SECOND DIVISION

DAISY B. TIU,
Petitioner,
G.R. No. 163512

- versus -

Present:

QUISUMBING, J., Chairperson,

CARPIO,
CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.

PLATINUM PLANS PHIL., INC.,

Respondent.

Promulgated:

February 28, 2007

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
QUISUMBING, J.:
For review on certiorari are the Decision[1] dated January 20, 2004 of the Court of
Appeals in CA-G.R. CV No. 74972, and its Resolution[2] dated May 4, 2004 denying
reconsideration. The Court of Appeals had affirmed the decision[3] dated February
28, 2002 of the Regional Trial Court (RTC) of Pasig City, Branch 261, in an action for
damages, ordering petitioner to pay respondent P100,000 as liquidated damages.

The relevant facts are as follows:

Respondent Platinum Plans Philippines, Inc. is a domestic corporation engaged in

the pre-need industry. From 1987 to 1989, petitioner Daisy B. Tiu was its Division
Marketing Director.
On January 1, 1993, respondent re-hired petitioner as Senior Assistant VicePresident and Territorial Operations Head in charge of its Hongkong and Asean
operations. The parties executed a contract of employment valid for five years.[4]

On September 16, 1995, petitioner stopped reporting for work. In November 1995,
she became the Vice-President for Sales of Professional Pension Plans, Inc., a
corporation engaged also in the pre-need industry.

Consequently, respondent sued petitioner for damages before the RTC of Pasig City,
Branch 261. Respondent alleged, among others, that petitioners employment with
Professional Pension Plans, Inc. violated the non-involvement clause in her contract
of employment, to wit:
8. NON INVOLVEMENT PROVISION The EMPLOYEE further undertakes that during
his/her engagement with EMPLOYER and in case of separation from the Company,
whether voluntary or for cause, he/she shall not, for the next TWO (2) years
thereafter, engage in or be involved with any corporation, association or entity,
whether directly or indirectly, engaged in the same business or belonging to the
same pre-need industry as the EMPLOYER. Any breach of the foregoing provision

shall render the EMPLOYEE liable to the EMPLOYER in the amount of One Hundred
Thousand Pesos (P100,000.00) for and as liquidated damages.[5]
Respondent thus prayed for P100,000 as compensatory damages; P200,000 as
moral damages; P100,000 as exemplary damages; and 25% of the total amount due
plus P1,000 per counsels court appearance, as attorneys fees.

Petitioner countered that the non-involvement clause was unenforceable for

being against public order or public policy: First, the restraint imposed was much
greater than what was necessary to afford respondent a fair and reasonable
protection. Petitioner contended that the transfer to a rival company was an
accepted practice in the pre-need industry. Since the products sold by the
companies were more or less the same, there was nothing peculiar or unique to
protect. Second, respondent did not invest in petitioners training or improvement.
At the time petitioner was recruited, she already possessed the knowledge and
expertise required in the pre-need industry and respondent benefited tremendously
from it. Third, a strict application of the non-involvement clause would amount to a
deprivation of petitioners right to engage in the only work she knew.

In upholding the validity of the non-involvement clause, the trial court ruled
that a contract in restraint of trade is valid provided that there is a limitation upon
either time or place. In the case of the pre-need industry, the trial court found the
two-year restriction to be valid and reasonable. The dispositive portion of the
decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and
against the defendant, ordering the latter to pay the following:
1. the amount of One Hundred Thousand Pesos (P100,000.00) for and as damages,
for the breach of the non-involvement provision (Item No. 8) of the contract of
employment;
2. costs of suit.
There being no sufficient evidence presented to sustain the grant of
attorneys fees, the Court deems it proper not to award any.
SO ORDERED.[6]
On appeal, the Court of Appeals affirmed the trial courts ruling. It reasoned that
petitioner entered into the contract on her own will and volition. Thus, she bound
herself to fulfill not only what was expressly stipulated in the contract, but also all
its consequences that were not against good faith, usage, and law. The appellate

court also ruled that the stipulation prohibiting non-employment for two years was
valid and enforceable considering the nature of respondents business.
Petitioner moved for reconsideration but was denied. Hence, this appeal by
certiorari where petitioner alleges that the Court of Appeals erred when:

A.
[IT SUSTAINED] THE VALIDITY OF THE NON-INVOLVEMENT CLAUSE IN
PETITIONERS CONTRACT CONSIDERING THAT THE PERIOD FIXED THEREIN IS VOID
FOR BEING OFFENSIVE TO PUBLIC POLICY
B.
[IT SUSTAINED] THE AWARD OF LIQUIDATED DAMAGES CONSIDERING THAT IT
BEING IN THE NATURE OF A PENALTY THE SAME IS EXCESSIVE, INIQUITOUS OR
UNCONSCIONABLE[7]
Plainly stated, the core issue is whether the non-involvement clause is valid.

Petitioner avers that the non-involvement clause is offensive to public policy since
the restraint imposed is much greater than what is necessary to afford respondent a
fair and reasonable protection. She adds that since the products sold in the preneed industry are more or less the same, the transfer to a rival company is
acceptable. Petitioner also points out that respondent did not invest in her training
or improvement. At the time she joined respondent, she already had the knowledge
and expertise required in the pre-need industry. Finally, petitioner argues that a
strict application of the non-involvement clause would deprive her of the right to
engage in the only work she knows.

Respondent counters that the validity of a non-involvement clause has been

sustained by the Supreme Court in a long line of cases. It contends that the
inclusion of the two-year non-involvement clause in petitioners contract of
employment was reasonable and needed since her job gave her access to the
companys confidential marketing strategies. Respondent adds that the noninvolvement clause merely enjoined her from engaging in pre-need business akin to
respondents within two years from petitioners separation from respondent. She
had not been prohibited from marketing other service plans.

As early as 1916, we already had the occasion to discuss the validity of a noninvolvement clause. In Ferrazzini v. Gsell,[8] we said that such clause was
unreasonable restraint of trade and therefore against public policy. In Ferrazzini, the
employee was prohibited from engaging in any business or occupation in the
Philippines for a period of five years after the termination of his employment
contract and must first get the written permission of his employer if he were to do
so. The Court ruled that while the stipulation was indeed limited as to time and
space, it was not limited as to trade. Such prohibition, in effect, forces an employee
to leave the Philippines to work should his employer refuse to give a written
permission.

In G. Martini, Ltd. v. Glaiserman,[9] we also declared a similar stipulation as void for

being an unreasonable restraint of trade. There, the employee was prohibited from
engaging in any business similar to that of his employer for a period of one year.
Since the employee was employed only in connection with the purchase and export
of abaca, among the many businesses of the employer, the Court considered the
restraint too broad since it effectively prevented the employee from working in any
other business similar to his employer even if his employment was limited only to
one of its multifarious business activities.

However, in Del Castillo v. Richmond,[10] we upheld a similar stipulation as legal,

reasonable, and not contrary to public policy. In the said case, the employee was
restricted from opening, owning or having any connection with any other drugstore
within a radius of four miles from the employers place of business during the time
the employer was operating his drugstore. We said that a contract in restraint of
trade is valid provided there is a limitation upon either time or place and the
restraint upon one party is not greater than the protection the other party requires.
Finally, in Consulta v. Court of Appeals,[11] we considered a non-involvement clause
in accordance with Article 1306[12] of the Civil Code. While the complainant in that
case was an independent agent and not an employee, she was prohibited for one
year from engaging directly or indirectly in activities of other companies that
compete with the business of her principal. We noted therein that the restriction did
not prohibit the agent from engaging in any other business, or from being
connected with any other company, for as long as the business or company did not
compete with the principals business. Further, the prohibition applied only for one
year after the termination of the agents contract and was therefore a reasonable
restriction designed to prevent acts prejudicial to the employer.

Conformably then with the aforementioned pronouncements, a non-involvement

clause is not necessarily void for being in restraint of trade as long as there are
reasonable limitations as to time, trade, and place.

In this case, the non-involvement clause has a time limit: two years from the time
petitioners employment with respondent ends. It is also limited as to trade, since it
only prohibits petitioner from engaging in any pre-need business akin to
respondents.

More significantly, since petitioner was the Senior Assistant Vice-President and
Territorial Operations Head in charge of respondents Hongkong and Asean
operations, she had been privy to confidential and highly sensitive marketing
strategies of respondents business. To allow her to engage in a rival business soon
after she leaves would make respondents trade secrets vulnerable especially in a
highly competitive marketing environment. In sum, we find the non-involvement
clause not contrary to public welfare and not greater than is necessary to afford a
fair and reasonable protection to respondent.[13]
In any event, Article 1306 of the Civil Code provides that parties to a contract may
establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public
order, or public policy.

Article 1159[14] of the same Code also provides that obligations arising from
contracts have the force of law between the contracting parties and should be
complied with in good faith. Courts cannot stipulate for the parties nor amend their
agreement where the same does not contravene law, morals, good customs, public
order or public policy, for to do so would be to alter the real intent of the parties,
and would run contrary to the function of the courts to give force and effect thereto.
[15] Not being contrary to public policy, the non-involvement clause, which
petitioner and respondent freely agreed upon, has the force of law between them,
and thus, should be complied with in good faith.[16]

Thus, as held by the trial court and the Court of Appeals, petitioner is bound to pay
respondent P100,000 as liquidated damages. While we have equitably reduced
liquidated damages in certain cases,[17] we cannot do so in this case, since it
appears that even from the start, petitioner had not shown the least intention to
fulfill the non-involvement clause in good faith.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January
20, 2004, and the Resolution dated May 4, 2004, of the Court of Appeals in CA-G.R.
CV No. 74972, are AFFIRMED. Costs against petitioner.

SO ORDERED.

LEONARDO A. QUISUMBING
Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice
CONCHITA CARPIO MORALES
Associate Justice
DANTE O. TINGA
Associate Justice
PRESBITERO J. VELASCO, JR.
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the Courts
Division.

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairpersons Attestation, I certify that the conclusions in the above Decision had
been reached in consultation before the case was assigned to the writer of the
opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

[1]
Rollo, pp. 58-64. Penned by Associate Justice Delilah Vidallon-Magtolis, with
Associate Justices Jose L. Sabio, Jr. and Hakim S. Abdulwahid concurring.
[2]

Id. at 66.

[3]

Records, Vol. I, pp. 213-219.

[4]

Id. at 175-178.

[5]

Id. at 176.

[6]

Id. at 219.

[7]

Rollo, p. 44.

[8]

34 Phil. 697, 714 (1916).

[9]

39 Phil. 120, 125 (1918).

[10]

45 Phil. 679, 683 (1924).

[11]

G.R. No. 145443, March 18, 2005, 453 SCRA 732, 745.

[12]
Art. 1306. The contracting parties may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary
to law, morals, good customs, public order, or public policy.
[13]

See Ollendorff v. Abrahamsom, 38 Phil. 585, 592 (1918).

[14]
Art. 1159. Obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith.
[15]
Philippine Communications Satellite Corporation v. Globe Telecom, Inc., G.R.
Nos. 147324 & 147334, May 25, 2004, 429 SCRA 153, 164.
[16]
Duncan Association of Detailman-PTGWO v. Glaxo Wellcome Philippines, Inc.,
G.R. No. 162994, September 17, 2004, 438 SCRA 343, 356.

[17]
Art. 2226. Liquidated damages are those agreed upon by the parties to a
contract, to be paid in case of breach thereof.
Art. 2227. Liquidated damages, whether intended as an indemnity or a
penalty, shall be equitably reduced if they are iniquitous or unconscionable.

THIRD DIVISION

[G.R. No. 134692. August 1, 2000]

ELISEO FAJARDO, JR., and MARISSA FAJARDO, petitioners, vs. FREEDOM TO BUILD,
INC., respondent.

DECISION

VITUG, J.:

Freedom To Build, Incorporated, an owner-developer and seller of low-cost housing,

sold to petitioner-spouses, a house and lot designated Lot No. 33, Block 14, of the
De la Costa Homes in Barangka, Marikina, Metro Manila. The Contract to Sell
executed between the parties, contained a Restrictive Covenant providing certain
prohibitions, to wit:[1]

"Easements. For the good of the entire community, the homeowner must observe a
two-meter easement in front. No structure of any kind (store, garage, bodega, etc.)
may be built on the front easement.

"x x x.............................x x x.............................x x x

"Upward expansion. A second storey is not prohibited. But the second storey
expansion must be placed above the back portion of the house and should not
extend forward beyond the apex of the original building.

"x x x.............................x x x.............................x x x

"Front expansion: 2nd Storey: No unit may be extended in the front beyond the line
as designed and implemented by the developer in the 60 sq. m. unit. In other
words, the 2nd floor expansion, in front, is 6 meters back from the front property
line and 4 meters back from the front wall of the house, just as provided in the 60
sq. m. units."[2]

The above restrictions were also contained in Transfer Certificate of Title No. N115384 covering the lot issued in the name of petitioner-spouses.

The controversy arose when petitioners, despite repeated warnings from

respondent, extended the roof of their house to the property line and expanded the
second floor of their house to a point directly above the original front wall.[3]
Respondent filed before the Regional Trial Court, National Capital Judicial Region,
Branch 261, Pasig City, an action to demolish the unauthorized structures.

After trial, judgment was rendered against petitioners; thus:

"WHEREFORE, premises considered, defendant spouses Eliseo B. Fajardo, Jr., and

Marissa F. Fajardo are hereby directed to immediately demolish and remove the

extension of their expanded housing unit that exceeds the limitations imposed by
the Restrictive Covenant, otherwise the Branch Sheriff of this Court shall execute
this decision at the expense of the defendants.

"As to damages and attorney's fees, it appearing from the records of this case that
no evidence to sustain the same was adduced by either of the parties, the Court
deems it proper not to award any.

"SO ORDERED."[4]

On appeal to it, the Court of Appeals affirmed the decision of the trial court.

