard, 13 Allen [Mass.], 370; Lufkin Rule Co. vs. Fringeli, 57 Ohio State, 596;Fowle vs. Park, 131 U.S., 88, 97; Diamond Match Co. vs. Roeber, 106 N.Y., 473; National BenefitCo. vs. Union Hospital Co., 45 Minn., 272; Swigert and Howard vs. Tilden, 121 Iowa, 650.)

The public welfare of course must always be considered, and if it be not involved and the restraintupon one party is not greater than protection to the other requires, contracts like the one we are

discussing will be sustained. The general tendency, we believe, of modern authority, is to make thetest whether the restraint is reasonably necessary for the protection of the contracting parties. If thecontract is reasonably necessary to protect the interest of the parties, it will be upheld.(Ollendorffvs. Abrahamson, 38 Phil., 585.)

In that case we held that a contract by which an employee agrees to refrain for a given lenght oftime, after the expiration of the term of his employment, from engaging in a business, competitivewith that of his employer, is not void as being in restraint of trade if the restraint imposed is notgreater than that which is necessary to afford a reasonable protection. In all cases like the present,the question is whether, under the particular circumstances of the case and the nature of theparticular contract involved in it, the contract is, or is not, unreasonable. Of course in establishingwhether the contract is a reasonable or unreasonable one, the nature of the business must also be

considered. What would be a reasonable restriction as to time and place upon the manufacture ofrailway locomotive engines might be a very unreasonable restriction when imposed upon theemployment of a day laborer.

Considering the nature of the business in which the defendant is engaged, in relation with thelimitation placed upon the plaintiff both as to time and place, we are of the opinion, and so decide,that such limitation is legal and reasonable and not contrary to public policy. Therefore the judgmentappealed from should be and is hereby affirmed, with costs. So ordered.

G.R. No. L-13505 February 4, 1919

GEO. W. DAYWALT, plaintiff-appellant,vs.LA CORPORACION DE LOS PADRES AGUSTINOS RECOLETOS, ET AL., defendants-appellees.

C. C. Cohn and Thos. D. Aitken for appellant.Crossfield & O'Brien for appellee.

STREET, J.:

In the year 1902, Teodorica Endencia, an unmarried woman, resident in the Province of Mindoro,executed a contract whereby she obligated herself to convey to Geo. W. Daywalt, a tract of landsituated in the barrio of Mangarin, municipality of Bulalacao, now San Jose, in said province. It wasagreed that a deed should be executed as soon as the title to the land should be perfected byproceedings in the Court of Land Registration and a Torrens certificate should be produced therefore

in the name of Teodorica Endencia. A decree recognizing the right of Teodorica as owner wasentered in said court in August 1906, but the Torrens certificate was not issued until later. Theparties, however, met immediately upon the entering of this decree and made a new contract with aview to carrying their original agreement into effect. This new contract was executed in the form of adeed of conveyance and bears date of August 16, 1906. The stipulated price was fixed at P4,000,and the area of the land enclosed in the boundaries defined in the contract was stated to be 452hectares and a fraction.


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The second contract was not immediately carried into effect for the reason that the Torrenscertificate was not yet obtainable and in fact said certificate was not issued until the period ofperformance contemplated in the contract had expired. Accordingly, upon October 3, 1908, theparties entered into still another agreement, superseding the old, by which Teodorica Endenciaagreed upon receiving the Torrens title to the land in question, to deliver the same to the Hongkongand Shanghai Bank in Manila, to be forwarded to the Crocker National Bank in San Francisco,

where it was to be delivered to the plaintiff upon payment of a balance of P3,100.

The Torrens certificate was in time issued to Teodorica Endencia, but in the course of theproceedings relative to the registration of the land, it was found by official survey that the area of thetract inclosed in the boundaries stated in the contract was about 1.248 hectares of 452 hectares asstated in the contract. In view of this development Teodorica Endencia became reluctant to transferthe whole tract to the purchaser, asserting that she never intended to sell so large an amount of landand that she had been misinformed as to its area.