In their petition for review to this Court, the spouses contest the judgment of the
courts below. Adjacent owners reportedly have no objection to the construction, and
have even expressed interest in undertaking a similar expansion in their respective
residences. Moreover, the couple's two children, a son and a daughter, might soon
get married and then share, with their families, living quarters with petitioners. The
latter also assail the personality of private respondent to question the construction
which have effectively relinquished its ownership, right or interest over the
subdivision upon the execution of the Deed of Absolute Sale in favor of the
individual homeowners. Per the contract between Freedom to Build Incorporated
and the De la Costa Low Income Project Homeowners' Association (hereinafter
homeowners' association), petitioners aver, the enforcement of the prohibitions
contained in the "Restrictive Covenant" originally residing on respondent is now
lodged in the homeowners' association. Petitioners maintain that it is incumbent
upon the homeowners' association, not on respondent, to enforce compliance with
the provisions of the covenant.

A perusal of the provisions of the covenant would show that the restrictions therein
imposed were intended -

"For the protection and benefit of the De La Costa Low Income Housing Project, and
of all the persons who may now, or hereafter become owners of any part of the
project, and as part of the consideration for the conveyance of the housing unit,
these restrictions are promulgated in order that; the intents and purposes for which
the project was designed shall be upheld; to wit: subsequent duly approved sale

and assignments of housing units shall be made only to low income families; a
certain level of privacy shall be observed; a community spirit shall be fostered; and
an undisturbed possession and occupancy at the homeowners shall be
maintained."[5]

Restrictive covenants are not, strictly speaking, synonymous with easements. While
it may be correct to state that restrictive covenants on the use of land or the
location or character of buildings or other structures thereon may broadly be said to
create easements or rights, it can also be contended that such covenants, being
limitations on the manner in which one may use his own property,[6] do not result
in true easements,[7] but a case of servitudes (burden), sometimes characterized to
be negative easements or reciprocal negative easements. Negative easement is the
most common easement created by covenant or agreement whose effect is to
preclude the owner of the land from doing an act, which, if no easement existed, he
would be entitled to do.[8]

Courts which generally view restrictive covenants with disfavor for being a
restriction on the use of one's property, have, nevertheless, sustained them[9]
where the covenants are reasonable,[10] not contrary to public policy,[11] or to law,
[12] and not in restraint of trade.[13] Subject to these limitations, courts enforce
restrictions to the same extent that will lend judicial sanction to any other valid
contractual relationship.[14] In general, frontline restrictions on constructions have
been held to be valid stipulations.[15]

The provisions in a restrictive covenant prescribing the type of the building to be

erected are crafted not solely for the purpose of creating easements, generally of
light and view, nor as a restriction as to the type of construction,[16] but may also
be aimed as a check on the subsequent uses of the building[17] conformably with
what the developer originally might have intended the stipulations to be. In its
Memorandum, respondent states in arguing for the validity of the restrictive
covenant that the -

"x x x restrictions are not without specific purpose. In a low cost-socialized housing,
it is of public knowledge that owners-developers are constrained to build as many
number of houses on a limited land area precisely to accommodate marginalized lot
buyers, providing as much as possible the safety, aesthetic and decent living
condition by controlling overcrowding. Such project has been designed to
accommodate at least 100 families per hectare."[18]

There appears to be no cogent reasons for not upholding restrictive covenants

aimed to promote aesthetics, health, and privacy or to prevent overcrowding.

Viewed accordingly, the statement of petitioners that their immediate neighbors

have not opposed the construction is unavailing to their cause, the subject
restrictive covenant not being intended for the benefit of adjacent owners but to
prescribe the uses of the building, i.e., to ensure, among other things, that the
structures built on De la Costa Homes Subdivision would prevent overcrowding and
promote privacy among subdivision dwellers. The argument then of petitioners that
expansion is necessary in order to accommodate the individual families of their two
children must fail for like reason. Nor can petitioners claim good faith; the restrictive
covenants are explicitly written in the Contract To Sell and annotated at the back of
the Transfer Certificate of Title.

Petitioners raise the issue of the personality of respondent to enforce the provisions
of the covenant. Broadly speaking, a suit for equitable enforcement of a restrictive
covenant can only be made by one for whose benefit it is intended.[19] It is not thus
normally enforceable by one who has no right nor interest in the land for the benefit
of which the restriction has been imposed.[20] Thus, a developer of a subdivision
can enforce restrictions, even as against remote grantees of lots, only if he retains
part of the land.[21] There would have been merit in the argument of petitioners that respondent, having relinquished ownership of the subdivision to the
homeowners, is precluded from claiming any right or interest on the same property
- had not the homeowners' association, confirmed by its board of directors, allowed
respondent to enforce the provisions of the restrictive covenant.

Finally, petitioners argue that for lack of a specific provision, prescribing the penalty
of demolition in the "Restrictive Covenant" in the event of a breach thereof, the
prayer of respondent to demolish the structure should fail. This argument has no
merit; Article 1168 of the New Civil Code states:

"When the obligation consists in not doing and the obligor does what has been
forbidden him, it shall be undone at his expense."

This Court is not unaware of its ruling in Ayala Corporation vs. Ray Burton
Development Corporation,[22] which has merely adjudged the payment of damages
in lieu of demolition. In the aforementioned case, however, the elaborate
mathematical formula for the determination of compensatory damages which takes
into account the current construction cost index during the immediately preceding 5
years based on the weighted average of wholesale price and wage indices of the
National Census and Statistics Office and the Bureau of Labor Statistics is explicitly
provided for in the Deed of Restrictions entered into by the parties. This unique and
peculiar circumstance, among other strong justifications therein mentioned, is not
extant in the case at bar.

In sum, the Court holds that -

(1)....The provisions of the Restrictive Covenant are valid;

(2)....Petitioners must be held to be bound thereby; and

(3)....Since the extension constructed exceeds the floor area limits of the Restrictive
Covenant, petitioner-spouses can be required to demolish the structure to the
extent that it exceeds the prescribed floor area limits.

WHEREFORE, the assailed decision, dated 13 July 1998, of the Court of Appeals in
CA-G.R. CV No. 50085, sustaining that of the court a quo, is AFFIRMED. No costs.

SO ORDERED.

Melo, (Chairman), Panganiban, Purisima, and Gonzaga-Reyes, JJ., concur.

[1] Restrictive Covenants: Apendix, Records, p. 11.

[2] Records, pp. 9-11.

[3] By mutual agreement between the Homeowners Association and the developer,
the restriction was relaxed from 4-meters to a 2-meter setback.
[4] Records, p. 191.
[5] Memorandum for respondent, Rollo, pp. 62-63.
[6] Kutchinski vs. Thompson, 101 NJ Eq. 649, 138 A569.
[7] Moses vs. Hazen, 63 App DC 104, 69 F 2d 842, 98 ALR 386.
[8] Wilson vs. Owen (Mo) 261 SW2d 19.
[9] Firth vs. Marovich, 160 Cal 257, 116 P729.
[10] Townsend vs. Allen, 114 Cal App 2d 291, 250 P2d 292, 39 ALR 2d 1108.
[11] Fusha vs. Dacono Town Site Co. 60 Colo 315, 153 P226.
[12] Supra, Townsend.
[13] Whitney vs. Union R. Co. 11 Gray (Mass) 359.
[14] Hartman vs. Wells, 257 III 167, 100 NE 500. In a notable number of cases,
restrictions imposed on property conveyed were declared invalid for having
contravened some constitutional or statutory provision, or where found to be of no
benefit to anyone and a serious interference in the proper development of the
community (Harris vs. Pease, 135 Conn 535, 66 A2d 590, 10 ALR 2d 819) and where
it amounted to a prohibition of the use of property. (Baker vs. Henderson, 137 Tex
266, 153 SW2d 465.)
[15] Bagiano vs. Harrow, 247 Mich 481 226 NW 262.
[16] Hutchinson vs. Ulrich, 145 III 336, 34 NE 556.
[17] Id, See also Schwarzchild vs. Welborne 186 Va 1052, 45 SE 2d 152.
[18] Memorandum for Respondent, Rollo, p. 62.
[19] Aull vs. Kraft (Tex Civ App) 286 SW2d 460.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-24670 December 14, 1979

ORTIGAS & CO., LIMITED PARTNERSHIP, plaintiff-appellant,

vs.
FEATI BANK AND TRUST CO., defendant-appellee.
Ramirez & Ortigas for appellant.
Taada, Teehankee & Carreon for appellee.

SANTOS, J.:
An appeal interposed on June 23, 1965 by plaintiff-appellant, Ortigas & Co., Limited Partnership,
from the decision of the Court of First Instance of Rizal, Branch VI, at Pasig, Hon. Andres Reyes
presiding, which dismissed its complaint in Civil Case No. 7706, entitled, "Ortigas & Company,
Limited Partnership, plaintiff, v. Feati Bank and Trust Company, defendant," for lack of merit.
The following facts a reproduction of the lower court's findings, which, in turn, are based on a
stipulation of facts entered into by the parties are not disputed. Plaintiff (formerly known as "Ortigas,
Madrigal y Cia") is a limited partnership and defendant Feati Bank and Trust Co., is a corporation
duly organized and existing in accordance with the laws of the Philippines. Plaintiff is engaged in real
estate business, developing and selling lots to the public, particularly the Highway Hills Subdivision
along Epifanio de los Santos Avenue, Mandaluyong, Rizal. 1
On March 4, 1952, plaintiff, as vendor, and Augusto Padilla y Angeles and Natividad Angeles, as
vendees, entered into separate agreements of sale on installments over two parcels of land, known
as Lots Nos. 5 and 6, Block 31, of the Highway Hills Subdivision, situated at Mandaluyong, Rizal. On
July 19, 1962, the said vendees transferred their rights and interests over the aforesaid lots in favor
of one Emma Chavez. Upon completion of payment of the purchase price, the plaintiff executed the
corresponding deeds of sale in favor of Emma Chavez. Both the agreements (of sale on installment)
and the deeds of sale contained the stipulations or restrictions that:
1. The parcel of land subject of this deed of sale shall be used the Buyer exclusively
for residential purposes, and she shall not be entitled to take or remove soil, stones
or gravel from it or any other lots belonging to the Seller.
2. All buildings and other improvements (except the fence) which may be constructed
at any time in said lot must be, (a) of strong materials and properly painted, (b)
provided with modern sanitary installations connected either to the public sewer or to
an approved septic tank, and (c) shall not be at a distance of less than two (2) meters
from its boundary lines. 2
The above restrictions were later annotated in TCT Nos. 101509 and 101511 of the Register of
Deeds of Rizal, covering the said lots and issued in the name of Emma Chavez. 3
Eventually, defendant-appellee acquired Lots Nos. 5 and 6, with TCT Nos. 101613 and 106092
issued in its name, respectively and the building restrictions were also annotated
therein. 4 Defendant-appellee bought Lot No. 5 directly from Emma Chavez, "free from all liens and
encumbrances as stated in Annex 'D', 5 while Lot No. 6 was acquired from Republic Flour Mills through a
"Deed of Exchange," Annex "E". 6 TCT No. 101719 in the name of Republic Flour Mills likewise contained
the same restrictions, although defendant-appellee claims that Republic Flour Mills purchased the said

Lot No. 6 "in good faith. free from all liens and encumbrances," as stated in the Deed of Sale, Annex
"F" 7 between it and Emma Chavez.

Plaintiff-appellant claims that the restrictions annotated on TCT Nos. 101509, 101511, 101719,
101613, and 106092 were imposed as part of its general building scheme designed for the
beautification and development of the Highway Hills Subdivision which forms part of the big landed
estate of plaintiff-appellant where commercial and industrial sites are also designated or
established. 8
Defendant-appellee, upon the other hand, maintains that the area along the western part of Epifanio
de los Santos Avenue (EDSA) from Shaw Boulevard to Pasig River, has been declared a
commercial and industrial zone, per Resolution No. 27, dated February 4, 1960 of the Municipal
Council of Mandaluyong, Rizal. 9 It alleges that plaintiff-appellant 'completely sold and transferred to
third persons all lots in said subdivision facing Epifanio de los Santos Avenue" 10 and the subject lots
thereunder were acquired by it "only on July 23, 1962 or more than two (2) years after the area ... had
been declared a commercial and industrial zone ... 11
On or about May 5, 1963, defendant-appellee began laying the foundation and commenced the
construction of a building on Lots Nos. 5 and 6, to be devoted to banking purposes, but which
defendant-appellee claims could also be devoted to, and used exclusively for, residential purposes.
The following day, plaintiff-appellant demanded in writing that defendant-appellee stop the
construction of the commerical building on the said lots. The latter refused to comply with the
demand, contending that the building was being constructed in accordance with the zoning
regulations, defendant-appellee having filed building and planning permit applications with the
Municipality of Mandaluyong, and it had accordingly obtained building and planning permits to
proceed with the construction. 12
On the basis of the foregoing facts, Civil Case No. 7706, supra, was submitted in the lower court for
decision. The complaint sought, among other things, the issuance of "a writ of preliminary
injunction ... restraining and enjoining defendant, its agents, assigns, and those acting on its or their
behalf from continuing or completing the construction of a commercial bank building in the
premises ... involved, with the view to commanding the defendant to observe and comply with the
building restrictions annotated in the defendant's transfer certificate of title."
In deciding the said case, the trial court considered, as the fundamental issue, whether or not the
resolution of the Municipal Council of Mandaluyong declaring Lots Nos. 5 and 6, among others, as
part of the commercial and industrial zone of the municipality, prevailed over the building restrictions
imposed by plaintiff-appellant on the lots in question. 13 The records do not show that a writ of
preliminary injunction was issued.
The trial court upheld the defendant-appellee and dismissed the complaint, holding that the subject
restrictions were subordinate to Municipal Resolution No. 27, supra. It predicated its conclusion on
the exercise of police power of the said municipality, and stressed that private interest should "bow
down to general interest and welfare. " In short, it upheld the classification by the Municipal Council
of the area along Epifanio de los Santos Avenue as a commercial and industrial zone, and held that
the same rendered "ineffective and unenforceable" the restrictions in question as against defendantappellee. 14 The trial court decision further emphasized that it "assumes said resolution to be valid,
considering that there is no issue raised by either of the parties as to whether the same is null and void. 15
On March 2, 1965, plaintiff-appellant filed a motion for reconsideration of the above decision, 16 which
motion was opposed by defendant-appellee on March 17, 1965. 17 It averred, among others, in the motion
for reconsideration that defendant- appellee "was duty bound to comply with the conditions of the contract

of sale in its favor, which conditions were duly annotated in the Transfer Certificates of Title issued in her
(Emma Chavez) favor." It also invited the trial court's attention to its claim that the Municipal Council had
(no) power to nullify the contractual obligations assumed by the defendant corporation." 18

The trial court denied the motion for reconsideration in its order of March 26, 1965.

19

On April 2, 1965 plaintiff-appellant filed its notice of appeal from the decision dismissing the
complaint and from the order of March 26, 1965 denying the motion for reconsideration, its record on
appeal, and a cash appeal bond." 20 On April 14, the appeal was given due course 21 and the records of
the case were elevated directly to this Court, since only questions of law are raised. 22
Plaintiff-appellant alleges in its brief that the trial court erred
I. When it sustained the view that Resolution No. 27, series of 1960 of the Municipal
Council of Mandaluyong, Rizal declaring Lots Nos. 5 and 6, among others, as part of
the commercial and industrial zone, is valid because it did so in the exercise of its
police power; and
II. When it failed to consider whether or not the Municipal Council had the power to
nullify the contractual obligations assumed by defendant-appellee and when it did not
make a finding that the building was erected along the property line, when it should
have been erected two meters away from said property line. 23
The defendant-appellee submitted its counter-assignment of errors. In this connection, We already
had occasion to hold in Relativo v. Castro 24 that "(I)t is not incumbent on the appellee, who occupies a
purely defensive position, and is seeking no affirmative relief, to make assignments of error, "
The only issues to be resolved, therefore, are: (1) whether Resolution No. 27 s-1960 is a valid
exercise of police power; and (2) whether the said Resolution can nullify or supersede the
contractual obligations assumed by defendant-appellee.
1. The contention that the trial court erred in sustaining the validity of Resolution No. 27 as an
exercise of police power is without merit. In the first place, the validity of the said resolution was
never questioned before it. The rule is that the question of law or of fact which may be included in
the appellant's assignment of errors must be those which have been raised in the court below, and
are within the issues framed by the parties. 25 The object of requiring the parties to present all questions
and issues to the lower court before they can be presented to the appellate court is to enable the lower
court to pass thereon, so that the appellate court upon appeal may determine whether or not such ruling
was erroneous. The requirement is in furtherance of justice in that the other party may not be taken by
surprise.26 The rule against the practice of blowing "hot and cold" by assuming one position in the trial
court and another on appeal will, in the words of Elliot, prevent deception. 27 For it is well-settled that
issues or defenses not raised 28 or properly litigated 29 or pleaded 30 in the Court below cannot be raised or
entertained on appeal.
In this particular case, the validity of the resolution was admitted at least impliedly, in the stipulation
of facts below. when plaintiff-appellant did not dispute the same. The only controversy then as stated
by the trial court was whether or not the resolution of the Municipal Council of Mandaluyong ... which
declared lots Nos. 4 and 5 among others, as a part of the commercial and industrial zone of the
municipality, prevails over the restrictions constituting as encumbrances on the lots in
question. 31 Having admitted the validity of the subject resolution below, even if impliedly, plaintiffappellant cannot now change its position on appeal.

But, assuming arguendo that it is not yet too late in the day for plaintiff-appellant to raise the issue of
the invalidity of the municipal resolution in question, We are of the opinion that its posture is
unsustainable. Section 3 of R.A. No. 2264, otherwise known as the Local Autonomy
Act," 32 empowers a Municipal Council "to adopt zoning and subdivision ordinances or regulations"; 33 for
the municipality. Clearly, the law does not restrict the exercise of the power through an ordinance.
Therefore, granting that Resolution No. 27 is not an ordinance, it certainly is a regulatory measure within
the intendment or ambit of the word "regulation" under the provision. As a matter of fact the same section
declares that the power exists "(A)ny provision of law to the contrary notwithstanding ... "
An examination of Section 12 of the same law 34 which prescribes the rules for its interpretation likewise
reveals that the implied power of a municipality should be "liberally construed in its favor" and that "(A)ny
fair and reasonable doubt as to the existence of the power should be interpreted in favor of the local
government and it shall be presumed to exist." The same section further mandates that the general
welfare clause be liberally interpreted in case of doubt, so as to give more power to local governments in
promoting the economic conditions, social welfare and material progress of the people in the community.
The only exceptions under Section 12 are existing vested rights arising out of a contract between "a
province, city or municipality on one hand and a third party on the other," in which case the original terms
and provisions of the contract should govern. The exceptions, clearly, do not apply in the case at bar.
2. With regard to the contention that said resolution cannot nullify the contractual obligations
assumed by the defendant-appellee referring to the restrictions incorporated in the deeds of sale
and later in the corresponding Transfer Certificates of Title issued to defendant-appellee it should
be stressed, that while non-impairment of contracts is constitutionally guaranteed, the rule is not
absolute, since it has to be reconciled with the legitimate exercise of police power, i.e., "the power to
prescribe regulations to promote the health, morals, peace, education, good order or safety and
general welfare of the people. 35 Invariably described as "the most essential, insistent, and illimitable of
powers" 36 and "in a sense, the greatest and most powerful attribute of government, 37 the exercise of the
power may be judicially inquired into and corrected only if it is capricious, 'whimsical, unjust or
unreasonable, there having been a denial of due process or a violation of any other applicable
constitutional guarantee. 38 As this Court held through Justice Jose P. Bengzon in Philippine Long
Distance Company vs. City of Davao, et al. 39 police power "is elastic and must be responsive to various
social conditions; it is not, confined within narrow circumscriptions of precedents resting on past
conditions; it must follow the legal progress of a democratic way of life." We were even more emphatic
inVda. de Genuino vs. The Court of Agrarian Relations, et al., 40 when We declared: "We do not see why
public welfare when clashing with the individual right to property should not be made to prevail through
the state's exercise of its police power.
Resolution No. 27, s-1960 declaring the western part of highway 54, now E. de los Santos Avenue
(EDSA, for short) from Shaw Boulevard to the Pasig River as an industrial and commercial zone,
was obviously passed by the Municipal Council of Mandaluyong, Rizal in the exercise of police
power to safeguard or promote the health, safety, peace, good order and general welfare of the
people in the locality, Judicial notice may be taken of the conditions prevailing in the area, especially
where lots Nos. 5 and 6 are located. The lots themselves not only front the highway; industrial and
commercial complexes have flourished about the place. EDSA, a main traffic artery which runs
through several cities and municipalities in the Metro Manila area, supports an endless stream of
traffic and the resulting activity, noise and pollution are hardly conducive to the health, safety or
welfare of the residents in its route. Having been expressly granted the power to adopt zoning and
subdivision ordinances or regulations, the municipality of Mandaluyong, through its Municipal
'council, was reasonably, if not perfectly, justified under the circumstances, in passing the subject
resolution.
The scope of police power keeps expanding as civilization advances, stressed this Court, speaking
thru Justice Laurel in the leading case of Calalang v. Williams et al., 41 Thus-

As was said in the case of Dobbins v. Los Angeles (195 US 223, 238 49 L. ed.
169), 'the right to exercise the police power is a continuing one, and a business
lawful today may in the future, because of changed situation, the growth of
population or other causes, become a menace to the public health and welfare, and
be required to yield to the public good.' And in People v. Pomar (46 Phil. 440), it was
observed that 'advancing civilization is bringing within the scope of police power of
the state today things which were not thought of as being with in such power
yesterday. The development of civilization), the rapidly increasing population, the
growth of public opinion, with an increasing desire on the part of the masses and of
the government to look after and care for the interests of the individuals of the state,
have brought within the police power many questions for regulation which formerly
were not so considered. 42 (Emphasis, supplied.)
Thus, the state, in order to promote the general welfare, may interfere with personal liberty, with
property, and with business and occupations. Persons may be subjected to all kinds of restraints and
burdens, in order to secure the general comfort health and prosperity of the state 43 and to this
fundamental aim of our Government, the rights of the individual are subordinated. 44
The need for reconciling the non-impairment clause of the Constitution and the valid exercise of
police power may also be gleaned from Helvering v. Davis 45 wherein Mr. Justice Cardozo, speaking for
the Court, resolved the conflict "between one welfare and another, between particular and general, thus

Nor is the concept of the general welfare static. Needs that were narrow or parochial
a century ago may be interwoven in our day with the well-being of the nation What is
critical or urgent changes with the times. 46
The motives behind the passage of the questioned resolution being reasonable, and it being a "
legitimate response to a felt public need," 47 not whimsical or oppressive, the non-impairment of
contracts clause of the Constitution will not bar the municipality's proper exercise of the power. Now Chief
Justice Fernando puts it aptly when he declared: "Police power legislation then is not likely to succumb to
the challenge that thereby contractual rights are rendered nugatory." 48
Furthermore, We restated in Philippine American Life Ins. Co. v. Auditor General 49 that laws and
reservation of essential attributes of sovereign power are read into contracts agreed upon by the parties.
Thus
Not only are existing laws read into contracts in order to fix obligations as between
the parties, butthe reservation of essential attributes of sovereign power is also read
into contracts as a postulate of the legal order. The policy of protecting contracts
against impairments presupposes the maintenance of a government by virtue of
which contractual relations are worthwhile a government which retains adequate
authority to secure the peace and good order of society.
Again, We held in Liberation Steamship Co., Inc. v. Court of Industrial Relations, 50 through Justice
J.B.L. Reyes, that ... the law forms part of, and is read into, every contract, unless clearly excluded
therefrom in those cases where such exclusion is allowed." The decision in Maritime Company of the
Philippines v. Reparations Commission, 51 written for the Court by Justice Fernando, now Chief Justice,
restates the rule.
One last observation. Appellant has placed unqualified reliance on American jurisprudence and
authorities 52 to bolster its theory that the municipal resolution in question cannot nullify or supersede the

agreement of the parties embodied in the sales contract, as that, it claims, would impair the obligation of
contracts in violation of the Constitution. Such reliance is misplaced.

In the first place, the views set forth in American decisions and authorities are not per se controlling
in the Philippines, the laws of which must necessarily be construed in accordance with the intention
of its own lawmakers and such intent may be deduced from the language of each law and the
context of other local legislation related thereto. 53 and Burgess, et al v. Magarian, et al., 55 two Of the
cases cited by plaintiff-appellant, lend support to the conclusion reached by the trial court, i.e. that the
municipal resolution supersedes/supervenes over the contractual undertaking between the parties. Dolan
v. Brown, states that "Equity will not, as a rule, enforce a restriction upon the use of property by
injunction where the property has so changed in character and environment as to make it unfit or
unprofitable for use should the restriction be enforced, but will, in such a case, leave the complainant to
whatever remedy he may have at law. 56 (Emphasis supplied.) Hence, the remedy of injunction in Dolan
vs. Brown was denied on the specific holding that "A grantor may lawfully insert in his deed conditions or
restrictions which are not against public policy and do not materially impair the beneficial enjoyment of the
estate. 57 Applying the principle just stated to the present controversy, We can say that since it is now
unprofitable, nay a hazard to the health and comfort, to use Lots Nos. 5 and 6 for strictly residential
purposes, defendants- appellees should be permitted, on the strength of the resolution promulgated
under the police power of the municipality, to use the same for commercial purposes. In Burgess v.
Magarian et al. it was, held that "restrictive covenants running with the land are binding on all subsequent
purchasers ... " However, Section 23 of the zoning ordinance involved therein contained
a proviso expressly declaring that the ordinance was not intended "to interfere with or abrogate or annul
any easements, covenants or other agreement between parties." 58 In the case at bar, no such proviso is
found in the subject resolution.
It is, therefore, clear that even if the subject building restrictions were assumed by the defendantappellee as vendee of Lots Nos. 5 and 6, in the corresponding deeds of sale, and later, in Transfer
Certificates of Title Nos. 101613 and 106092, the contractual obligations so assumed cannot prevail
over Resolution No. 27, of the Municipality of Mandaluyong, which has validly exercised its police
power through the said resolution. Accordingly, the building restrictions, which declare Lots Nos. 5
and 6 as residential, cannot be enforced.
IN VIEW OF THE FOREGOING, the decision appealed from, dismissing the complaint, is hereby
AFFIRMED. "without pronouncement as to costs.
SO ORDERED.

Makasiar, Antonio, Concepcion, Jr., Fernandez, Guerrero, De Castro and Melencio-Herrera, JJ.,
concur.
Teehankee * and Aquino,JJ., took no part.
Separate Opinions

BARREDO, J., concurring:

I hold it is a matter of public knowledge that the place in question is commercial. It would be worse if
the same were to be left as residential and all around are already commercial.