This attitude of hers led to litigation in which Daywalt finally succeeded, upon appeal to the SupremeCourt, in obtaining a decree for specific performance; and Teodorica Endencia was ordered toconvey the entire tract of land to Daywalt pursuant to the contract of October 3, 1908, which contract

was declared to be in full force and effect. This decree appears to have become finally effective inthe early part of the year 1914.1

The defendant, La Corporacion de los Padres Recoletos, is a religious corporation, with its domicilein the city of Manila. Said corporation was formerly the owner of a large tract of land, known as theSan Jose Estate, on the island of Mindoro, which was sold to the Government of the PhilippineIslands in the year 1909. The same corporation was at this time also the owner of another estate onthe same island immediately adjacent to the land which Teodorica Endencia had sold to Geo. W.Daywalt; and for many years the Recoletos Fathers had maintained large herds of cattle on thefarms referred to. Their representative, charged with management of these farms, was father IsidoroSanz, himself a members of the order. Father Sanz had long been well acquainted with TeodoricaEndencia and exerted over her an influence and ascendency due to his religious character as wellas to the personal friendship which existed between them. Teodorica appears to be a woman of little

personal force, easily subject to influence, and upon all the important matters of business wasaccustomed to seek, and was given, the advice of father Sanz and other members of his order withwhom she came in contact.

Father Sanz was fully aware of the existence of the contract of 1902 by which Teodorica Endenciaagreed to sell her land to the plaintiff as well as of the later important developments connected withthe history of that contract and the contract substituted successively for it; and in particular FatherSanz, as well as other members of the defendant corporation, knew of the existence of the contractof October 3, 1908, which, as we have already seen finally fixed the rights of the parties to theproperty in question. When the Torrens certificate was finally issued in 1909 in favor of TeodoricaEndencia, she delivered it for safekeeping to the defendant corporation, and it was then taken toManila where it remained in the custody and under the control of P. Juan Labarga the procurador

and chief official of the defendant corporation, until the deliver thereof to the plaintiff was madecompulsory by reason of the decree of the Supreme Court in 1914.

When the defendant corporation sold the San Jose Estate, it was necessary to bring the cattle off ofthat property; and, in the first half of 1909, some 2,368 head were removed to the estate of thecorporation immediately adjacent to the property which the plaintiff had purchased from TeodoricaEndencia. As Teodorica still retained possession of said property Father Sanz entered into anarrangement with her whereby large numbers of cattle belonging to the defendant corporation werepastured upon said land during a period extending from June 1, 1909, to May 1, 1914.


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Under the first cause stated in the complaint in the present action the plaintiff seeks to recover fromthe defendant corporation the sum of P24,000, as damages for the use and occupation of the land inquestion by reason of the pasturing of cattle thereon during the period stated. The trial court came tothe conclusion that the defendant corporation was liable for damages by reason of the use andoccupation of the premises in the manner stated; and fixed the amount to be recovered at P2,497.The plaintiff appealed and has assigned error to this part of the judgment of the court below, insisting

that damages should have been awarded in a much larger sum and at least to the full extent ofP24,000, the amount claimed in the complaint.

As the defendant did not appeal, the property of allowing damages for the use and occupation of theland to the extent o P2,497, the amount awarded, is not now in question an the only thing here to beconsidered, in connection with this branch of the case, is whether the damages allowed under thishead should be increased. The trial court rightly ignored the fact that the defendant corporation hadpaid Teodorica Endencia of ruse and occupation of the same land during the period in question atthe rate of P425 per annum, inasmuch as the final decree of this court in the action for specificperformance is conclusive against her right, and as the defendant corporation had notice of therights of the plaintiff under this contract of purchase, it can not be permitted that the corporationshould escape liability in this action by proving payment of rent to a person other than the trueowner.

With reference to the rate of which compensation should be estimated the trial court came to thefollowing conclusion:

As to the rate of the compensation, the plaintiff contends that the defendant corporationmaintained at leas one thousand head of cattle on the land and that the pasturage was of thevalue of forty centavos per head monthly, or P4,800 annually, for the whole tract. The courtcan not accept this view. It is rather improbable that 1,248 hectares of wild Mindoro landwould furnish sufficient pasturage for one thousand head of cattle during the entire year,and, considering the locality, the rate of forty centavos per head monthly seems too high.The evidence shows that after having recovered possession of the land the plaintiff rented itto the defendant corporation for fifty centavos per hectares annually, the tenant to pay the

taxes on the land, and this appears to be a reasonable rent. There is no reason to supposethat the land was worth more for grazing purposes during the period from 1909 to 1913, thanit was at the later period. Upon this basis the plaintiff is entitled to damages in the sum ofp2,497, and is under no obligation to reimburse the defendants for the land taxes paid byeither of them during the period the land was occupied by the defendant corporation. It maybe mentioned in this connection that the Lontok tract adjoining the land in question andcontaining over three thousand hectares appears to have been leased for only P1,000 ayear, plus the taxes.