FERNANDO, C.J., concurring:

The exhaustive and lucid opinion of the Court penned by Justice Guillermo S. Santos commends
itself for approval. I feel no hesitancy, therefore, in yielding concurrence, The observation, however,
in the dissent of Justice Vicente Abad Santos relative to restrictive covenants calls, to my mind, for
further reflection as to the respect to which they are entitled whenever police power legislation,
whether on the national or local level, is assailed. Before doing so, however, it may not be amiss to
consider further the effect of such all-embracing attribute on existing contracts.
1. Reference was made in the opinion of the Court to Philippine American Life Insurance Company
v. Auditor General. 1 The ponente in that case was Justice Sanchez. A concurrence came from me. It
contained this qualification: "It cannot be said, without rendering nugatory the constitutional guarantee of
non-impairment, and for that matter both the equal protection and due process clauses which equally
serve to protect property rights, that at the mere invocation of the police power, the objection on nonimpairment grounds automatically loses force. Here, as in other cases where governmental authority may
trench upon property rights, the process of balancing, adjustment or harmonization is called for. 2 After
referring to three leading United States Supreme Court decisions, Home Building and Loan Association v.
Blaisdell, 3Nebbia v. New York, 4 and Norman v. Baltimore and Ohio Railroad Co., 5 I stated: "All of the
above decisions reflect the view that an enactment of a police power measure does not per se call for the
overruling of objections based on either due process or non-impairment based on either due process or
non-impairment grounds. There must be that balancing, or adjustment, or harmonization of the conflicting
claims posed by an exercise of state regulatory power on the one hand and assertion of rights to property,
whether of natural or of juridical persons, on the other. 'That is the only way by which the constitutional
guarantees may serve the high ends that call for their inclusion in the Constitution and thus effectively
preclude ally abusive exercise of governmental authority." 6 Nor did my concurrence stop there: "In the
opinion of the Blaisdell case, penned by the then Chief Justice Hughes, there was this understandable
stress on balancing or harmonizing, which is called for in litigations of this character: 'The policy of
protecting contracts against impairment presupposes the maintenance of a government by virtue of which
contractual relations are worthwhile a government which retains adequate authority to secure the peace
and good order of society. This principle of harmonizing the constitutional prohibition with the necessary
residuum of state power has had progressive recognition in the decisions of this Court.' Also to the same
effect: 'Undoubtedly, whatever is reserved of state power must be consistent with the fair intent of the
constitutional limitation of that power. The reserve power cannot be construed so as to destroy the
limitation, nor is the limitation to be construed to destroy the reserved power in its essential aspects. 'They
must be construed in harmony with each other. This principle precludes a construction which would permit
the State to adopt as its policy the repudiation of debts or the destruction of contracts or the denial of
means to enforce them. But it does not follow that conditions may not arise in which a temporary restraint
of enforcement may be consistent with the spirit and purpose of the constitutional provision and thus be
found to be within the range of the reserved power of the State to protect the vital interests of the
community.' Further on, Chief Justice Hughes likewise stated: 'It is manifest from this review of our
decisions that there has been a growing appreciation of public needs and of the necessity of finding
ground for a rational compromise between individual rights and public welfare. " 7 This is the concluding
paragraph of my concurrence in the Philippine American Life Insurance Co. case: "If emphasis be
therefore laid, as this concurring opinion does, on the pressing and inescapable need for such an
approach whenever a possible collision between state authority and an assertion of constitutional right to
property may exist, it is not to depart from what sound constitutional orthodoxy dictates. It is rather to
abide by what is compels. In litigations of this character then, perhaps much more so than in other
disputes, where there is a reliance on a constitutional provision, the judiciary cannot escape what Holmes
fitly referred to as the sovereign prerogative of choice, the exercise of which might possibly be impugned
if there be no attempt, however slight, at such an effort of adjusting or reconciling the respective claims of
state regulatory power and constitutionally protected rights." 8
I adhere to such a view. This is not to say that there is a departure therefrom in the able and
scholarly opinion of Justice Santos. It is merely to stress what to my mind is a fundamental postulate
of our Constitution. The only point I would wish to add is that in the process of such balancing and

adjustment, the present Constitution, the Philippine American Life Insurance Co. decision having
been promulgated under the 1935 Charter, leaves no doubt that the claim to property rights based
on the non-impairment clause has a lesser weight. For as explicitly provided by our present
fundamental law: "The State shall promote social Justice to ensure the dignity, welfare, and security
of all the people. Towards this end, the
State shall regulate the acquisition, ownership, use, enjoyment, and disposition of private property,
and equitably diffuse property ownership and profits. 9
2. Now as to restrictive convenants, accurately included by Hart and Sacks under the category of
"private directive arrangements. " 10 Through them people are enable to agree on how to order their
affairs. They could be utilized to govern their affairs. They could be utilized to govern their future conduct.
It is a well-known fact that the common law relies to a great extent on such private directive arrangements
to attain a desirable social condition. More specifically, such covenants are an important means of
ordering one aspect of property relationships. Through them, there could be delimitation of land use
rights. It is quite understandable why the law should ordinarily accord them deference, It does so, it has
been said, both on grounds of morality and utility. Nonetheless, there are limits to the literal enforcement
of their terms. To the extent that they ignore technological or economic progress, they are not
automatically entitled to judicial protection. Clearly, they must "speak from one point of time to
another." 11 The parties, like all mortal, do not have the power of predicting the future with unfailing
certainty. In cases therefore where societal welfare calls for police power legislation, the parties adversely
affected should realize that arrangements dealing with property rights are not impressed with sanctity.
That approach, in my view, was the guiding principle of the opinion of the Court. f fence my full and entire
concurrence.
ABAD SANTOS, J:, dissenting:
Although Resolution No. 27, series of 1960, of the Municipal Council of Mandaluyong, Rizal, is valid
until otherwise declared, I do not believe that its enactment was by virtue of the police power of that
municipality. I do not here dispute the concept of police power as stated in Primicias vs. Fugoso, 80
Phil. 77 (1948) for as a matter of fact I accept it. And I agree also that it is elastic and must be
responsive to various social conditions, etc. as ruled in PLDT vs. City of Davao, L-23080, Oct. 26,
1965, 15 SCRA 244. But Resolution No. 27, cannot be described as promotive of the health, morals,
peace, education, good order or safety and general welfare of the people of Mandaluyong. On the
contrary, its effect is the opposite. For the serenity, peace and quite of a residential section would by
the resolution be replaced by the chaos, turmoil and frenzy of commerce and industry. Where there
would be no industrial and noise pollution these bane of so-called progress would now pervade and
suffocate the environment to the detriment of the ecology. To characterize the ordinance as an
exercise of police power would be retrogressive. It will set back all the efforts of the Ministry of
Human Settlements to improve the quality of life especially in Metro Manila. It will make Metro
Manila, not the city of man as envisioned by its Governor but a city of commerce and industry.
Considering, therefore, that Resolution No, 2-1 was not enacted in the legitimate exercise of police
power, it cannot impair the restrictive covenants which go with the lands that were sold by the
plaintiff-appellant. I vote for the reversal of the appealed decision.

# Separate Opinions
BARREDO, J., concurring:
I hold it is a matter of public knowledge that the place in question is commercial. It would be worse if
the same were to be left as residential and all around are already commercial.
FERNANDO, C.J., concurring:
The exhaustive and lucid opinion of the Court penned by Justice Guillermo S. Santos commends
itself for approval. I feel no hesitancy, therefore, in yielding concurrence, The observation, however,
in the dissent of Justice Vicente Abad Santos relative to restrictive covenants calls, to my mind, for
further reflection as to the respect to which they are entitled whenever police power legislation,
whether on the national or local level, is assailed. Before doing so, however, it may not be amiss to
consider further the effect of such all-embracing attribute on existing contracts.
1. Reference was made in the opinion of the Court to Philippine American Life Insurance Company
v. Auditor General. 1 The ponente in that case was Justice Sanchez. A concurrence came from me. It
contained this qualification: "It cannot be said, without rendering nugatory the constitutional guarantee of
non-impairment, and for that matter both the equal protection and due process clauses which equally
serve to protect property rights, that at the mere invocation of the police power, the objection on nonimpairment grounds automatically loses force. Here, as in other cases where governmental authority may
trench upon property rights, the process of balancing, adjustment or harmonization is called for. 2 After
referring to three leading United States Supreme Court decisions, Home Building and Loan Association v.
Blaisdell, 3Nebbia v. New York, 4 and Norman v. Baltimore and Ohio Railroad Co., 5 I stated: "All of the
above decisions reflect the view that an enactment of a police power measure does not per se call for the
overruling of objections based on either due process or non-impairment based on either due process or
non-impairment grounds. There must be that balancing, or adjustment, or harmonization of the conflicting
claims posed by an exercise of state regulatory power on the one hand and assertion of rights to property,
whether of natural or of juridical persons, on the other. 'That is the only way by which the constitutional
guarantees may serve the high ends that call for their inclusion in the Constitution and thus effectively
preclude ally abusive exercise of governmental authority." 6 Nor did my concurrence stop there: "In the
opinion of the Blaisdell case, penned by the then Chief Justice Hughes, there was this understandable
stress on balancing or harmonizing, which is called for in litigations of this character: 'The policy of
protecting contracts against impairment presupposes the maintenance of a government by virtue of which
contractual relations are worthwhile a government which retains adequate authority to secure the peace
and good order of society. This principle of harmonizing the constitutional prohibition with the necessary
residuum of state power has had progressive recognition in the decisions of this Court.' Also to the same
effect: 'Undoubtedly, whatever is reserved of state power must be consistent with the fair intent of the
constitutional limitation of that power. The reserve power cannot be construed so as to destroy the
limitation, nor is the limitation to be construed to destroy the reserved power in its essential aspects. 'They
must be construed in harmony with each other. This principle precludes a construction which would permit
the State to adopt as its policy the repudiation of debts or the destruction of contracts or the denial of
means to enforce them. But it does not follow that conditions may not arise in which a temporary restraint
of enforcement may be consistent with the spirit and purpose of the constitutional provision and thus be
found to be within the range of the reserved power of the State to protect the vital interests of the
community.' Further on, Chief Justice Hughes likewise stated: 'It is manifest from this review of our
decisions that there has been a growing appreciation of public needs and of the necessity of finding
ground for a rational compromise between individual rights and public welfare. " 7 This is the concluding
paragraph of my concurrence in the Philippine American Life Insurance Co. case: "If emphasis be
therefore laid, as this concurring opinion does, on the pressing and inescapable need for such an
approach whenever a possible collision between state authority and an assertion of constitutional right to

property may exist, it is not to depart from what sound constitutional orthodoxy dictates. It is rather to
abide by what is compels. In litigations of this character then, perhaps much more so than in other
disputes, where there is a reliance on a constitutional provision, the judiciary cannot escape what Holmes
fitly referred to as the sovereign prerogative of choice, the exercise of which might possibly be impugned
if there be no attempt, however slight, at such an effort of adjusting or reconciling the respective claims of
state regulatory power and constitutionally protected rights." 8

I adhere to such a view. This is not to say that there is a departure therefrom in the able and
scholarly opinion of Justice Santos. It is merely to stress what to my mind is a fundamental postulate
of our Constitution. The only point I would wish to add is that in the process of such balancing and
adjustment, the present Constitution, the Philippine American Life Insurance Co. decision having
been promulgated under the 1935 Charter, leaves no doubt that the claim to property rights based
on the non-impairment clause has a lesser weight. For as explicitly provided by our present
fundamental law: "The State shall promote social Justice to ensure the dignity, welfare, and security
of all the people. Towards this end, the
State shall regulate the acquisition, ownership, use, enjoyment, and disposition of private property,
and equitably diffuse property ownership and profits. 9
2. Now as to restrictive convenants, accurately included by Hart and Sacks under the category of
"private directive arrangements. " 10 Through them people are enable to agree on how to order their
affairs. They could be utilized to govern their affairs. They could be utilized to govern their future conduct.
It is a well-known fact that the common law relies to a great extent on such private directive arrangements
to attain a desirable social condition. More specifically, such covenants are an important means of
ordering one aspect of property relationships. Through them, there could be delimitation of land use
rights. It is quite understandable why the law should ordinarily accord them deference, It does so, it has
been said, both on grounds of morality and utility. Nonetheless, there are limits to the literal enforcement
of their terms. To the extent that they ignore technological or economic progress, they are not
automatically entitled to judicial protection. Clearly, they must "speak from one point of time to
another." 11 The parties, like all mortal, do not have the power of predicting the future with unfailing
certainty. In cases therefore where societal welfare calls for police power legislation, the parties adversely
affected should realize that arrangements dealing with property rights are not impressed with sanctity.
That approach, in my view, was the guiding principle of the opinion of the Court. f fence my full and entire
concurrence.
ABAD SANTOS, J:, dissenting:
Although Resolution No. 27, series of 1960, of the Municipal Council of Mandaluyong, Rizal, is valid
until otherwise declared, I do not believe that its enactment was by virtue of the police power of that
municipality. I do not here dispute the concept of police power as stated in Primicias vs. Fugoso, 80
Phil. 77 (1948) for as a matter of fact I accept it. And I agree also that it is elastic and must be
responsive to various social conditions, etc. as ruled in PLDT vs. City of Davao, L-23080, Oct. 26,
1965, 15 SCRA 244. But Resolution No. 27, cannot be described as promotive of the health, morals,
peace, education, good order or safety and general welfare of the people of Mandaluyong. On the
contrary, its effect is the opposite. For the serenity, peace and quite of a residential section would by
the resolution be replaced by the chaos, turmoil and frenzy of commerce and industry. Where there
would be no industrial and noise pollution these bane of so-called progress would now pervade and
suffocate the environment to the detriment of the ecology. To characterize the ordinance as an
exercise of police power would be retrogressive. It will set back all the efforts of the Ministry of
Human Settlements to improve the quality of life especially in Metro Manila. It will make Metro
Manila, not the city of man as envisioned by its Governor but a city of commerce and industry.

Considering, therefore, that Resolution No, 2-1 was not enacted in the legitimate exercise of police
power, it cannot impair the restrictive covenants which go with the lands that were sold by the
plaintiff-appellant. I vote for the reversal of the appealed decision.
#Footnotes
1 Record on Appeal, p. 110.
2 Id., pp. 4-5. Emphasis supplied.
3 Id pp. 111-112.
4 Id., p. 112.
5 Id., p. 80.
6 Id., p. 86.
7 Id., p. 94.
8 Id., pp. 11 2-113.
9 Id., pp. 60 and 113.
10 Brief for Defendant-Appellee, p. 2.
11 Id, p. 3.
12 Record on Appeal, pp. 113-114.
13 Id., p. 114.
14 Id., pp. 114-115.
15 Id., p. 114.
16 Id., p. 116.
17 Id., p.118.
18 Id., p. 117.
19 Id., p. 127.
20 Id., pp. 127-129.
21 Id., p. 130.
22 Ibid.

23 See Brief for Defendant-Appellee, pp. 30-31.

24 76 Phil. 563, 567 (1946).
25 Sec. 18, Rule 46, Revised Rules of Court; Tan Machan v. De la Trinidad 3 Phil.
684, (1946).
26 Francisco, The Revised Rules of Court, Vol. 111, 1968 Ed., p. 648, citing Jones v.
Seymour, 95 Art. 593, 597, 130 S.W. 560.
27 Id., pp.638-649, cit Elliot on Appellate Procedure, 416-417.
28 Sumerariz, et al. vs. Development Bank of the Philippines, et al., L-23764, Dec.
26, 1967, 21 SCRA 1374: San Miguel Brewery, et al. vs. Vda. de Joves. et al., L24258, June 26, 1968, 23 SCRA 1093, 1097. See also Tuason vs. Hon. Arca, et al.,
L- 24346, June 29, 1968, 23 SCRA 1308, 1312.
29 Plaridel Surety and Ins. Co. vs. Commissioner of Internal Revenue, L-21520, Dec.
11, 1967, 21 SCRA 1187.
30 Manila Port Service, et al vs, Court of Appeals, et al., L21890, March 29. 1968, 22
SCRA 1364.
31 Record on Appeal, p. 114.
32 Sec. 3 reads:
Sec. 3. Additional powers of provincial boards, municipal boards or city councils and
municipal and regularly organized municipal district councils.
xxx xxx xxx
Power to adopt zoning and planning ordinances. Any provision of law to the contrary
notwithstanding Municipal Boards or City Councils in cities, and Municipal Councils in
municipalities are hereby authorized to adopt zoning and subdivision ordinances or
regulations for their respective cities and municipalities subject to the approval of the
City Mayor or Municipal Mayor, as the case may be. Cities and municipalities may,
however, consult the National Planning Commission on matters pertaining to
planning and zoning. (Emphasis supplied).
33 Emphasis supplied.
34 The full text of Section 12 follows:
SEC. 12. Rules for the Interpretation of the Local Autonomy Act.
1. Implied power of a province, a city or municipality shall be liberally
construed in its favor. Any fair and reasonable doubt as to the
existence of the power should be interpreted infavor of the local
government and it shall be presumed to exist.

2. The general welfare clause be liberally interpreted in case of local

governments in promoting the economic condition, social welfare and
material progress of the people in the community.
3. Vested rights existing at the time of the promulgation of this arising
out of a contract between a province, city or municipality on one hand
and third party on the other, should be governed by the original terms
and provisions of the same, and in no case would this act infringe
existing right.
35 Primicias vs. Fugoso 80 Phil, 77 (1948).
36 Smith Bell & Co. v. Natividad, 40 Phil. 136 (1919), citing earlier authorities, Justice
Malcolmponente.
37 Edu v. Ericta, L-3206, Oct. 24, 1970, 35 SCRA 487, Justice Fernando, now Chief
Justice, speaking for the court.
38 See Ermita-Malate Hotel and Motel Operators Association, Inc. v. City Mayor of
Manila, L-24693, July 31, 1967, 20 SCRA 849, Justice Fernando, now Chief Justice,
also wrote the decision for the Court.
39 L-23080, Oct. 20, 1965, 15 SCRA 244, 247-248.
40 L-25035, Feb. 26, 1968, 22 SCRA 792, 797.
41 70 Phil. 726 (1940).
42 Id., P. 734; Emphasis supplied.
43 Id., p. 733, citing U.S. v. Gomez Jesus, 31 Phil. 218 (1915).
44 Id., p. 733.
45 301 U.S. 619 (1937).
46 Emphasis supplied.
47 Edu v. Ericta, supra, p. 489.
48 Fernando on the Philippine Constitution, 1974 ed., p. 558.
49 L-19255, January 18, 1968, 22 SCRA 135, citing Home Building and Loan
Association v. Blaisedell, 78 L. ed., 413, 428.
50 L-25389-90, June 27, 1968, 28 SCRA 1115, citing Manresa, Comm. Vol. 8, part 2
(5th Ed.) p. 535.
51 L-29203, July 26, 1971, 40 SCRA 75.

52 Brief for Plaintiff-Appellant, pp. 9-17.

53 Proctor & Gamble Philippine Manufacturing Corporation vs. Commissioner of
Customs, L-24173, May 23, 1968, 23 SCRA 691.
54 170 NE 425, 428 Illinois (1930).
55 243 NW 356, 358-359 Iowa (1932).
56 Op. Cit at p. 427.
57 Id., Id.
58 Op. Cit. at p. 358.
1 L-19244, January 18, 1968, 22 SCRA 135.
2 Ibid, 148.
3 290 US 398 (1934).
* Justice Teehankee was co-counsel for defendant-appellee.
4 291 US 502 (1934).
5 294 US 240 (1935).
6 Ibid, 151-152.
7 Ibid., 152-153.
8 Ibid., 155.
9 Article II, Section 6 of the Constitution.
10 H. Hart and A. Sacks, The Legal Process, 124.
11 Ibid, 125.

SECOND DIVISION
[G.R. No. 126102. December 4, 2000]

ORTIGAS & CO. LTD., petitioner, vs. THE COURT OF APPEALS and ISMAEL G. MATHAY
III, respondents.
DECISION
QUISUMBING, J.:

This petition seeks to reverse the decision of the Court of Appeals, dated March 25,
1996, in CA-G.R. SP No. 39193, which nullified the writ of preliminary injunction
issued by the Regional Trial Court of Pasig City, Branch 261, in Civil Case No. 64931.
It also assails the resolution of the appellate court, dated August 13, 1996, denying
petitioners motion for reconsideration.

The facts of this case, as culled from the records, are as follows:

On August 25, 1976, petitioner Ortigas & Company sold to Emilia Hermoso, a parcel
of land known as Lot 1, Block 21, Psd-66759, with an area of 1,508 square meters,
located in Greenhills Subdivision IV, San Juan, Metro Manila, and covered by Transfer
Certificate of Title No. 0737. The contract of sale provided that the lot:

1. (1) be used exclusivelyfor residential purposes only, and not more than one
single-family residential building will be constructed thereon,

xxx

6. The BUYER shall not erectany sign or billboard on the rooffor advertising
purposes

xxx

11.
No single-family residential building shall be erecteduntil the building
plans, specificationhave been approved by the SELLER

xxx

14....restrictions shall run with the land and shall be construed as real covenants
until December 31, 2025 when they shall cease and terminate[1]

These and the other conditions were duly annotated on the certificate of title issued
to Emilia.

In 1981, the Metropolitan Manila Commission (now Metropolitan Manila

Development Authority) enacted MMC Ordinance No. 81-01, also known as the
Comprehensive Zoning Area for the National Capital Region. The ordinance
reclassified as a commercial area a portion of Ortigas Avenue from Madison to
Roosevelt Streets of Greenhills Subdivision where the lot is located.

On June 8, 1984, private respondent Ismael Mathay III leased the lot from Emilia
Hermoso and J.P. Hermoso Realty Corp.. The lease contract did not specify the
purposes of the lease. Thereupon, private respondent constructed a single story
commercial building for Greenhills Autohaus, Inc., a car sales company.

On January 18, 1995, petitioner filed a complaint against Emilia Hermoso with the
Regional Trial Court of Pasig, Branch 261. Docketed as Civil Case No. 64931, the
complaint sought the demolition of the said commercial structure for having
violated the terms and conditions of the Deed of Sale. Complainant prayed for the
issuance of a temporary restraining order and a writ of preliminary injunction to
prohibit petitioner from constructing the commercial building and/or engaging in
commercial activity on the lot. The complaint was later amended to implead Ismael
G. Mathay III and J.P. Hermoso Realty Corp., which has a ten percent (10%) interest
in the lot.

In his answer, Mathay III denied any knowledge of the restrictions on the use of the
lot and filed a cross-claim against the Hermosos.

On June 16, 1995, the trial court issued the writ of preliminary injunction. On June
29, 1995, Mathay III moved to set aside the injunctive order, but the trial court
denied the motion.

Mathay III then filed with the Court of Appeals a special civil action for certiorari,
docketed as CA-G.R. SP No. 39193, ascribing to the trial court grave abuse of
discretion in issuing the writ of preliminary injunction. He claimed that MMC
Ordinance No. 81-01 classified the area where the lot was located as commercial
area and said ordinance must be read into the August 25, 1976 Deed of Sale as a
concrete exercise of police power.

Ortigas and Company averred that inasmuch as the restrictions on the use of the lot
were duly annotated on the title it issued to Emilia Hermoso, said restrictions must
prevail over the ordinance, specially since these restrictions were agreed upon
before the passage of MMC Ordinance No. 81-01.

On March 25, 1996, the appellate court disposed of the case as follows:

WHEREFORE, in light of the foregoing, the petition is hereby GRANTED. The assailed
orders are hereby nullified and set aside.

SO ORDERED.[2]

In finding for Mathay III, the Court of Appeals held that the MMC Ordinance No. 8101 effectively nullified the restrictions allowing only residential use of the property
in question.

Ortigas seasonably moved for reconsideration, but the appellate court denied it on
August 13, 1996.

Hence, the instant petition.

In its Memorandum, petitioner now submits that the principal issue in this case is
whether respondent Court of Appeals correctly set aside the Order dated June 16,
1995 of the trial court which issued the writ of preliminary injunction on the sole
ground that MMC Ordinance No. 81-01 nullified the building restriction imposing
exclusive residential use on the property in question.[3] It also asserts that
Mathay III lacks legal capacity to question the validity of conditions of the deed of
sale; and he is barred by estoppel or waiver to raise the same question like his
principals, the owners.[4] Lastly, it avers that the appellate court unaccountably
failed to address several questions of fact.

Principally, we must resolve the issue of whether the Court of Appeals erred in
holding that the trial court committed grave abuse of discretion when it refused to
apply MMC Ordinance No.81-01 to Civil Case No. 64931.

But first, we must address petitioners allegation that the Court of Appeals
unaccountably failed to address questions of fact. For basic is the rule that
factual issues may not be raised before this Court in a petition for review and this
Court is not duty-bound to consider said questions.[5] CA-G.R. SP No. 39193 was a
special civil action for certiorari, and the appellate court only had to determine if the
trial court committed grave abuse of discretion amounting to want or excess of
jurisdiction in issuing the writ of preliminary injunction. Thus, unless vital to our
determination of the issue at hand, we shall refrain from further consideration of
factual questions.

Petitioner contends that the appellate court erred in limiting its decision to the cited
zoning ordinance. It avers that a contractual right is not automatically discarded
once a claim is made that it conflicts with police power. Petitioner submits that the
restrictive clauses in the questioned contract is not in conflict with the zoning
ordinance. For one, according to petitioner, the MMC Ordinance No. 81-01 did not
prohibit the construction of residential buildings. Petitioner argues that even with
the zoning ordinance, the seller and buyer of the re-classified lot can voluntarily
agree to an exclusive residential use thereof. Hence, petitioner concludes that the
Court of Appeals erred in holding that the condition imposing exclusive residential
use was effectively nullified by the zoning ordinance.

In its turn, private respondent argues that the appellate court correctly ruled that
the trial court had acted with grave abuse of discretion in refusing to subject the
contract to the MMC Ordinance No. 81-01. He avers that the appellate court

properly held the police power superior to the non-impairment of contract clause in
the Constitution. He concludes that the appellate court did not err in dissolving the
writ of preliminary injunction issued by the trial court in excess of its jurisdiction.

We note that in issuing the disputed writ of preliminary injunction, the trial court
observed that the contract of sale was entered into in August 1976, while the zoning
ordinance was enacted only in March 1981. The trial court reasoned that since
private respondent had failed to show that MMC Ordinance No. 81-01 had
retroactive effect, said ordinance should be given prospective application only,[6]
citing Co vs. Intermediate Appellate Court, 162 SCRA 390 (1988).

In general, we agree that laws are to be construed as having only prospective

operation. Lex prospicit, non respicit. Equally settled, only laws existing at the time
of the execution of a contract are applicable thereto and not later statutes, unless
the latter are specifically intended to have retroactive effect.[7] A later law which
enlarges, abridges, or in any manner changes the intent of the parties to the
contract necessarily impairs the contract itself[8] and cannot be given retroactive
effect without violating the constitutional prohibition against impairment of
contracts.[9]

But, the foregoing principles do admit of certain exceptions. One involves police
power. A law enacted in the exercise of police power to regulate or govern certain
activities or transactions could be given retroactive effect and may reasonably
impair vested rights or contracts. Police power legislation is applicable not only to
future contracts, but equally to those already in existence.[10] Nonimpairment of
contracts or vested rights clauses will have to yield to the superior and legitimate
exercise by the State of police power to promote the health, morals, peace,
education, good order, safety, and general welfare of the people.[11] Moreover,
statutes in exercise of valid police power must be read into every contract.[12]
Noteworthy, in Sangalang vs. Intermediate Appellate Court,[13] we already upheld
MMC Ordinance No. 81-01 as a legitimate police power measure.

The trial courts reliance on the Co vs. IAC,[14] is misplaced. In Co, the disputed
area was agricultural and Ordinance No. 81-01 did not specifically provide that it
shall have retroactive effect so as to discontinue all rights previously acquired over
lands located within the zone which are neither residential nor light industrial in
nature,[15] and stated with respect to agricultural areas covered that the zoning
ordinance should be given prospective operation only.[16] The area in this case

involves not agricultural but urban residential land. Ordinance No. 81-01
retroactively affected the operation of the zoning ordinance in Greenhills by
reclassifying certain locations therein as commercial.