From this it will be seen that the trial court estimated the rental value of the land for grazing purposesat 50 centavos per hectare per annum, and roughly adopted the period of four years as the time forwhich compensation at that rate should be made. As the court had already found that the defendant

was liable for these damages from June, 1, 1909, to May 1, 1914, or a period of four years andeleven months, there seems some ground for the contention made in the appellant's first assignmentof error that the court's computation was erroneous, even accepting the rule upon which thedamages were assessed, as it is manifest that at the rate of 50 centavos per hectare per annum, thedamages for four years and eleven months would be P3,090.

Notwithstanding this circumstance, we are of the opinion that the damages assessed are sufficient tocompensate the plaintiff for the use and occupation of the land during the whole time it was used.There is evidence in the record strongly tending to show that the wrongful use of the land by the


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defendant was not continuous throughout the year but was confined mostly to the reason when theforage obtainable on the land of the defendant corporation was not sufficient to maintain its cattle, forwhich reason it became necessary to allow them to go over to pasture on the land in question; and itis not clear that the whole of the land was used for pasturage at any time. Considerations of thischaracter probably led the trial court to adopt four years as roughly being the period during whichcompensation should be allowed. But whether this was advertently done or not, we see no sufficient

reason, in the uncertainty of the record with reference to the number of the cattle grazed and theperiod when the land was used, for substituting our guess for the estimate made by the trial court.

In the second cause of action stated in the complaint the plaintiff seeks to recover from thedefendant corporation the sum of P500,000, as damages, on the ground that said corporation, for itsown selfish purposes, unlawfully induced Teodorica Endencia to refrain from the performance of hercontract for the sale of the land in question and to withhold delivery to the plaintiff of the Torrens title,and further, maliciously and without reasonable cause, maintained her in her defense to the action ofspecific performance which was finally decided in favor of the plaintiff in this court. The cause ofaction here stated is based on liability derived from the wrongful interference of the defendant in theperformance of the contract between the plaintiff and Teodorica Endencia; and the large damageslaid in the complaint were, according to the proof submitted by the plaintiff, incurred as a result of acombination of circumstances of the following nature: In 1911, it appears, the plaintiff, as the ownerof the land which he had bought from Teodorica Endencia entered into a contract (Exhibit C) with S.B. Wakefield, of San Francisco, for the sale and disposal of said lands to a sugar growing and millingenterprise, the successful launching of which depended on the ability of Daywalt to get possessionof the land and the Torrens certificate of title. In order to accomplish this end, the plaintiff returned tothe Philippine Islands, communicated his arrangement to the defendant,, and made repeated effortsto secure the registered title for delivery in compliance with said agreement with Wakefield.Teodorica Endencia seems to have yielded her consent to the consummation of her contract, but theTorrens title was then in the possession of Padre Juan Labarga in Manila, who refused to deliver thedocument. Teodorica also was in the end contract with the plaintiff, with the result that the plaintiffwas kept out of possession until the Wakefield project for the establishment of a large sugar growingand milling enterprise fell through. In the light of what has happened in recent years in the sugarindustry, we feel justified in saying that the project above referred to, if carried into effect, must

inevitably have proved a great success.

The determination of the issue presented in this second cause of action requires a consideration oftwo points. The first is whether a person who is not a party to a contract for the sale of land makeshimself liable for damages to the vendee, beyond the value of the use and occupation, by colludingwith the vendor and maintaining him in the effort to resist an action for specific performance. Thesecond is whether the damages which the plaintiff seeks to recover under this head are too remoteand speculative to be the subject of recovery.