Following our ruling in Ortigas & Co., Ltd. vs. Feati Bank & Trust Co., 94 SCRA 533
(1979), the contractual stipulations annotated on the Torrens Title, on which Ortigas
relies, must yield to the ordinance. When that stretch of Ortigas Avenue from
Roosevelt Street to Madison Street was reclassified as a commercial zone by the
Metropolitan Manila Commission in March 1981, the restrictions in the contract of
sale between Ortigas and Hermoso, limiting all construction on the disputed lot to
single-family residential buildings, were deemed extinguished by the retroactive
operation of the zoning ordinance and could no longer be enforced. While our legal
system upholds the sanctity of contract so that a contract is deemed law between
the contracting parties,[17] nonetheless, stipulations in a contract cannot
contravene law, morals, good customs, public order, or public policy.[18]
Otherwise such stipulations would be deemed null and void. Respondent court
correctly found that the trial court committed in this case a grave abuse of
discretion amounting to want of or excess of jurisdiction in refusing to treat
Ordinance No. 81-01 as applicable to Civil Case No. 64931. In resolving matters in
litigation, judges are not only duty-bound to ascertain the facts and the applicable
laws,[19] they are also bound by their oath of office to apply the applicable law.[20]

As a secondary issue, petitioner contends that respondent Mathay III, as a mere

lessee of the lot in question, is a total stranger to the deed of sale and is thus
barred from questioning the conditions of said deed. Petitioner points out that the
owners of the lot voluntarily agreed to the restrictions on the use of the lot and do
not question the validity of these restrictions. Petitioner argues that Mathay III as a
lessee is merely an agent of the owners, and could not override and rise above the
status of his principals. Petitioner submits that he could not have a higher interest
than those of the owners, the Hermosos, and thus had no locus standi to file CA-G.R.
SP No. 39193 to dissolve the injunctive writ issued by the RTC of Pasig City.

For his part, private respondent argues that as the lessee who built the commercial
structure, it is he and he alone who stands to be either benefited or injured by the
results of the judgment in Civil Case No. 64931. He avers he is the party with real
interest in the subject matter of the action, as it would be his business, not the
Hermosos, which would suffer had not the respondent court dissolved the writ of
preliminary injunction.

A real party in interest is defined as the party who stands to be benefited or injured
by the judgment or the party entitled to the avails of the suit. Interest within the
meaning of the rule means material interest, an interest in issue and to be affected
by the decree, as distinguished from mere interest in the question involved, or a
mere incidental interest.[21] By real interest is meant a present substantial interest,
as distinguished from a mere expectancy or a future, contingent, subordinate, or
consequential interest.[22]

Tested by the foregoing definition, private respondent in this case is clearly a real
party in interest. It is not disputed that he is in possession of the lot pursuant to a
valid lease. He is a possessor in the concept of a holder of the thing under Article
525 of the Civil Code.[23] He was impleaded as a defendant in the amended
complaint in Civil Case No. 64931. Further, what petitioner seeks to enjoin is the
building by respondent of a commercial structure on the lot. Clearly, it is private
respondents acts which are in issue, and his interest in said issue cannot be a mere
incidental interest. In its amended complaint, petitioner prayed for, among others,
judgment ordering the demolition of all improvements illegally built on the lot in
question.[24] These show that it is petitioner Mathay III, doing business as
Greenhills Autohaus, Inc., and not only the Hermosos, who will be adversely
affected by the courts decree.

Petitioner also cites the rule that a stranger to a contract has no rights or
obligations under it,[25] and thus has no standing to challenge its validity.[26] But
in seeking to enforce the stipulations in the deed of sale, petitioner impleaded
private respondent as a defendant. Thus petitioner must recognize that where a
plaintiff has impleaded a party as a defendant, he cannot subsequently question the
latters standing in court.[27]

WHEREFORE, the instant petition is DENIED. The challenged decision of the Court of
Appeals dated March 25, 1996, as well as the assailed resolution of August 13,
1996, in CA-G.R. SP No. 39193 is AFFIRMED. Costs against petitioner.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.

[1] Rollo, p. 92.

[2] Rollo, p. 52.

[3] Id. at 227.

[4] Ibid.

[5] First Nationwide Assurance Corp. vs. Court of Appeals, et al., G.R. No. 128797,
November 18, 1999, p. 1.

[6] CA Rollo, p. 26.

[7] Phil. Virginia Tobacco Administration vs. Gonzales, 92 SCRA 172, 185 (1979).

[8] US vs. Diaz Conde, 42 Phil. 766, 769 (1922).

[9] Const., Art. III, Sec. 10.

[10] Melchor, Jr. vs. Moya, 121 SCRA 1, 6 (1983); Co Chiong vs. Cuaderno, 83 Phil.
242 (1949); Santos vs. Alvarez, 78 Phil. 503 (1947).

[11] Presley vs. Bel-Air Village Association, Inc., 201 SCRA 13, 18-19 (1991).

[12] Phil. American Life Insurance Co. vs. Auditor General, 22 SCRA 135, 136-137
(1968).

[13] 168 SCRA 634, 669 (1988).

[14] 162 SCRA 390 (1988).

[15] Id. at 396.

[16] Ibid.

[17] CIVIL CODE, Art. 1159.

[18] Supra, Art. 1306.

[19] Parada vs. Veneracion, 269 SCRA 371, 378 (1997).

[20] Caram Resources Corp. vs. Contreras, 237 SCRA 724, 734 (1994).

[21] 1997 RULES OF CIVIL PROCEDURE, Rule 3, Sec. 2; Republic vs. Sandiganbayan,
203 SCRA 310, 324 (1991) citing Samahan ng mga Nangungupahan sa Azcarraga
Textile Market, Inc., et al. vs. Court of Appeals, 165 SCRA 598 (1988).

[22] De Leon vs. Court of Appeals, 277 SCRA 478, 486-487 (1997); Barfel
Development Corp. vs. Court of Appeals, 223 SCRA 268 (1993).

[23] CIVIL CODE, Art. 525. The possession of things or rights may be had in one of
two concepts; either in the concept of owner, or in that of the holder of the thing or
right to keep or enjoy it, the ownership pertaining to another person.

[24] Rollo, p. 61.

[25] CIVIL CODE, Art. 1311. Contracts take effect only between the parties, their
assigns and heirs, except in case where the rights and obligations arising from the
contract are not transmissible by their nature, or by stipulation, or by provision of
law

[26] Ibaez vs. Hongkong and Shanghai Banking Corp., 22 Phil. 572, 584 (1912);
Wolfson vs. Estate of Martinez, 20 Phil. 340, 344 (1911).

[27] Lao vs. Court of Appeals, 275 SCRA 237, 256 (1997).

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 196539

October 10, 2012

MARIETTA N. PORTILLO, Petitioner,

vs.
RUDOLF LIETZ, INC., RUDOLF LIETZ and COURT OF APPEALS Respondents.

DECISION

PEREZ, J.:

Before us is a petition for certiorari assailing the Resolution 1 dated 14 October

2010 of the Court of Appeals in CA-G.R. SP No. I 065g I which modified its Decision2
dated 31 March 2009, thus allowing the legal compensation or petitioner Marietta N.
Portillo's (Portillo) monetary claims against respondent corporation Rudolf Lietz,
Inc.'s (Lietz Inc.)3 claim for liquidated damages arising from Portillos alleged
violation of the "Goodwill Clause" in the employment contract executed by the
parties.

The facts are not in dispute.

In a letter agreement dated 3 May 1991, signed by individual respondent Rudolf

Lietz (Rudolf) and conformed to by Portillo, the latter was hired by the former under
the following terms and conditions:

A copy of [Lietz Inc.s] work rules and policies on personnel is enclosed and an
inherent part of the terms and conditions of employment.

We acknowledge your proposal in your application specifically to the effect that you
will not engage in any other gainful employment by yourself or with any other
company either directly or indirectly without written consent of [Lietz Inc.], and we
hereby accept and henceforth consider your proposal an undertaking on your part,
a breach of which will render you liable to [Lietz Inc.] for liquidated damages.

If you are in agreement with these terms and conditions of employment, please
signify your conformity below.4

On her tenth (10th) year with Lietz Inc., specifically on 1 February 2002, Portillo was
promoted to Sales Representative and received a corresponding increase in basic
monthly salary and sales quota. In this regard, Portillo signed another letter
agreement containing a "Goodwill Clause:"

It remains understood and you agreed that, on the termination of your employment
by act of either you or [Lietz Inc.], and for a period of three (3) years thereafter, you

shall not engage directly or indirectly as employee, manager, proprietor, or solicitor

for yourself or others in a similar or competitive business or the same character of
work which you were employed by [Lietz Inc.] to do and perform. Should you breach
this good will clause of this Contract, you shall pay [Lietz Inc.] as liquidated
damages the amount of 100% of your gross compensation over the last 12 months,
it being agreed that this sum is reasonable and just.5

Three (3) years thereafter, on 6 June 2005, Portillo resigned from Lietz Inc. During
her exit interview, Portillo declared that she intended to engage in businessa rice
dealership, selling rice in wholesale.

On 15 June 2005, Lietz Inc. accepted Portillos resignation and reminded her of the
"Goodwill Clause" in the last letter agreement she had signed. Upon receipt thereof,
Portillo jotted a note thereon that the latest contract she had signed in February
2004 did not contain any "Goodwill Clause" referred to by Lietz Inc. In response
thereto, Lietz Inc. categorically wrote:

Please be informed that the standard prescription of prohibiting employees from

engaging in business or seeking employment with organizations that directly or
indirectly compete against [Lietz Inc.] for three (3) years after resignation remains
in effect.

The documentation you pertain to is an internal memorandum of your salary

increase, not an employment contract. The absence of the three-year prohibition
clause in this document (or any document for that matter) does not cancel the
prohibition itself. We did not, have not, and will not issue any cancellation of such in
the foreseeable future[.] [T]hus[,] regretfully, it is erroneous of you to believe
otherwise.6

In a subsequent letter dated 21 June 2005, Lietz Inc. wrote Portillo and supposed
that the exchange of correspondence between them regarding the "Goodwill
Clause" in the employment contract was a moot exercise since Portillos articulated
intention to go into business, selling rice, will not compete with Lietz Inc.s products.

Subsequently, Lietz Inc. learned that Portillo had been hired by Ed Keller Philippines,
Limited to head its Pharma Raw Material Department. Ed Keller Limited is
purportedly a direct competitor of Lietz Inc.

Meanwhile, Portillos demands from Lietz Inc. for the payment of her remaining
salaries and commissions went unheeded. Lietz Inc. gave Portillo the run around, on
the pretext that her salaries and commissions were still being computed.

On 14 September 2005, Portillo filed a complaint with the National Labor Relations
Commission (NLRC) for non-payment of 1 months salary, two (2) months
commission, 13th month pay, plus moral, exemplary and actual damages and
attorneys fees.

In its position paper, Lietz Inc. admitted liability for Portillos money claims in the
total amount of P110,662.16. However, Lietz Inc. raised the defense of legal
compensation: Portillos money claims should be offset against her liability to Lietz
Inc. for liquidated damages in the amount of 869,633.097 for Portillos alleged
breach of the "Goodwill Clause" in the employment contract when she became
employed with Ed Keller Philippines, Limited.

On 25 May 2007, Labor Arbiter Daniel J. Cajilig granted Portillos complaint:

WHEREFORE, judgment is hereby rendered ordering respondents Rudolf Lietz, Inc.

to pay complainant Marietta N. Portillo the amount of Php110,662.16, representing
her salary and commissions, including 13th month pay.8

On appeal by respondents, the NLRC, through its Second Division, affirmed the
ruling of Labor Arbiter Daniel J. Cajilig. On motion for reconsideration, the NLRC
stood pat on its ruling.

Expectedly, respondents filed a petition for certiorari before the Court of Appeals,
alleging grave abuse of discretion in the labor tribunals rulings.

As earlier adverted to, the appellate court initially affirmed the labor tribunals:

WHEREFORE, considering the foregoing premises, judgment is hereby rendered by

us DENYING the petition filed in this case. The Resolution of the National Labor
Relations Commission (NLRC), Second Division, in the labor case docketed as NLRC
NCR Case No. 00-09- 08113-2005 [NLRC LAC No. 07-001965-07(5)] is hereby
AFFIRMED.9

The disposition was disturbed. The Court of Appeals, on motion for reconsideration,
modified its previous decision, thus:

WHEREFORE, in view of the foregoing premises, we hereby MODIFY the decision

promulgated on March 31, 2009 in that, while we uphold the monetary award in
favor of the [petitioner] in the aggregate sum of 110,662.16 representing the
unpaid salary, commission and 13th month pay due to her, we hereby allow legal
compensation or set-off of such award of monetary claims by her liability to
[respondents] for liquidated damages arising from her violation of the "Goodwill
Clause" in her employment contract with them.10

Portillos motion for reconsideration was denied.

Hence, this petition for certiorari listing the following acts as grave abuse of
discretion of the Court of Appeals:

THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION BY EVADING TO

RECOGNIZE (sic) THAT THE RESPONDENTS EARLIER PETITION IS FATALLY
DEFECTIVE;

THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION BY

OVERSTEPPING THE BOUNDS OF APPELLATE JURISDICTION[;]

THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION BY MODIFYING

ITS PREVIOUS DECISION BASED ON AN ISSUE THAT WAS RAISED ONLY ON THE FIRST

INSTANCE AS AN APPEAL BUT WAS NEVER AT THE TRIAL COURT AMOUNTING TO

DENIAL OF DUE PROCESS[;]

THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION BY EVADING

THE POSITIVE DUTY TO UPHOLD THE RELEVANT LAWS[.]11

Simply, the issue is whether Portillos money claims for unpaid salaries may be
offset against respondents claim for liquidated damages.

Before anything else, we address the procedural error committed by Portillo, i.e.,
filing a petition for certiorari, a special civil action under Rule 65 of the Rules of
Court, instead of a petition for review on certiorari, a mode of appeal, under Rule 45
thereof. On this score alone, the petition should have been dismissed outright.

Section 1, Rule 45 of the Rules of Court expressly provides that a party desiring to
appeal by certiorari from a judgment or final order or resolution of the Court of
Appeals may file a verified petition for review on certiorari. Considering that, in this
case, appeal by certiorari was available to Portillo, that available recourse
foreclosed her right to resort to a special civil action for certiorari, a limited form of
review and a remedy of last recourse, which lies only where there is no appeal or
plain, speedy and adequate remedy in the ordinary course of law.12

A petition for review on certiorari under Rule 45 and a petition for certiorari under
Rule 65 are mutually exclusive remedies. Certiorari cannot co-exist with an appeal
or any other adequate remedy.13 If a petition for review is available, even
prescribed, the nature of the questions of law intended to be raised on appeal is of
no consequence. It may well be that those questions of law will treat exclusively of
whether or not the judgment or final order was rendered without or in excess of
jurisdiction, or with grave abuse of discretion. This is immaterial. The remedy is
appeal, not certiorari as a special civil action.14

Be that as it may, on more than one occasion, to serve the ultimate purpose of all
rules of proceduresattaining substantial justice as expeditiously as possible15we
have accepted procedurally incorrect petitions and decided them on the merits. We
do the same here.

The Court of Appeals anchors its modified ruling on the ostensible causal connection
between Portillos money claims and Lietz Inc.s claim for liquidated damages, both
claims apparently arising from the same employment relations. Thus, did it say:

x x x This Court will have to take cognizance of and consider the "Goodwill Clause"
contained [in] the employment contract signed by and between [respondents and
Portillo]. There is no gainsaying the fact that such "Goodwill Clause" is part and
parcel of the employment contract extended to [Portillo], and such clause is not
contrary to law, morals and public policy. There is thus a causal connection between
[Portillos] monetary claims against [respondents] and the latters claim for
liquidated damages against the former. Consequently, we should allow legal
compensation or set-off to take place. [Respondents and Portillo] are both bound
principally and, at the same time, are creditors of each other. [Portillo] is a creditor
of [respondents] in the sum of 110,662.16 in connection with her monetary claims
against the latter. At the same time, [respondents] are creditors of [Portillo] insofar
as their claims for liquidated damages in the sum of 980,295.2516 against the
latter is concerned.17

We are not convinced.

Paragraph 4 of Article 217 of the Labor Code appears to have caused the reliance by
the Court of Appeals on the "causal connection between [Portillos] monetary claims
against [respondents] and the latters claim from liquidated damages against the
former."

Art. 217. Jurisdiction of Labor Arbiters and the Commission. (a) Except as
otherwise provided under this code, the Arbiters shall have original and exclusive
jurisdiction to hear and decide, within thirty (30) calendar days after the submission
of the case by the parties for decision without extension, even in the absence of
stenographic notes, the following case involving all workers, whether agricultural or
nonagricultural:

xxxx

4. Claims for actual, moral, exemplary and other forms of damages arising from the
employer-employee relations; (Underscoring supplied)

Evidently, the Court of Appeals is convinced that the claim for liquidated damages
emanates from the "Goodwill Clause of the employment contract and, therefore, is a
claim for damages arising from the employeremployee relations."

As early as Singapore Airlines Limited v. Pao,18 we established that not all disputes
between an employer and his employee(s) fall within the jurisdiction of the labor
tribunals. We differentiated between abandonment per se and the manner and
consequent effects of such abandonment and ruled that the first, is a labor case,
while the second, is a civil law case.

Upon the facts and issues involved, jurisdiction over the present controversy must
be held to belong to the civil Courts. While seemingly petitioner's claim for damages
arises from employer-employee relations, and the latest amendment to Article 217
of the Labor Code under PD No. 1691 and BP Blg. 130 provides that all other claims
arising from employer-employee relationship are cognizable by Labor Arbiters
[citation omitted], in essence, petitioner's claim for damages is grounded on the
"wanton failure and refusal" without just cause of private respondent Cruz to report
for duty despite repeated notices served upon him of the disapproval of his
application for leave of absence without pay. This, coupled with the further
averment that Cruz "maliciously and with bad faith" violated the terms and
conditions of the conversion training course agreement to the damage of petitioner
removes the present controversy from the coverage of the Labor Code and brings it
within the purview of Civil Law.

Clearly, the complaint was anchored not on the abandonment per se by private
respondent Cruz of his jobas the latter was not required in the Complaint to report
back to workbut on the manner and consequent effects of such abandonment of
work translated in terms of the damages which petitioner had to suffer.

Squarely in point is the ruling enunciated in the case of Quisaba vs. Sta. Ines Melale
Veneer & Plywood, Inc. [citation omitted], the pertinent portion of which reads:

"Although the acts complained of seemingly appear to constitute 'matter involving

employee-employer' relations as Quisaba's dismissal was the severance of a preexisting employee-employer relations, his complaint is grounded not on his
dismissal per se, as in fact he does not ask for reinstatement or backwages, but on
the manner of his dismissal and the consequent effects of such dismissal.

"Civil law consists of that 'mass of precepts that determine or regulate the
relations . . . that exist between members of a society for the protection of private
interest (1 Sanchez Roman 3).

"The 'right' of the respondents to dismiss Quisaba should not be confused with the
manner in which the right was exercised and the effects flowing therefrom. If the
dismissal was done anti-socially or oppressively as the complaint alleges, then the
respondents violated Article 1701 of the Civil Code which prohibits acts of
oppression by either capital or labor against the other, and Article 21, which makes
a person liable for damages if he wilfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy, the sanction for
which, by way of moral damages, is provided in article 2219, No. 10. [citation
omitted]"

Stated differently, petitioner seeks protection under the civil laws and claims no
benefits under the Labor Code. The primary relief sought is for liquidated damages
for breach of a contractual obligation. The other items demanded are not labor
benefits demanded by workers generally taken cognizance of in labor disputes, such
as payment of wages, overtime compensation or separation pay. The items claimed
are the natural consequences flowing from breach of an obligation, intrinsically a
civil dispute.19 (Emphasis supplied)

Subsequent rulings amplified the teaching in Singapore Airlines. The reasonable

causal connection rule was discussed. Thus, in San Miguel Corporation v. National
Labor Relations Commission,20 we held:

While paragraph 3 above refers to "all money claims of workers," it is not necessary
to suppose that the entire universe of money claims that might be asserted by
workers against their employers has been absorbed into the original and exclusive
jurisdiction of Labor Arbiters. In the first place, paragraph 3 should be read not in
isolation from but rather within the context formed by paragraph 1 (relating to

unfair labor practices), paragraph 2 (relating to claims concerning terms and

conditions of employment), paragraph 4 (claims relating to household services, a
particular species of employer-employee relations), and paragraph 5 (relating to
certain activities prohibited to employees or to employers). It is evident that there is
a unifying element which runs through paragraph 1 to 5 and that is, that they all
refer to cases or disputes arising out of or in connection with an employer-employee
relationship. This is, in other words, a situation where the rule of noscitur a sociis
may be usefully invoked in clarifying the scope of paragraph 3, and any other
paragraph of Article 217 of the Labor Code, as amended. We reach the above
conclusion from an examination of the terms themselves of Article 217, as last
amended by B.P. Blg. 227, and even though earlier versions of Article 217 of the
Labor Code expressly brought within the jurisdiction of the Labor Arbiters and the
NLRC "cases arising from employer-employee relations, [citation omitted]" which
clause was not expressly carried over, in printer's ink, in Article 217 as it exists
today. For it cannot be presumed that money claims of workers which do not arise
out of or in connection with their employer-employee relationship, and which would
therefore fall within the general jurisdiction of regular courts of justice, were
intended by the legislative authority to be taken away from the jurisdiction of the
courts and lodged with Labor Arbiters on an exclusive basis. The Court, therefore,
believes and so holds that the "money claims of workers" referred to in paragraph 3
of Article 217 embraces money claims which arise out of or in connection with the
employer-employee relationship, or some aspect or incident of such relationship.
Put a little differently, that money claims of workers which now fall within the
original and exclusive jurisdiction of Labor Arbiters are those money claims which
have some reasonable causal connection with the employer-employee
relationship.21 (Emphasis supplied)

We thereafter ruled that the "reasonable causal connection with the employeremployee relationship" is a requirement not only in employees money claims
against the employer but is, likewise, a condition when the claimant is the
employer.

In Dai-Chi Electronics Manufacturing Corporation v. Villarama, Jr.,22 which reiterated

the San Miguel ruling and allied jurisprudence, we pronounced that a non-compete
clause, as in the "Goodwill Clause" referred to in the present case, with a stipulation
that a violation thereof makes the employee liable to his former employer for
liquidated damages, refers to post-employment relations of the parties.

In Dai-Chi, the trial court dismissed the civil complaint filed by the employer to
recover damages from its employee for the latters breach of his contractual

obligation. We reversed the ruling of the trial court as we found that the employer
did not ask for any relief under the Labor Code but sought to recover damages
agreed upon in the contract as redress for its employees breach of contractual
obligation to its "damage and prejudice." We iterated that Article 217, paragraph 4
does not automatically cover all disputes between an employer and its employee(s).
We noted that the cause of action was within the realm of Civil Law, thus,
jurisdiction over the controversy belongs to the regular courts. At bottom, we
considered that the stipulation referred to post-employment relations of the parties.

That the "Goodwill Clause" in this case is likewise a postemployment issue should
brook no argument. There is no dispute as to the cessation of Portillos employment
with Lietz Inc.23 She simply claims her unpaid salaries and commissions, which
Lietz Inc. does not contest. At that juncture, Portillo was no longer an employee of
Lietz Inc.24 The "Goodwill Clause" or the "Non-Compete Clause" is a contractual
undertaking effective after the cessation of the employment relationship between
the parties. In accordance with jurisprudence, breach of the undertaking is a civil
law dispute, not a labor law case.

It is clear, therefore, that while Portillos claim for unpaid salaries is a money claim
that arises out of or in connection with an employer-employee relationship, Lietz
Inc.s claim against Portillo for violation of the goodwill clause is a money claim
based on an act done after the cessation of the employment relationship. And, while
the jurisdiction over Portillos claim is vested in the labor arbiter, the jurisdiction
over Lietz Inc.s claim rests on the regular courts. Thus:

As it is, petitioner does not ask for any relief under the Labor Code. It merely seeks
to recover damages based on the parties' contract of employment as redress for
respondent's breach thereof. Such cause of action is within the realm of Civil Law,
and jurisdiction over the controversy belongs to the regular courts. More so must
this be in the present case, what with the reality that the stipulation refers to the
postemployment relations of the parties.

For sure, a plain and cursory reading of the complaint will readily reveal that the
subject matter is one of claim for damages arising from a breach of contract, which
is within the ambit of the regular court's jurisdiction. [citation omitted]

It is basic that jurisdiction over the subject matter is determined upon the
allegations made in the complaint, irrespective of whether or not the plaintiff is
entitled to recover upon the claim asserted therein, which is a matter resolved only
after and as a result of a trial. Neither can jurisdiction of a court be made to depend
upon the defenses made by a defendant in his answer or motion to dismiss. If such
were the rule, the question of jurisdiction would depend almost entirely upon the
defendant.25 [citation omitted]

xxxx

Whereas this Court in a number of occasions had applied the jurisdictional

provisions of Article 217 to claims for damages filed by employees [citation
omitted], we hold that by the designating clause "arising from the employeremployee relations" Article 217 should apply with equal force to the claim of an
employer for actual damages against its dismissed employee, where the basis for
the claim arises from or is necessarily connected with the fact of termination, and
should be entered as a counterclaim in the illegal dismissal case.26

xxxx

This is, of course, to distinguish from cases of actions for damages where the
employer-employee relationship is merely incidental and the cause of action
proceeds from a different source of obligation. Thus, the jurisdiction of regular
courts was upheld where the damages, claimed for were based on tort [citation
omitted], malicious prosecution [citation omitted], or breach of contract, as when
the claimant seeks to recover a debt from a former employee [citation omitted] or
seeks liquidated damages in enforcement of a prior employment contract. [citation
omitted]

Neither can we uphold the reasoning of respondent court that because the
resolution of the issues presented by the complaint does not entail application of
the Labor Code or other labor laws, the dispute is intrinsically civil. Article 217(a) of
the Labor Code, as amended, clearly bestows upon the Labor Arbiter original and
exclusive jurisdiction over claims for damages arising from employer-employee
relationsin other words, the Labor Arbiter has jurisdiction to award not only the
reliefs provided by labor laws, but also damages governed by the Civil Code.27
(Emphasis supplied)

In the case at bar, the difference in the nature of the credits that one has against
the other, conversely, the nature of the debt one owes another, which difference in
turn results in the difference of the forum where the different credits can be
enforced, prevents the application of compensation. Simply, the labor tribunal in an
employees claim for unpaid wages is without authority to allow the compensation
of such claims against the post employment claim of the former employer for
breach of a post employment condition. The labor tribunal does not have jurisdiction
over the civil case of breach of contract.