As preliminary to a consideration of the first of these questions, we deem it well it dispose of thecontention that the members of the defendants corporation, in advising and prompting TeodoricaEndencia not to comply with the contract of sale, were actuated by improper and malicious motives.The trial court found that this contention was not sustained, observing that while it was true that thecircumstances pointed to an entire sympathy on the part of the defendant corporation with the effortsof Teodorica Endencia to defeat the plaintiff's claim to the land, the fact that its officials may haveadvised her not to carry the contract into effect would not constitute actionable interference with suchcontract. It may be added that when one considers the hardship that the ultimate performance of thatcontract entailed on the vendor, and the doubt in which the issue was involved to the extent thatthe decision of the Court of the First Instance was unfavorable to the plaintiff and the Supreme Courtitself was divided the attitude of the defendant corporation, as exhibited in the conduct ofits procurador, Juan Labarga, and other members of the order of the Recollect Fathers, is notdifficult to understand. To our mind a fair conclusion on this feature of the case is that father Juan


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Labarga and his associates believed in good faith that the contract cold not be enforced and thatTeodorica would be wronged if it should be carried into effect. Any advice or assistance which theymay have given was, therefore, prompted by no mean or improper motive. It is not, in our opinion, tobe denied that Teodorica would have surrendered the documents of title and given possession of theland but for the influence and promptings of members of the defendants corporation. But we do notcredit the idea that they were in any degree influenced to the giving of such advice by the desire to

secure to themselves the paltry privilege of grazing their cattle upon the land in question to theprejudice of the just rights of the plaintiff.

The attorney for the plaintiff maintains that, by interfering in the performance of the contract inquestion and obstructing the plaintiff in his efforts to secure the certificate of tittle to the land, thedefendant corporation made itself a co-participant with Teodorica Endencia in the breach of saidcontract; and inasmuch as father Juan Labarga, at the time of said unlawful intervention between thecontracting parties, was fully aware of the existence of the contract (Exhibit C) which the plaintiff hadmade with S. B. Wakefield, of San Francisco, it is insisted that the defendant corporation is liable forthe loss consequent upon the failure of the project outlined in said contract.

In this connection reliance is placed by the plaintiff upon certain American and English decisions in

which it is held that a person who is a stranger to contract may, by an unjustifiable interference in theperformance thereof, render himself liable for the damages consequent upon non-performance. It issaid that the doctrine of these cases was recognized by this court in Gilchrist vs. Cuddy (29 Phil.Rep., 542); and we have been earnestly pressed to extend the rule there enunciated to the situationhere presente.

Somewhat more than half a century ago the English Court of the Queen's Bench saw its way clear topermit an action for damages to be maintained against a stranger to a contract wrongfully interferingin its performance. The leading case on this subject is Lumley vs. Gye ([1853], 2 El. & Bl., 216). Itthere appeared that the plaintiff, as manager of a theatre, had entered into a contract with MissJohanna Wagner, an opera singer,, whereby she bound herself for a period to sing in the plaintiff'stheatre and nowhere else. The defendant, knowing of the existence of this contract, and, as thedeclaration alleged, "maliciously intending to injure the plaintiff," enticed and produced Miss Wagner

to leave the plaintiff's employment. It was held that the plaintiff was entitled to recover damages. Theright which was here recognized had its origin in a rule, long familiar to the courts of the commonlaw, to the effect that any person who entices a servant from his employment is liable in damages tothe master. The master's interest in the service rendered by his employee is here considered as adistinct subject of juridical right. It being thus accepted that it is a legal wrong to break up a relationof personal service, the question now arose whether it is illegal for one person to interfere with anycontract relation subsisting between others. Prior to the decision of Lumley vs. Gye [supra] it hadbeen supposed that the liability here under consideration was limited to the cases of the enticementof menial servants, apprentices, and others to whom the English Statutes of Laborers wereapplicable. But in the case cited the majority of the judges concurred in the opinion that the principleextended to all cases of hiring. This doctrine was followed by the Court of Appeal in Bowen vs. Hall([1881], 6 Q. B., Div., 333); and in Temperton vs. Russell ([1893], Q. B., 715), it was held that theright of action for maliciously procuring a breach of contract is not confined to contracts for personalservices, but extends to contracts in general. In that case the contract which the defendant hadprocured to be breached was a contract for the supply of building material.

Malice in some form is generally supposed to be an essential ingredient in cases of interference withcontract relations. But upon the authorities it is enough if the wrong-doer, having knowledge of theexistence of the contract relations, in bad faith sets about to break it up. Whether his motive is tobenefit himself or gratify his spite by working mischief to the employer is immaterial. Malice in thesense of ill-will or spite is not es

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Autonomy of Contracts