We are aware that in Baez v. Hon. Valdevilla, we mentioned that:

Whereas this Court in a number of occasions had applied the jurisdictional

provisions of Article 217 to claims for damages filed by employees [citation
omitted], we hold that by the designating clause "arising from the employeremployee relations" Article 217 should apply with equal force to the claim of an
employer for actual damages against its dismissed employee, where the basis for
the claim arises from or is necessarily connected with the fact of termination, and
should be entered as a counterclaim in the illegal dismissal case.28

While on the surface, Baez supports the decision of the Court of Appeals, the facts
beneath premise an opposite conclusion. There, the salesman-employee obtained
from the NLRC a final favorable judgment of illegal dismissal. Afterwards, the
employer filed with the trial court a complaint for damages for alleged nefarious
activities causing damage to the employer. Explaining further why the claims for
damages should be entered as a counterclaim in the illegal dismissal case, we said:

Even under Republic Act No. 875 (the Industrial Peace Act, now completely
superseded by the Labor Code), jurisprudence was settled that where the plaintiffs
cause of action for damages arose out of, or was necessarily intertwined with, an
alleged unfair labor practice committed by the union, the jurisdiction is exclusively
with the (now defunct) Court of Industrial Relations, and the assumption of
jurisdiction of regular courts over the same is a nullity. To allow otherwise would be
"to sanction split jurisdiction, which is prejudicial to the orderly administration of
justice." Thus, even after the enactment of the Labor Code, where the damages
separately claimed by the employer were allegedly incurred as a consequence of
strike or picketing of the union, such complaint for damages is deeply rooted from
the labor dispute between the parties, and should be dismissed by ordinary courts

for lack of jurisdiction. As held by this Court in National Federation of Labor vs.
Eisma, 127 SCRA 419:

Certainly, the present Labor Code is even more committed to the view that on
policy grounds, and equally so in the interest of greater promptness in the
disposition of labor matters, a court is spared the often onerous task of determining
what essentially is a factual matter, namely, the damages that may be incurred by
either labor or management as a result of disputes or controversies arising from
employer-employee relations.29

Evidently, the ruling of the appellate court is modeled after the basis used in Baez
which is the "intertwined" facts of the claims of the employer and the employee or
that the "complaint for damages is deeply rooted from the labor dispute between
the parties." Thus, did the appellate court say that:

There is no gainsaying the fact that such "Goodwill Clause" is part and parcel of the
employment contract extended to [Portillo], and such clause is not contrary to law,
morals and public policy. There is thus a causal connection between [Portillos]
monetary claims against [respondents] and the latters claim for liquidated
damages against the former. Consequently, we should allow legal compensation or
set-off to take place.30

The Court of Appeals was misguided. Its conclusion was incorrect.

There is no causal connection between the petitioner employees claim for unpaid
wages and the respondent employers claim for damages for the alleged "Goodwill
Clause" violation. Portillos claim for unpaid salaries did not have anything to do
with her alleged violation of the employment contract as, in fact, her separation
from employment is not "rooted" in the alleged contractual violation. She resigned
from her employment. She was not dismissed. Portillos entitlement to the unpaid
salaries is not even contested. Indeed, Lietz Inc.s argument about legal
compensation necessarily admits that it owes the money claimed by Portillo.

The alleged contractual violation did not arise during the existence of the employeremployee relationship. It was a post-employment matter, a post-employment
violation. Reminders are apt. That is provided by the fairly recent case of Yusen Air

and Sea Services Phils., Inc. v. Villamor,31 which harked back to the previous rulings
on the necessity of "reasonable causal connection" between the tortious damage
and the damage arising from the employer-employee relationship. Yusen proceeded
to pronounce that the absence of the connection results in the absence of
jurisdiction of the labor arbiter. Importantly, such absence of jurisdiction cannot be
remedied by raising before the labor tribunal the tortious damage as a defense.
Thus:

When, as here, the cause of action is based on a quasi-delict or tort, which has no
reasonable causal connection with any of the claims provided for in Article 217,
jurisdiction over the action is with the regular courts. [citation omitted]

As it is, petitioner does not ask for any relief under the Labor Code. It merely seeks
to recover damages based on the parties contract of employment as redress for
respondents breach thereof. Such cause of action is within the realm of Civil Law,
and jurisdiction over the controversy belongs to the regular courts. More so must
this be in the present case, what with the reality that the stipulation refers to the
postemployment relations of the parties.

For sure, a plain and cursory reading of the complaint will readily reveal that the
subject matter is one of claim for damages arising from a breach of contract, which
is within the ambit of the regular courts jurisdiction. [citation omitted]

It is basic that jurisdiction over the subject matter is determined upon the
allegations made in the complaint, irrespective of whether or not the plaintiff is
entitled to recover upon the claim asserted therein, which is a matter resolved only
after and as a result of a trial. Neither can jurisdiction of a court be made to depend
upon the defenses made by a defendant in his answer or motion to dismiss. If such
were the rule, the question of jurisdiction would depend almost entirely upon the
defendant.32 (Underscoring supplied).

The error of the appellate court in its Resolution of 14 October 2010 is basic. The
original decision, the right ruling, should not have been reconsidered.1wphi1

Indeed, the application of compensation in this case is effectively barred by Article

113 of the Labor Code which prohibits wage deductions except in three
circumstances:

ART. 113. Wage Deduction. No employer, in his own behalf or in behalf of any
person, shall make any deduction from wages of his employees, except:

(a) In cases where the worker is insured with his consent by the employer, and the
deduction is to recompense the employer for the amount paid by him as premium
on the insurance;

(b) For union dues, in cases where the right of the worker or his union to check-off
has been recognized by the employer or authorized in writing by the individual
worker concerned; and

(c) In cases where the employer is authorized by law or regulations issued by the
Secretary of Labor.

WHEREFORE, the petition is GRANTED. The Resolution of the Court of Appeals in CAG.R. SP No. I 06581 dated 14 October 20 I 0 is SET ASIDE. The Decision of the Court
of Appeals in CA-G.R. SP No. I 06581 dated 3 I March :2009 is REINSTATED. No costs.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice

WE CONCUR:

ANTONIO T. CARPIO

Associate Justice
Chairperson

ARTURO D. BRION
Associate Justice

MARIANO C. DEL CASTILLO

Associate Justice
ESTELA M. PERLAS-BERNABE
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Court's Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's
Attestation, I certify that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the Court's
Division.

MARIA LOURDES P.A. SERENO

Chief Justice

Footnotes

1 Penned by Associate Justice Isaias Diodican with Associate Justices Bienvenido L.

Reyes (now a member of this Court) and Marlene Gonzales-Sison, concurring. Rollo.
pp. 40-42

2 Id. at 21-30

3 Designated as such to distinguish from respondent Rudolf Lietz, the individual,

simply designated herein as Rudolf.

4 Rollo, p. 22.

5 Id. at 23.

6 Id. at 23-24.

7 Varied amount of 980,295.25 in the 14 October 2010 Resolution of the Court of

Appeals. Id. at 42.

8 Id. at 25.

9 Id. at 30.

10 Id. at 42.

11 Id. at 6.

12 Section 1, Rule 65 of the Rules of Court.

13 Estinozo v. Court of Appeals, G.R. No. 150276, 12 February 2008, 544 SCRA 422,
431.

14 Id.

15 Cirtek Employees Labor Union-Federation of Free Workers v. Cirtek Electronics,

Inc., G.R. No. 190515, 6 June 2011, 650 SCRA 656, 659.

16 Rollo, p. 42.

17 Id. at 41-42.

18 207 Phil. 585 (1983).

19 Id. at 589-591.

20 244 Phil. 741 (1988).

21 Id. at 747-748.

22 G.R. No. 112940, 21 November 1994, 238 SCRA 267.

23 See Article 212, paragraph (l) of the Labor Code.

24 See Article 212, paragraph (f) of the Labor Code.

25 Yusen Air & Sea Service Phils., Inc. v. Villamor, 504 Phil. 437, 447 (2005).

26 Baez v. Hon. Valdevilla, 387 Phil. 601, 608 (2000).

27 Id. at 610-611.

28 Supra note 26 at 608.

29 Id. at 608-609.

30 Rollo, pp. 41-42.

31 Supra note 25.

32 Id. at 446-447.

The Duration of Confidentiality Agreements

Posted on May 21, 2008 by Ken Adams

Reader David recently posed the following question:

I have a question for you that has bugged me for several years. From time to time, my
company shares company-related information with a third party and, before doing so,
enters into a confidentiality agreement (CA) [also known as a nondisclosure agreement
KAA] with the third party. Our CA has a term of five years, and it often gets
negotiated down to a shorter time frame. Several lawyers have suggested that we
remove the term in our agreement and force the third party to request a term. These
attorneys argue that, if a term is not requested, and thus no term is specified in the CA,
the term is perpetual (i.e., the confidentiality obligations will go on forever), which
would benefit my company. Other attorneys I have spoken with have said that a CA
without a term runs the risk of being voided by a court (either the court would impose
its own reasonable term, or void the entire contract for vagueness reasons). Do you
know of any case law on this particular issue or have any thoughts on whether you
should or should not include a term in a CA (or any other contract)?
It would take me several pages to answer this question thoroughly. For the time being,
heres my quick answer:
Information that Constitutes a Trade Secret
The key issue is the nature of the information being protected.
Information that constitutes a trade secret is protected under common law until such
time as its no longer a trade secret.
The owner of a trade secret could elect to reinforce by contract the common-law
protection afforded trade secrets, and there are advantages to doing so. See Milgrim on
Trade Secrets 4.02[1].
Could duration of a contract obligation not to disclose trade secrets be subject to a
reasonableness standard? Heres what Milgrim has to say:
While there is some (and, in your authors view, fundamentally misconceived) authority
for the proposition that covenants not to disclose must also be reasonable as to
duration, such view is patently unsound because the covenant simply ceases to be
enforceable upon the underlying matters becoming generally known or otherwise
ceasing to be a trade secret, and hence such restriction can never be unreasonably
enforced.

Given the inherently indeterminate life of trade secrets and the practical inability to
enumerate specific trade secrets which may be known to the employee as a
consequence of the ensuing employment, the notion that restrictions on use and
disclosure must be limited as to time is both unreasonable and harsh.
In other words, according to Milgrim it wouldnt make sense for a court to say that an
open-ended contract obligation to keep trade secrets confidential isnt enforceable, that
instead it should have been of limited duration.
But Id add that it might make matters clearer for the parties, and for any court, if it
were made explicit that any contract obligation not to disclose trade secrets would lapse
once the trade secrets in question stopped constituting trade secrets. Sure, youre
stating the obvious, but sometimes stating the obvious is the cautious thing to do.
What say you?
Information the Doesnt Constitute a Trade Secret
But its a different matter when a contract seeks to cover information, such as
confidential information revealed to an employee during the course of employment,
thats broader than trade secrets. Such broad confidentiality obligations constitute,
along with restrictions on competition, restrictive covenants, and in many jurisdictions
restrictive covenants have been held unforceable unless they are limited in duration.
See Milgrim on Trade Secrets4.02[2][a].
Ive only dipped into the case law. For instance, one relevant case is AMP, Inc. v.
Fleischhacker, 823 F.2d 1199 (7th Cir. 1987) (applying Illinois law).
So David, whether it would make sense to remove the term from your confidentiality
agreement depends on the nature of the protected information. But even if the
agreement protects only trade secrets, the protection wouldnt last forever. I suspect
that your agreement covers more than trade secrets. If thats the case, Im not sure
youve been given good advice. Of course, this isnt the place to get into a discussion of
what constitutes a trade secret.
And of course, Im not giving you legal advice! These are simply my first impressions,
based on a couple of hours of thought. I expect some readers will weigh in with
thoughts of their own.
How to State Duration in a Confidentiality Agreement
Heres a question David didnt ask: whats the best way to state the duration of a
confidentiality agreement?
To state the duration of any obligation, you have two choices. You could build it into the
obligation: Acme shall keep the Information confidential for three years. Alternatively,
you could omit any mention of duration from the obligation and instead specify the
duration (or term) of the entire agreement.
Economy favors the former approach, but I can think of two reasons in favor of
specifying duration of the agreement.
First, if you state the duration in the obligation, that suggests that the agreement itself
is of indefinite duration. I prefer to specify that a confidentiality agreement terminates

at some point, so there isnt any question of a company having to forever include a
given confidentiality agreement in any list of contracts to which its party, even though
its no longer bound by the only obligation in the agreement.
And second, confidentiality obligations often form part of a broader agreement that
contains a term provision; duration of the confidentiality obligation should key off that
term provision. Sometimes that requires a hybrid arrangement, with the
confidentiality obligation also addressing duration: During the term of this agreement
and three years thereafter, Acme shall keep the Information confidential.

Question: Non-Compete, Non-Disclosure, and Non-Solicitation Agreements

Employment contracts often contain restrictive agreements, and there is much
confusion about the differences between these agreements. They are sometimes called
"restrictive covoenants" because they involve a covenant(promise) not to do something
or restricting someone from doing something. Sometimes, but not always, the
agreement includes compensation for the party who agrees to refrain from the act.
There are three general types of restrictive agreements or covenants.
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Answer:
Non-compete Agreements
These agreements are used in two circumstances:

1.

For employment situations in which an employer wants to restrict an

employee from leaving the company and setting up a competitor business next
door. Most often non-competes restrict the employee from working in a similar
business, within a defined time (one year, two years, or more), and within a
defined radius from the original business. Non-compete agreements are
difficult to enforce, and several states have said they are not enforceable
because they restrain trade. Other states will enforce a non-compete if there is
adequate consideration (money or other benefits) to balance the loss of
income.

2.

In business sales agreements, in which the original owner agrees not to

compete with the new owner over a specific time and area and in a similar

business. In this situation, the seller receives specific compensation for the
agreement not to compete.

Non-Solicitation Agreements

A non-solicitation agreement restricts someone from soliciting employees or customers

of a business. In a common case, an employee who leaves a company agrees not to
solicit other employees to work for him or her. For example, Joe leave XYZ
Manufacturing and he wants to take Sally, his fantastic administrative assistant with him.
If he had signed a non-solicitation agreement, he would not be allowed to take her
along. Non-solicitation agreements are common in professional practices, and in many
cases the professional who is leaving is also restrained from soliciting clients,
customers, or patients of the practice.

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Nondisclosure (Confidentiality) Agreements
A nondisclosure or confidentiality agreement is designed to keep someone from talking
about or stealing proprietary information, trade secrets, inventions, or other information
that has competitive advantage to the owner.
All three types of agreements have the purpose of trying to prevent someone from
taking something from a business - customers, employees, business in general,
proprietary products or trade secrets. The problem with all three is enforcement; once
the employee or trade secret has been stolen, it takes a lengthy and costly legal process
to recover damages and put the genie back in the bottle, so to speak. In these cases, no
one benefits but the lawyers.